Your are working as a consultant to ABC company which needs your help. When assisting the company,
Question:
Your are working as a consultant to ABC company which needs your help. When assisting the company, make sure to comprehensively show your underlying calculations. Provide reasoning for assessments and recommendations and communicate effectively. ABC Ltd., a profit maximizing company, manufactures and sells a wide range of products. The products are manufactured in various locations and sold in a number of different markets. The company's operations are organised into five divisions which may supply each other as well as sell their products on the open market. The following profit and loss statement is available for the company for the year 2016 that just ended:
Sales -> 8,600,000
- Cost of Sales -> 5,332,000
= Gross Profit ->3,268,000
- Other expenses -> 2,532,000
= Net Profit ->736,000
ABC Ltd. just received an offer from a competitor who wants to purchase ABC's division 'baby nutrition' for 1,500,000 EUR. The following information is available for this division:
• The gross profit margin is half that earned by the company as a whole in 2016.
• The sales are 10 % of total company sales in 2016.
• Of the cost of sales of this division, fixed costs are 316,000 EUR
Other expenses incurred by the division are 156,000 EUR, all of which are fixed. These expenses include 38,000 EUR apportionments of general company expenses which would not be affected by the decision concerning the sale of the division 'baby nutrition'.
• In 2017, if the division is not sold, fixed costs of the division would be expected to increase by 5 % and variable costs to remain the same percentage of sales. Sales would be expected to increase by 10 %.
• Moreover, if the division 'baby nutrition' is sold, it is expected that some sales of other divisions would be lost. This loss of sales would result in a loss of contribution to profits of 20,000 EUR (if the division is sold).
On the other hand, if the capital sum received for the sale of the division 'baby nutrition' would be invested, ABC could earn 5 % interest in 2017.
The CEO now asks you to do the following:
1. Calculate whether it would be in the best interest of ABC, based upon the expected situation in 2017, to sell its division 'baby nutrition'.
2. Discuss other factors that you feel should influence the decision.
3. Calculate the percentage increase in the division baby nutrition's sales (i.e. instead of the 10 % assumed above) that is required from 2016 to 2017 (based upon the expected situation in 2017) in order to let the two alternatives be the same (in pure financial terms)?
Canadian Organizational Behaviour
ISBN: 978-0070401877
8th Canadian Edition
Authors: Steven Lattimore McShane, Sandra Steen