Shark Ltd

Subject:FinancePrice:2.86 Bought15

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Shark Ltd. specialises in manufacturing low-price, high-volume accessories for mobile phones. Examples of the company’s products include phone cases and stylus pens for touch screens. Recently, the research and development (R & D) staff at Shark developed a faux leather case, which is specially designed to fit a new model of mobile phone which has just been launched by a major phone manufacturer. Based on past experience, Shark estimates that demand for this phone will be very strong for the next two years but will then largely cease as new phone models appear on the market. Shark’s financial manager has determined that, in order to manufacture and distribute the phone case, the company will need to make an immediate investment of €1,000,000 in new production and distribution facilities. The company finances this type of investment by raising capital funds from a combination of banks and shareholders, and a return of 4% per annum is required in order to justify this type of capital investment. Shark’s marketing manager is aware that Shark is not the only company developing a case for this particular phone. He believes that Shark should quickly build up market share by entering the market as soon as possible and selling its phone case at a highly competitive selling price. Specifically, he recommends that Shark should immediately start manufacturing the product and selling it for €3 per unit, while paying its sales staff a commission of €0.25 per unit sold. He believes that if this marketing strategy is adopted then Shark can realistically expect to sell 125,000 units per annum of the phone case over the next two years. The production manager has taken note of the financial manager’s and marketing manager’s recommendations and hopes that they will be adopted. His estimate of the cost of manufacturing the product is €2.53 per unit. Required: (a) Prepare calculations to indicate the target cost (per unit) of manufacturing the phone case. Then, explain clearly the significance of this figure. (10 marks) (b) Assume now that the general manager of Shark has said that “we should start manufacturing and selling this product so long as the expected sales revenue exceeds the combined manufacturing cost and sales commission”. Determine what percentage return on the €1,000,000 capital investment will be achieved if this recommendation is followed, and explain to the general manager (with detailed reasons) whether you recommend that this approach should be followed. (5 marks) (c) Assume now that, having reviewed the results of your analysis in answer to parts (a) and (b) above, the general manager of Shark Ltd. decided to refer the design back to the company’s R & D staff for further design work. She believes that this will result in a 6-month delay before Shark can bring its product to market, but will result in a significant reduction in the manufacturing cost without adversely affecting the quality of the product. Critically evaluate whether, with this approach, Shark can make a commercial success of the product.