Question 4 Strategic and International issues in Management Accounting (20 marks).
This question relates specifically to the subject’s 3rd and 5th learning outcomes.
Resources to assist students to conduct research and answer this question will be provided in the subject Interact site at the start of the session. However, students are expected to research beyond the resources provided and are encouraged conduct their own research using academic research resources. Guidance on how to conduct simple academic searches will be provided by your Subject Coordinato
Lecturer. Please note that marks will be deducted for referencing e
ors and an APA guide to in-text referencing has been provided in the subject Interact site. Please ask for directions with referencing from your Subject Coordinator if you are having trouble with this requirement (approximate 600 word limit).
The purchase by Neptune International Ltd of the ChinaSouth DairyCo, a large dairy distributor network with wholesale outlets and networks throughout South East China, has led to the parent company looking to develop vertical supply chain security by purchasing dairy producers in Australia.
The Neptune International CFO for Dairy Mr. Davis Nicks is travelling to Guangzhou to hold further meetings with the Chinese born CEO of the newly acquired subsidiary and his senior management team. Ahead of his trip Davis has requested that you provide him with a
iefing regarding the following:
(i) Part of Davis Nicks objectives during his trip to China is to assess the veracity of the budget sales estimates for baby infant formula provided by ChinaSouth on which Neptune are basing the proposed purchase of Kiewa Milk. Davis would like you to provide a critical review of the risks and assumptions underpinning the unit and AUD dollar sales projections provided by ChinaSouth. What are the dangers inherent in Neptune’s proposed purchase of the Australian milk processing business based on estimates of Chinese domestic sales? (10 marks)
(ii) Davis also wishes to understand how the concepts of ‘guanxi’ and ‘power distance’ will impact on his interactions with the cu
ent ChinaSouth DairyCo executive who will be reporting directly to him and, in particular identify any difference between Chinese and Western approaches to management accounting and budgeting that Davis may encounter in his coming dealings with Chinese-based and trained accounting staff. (10 marks)
Question 5 Strategic Management Accounting (25 marks)
This question specifically addresses all five of the subject learning outcomes.
This question builds on prior studies of Cost Volume Profit (CVP) analysis and relates to learning material and objectives from Online Modules 1 and 2.(For assistance on this question you are advised to undertake the case study from Mars Petcare which is provided online (with solution) in Topic 2 as the Reflection Task).
‘Nutty Nut’ Candy Coated Chocolate
STRATEGIC MARKET ANALYSIS
You have joined the cross-discipline Strategic Management Committee of Neptune International Ltd as the management accounting representative. The key issue facing this top level management committee at the moment is how to improve profitability in several key product categories.
The product cu
ently under discussion is the ‘Nutty Nut’ line of sugar coated chocolates sold by Neptune through the major supermarket chains in Australia and New Zealand. The product has been a great success story for the Neptune Confectionery Division however lately it has come under increased price competition and the sales and market share of ‘Nutty Nut’ chocolates have fallen dramatically. The major competition comes from a similar product
anded as ‘N&N’s’ which is manufactured by a multinational rival.
The Marketing Department for the Neptune Confectionery Division has provided the following information about the sugar coated chocolate market during 2018:
The Marketing Department advises you that at the end of the 2016 year Nutty Nut’s market share had been 80% and N & N’s had been only 10%. Since that time N & N’s have been advertising heavily and aggressively pricing their product in the market, increasing their market share to the cu
ent level of 30%. The marketing department believes that, by discounting the wholesale sale price by $0.25 from $3.20 to $2.95, gross unit sales will increase by 20%. The research and development team have identified that by slightly altering the raw material mix a saving of 10% of prime costs can also be made without impacting on the quality and taste of the product.
As the Management Accounting representative you have provided the Strategic Management Committee with the following
eakdown of revenues and costs for the ‘Nutty Nut’ product line for the just completed 2018 year:
Nutty Nut
Total Assets ‘Nutty Nut’ Factory
$30m
Total Sales (Volume in Units)
18m
Regular Retail Price (per unit retail price)
$3.99
Gross Sales Value Received (per unit wholesale price)
$3.20
Supermarket Advertising Rebates (per unit)
$0.20
Net Sales Value Received (per unit)
$3.00
Prime Costs (per unit)
$0.75
Other Manufacturing Costs (per unit)
$1.25
Logistic Costs (per unit)
$0.75
Gross $ Margin (Gross Profit) (per unit)
$0.25
Total $ Margin (Gross Profit)
$4.5m
% Margin on Net Sales Value
8.33%
% Return on Total Assets (ROTA)
15%
The CEO of Neptune Confectionery, who is the Chair of the Strategic Committee, advises that even allowing for the 10% reduction in prime costs, discounting the product by $0.25 per unit will mean that the product will no longer achieve the firm’s required return on total assets (ROTA) of 17.5%. ROTA is calculated by dividing Gross Profit by Total Assets and cu
ently sits at 15%. The CEO argues that if this remains the case, the previously successful ‘Nutty Nut’ product line may have to be discontinued.
You advise the Committee that you are aware that the ‘Nutty Nut’ manufacturing facility is cu
ently running at 53% of its practical capacity and that the warehouse facility (logistics) is running at 62% capacity. You are also aware that whilst the ‘Nutty Nut’ product’s Prime Costs are 100% Variable, Other Manufacturing Costs and Logistic Costs are made up of 80% Fixed and 20% Variable cost.
You ask if you can be given time to prepare a report for the Strategic Committee on the cost and profit implications of the proposed changes and resultant increase in sales and production.
For the purpose of your analysis it can be assumed that this cost
eak-down between variable and fixed costs will hold consistently across the industry (including for the ‘N & N’ competitor). Assume 90% of the predicted ‘Nutty Nut’ unit sales increase will be made at the expense of their main competitor ‘N&Ns’ unit sales. Finally, assume that ‘N&N’ costs start out the same as ‘Nutty Nut’ and that the competitors make no immediate competitive adjustment to their offering.
(i) Using excel prepare a ‘before and after’ comparative analysis of the revenues and costs of the ‘Nutty Nut’ product line incorporating the 20% predicted sales increase and the 10% predicted savings in prime costs (Ensure you include any impact of the production increase on manufacturing and logistics costs in your analysis).
(10 marks)
(ii) Prepare a
ief report (approx. 300 words) for the Strategic Management Committee outlining the key points of your findings. Include some discussion on:
a. the likely impact of the changes on the cost and profit structure of Neptune Confectionery (derived from your answer to (i)) (5 marks).
. Calculate and discuss the likely impact of the changes on the cost structure of ‘N&N’s’, our main competitor in this market segment (use Excel) (5 marks).
c. Make a recommendation to the Committee on whether to go ahead with the planned changes. Include any other strategic advice that you consider relevant to the Committee’s decision making (5 marks).
(Please ensure that your answer adequately addresses ALL of the points above)
(15 marks)