Opex Ltd is planning to launch new kitchen equipment with multiple tasks and low energy consumption....

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Opex Ltd is planning to launch new kitchen equipment with multiple tasks and low energy consumption. This is totally a new product line where the company has no previous experience. However, the company has been selling agricultural processing equipment for 10 years. Marketing Manager has obtained the services of a market research firm to decide a selling price and estimate the potential sales volume. Accordingly, the market research firm has provided three prices along with probable sales volumes. Different probabilities have been identified based on market conditions for each price category. Price per unit-Rs. 6,500 Price per unit-Rs. 7,250 Probability Sales Volume Probability Sales Volume (Per annum) (per annum) 0.4 0.5 0.1 10,000 10,500 11,000 0.3 0.5 0.2 9,000 8,000 8,500 Price per unit-Rs. 8,000 Probability Sales Volume (Per annum) 7000 7500 7250 0.25 0.45 0.3 Advertising costs are estimated to be Rs. 4 million per annum at the selling price of Rs. 6,500 and Rs. 5 million at the selling price of Rs. 7,250. The estimated variable production cost is Rs. 3,500 below 10,000 units per year and it would be Rs..3,000 for 10,000 units and above. The current fixed costs of the company are Rs110 mn per annum and this is expected to rise by 10% with the new product for volumes below 8,000. The expected rise in fixed cost is 11% for volumes 8,000 and above but less than 10,000 units. Fixed costs will rise by 12% for volumes of 10000 and above. The company also finds similar products in the international market and is looking at the feasibility of importing and selling the product in the local market under the company brand name as an alternative to inhouse manufacturing. A foreign supplier has quoted prices based on different volumes which are given below. Further, the direct costs including irrecoverable taxes of importing the product are provided. 10000 units 8000 above and above but less than 10000 Price quoted -Rs. 3100 Direct costs & irrecoverable 10% taxes-as a % of quoted price units units and Below 8000 units 3900 15% 4000 20% Importing the product would result in a decrease in the incremental fixed cost estimated under the manufacturing option by 50%. The Operations Manager has come up with the following risks at the operational level when the new product is launched. As the new product requires a high voltage of electricity, it is expected to have power interruptions that would cause damage to existing machinery. Employees may be injured when handling new machinery required for the new product. As the current warehouse space is not sufficient, it needs to stock the finished goods at a third party location obtained on a rent basis which may create room for theft. According to the layout of the factory, some of the processes of the new product will be set up in proximity to the main boiler of the factory. Required: a) Estimate the profit the company could earn under different prices and recommend whether it is best to import or manufacture the product at each of these prices. (09 marks) b) Recommend a price that the company should set for the new product on the basis of expected value of profit. (02 marks) c) If the company chooses a maximum decision rule, explain whether you would change the recommendation in part b) (03 marks) d) Recommend strategies to manage the operational risks by applying TARA framework. (06 marks) Opex Ltd is planning to launch new kitchen equipment with multiple tasks and low energy consumption. This is totally a new product line where the company has no previous experience. However, the company has been selling agricultural processing equipment for 10 years. Marketing Manager has obtained the services of a market research firm to decide a selling price and estimate the potential sales volume. Accordingly, the market research firm has provided three prices along with probable sales volumes. Different probabilities have been identified based on market conditions for each price category. Price per unit-Rs. 6,500 Price per unit-Rs. 7,250 Probability Sales Volume Probability Sales Volume (Per annum) (per annum) 0.4 0.5 0.1 10,000 10,500 11,000 0.3 0.5 0.2 9,000 8,000 8,500 Price per unit-Rs. 8,000 Probability Sales Volume (Per annum) 7000 7500 7250 0.25 0.45 0.3 Advertising costs are estimated to be Rs. 4 million per annum at the selling price of Rs. 6,500 and Rs. 5 million at the selling price of Rs. 7,250. The estimated variable production cost is Rs. 3,500 below 10,000 units per year and it would be Rs..3,000 for 10,000 units and above. The current fixed costs of the company are Rs110 mn per annum and this is expected to rise by 10% with the new product for volumes below 8,000. The expected rise in fixed cost is 11% for volumes 8,000 and above but less than 10,000 units. Fixed costs will rise by 12% for volumes of 10000 and above. The company also finds similar products in the international market and is looking at the feasibility of importing and selling the product in the local market under the company brand name as an alternative to inhouse manufacturing. A foreign supplier has quoted prices based on different volumes which are given below. Further, the direct costs including irrecoverable taxes of importing the product are provided. 10000 units 8000 above and above but less than 10000 Price quoted -Rs. 3100 Direct costs & irrecoverable 10% taxes-as a % of quoted price units units and Below 8000 units 3900 15% 4000 20% Importing the product would result in a decrease in the incremental fixed cost estimated under the manufacturing option by 50%. The Operations Manager has come up with the following risks at the operational level when the new product is launched. As the new product requires a high voltage of electricity, it is expected to have power interruptions that would cause damage to existing machinery. Employees may be injured when handling new machinery required for the new product. As the current warehouse space is not sufficient, it needs to stock the finished goods at a third party location obtained on a rent basis which may create room for theft. According to the layout of the factory, some of the processes of the new product will be set up in proximity to the main boiler of the factory. Required: a) Estimate the profit the company could earn under different prices and recommend whether it is best to import or manufacture the product at each of these prices. (09 marks) b) Recommend a price that the company should set for the new product on the basis of expected value of profit. (02 marks) c) If the company chooses a maximum decision rule, explain whether you would change the recommendation in part b) (03 marks) d) Recommend strategies to manage the operational risks by applying TARA framework. (06 marks)

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