"The time has come," the Walrus said,
"To talk of many things:
Of shoes--and ships--and sealing-wax--
Of cabbages--and kings--
And why the sea is boiling hot--
And whether pigs have wings."
So said Lewis Carrol in Alice in Wonderland and indeed the time has come for us at IMS Jalandhar to start the process of GD/PI’s .
So pranksters and tricksters, nerdy smiles and goofy faces, gear up for our journey is about to begin.
GD’s and PI’s are not something that one mugs up over a week and can ace. To crack the GD’s and impress the interviewer in the PI, preparation has to begin now. You heard me...NOW!!!
So what will we do??
Lets start by developing a thinking process through which we can ace case studies. Lets read up on past interview experiences of all leading institutes . Lets take the help of national experts. In short lets stir up those grey cells and go in all guns blazing.
Here’s what we will do!!
- Case studies from Harvard, Wharton and other leading business schools would be uploaded weekly on the blog. Ask questions, get your thought process flowing and start cracking the case studies. The best attempt every week gets a price and would be recognized in the IMS Jalandhar weekly hall of fame.
- On the student board a fresh interview experience of a candidate from a leading business school would be put. Make sure you read up on it. After going through a hundred such caselets you should know how your interview would be
- We would be inviting subject matter national level experts to deliver lectures on how one aces the GD’s and Pi’s. These people have seen it all. So take what they say very seriously.
- Can we have a newsbite section where the weekly news is taken apart?? Can we get 100 different persepectives on the same news??
And this is just the beginning , a precursor to the main preparation to be done after CAT. But necessary nevertheless. After all no one built a skyscraper without digging the foundation first.
Let us start with the first case study
Question ( Source : Harvard Case Book – Practice Case 3 – Pg 39 )
A major producer of juice is in the business of processing and packaging fruit juice for retail outlets. Traditionally, the producer has packaged the juice in 18-ounce carton containers. Recently, in response to demand from the market, the producer purchased a machine that packages the juice in plastic gallons (36 ounces). Over the next couple of years, sales continued to grow on average of 20% per year. Yet, as sales continued to increase, profits steadily decreased. The owner cannot understand why. He hires you to help out.
What do you have to do??
You are consultants and the company has asked you to help out with a problem. The first step is to understand the problem. So ask the company. Put in your questions about the industry, the competitors, the product etc , basically anything you deem important to solve the problem.
We would be answering the questions everyday.
Based on your understanding of the problem, diagnose and then come out with a solution.
There is a reward for the best solution.
Hints and guidelines would be provided periodically.
After a week, next Thursday 9:00 P.M., best attempt would be declared as the winner.
So let the games begin
All the best.
Happy thinking!
IMS Jalandhar team
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1 ounce=28.35 gm(approx)
ReplyDelete18 ounce=510.3gm
36 ounce=1020.6gm
Now we can think in an Indianized format!!!
we need the information about the competition to the above mentioned firm... who is the competitor,and what is the threats he is posing for the firm?
ReplyDeletealso sir please mention any major strengths of the firm...
actually we didn't know the selling price of both 18 ounce carton container and 36 ounce plastic gallons..so how come we arrive at the conclusion of profit or loss...
ReplyDeletefrom the data which is given,customers surely gain something by having this particular firm's juice in comparison to others..so there sales are increasing..but profit is reducing on the point of view of the manufacturer..so this may be concluded that they are selling that much amount at less than their cost price..
also please mention any major areas of strength of the opponent... and any major strategy he is using to take over the market...
ReplyDeleteHow come the opponent plays a role here...the firm have already hold on the market as their sales are increasing every year..its basically the internal flaw..that's why they are not gaining...
ReplyDeleteaccording to me the knowledge about the competitor is of utmost importance... coz since the company is incurring losses .. they would surely have implemented some strategy that would have led to this condition... this may be to counter some strategy of the opponent... else if he would have been a price leader he would never have fixed a price that would have led to decrease in his profits... so i think knowing about the competitor is important... :)
ReplyDeleteI don't think competitor is playing any role here.. sales of the company is increasing this shows the company has a good hold over the market.. a competitor will focus on icreasing his sales so as to reduce the sales of his competitor but what can he do to reduce his profit???
