Question

1. Coral Ltd is a medium sized company based in NSW. It has had a number of years of relative success, but being conservative by nature, it has tended to serve the local market only. This market has shown signs of decline and the directors are now considering whether to expand the operation from its NSW base into Australian Territories. They are attempting to judge how successful this strategy will be over the next six months.

Sales (20,000 units at $20 per unit)                                $400,000

Selling costs:

                           Marketing                                                                            $60,000

                           Salaries of sales personnel                               $20,000

             Commission costs (1% of sales)                                                  $4,000

             Travelling expenses of sales personnel                                     $1,000

Sales office costs                                                                            $10,000

Telephones                                                                                       $9,000

Stationery                                                                                          $5,000

• The company accountant has calculated that marketing expenditure will need to double in order to achieve penetration of what historically has been a difficult area for the company to achieve even modest sales.
• Two new sales staff will have to be employed at a cost of $20,000 (each) on six -months contracts, and an additional cost to train them of $2000.
• A new office will be opened at a rental cost of $5,000 for six months.
• Additional telephone equipment will cost $1,000 and existing telephone costs are projected to rise by 50%.
• Stationery costs will increase by $2,000.
• Travelling costs will rise by $1,500.
• An additional office assistant will be required in the finance department to process orders and monitor commissions at a salary of $8,000 for six months.
• Estimated sales will rise by 1000 units per month for the first two months and revenue per unit will fall to $18 per unit in order to achieve initial market penetration.
• It is expected that this discount will only be necessary for two months and that sales from month 3 will rise to 2000 units per month.
• The variable cost of producing each extra unit is projected to remain at the current cost of $6.

You are now required to prepare a project report on the incremental analysis of proposed expansion in the format mentioned below. (You have to prepare a spreadsheet for the same-Excel) and also give your recommendations for the same.

	Existing budget for the next six months		Projected budget for the next six months		Incremental costs & revenues
	$	$	$	$	$	$
Sales		400,000		596,000		196,000
Marketing	60,000		120,000		60,000
Sales salaries
Commission
Travelling
Sales office
Telephones
Stationery
Admn. Assistant	0		8,000		8,000
Training
Variable production costs	120,000	229,000	180,000	414,960	60,000	185,960
Profit

Answer 1