Question

Question 2
A department at Venta Technology has prepared the following report for 2020. This department has recently faced severe competitive pressures, which has resulted in falling sales and profits over the last 3 years.

Summarised data from the management accounts
Budgeted profit and loss account for 12 months

	£
Sales (80,000 units)	5,600,000
Cost of goods sold (see notes 1 and 2)	4,800,000
Gross profit	800,000
Selling general & administrative overheads (see note 3)	800,000
Profit before tax	0

A new customer has placed an order for 10,000 units at £60 per unit. The current capacity of the factory is 90,000 units.

Note 1. Cost of goods sold includes fixed costs of £500,000. All other costs are variable.

Note 2. If the order is accepted there will be additional fixed costs of £50,000. Staff will receive a bonus of £10,000 if the order is completed on time.

Note 3. Sales commission is 10% of sales and is included in the total cost of £800,000. The sales commission on the new order is only 5%. All other costs are fixed

Required:

1. Advise managers whether or not the order will increase the department’s profits.

2. Calculate the minimum price the company should accept for the order.  

3. Assume that the company will lose 10% of current sales if the order is accepted. What is the lost contribution if the company loses 10% of current sales?           

4. Identify and evaluate what additional information management need about existing and potential customers before finally accepting or rejecting the order.   (14⅓ marks)

Answer 1

The answer to first three are contained in the table heunder , write up on fouth part is typed below the table :

ADDITIONAL INFORMATION ON EXISTING CUSTOMER BASE

Management needs to know the following :

1. Likelihood of the existing base continuing.

2. What is the correlation of existing customers to potential new customer so that risk associated of loosing old base can be addressed.

3. What are the chances of consumtion of exiting customers going up and what factors can propel the same

4. What is making the customers go for competition so that drops in sales can be addressed.

5. What is the customer profile like meaning what is the average age and life of customers.

6. For the Customers which are oldest in the system what is value they see in the product so that same can be effectively leveraged.

ADDITIONAL INFORMATION ON POTENTIAL CUSTOMER BASE

1. Social profile.

2. Responsivess to price changes.

3. Expectations from the product.

4. Potential Alternatices available to him.

5. Financial standing and creditworthiness

6. Loyalty trend of the potential customers with past Suppliers/product