ReplyDeletei think the problem lies in the cost of production and selling price so thats the information needed...
hello everyone.
ReplyDeletei think there has been a slight misinterpretation of term 'decreasing profits'.some people here are assuming them to be losses (which is not the case i suppose). Reduced profits do not connote to losses. the company has started dispatching larger cans(plastic barrels 36oz), double the initial capacity(18oz), and the sales have grown by 20%.
firstly, in order to do this, they procured a new machine. maybe the costs (capital recovery costs + maintenance costs +operation costs) of the machine is very high, that might be cutting into the profits of the company. The machine is deteriorating and maintenance costs are rising with every unit packed, that is why they have decreasing profits.
secondly, there might be miscalculations as per selecting the selling price of the new 36oz plastic gallons. the packaging material might be expensive and that is diminishing the profit margins. since the company is managing to sell off a larger quantity, and every time they sell off larger quantity they make larger cuts in profits, something is wrong in the internal system that affects the per unit price of the packaging.
it's more of an internal matter isolated from the competitors.
if the fist unit costs 'x', second unit costs 'x+dx',so on... with every increasing unit the cost increases, while selling price (y) remains stagnant(safe assumption) over a certain period of time. hence the profits are reducing with increase in sales.the profit so defined is the 'profit per unit'.
the overall profit will increase till the point we have a non negative prfit margin; when the profit margin becomes negatine for the 'n'th unit, the overall profit then starts decreasing from there on.
thirdly, there may be a case of excessive production and improper inventory control. since the unit size is increasing, there maybe a shortage of space for storing the finished goods. so quite a few units have to be disposed off at a much lower price.
fourthly, the machine might have a greater production capacity and a larger amount of units have to be sold to breakeven its operating costs, maybe the 20% increase in sales is not sufficient to provide the breakeven, hence profits are reducing.
these are few of my viewpoints, please share your thoughts on these.
@Abhishek … The competitive environment is as thus: There is only 1 other juice producer in the market. His product is vitamin and mineral enriched and is available in cartons of 36 oz. It is priced at $ 6. 37 per carton. The distribution channel that the competitor is using is a mix of general retail and self owned outlets. However the positioning of their product is different from ours and we do not compete for the directly for same consumer.
ReplyDelete@Tushar… Initially the company was selling the 18 oz cartons at $ 2. They initially decided to price the 36 oz carton at $ 3.50 to incentivize the consumer to buy the larger pack size. However to recover the cost of the machine the MRP’s were changed to $2.5 and $ 4 for the 18 oz and 36 oz carton respectively.
As regards the cost of production you will have to ask the company more specific questions to which they can provide answers.
@Rohit… Good that you are clear with the popularity of the brand but the producer would like to know what Internal Flaws you are hinting about….??
& & & Krittika…. Thanks for making a base measurement figure to make it easier. Now try to look for the problems in the case study. Looking forward for your insight on it.
@ Sumeat.. Please try and get into the shoes of a consultant. The company has hired you to diagnose the problem and fix it. Aside from the reasons you have mentioned there can be hazaar and one others. Your job is to understand what the problem particularly is. It might be what you have said or it might be something else . Ask questions to diagnose the particular issue the company is facing and come out with concrete solutions.
ReplyDeleteThere are no questions Sumeet has asked so there is nothing for us to answer
i would like to know a few answers.
ReplyDeletedoes the company still have the production of 18oz units ?
initial
1. cost price of the 18oz product,
2. selling price of 18oz product
revised
3. SP of both the products.(i.e if 18oz is still sold)
4.the volume of sales(both products separately).
5.price and life(in units processed) of new machine.
are the maintenance costs increasing for the machine?
any more new arrangements made along with machine? for eg. new modes of transportation employed, new recruitment, more land procured for inventory ?
was the juice company getting any aid from any other agency, like a subsidy from government or some sponsorship from elsewhere.
ReplyDeletedoes the company have any other areas where it spends ? e.g. corporate social responsibility, donations etc etc.
all i am concerned with is- if there are any changes prior to and post change in production strategy. are there any changes in the inflow and/or outflow of money (besides the conventional producing-selling practices) ?
