Stark Air manufacturing company limited is a customer-focused, service-orientated company that is firmly established and recognized as a leader in the market and a leading manufacturing company is industrial air extraction units and is concerned that, as the market leader, they should be able to make higher profits than they currently are in order to achieve competitive advantage and capitalize on economies of scope.
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The company produces specialised industrial air extraction units and is concerned that, as the market leader, they should be able to make higher profits than they currently are. The firm’s costs are as follows; overheads (d) are 800,000 labour costs per unit (e) are 100 and raw material costs per unit (f) are 258. They also spend 40,000 (V) per period on advertising and are capable of producing up to 1,000 units in each period.
Here we have maximised the quantity to be sold and however hope to have the highest profitability which is defined below: When the demand is 3500 the quantity sold is 953 and the profit is 1575483 which are much more than the other two proposals. 3. Discussion 3. 1 Price Reduction by 10% Stark Air Ltd has considered reducing their prices by 10%. Before making this kind of a decision they must first consider all financial and practical factors in order to achieve a cost effective budget.
These considerations would include cutting down on expenses without reducing the quality of the end product, such as by purchasing raw materials from a cheaper source, the use of machinery that would reduce on labor and other overhead costs to increase production. The company must ensure that none of these changes will reduce the quality of the products being made available on the market. This reduction in price would appeal to buyers (old and new) and then units sold (Q) would inevitably increase considerably.
Doubling Advertising Budget The next company strategy would be to increase advertising. Stark air would like to double its allocation for advertising from 40,000 to 80,000 pounds. This may help to increase profits but is risky as the sale will rely on the adverts being effective and more importantly-appealing to the buyer(s). The company will have to think of this as a long term investment as the results of advertising are never instant.
Again, if the advertisements prove to be effective, the company should expect an increase in sale and should be prepared to satisfy the demand of the consumers. Both strategies are good and may be very effective as long as the company is willing and ready to increase their input in hope for a bigger and better output. The company has to be prepared to not only sell more but to be able to produce enough to satisfy their market. These strategies could double or even triple company sales and they need to have their products readily available to customers.
Unavailability of products could hinder the profit making strategy and should therefore be taken into serious consideration. 3. 3 Possible Alternatives Cost-volume-profit analysis method is used to study the interrelationship between total revenues, total cost, operating income and total volume. When a budgeted income statement is prepared and the project operating income doesn’t meet the company’s profit objective, CVP analysis can be used to consider different alternatives to achieve it.