One of the most alarming issues is the high gearing level. The company has accumulated large amount debts which resulted in high interest payment. This has dampened the profitability of the company. Besides the high gearing issue, the company may be experiencing collection problems. The increasing trend in the collection period needs to be addressed as this may lead to bad debts and provision may have to be provided. This would further lower the profit level.
The high inventory level could be due to poor production planning.It also seems that the company’s expansion plan is not in tandem with the sales and this is reflected in the low utilisation level of the assets in generating sales. In summary, the company’s performance for the last 3 years (2001 to 2003) has not been encouraging.
The drop in the market share price below the book market value is the reflection of investors’ confidence in the company’s future performance. By reducing the selling price by 20% to $20, he anticipated the sales volume to increase to 1,600,000 units from 750,000 units thus registering an increase of 113%.The breakeven point in unit increased to 1,000,000 units. The difference of 250,000 units (1,000,000 – 750,000) in breakeven point represents 33% increase. Based on the anticipated sales the company is expected to generate operating profit of $9,000,000.
Julie’s strategy to increase sales is via aggressive advertising. She anticipated the sales volume to reach 1,500,000 units level, a 100% increase in sales volume as well as in revenue. She explained that the cost will involve an additional $3,000,000 million in advertising cost and still maintain the selling price.The new breakeven point is at 900,000 units’ level an increase of 20% from 750,000 units.
The company is expected to generate operating profit of $12,000,000. Evaluation of the strategies The strategy of doing nothing should not be adopted as the company would not be generating any profits. However if the company decided to adopt either one of the 2 strategies it would be generating profits. Therefore both the strategies need to be analysed to identify the one which the company will benefit most.In Steve’s plan he suggested that sales of 1,600,000 units could be achieved by only reducing the selling price to $20 and all other costs remain unchanged. However, in actual fact the company stands to loss $8,000,000 [($25 – $20) x 1,600,000] in revenue if it adopted his plan. The price reduction also increased the breakeven point level to 1,000,000 units. In Julie’s plan, she suggested that sales of 1,500,000 units could be achieved by increasing the advertising budget by an additional of $3,000 000 to $8,000,000 and the price remains unchanged.
The increase in cost also increases the breakeven point level to 900,000 units.