Did we change our marketing strategy? What exactly is the marketing strategy of our firm?Has our company switched its advertising firm?
ReplyDeleteA bad advertisement can surely offend customers(even the loyal ones)!! Is there an increase in the number of complaints regarding our juice's quality?
A/Q(NOTE:Decreasing Profit doenot refer to losses it just refers to decreasing returns.)
ReplyDeleteProfit=Revenue-Cost
Total Revenue=Sales*S.P
Total Cost=Sales*CP + Advertising + commision + taxes(e.g octri)
now given that Sales increases yet Profit is decreasing.
can imply the following:-
1.Total Cost is increasing.
2.Industry's overall prices of raw materials have increased.
3.Economic cycle may be one of the factors.
The following are the questions I as a consultant would like to ask the following questions to my client:-
1)What are the company's cost drivers?
--Is the company spending too much on Advertisement,so as to promote its Brand.
--Has the cost of raw materials increased?
2)Why was there a need to purchase to purchase
the machine,apart from demand?
-- Was it to skim the market?
--Was it to offset competition?
--Was it to enhance the customer base?
3) What is the current objective/strategy of your firm?
--Is it sales Maximization/Profit Maximization?
4)How much did you spent on MACHINE
PROCUREMENT & when do you expect to recover all your fixed cost?
--Are you following variable rate of return scheme or a constant one?
5)How are your relations with the suppliers?
--Is there any corruption prevelent into it?
6)How is you Brand equity?
--Does your customer base include more of loyal
customers or innovators?
7)What is the current situation of the economy?
Sir this is me RADHIKA.
ReplyDeleteAs the sales are increasing continuously but profit steadly decrease shows that industry is at stagnant stage as there is change in social habits and development of improved technology,further the profitability depends on the bargaining power of the buyers, in an industry where buyers market prevails,the buyers have more bargaining power.They would demand better quality and better services,they will also forced down the prices,erroding profitability and excess supply reducs the profitability through a decline in the unit price realisation.
ReplyDeleteI think that in this company if the bargaining power of seller overcomes the bargaining power of buyers the company is in profit.
1. considering the current situation what percentage of new packing is being sold among the total sales?
ReplyDelete2. Could we have bought a cheaper packing machine?
hie all.
ReplyDeletei want to know about two things:
1.what is the life time of the second type of packaging???
since the overall profit is decreasing there may be chances that shelf life of the product is being decreased and the firm had to replace it often....it may be the case...is it so???
moreover packing cost may be higher??
also tellme about this...
2.secondly,i will like to know about the cost of both type of packing??
is it proportionate?..i mean is it like this that
18 ounces of juice packing was having more margain than the 36 ounce packing??
is it case
please give me stats about it...???
because sales is increasing it appeals me that 36 ounce packing is successful but the trouble is with margains....may it be retailer margain or any other sort of margain...
every other factor seems somehow of okay type like -market relations,advertisement,etc,etc,
because sales is on increase!!
please add answers so we can move forward towards a solution...
hello everyone
ReplyDeleteas the co. has bought a new machine... there must be the requirement of new personnels to handle the machine... so has the co. made any new recruitments for this???? if old workers are working with the new machine, has the co. spent anything to train them or to hone up their skills????
and was the machine bought on loan or with down payment??? if on loan, is the interest rate increasing or is it constant???
what is the expenditure on machine utilities like power consumption etc.??
Firstly i want to know what was the cost price and selling price of juice when packaged in 18 ounce cartoon.
ReplyDeleteAnd also the cost price and selling price when packaged in 36 ounce pack.
And how much the machine is costing for packaging.
