Irish Perfumes Ltd (IPL) is a large, multinational perfume company. It started a new division in a rural area outside a major city in 2018. This was very good news for the area, as at the time, a number of other unrelated factories had closed in the area and unemployment was above the national average. The plant employs 2,000 people and it has a shift pattern to allow it to operate from 6.00am until 11.30pm Monday to Saturday. It chose this location as it is close to the various wild flowers that IPL currently uses in production. At the time there was some opposition to a large factory setting up in a delicate natural environment, but the promise of so many new jobs meant that the local feeling was mostly positive to the factory. IPL has a board meeting in one week. You are required to prepare a report to the board on the two current issues being considered by the board of the plant. Issue 1. IPL has recently developed sales of ‘Fleur’ Perfume in a recyclable atomiser which is sold alongside the companies traditional products of bottles of ‘Fleur’ Perfume and bottles of ‘Rose’ Perfume. The company is now considering the sale of ‘Rose’ Perfume in atomiser bottles. It is the company policy that any new product must be capable of generating sufficient profit to cover all costs, including initial marketing and advertising expenditure of €1,100,000. Current weekly production, with unit costs and selling prices, is as follows: Sales volume is equal to production volume. A 50 week trading year is assumed. Rates of absorption of fixed costs are based on current levels of output. All products have a similar cost structure. In order to produce ‘Rose’ in atomisers, the atomiser machine would require modification at a cost of €500,000 which is to be recovered through sales within one year. Additional annual fixed costs of €450,000 would be incurred in manufacturing the new product. Variable costs of production would be 50c per atomiser. Research has estimated demand at different selling price levels to be: There is enough capacity on the atomiser machine, but the factory is operating near capacity in other areas. The new atomiser product would have to be produced by reducing production in other areas and two alternatives have been identified:
(1) Reduce production of bottles of ‘Fleur’ by 30% p.a. or
(2) Reduce production of bottles of ‘Rose’ by 33% p.a.
The directors consider that the new product must cover any loss of profit caused by this reduction in volume. They are aware that bottling is a much more labour intensive process that atomizing perfume. They are also aware that market research has shown growing customer dissatisfaction with the wastage of perfume sold in bottles, particularly the type of bottle that ‘Fleur’ Perfume is sold in. All labour is accounted for as variable costs. The Board will expect your report to contain:
(1) The current annual profit being made by the company.
(2) The contributions that the various alternative sales levels of atomisers might make
(3) A recommendation as to the most profitable course of action.
(4) An overall recommendation based on the quantitative factors above and, most importantly, the qualitative factors based on the information provided and also based on your research given the facts of this case.