to trim or not to trim that is the question Case Solution
Question No: 1
After analyzing the data set provided, it can be determined that, with respect to its products Pertofran and Visergil, the variable cost of these products amounts to 5.9 & 0.9 respectively. Whereas, the total sales have been consistently and significantly less over the years than the variable cost incurred to produce and sell these products in the market. However, it can be evaluated that dropping these products from the products mix would not decrease the fixed cost incurred on them. Although, it would increase the idle capacity of its production plant, which was already facing idle capacity. This means that the company was not producing products up to the optimum capacity of its production plant. This compromised its ability to generate additional revenues through optimum production. Whereas, it can be assessed that the fixed cost incurred currently on the plant would not increase up to its optimum capacity of production. Therefore, it can be determined that dropping these productions would further increase the idle capacity of the plant and compel them to actually lose money instead. Hence, it was recommended to the company that, it should increase its marketing expenditure on these products. Which, in turn, would increase their appeal and demand in the market, causing the company to sell more products in the market, generating additional revenues from these products, which could increase their declining sales and compelling the company to enhance their overall product returns. Moreover, it would also keep the company aligned with its mission and strategic objective of curing, preventing diseases and enhancing the quality of life for the patients.
Question No: 2
The strategic factors that should be considered regarding the decision of dropping all 50 products arethat those products are attributed towards $422 million in sales revenues and 15 other product brands amounting for an additional $2.4 million in revenues. The company should consider the potential impact thatits decision of dropping all 50 products would have onits image in the market. Furthermore, its potential impact on the customer’s perception, which would either increase or decrease their demands with respect to the products being offered by the company. Lastly, assess the impactthis decision would have on its core mission and strategic objectives. The company’s core objectives were to provide quality products that would cure and prevent diseases in patients and enhance their life span. Furthermore, it was assessed that its 15 products amounting to $2.4 million in revenues providesome very important medical needs of the patients in the market. Therefore, it can be determined that, if the company decided to drop these products from its products mix then, it could have significant adverse effects on the image of the company and it also goes against its mission and strategic objectives.
Question No: 3
After analyzing the case and reviewing the excel exhibit, it can be determined that, the company should not drop all 50 products, as it would decrease its image value and drive it away from its mission and strategic objective. The NPV calculated under 8% discount factors amounts to 1751.2, where the initial investment was considered as the total variable cost of producing each product and adding first year’s fixed cost that would be incurred. Furthermore, if the company decided to drop all 50 products, then the NPV loss would amount to 1751.2 and the cost saving in form of fixed saving at 50% would amount to 69.5, resulting in a loss of revenue amounting to 1681.7. Therefore, it can be determined that, it should not drop all 50 products and instead it should increase its marketing expenditure on those products with sales revenues lesser then their variable cost.
Additionally, conducting the same calculations under 12% discount factors would give an NPV amounting to 1513.8. If the company decides to drop all 50 products then the NPV lost would also be 1513.8 and the cost saving in the form of fixed cost saved at 50% would amount to 69.5. It would generate a revenue loss amounting to 1444.3.
Moreover, the discount factors considers the value of time, in which, today’s $1 would be relatively greater then tomorrows $1. This could be caused by inflation, various political factors, environment and the volatility of the market. Therefore, the management of the company uses discount factor to generate present value of an investment return in the future, so that they could make appropriate decision regarding the acceptance or rejection of the potential investment...................................
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