Then accordingly, i can deduce the problem.
few more questions,
ReplyDeletea) was it a bad phase for the juice industry? was the situation worsening day by day so as to force the company to reduce their profit margins repeatedly?
b) how were the other companies performing? were they undergoing losses, so that this company decided to reduce profit margins to somehow stay in the profit zone?
c) was it during recession? was it after the Lehman Brothers debacle?
d) was it a change in the company's policy to gain an extra share in the consumer pie by lowering profit margins?
e) what was the consumer feedback on the 36oz units? did the public like it? do you think the public would have preferred the 36oz unit at a higher price as well ?
f) what was the primary difference between 2 smaller units and a larger unit ? why wouldn't have the consumers been satisfied buying 2 smaller units?
if there is no competition for the firm in its segment.. it means the firm is monopolizing in its target segment...and it is the price leader for the product...
ReplyDeletei would like to know whether the company is using limit price strategy?
according to me, the two majr cntributing factors are the cost of production n d market mix...
ReplyDeletenow, there is a chance that the cost of production is high such that the company is yet unable to reach the point(due to many factors like cst of machine, labour cost, packing material related points etc,)
also the imp point is the channel of distribution the company is folllowing...
there is a major chance that the major portion of the profit earned goes to the distributers and bcz of that company suffers losses..
so here are the following details i want from the company..
1) the details of the manufacturing cost of product with its selling and cost price(i.e. how much the company spends on packaging, its fixed costs, labour cost,etc..)
this is bcoz we need to look for the problem asap.. nn if its not d manuf. cost then we can look for other otions.
2) the details of company's distribution channels n wht is the agreement of the co. with them regarding the costs.. i.e. whether the distributers have a fixed income or it is some percentage of the profits or any other details regarding this..
hope to get the details soon..
Few are the internal flaws which i have deduced for the decrement in profit margin:
ReplyDelete1. I think the company is focusing on sales maximization till now.They are selling their product even at the break-even point.
2.When they replace the machinery, they didn't count the salvage value of the replaced machine.The new machinery costs them too much, in addition to the cost of the machinery, the hiring of the new operators for it was also done.And the maintenance cost of the machinery every year may be high.
3. Their may be the point that the cost of the raw materials may have increase in due course, this may be one of the reasons(provided the S.P. remains constant). In addition to that the cost of the man power may also have increased.
4.The production strategy also plays a vital role here. For instance, the production unit has a capacity to produce 1000 gallons of juice but they are producing only 750 gallons, so in this manner they are incurring loss.
For this, i want the complete information about the machinery cost(including replacement value of the previous machine) and about the production strategy........
is the value of dollar decreasing?
ReplyDeleteare the loan rates increasing ?
as the company offering low prices when a large quantity was ordered? or a buy one get one free offer? that might bring down the profit despite increase in sales.
please note that the 'sales' i am talking of refers to the 'quantity sold'.
What percentage of the total sales took place when the prices were $2 and $3.5?
ReplyDeleteWhat has been the trend of sales and profit after the prices were changed to $2.5 and $4 respectively?
Means did the sales decline after the prices were changed and its only due to the earlier prices that we get a 20% sales increase.
this is Neelabh
ReplyDeletehi
ReplyDeletein this problems cost of machine is not given. sale is increasing by 20 % every year but profit is not generated unless actual cost of machine is not recovered.
@ all …
ReplyDeleteThis is a good time to introduce the framework approach to solving case studies. The idea of a framework is that it gives a structured way of thinking and helps the consultant explore all possibilities :
A Caveat though : The framework provides the building blocks to the analysis. Every case is different and needs a customized solution
Profitability Framework
Kudos to Radhika for thinking in this direction
Profits = Sales – Costs ( obviously – but lets see where we go from this simple rule )
Sales = Number of units sold x price per unit
Costs = Fixed costs + Variable costs
Fixed Costs : Those that remain fixed across any volume of production . eg The cost of the machine will remain fixed whatever the level of production so this cost is fixed
Variable costs : These are constant per unit and increase with increase in production volume . Eg raw material costs will vary if 1 unit is produced vis a vis if 10 units are produced
Now the fixed and variable costs can be production costs, advertisement costs , advertisement costs etc
Now all your individual queries are answered below . Try and apply the framework and think further .
ReplyDelete@ Sumeat : The company is now producing both 18oz and 36 oz units. Please read our earlier posts for details about selling prices.
The company is a small sized entity and does not have a suitable cost allocation system for allocating indirect overhead costs and hence any ad hoc statements about costs would be misleading . Please specify what costs you want information on.
