It was early 2019 and Jason Moss, CEO of Plasticon Canada Inc., was pondering his company’s next move. Plasticon’s mission was to be a leader in adapting new and evolving advanced plastic materials. The company focused on producing high performance plastic components to machinery and equipment manufacturers. While plastics were being explored by other similar producers, Moss believed, at least in in his mind, that his faciliti22es and equipment enabled a strong competitive position in the production of these products.

Yet Moss was concerned about the ongoing viability of his business. Sales were down in recent years. He was also concerned that existing well established and renowned competitors were undertaking aggressive marketing efforts to preserve their sales in a challenging environment. He was therefore considering three options: cutting price to drive an increase in market share; that is, a market penetration strategy; attempting a market development strategy (entering new markets) by entering international markets where there appeared to be considerable potential; or pursuing a diversification strategy (creating and marketing new products) by producing new plastic-based consumer packaging.

The Company

Plasticon Canada Inc. was a Canadian-based company that produced advanced high quality plastic components for a variety of machinery and equipment types. Products were made using a standard extrusion process. This creates shapes by pushing plastic material through a die mould. The die mould enables the creation of specific shapes. For certain applications, the products offered more cost-effective strength, heat resistance, and durability compared to traditional materials, such as alloyed metals. The company positioned itself as a pioneer and continually explored emerging plastics in its quest to develop new and advanced components. Plasticon was committed to employee engagement and had a policy of no layoffs.

Plasticon’s competitive advantage was the production of customised products. The company’s revenues were derived from custom production of specialised components sold directly to machinery manufacturers. Plasticon worked closely with these customers to develop products specific to their needs. These manufacturers then sold finished machinery and equipment to many different manufacturers. Normally the company received 40 orders each month for these parts. A standard order had the same quantity.

The company’s factory, located in the Niagara Region, Canada, started production at the beginning of 2011. A series of private investors provided $100 million investment in the company. The company sold to a variety of specialized machinery manufacturing companies across North America. In 2018 there were approximately 50,000 machinery and equipment manufacturers across North America. Most were mid-sized type companies that Plasticon served. In 2018, the company had revenue of $200 million, operating costs of $90 million (including variable material and energy costs of $70 million, and fixed labour costs $20 million) and fixed overhead costs of $125 million, including marketing costs of $20 million per year. Net income, after 30 percent corporate income tax, was $3.5 million. The company’s targeted after-tax return on investment (ROI) was 10 percent. At the end of 2018 the company was holding $6 million in cash on its balance sheet.

Between 2011 and 2016 the demand for its products had grown by 5% per year. This was because manufacturing companies were upgrading their machinery and equipment to both reduce costs and expand their productivity. However, since 2016 capital spending in the manufacturing sector had declined by a total of 10% to 2019. Also, the number of manufacturing companies across North America had declined by 5% since 2016. As a result, machinery and equipment parts manufacturers (including Plasticon) were operating at 60% of their capacity. Across North America there were over 2,000 machinery equipment parts manufacturers and suppliers. With such a fragmented market, excess capacity, and an investment downturn, price competition became intense. This was undermining the cost performance advantage of using Plasticon’s products by some customers.

Options

Moss recognized that he needed do something to sustain his business. His initial thought was a penetration strategy: reduce the average price to increase market share. His marketing director advised him that based on her analysis, the firm could increase demand for its products by 30 percent if prices were reduced by 10 percent. Without this sales volume would only grow 1 percent each year. This would enable the company to offer a strong price value proposition. The manager believed that with proper marketing and customer servicing strategies, Plasticon could secure a stable customer base by convincing select customers of the irreplaceable benefit of his advanced products. To do this, marketing costs would have to rise by 20%.

A second option Moss considered was to produce and sell more components to overseas markets. He was especially interested in selling into southern China. There were approximately 2,500 machinery and equipment manufacturers in Guangzhou, China. Components would be sold through specialized industrial parts distributors, rather than direct sales. These distributors insist on a 10-15% discount off the price paid by machinery and equipment manufacturers. Many industries have attempted to enter this market aggressively, thus increasing the bargaining power of politically well-connected distributors who understand the business culture. Entering this market would involve hiring a broker. The role of the broker is to facilitate a commercial agreement between buyers and sellers. Brokers typically represent many different companies across different industries. The broker would be paid a commission of 2% of the selling price to China. Furthermore, Moss anticipated that unit variable costs would rise 5% to reflect shipping and custom brokers costs.

The third option was to explore advanced plastics consumer packaging. Moss saw rising demand for consumer packaging using advanced plastics, especially plastics that were bio-degradable. This refers to the ability of plastic to degrade through naturally occurring bacteria. Because they degrade, they do not accumulate in landfills. Moreover, they leave no carbon footprint, as the plastic resin is not made from crude oil base resins. Over 70% of plastic packaging are made from such resins. The plastics container market in North America is valued at $50bn. The cost of producing bio-degradable containers would be $0.35. While bio-degradable plastics represented only 2% of the market today, they were forecast to grow 20% per year over the next decade. Most of these containers would be sold to high value industries that promote sustainability and would be prepared to pay the higher costs for plastics packaging. These would include more popular organic products in cosmetics, personal care and food and beverage producers. Moss was confident he could charge $0.50-0.75 for each container. He further estimated he would have to invest $2m dollars in a new extrusion production line and moulds needed to produce 10 million containers annually. Furthermore, he would have to increase marketing expenses by 20%, to account for new sales staff, promotional efforts, customer service and product development. Longer term, Moss believed he could triple his capacity in plastic containers quickly and at small additional cost. Moss recognized that competition was fragmented and intense in this area. There were nearly 500 plastic container manufacturers across North America, and the top 10 producers accounted for only 10% of the market. To mitigate the emerging price competition, product differentiation and specialization was essential.

Q1. PLEASE PREPARE THE PROFIT AND LOSS STATEMENTS

Q2. AND DO THE ANALYSIS OF THR SAME :)

[Moreover what changes do we get after options A,B and C in financials?]

Answer rating: 100% (QA)

Since the profit is already given as 35 million we will do reverse calculation to find out the other income so that the revenue after deducting the gi... View the full answer