The only sales data that the consultants have been provided with is that currently 60 % of the sales come from the 36 oz pack size
As regards the machine costs : it is a new machine and naturally all operational, maintenance and other costs are being incurred. Dollar value and loan rates have remained stable.
The aids, donations etc if any have remained unchanged. The industry dynamics remain unchanged and company policy regarding profitability remains same.
As regards your questions on the consumer response to 36 oz etc the information has also been provided. The information about why 2 18 oz cartons are not equal to 1 36 oz carton cal also be deduced. Think about pricing
@ Kritika : A new carton size has been introduced for the same juice. The juice continues to be marketed and advertised as it was done earlier
@ Radhika : Great work on thinking in terms of the profitability framework. Just to add on a little it would be great if you could break the cost price further. Basically cost price = material costs + labour costs + overhead costs. Think further on these lines .
You have said that sales increase and profit decrease may imply some things. It may imply other things as well . The company you are consulting for is not interested in this. It wants to know what its particular problems are. Dig deeper !!!
Your specific questions are answered below :
1. Spending on ads has kept pace with increase in top line. Raw material costs per unit have remained the same
2. The need to purchase the machine stemmed from the fact that the old machine could only generate a pack size of 18oz . This one generates packs of 36 oz. Nothing beyond that .
Please read our earlier posts about competitor activity. Skimming does not enter into the equation. Your questions about competition and enhancement of customer base should get answered from there
3. The cost structure of the firm implies sales maximization would automatically lead to profit maximization. So the strategies are not mutually exclusive . On a side note think how this can happen ??
4. The company is writing off the machine across 10 years
There is no change in inter firm rivalry, substitutes , supplier power , buyer power and barriers to entry ( in case you are thinking in terms of Porter’s 5 forces )
@ Arun : Your conclusions about the industry being in decline stage are premature. Further there are no changes in buyer and supplier power. The customer habits and preferences have remained unchanged. Try and apply the profitability framework
ReplyDelete@Preet : No we could have not bought a cheaper packing machine.
@ gagan : This is an FMCG product like real juice. The shelf life and replacement cost is not an issue here
However your point about packaging costs is an excellent point. The new 36 oz cartons are packed in plastic containers. The 18 oz containers continue to be packed in cardboard containers. Plastic is more expensive than cardboard and hence the packaging costs for the 36 oz carton is significantly higher.
Your conclusions about sales increasing because the 36oz carton is more acceptable to the customers is justified. Try and think why it would be more acceptable to the customers. Is it because of the pricing ??
@shagun : As the machine is new obviously there is increased expenditure on it. New workers have been hired etc. To recover these costs the MRP has been hiked as you will read in our earlier posts.
@ paritosh :Selling price has been posted in our earlier post. The company is a small sized entity and does not have a suitable cost allocation system for allocating indirect overhead costs and hence any ad hoc statements about costs would be misleading . Please specify what costs you want information on.
@ abhishek : The information has been given in our previous posts.
@ mili : The manufacturing costs remain same except packaging. The 18 oz cartons were packed in cardboard containers. The 36 oz cartons have been packed in plastic containers so the packaging costs have gone up.
The distribution channels and margins have remained same.
@ Rohit : How have you reached conclusion 1 . Dig deeper gather supporting facts . Yes costs of the machine have gone up but sales volume has also gone up by 20 %. You are right when you say costs may have gone up. The packaging costs have gone up . Read response to Mili above
This is not a capacity issue
@ Baffling realities : The prices were changed to $ 2.5 and $ 4 the day the 36 oz carton was launched. The higher price was charged to recover the machine costs.
@ love : The cost of the machine is amortised over 10 years . This is a justifiable figure.
as our demand is increasing ,so there is no point of competition from any one...
ReplyDeletebut,,,the point is we are facing loss....so the main fact can be the new selling price of 36 ounce pack.....as it is not with the accordance of cost price....
Also...customers may not be willing to buy bigger pack product due to the cost....they can be more willing in buying 18 ounce pack...
one big reason for the loss could be the machine....
ReplyDeleteits operating cost like new workers, training process, its cost, daily consumption like electricity, raw materials cost etc.
I want to know about all these details...
observing upon all the earlier conversations there were certain deductions i cud figure out.
ReplyDelete1) sales r increasing by 20% every year but overall profit is decreasing.
possible reasons cud be
a) company was first using manpower and now they r using machinery... to compensate the cost of machines company increased the cost by 0.50$ both for 18 oz as well as 36 oz respectively i.e., firstly, it was priced at 2$ n 3.5$ but now it is 2.5$ and 4$ for 18oz n 36 oz respectively. But the compensation is limited to machine only... 1 side of production has been neglected as previously company was producing their products in cartons n now they are using plastic bottles. cartons were cheaply produced without adding much cost to production where as plastic bottles add sum amount to the production as well they require skilled workers to handle the bottles n so there wages would also be more than previous workers....
This could be the 1 possible reason for loss...
2.) sir, i would like to ask you about any wear and tear of the machine, as machine could become faulty n spoil a set of production and later it would cost more $s to get it repaired??
n also give some information about the transportation of products to the selling grounds....
we have to concentrate on cost side rather than revenue(i m not using any formula as like above)
ReplyDeletesir i asked about the cost of 18oz and 36 oz packing...
now i will assume it as like::
suppose j.p. had earlier fixed price for
18oz=20rs.
36oz=37rs(new price)
(because we see that bigger packing is somewhat economical)
but since the machine is there so cost may be increased by 2 rupees for both the packings
(becoz no j.p. will singlehandedly share the exp)
18oz=20+0=20rs.(no effect...if it is cartoon...i m bit....i m bit confused here....this packing is available ryt now...plz answer yes/no?)
36oz=37+2=39rs(new price)
have to know the sales, number of gallons to cartoon beiing sold in the market after the introduction of the 36oz packing,,,
becoz wat i meant to said earlier was cost per unit of juice in both packings
ie.18oz=what rupees in 18 oz packing
and 18oz=what rupees in 36 oz packing
cost estimation my be wrong here as earlier said....margains,etc...
someehow i will like to point oyut that there must be some price disproportion and plastic gallons were there which costed more to j.p.(thnx for prev answer sir)...
here it seems that if i suppose that company sales 100 plastic packs because of lesser pricing of these packing (it shud have been more than what it is actually)it will face more losses as the sales increases since selling a product lesser than cp is a loss!!!
slowly as the 36oz takes over the market,the losses becoz of its more sales will consequetly nullify the profit fron the 18 oz packing!!
(i feel like saying to j.p. who told u to install a new machine and if u did set the price accordingly for the 36 0z,but i will not do that
:) )
wat i have in my mind is that j.p shud do a thorugh check of the costs being incurred and the basic costs and the cost of machine+packaging material,lbour costs incurred because of machine,etc....
the value which may come forward is the cost price for the firm
now
sp shud be =cp+profit
remark:SET YOUR PRICE ACCORDINGLY...NOTHING ELSE IS MATTER OF CONCERN TO ME!!
THE CONSUMER WILL BUY 36oz (AS SALES INCREAED)
SO KEEP THAT THING IN MIND...YOU ARE AT LOSS!!
CHANGE THE PRICE TAG!!
thnx.....
sir i would like to ask few questions regarding the following query :-
ReplyDeleteA)are there any seasonal effects to the sales and production of the product?
B)how much amount of cost does the transportation and the distribution of the product takes?
C)AS the new packaging takes more area than the previous packaging,is their any increase in the vehicle needed for transportation and man power?
to support this query let me put on following case-
let's say if the company used to send 1800-3000 numbers of bottles to a super market every week.
earlier it used to be bottles of 18-ounce quantity,
but now since the quantity of a single bottle increased by nearly double so,the area taken up by the new botttle of 36-ounce is doubled,therefore,to carry out the respected number of bottles more vehicles are required as the area consumed by the new bottles increased.therefore,more manpower is required along with more vehicles and transportation cost.
thanx.........
This comment has been removed by the author.
ReplyDeletethank you for the details.
ReplyDeletethe SP of 18oz = 2$ initially
the SP of 36oz = 3.5$ ( initially thought of setting)
to recover the new machine costs both the product prices were raised by half a dollar.
now, the curiosity arises
i) what was the cost of processing 18oz juice just prior to packing it? (say x). therefore, the cost of processing 36oz juice just prior to packing it is
2x.)
ii) what were the packing charges per 18oz units? (say y)
iii) what were the packing charges per 36oz units(new plastic packing)? (say z)
since it has been mentioned that the packing charges z > y.
let z=y+d, where d is a positive quantity (as z>y).
for 18oz,
cost price = x + y.
profit per 18oz juice unit is = 2.5-(x+y).
therefore profit on two 18oz units
= 5-(2x+2y)--------------(1)
for 36oz,
cost price= 2x + z.
profit per 36 oz juice unit is = 4-(2x+z)
= 4-(2x+y+d)----------(2)
now, we define a situation as "consumer's choice"(simply, for better understanding). here it goes:
when a consumer buys a 36oz juice instead of 2 X 18 oz juices, the company loses certain amount of profit. which can be calculated using equations (1) and (2).
the decrease in profits come out to be =(1+d-y).
i think it is a safe assumption to take this quantity(1+d-y) a positive quantity.
every time the consumer opts for ONE 36oz instead of TWO 18oz, we call it a "consumer choice".
now, regarding the sales.
given that 36oz unit contributes to 60%of sales.
therefore if we assume that the sales are 100$.
60$ comes from 36oz units. (i.e. 15 units X 4$)
and 40$ comes from 18oz units. (i.e. 16 units X 2.5$)
there were 15 "consume choice" events.hence incurring a loss of profit amounting to 15(1+d-y).
since instead of buying 30 X 18oz units, the consumers bought 15 X 36oz units.
the introduction of 36 oz units have become popular for sure as they amount to 60% sales, but then with every 36oz unit, the company loses PROFIT money that it could have otherwise earned by selling 2 smaller units.
do you feel that my assumptions are correct?
do you feel that the company could have made more profits by selling the smaller units only or by raising the price of the 36oz units?
i feel the problem is that the company is now not considering the difference in packing charges per unit in both the cases. the new technology incurs a larger cost per unit, but the amount charged for the new product is less. The variable cost is where the cath is.
yes, the company has taken into account the Machine recovery cost and all supporting costs, BUT the company has failed to realize that the packaging cost per unit has also increased in the newer case, hence that difference (d) must be taken into account, and price of 36oz set accordingly so that the "consumer choice" situations do not hurt the company's profits.
another question to the company:
has the company done enough calculations to recover the cost of the old machine which was packing 18oz units? the new machine cost recovery has been taken care of by raising half a dollar per unit juice. BUT since the sales of the 18oz have gone down drastically (down by 60%,which 36oz has taken over), the old machine recovery costs might have been hit severely.
please let me know if my assumptions are wrong anywhere.
at this point i can hint that the Unreasonably low pricing of the 36oz product is making the company suffer. because of the shockingly low price the 36oz is a hit and is selling more, but the company is bleeding profit cuts. however i can work it out if the values of x,y,z are provided. even y and z will be sufficient to calculate.
wonder if mathematics is reqd in case study???
ReplyDeleteis it good to give variables in case study??
please tell sir
???
1.sir you wrote that,
ReplyDelete"Plastic is more expensive than cardboard and hence the packaging costs for the 36 oz carton is significantly higher".
so what was the % increase in the packaging cost per unit?
2.do the weights 18 ounces and 36 ounces include the weights of the juice only or juice with the container.
since,if container weights are included, effective weight of juice sold for the same selling price will decrease,decreasing the profit margin.
this is because of the fact that one plastic container can be significantly lighter than two
carton containers.
3.it can be easily calculated that the no. of
units sold has decreased from x to(21/25)x.
is the company more focused on the no. of units in calculating profits.(this should not be the case)
a possible solution:
*****previous case:
only 18 ounces were sold
y=no. of units sold/year
18*y ounces of juice is sold
selling price/unit=2/unit
z=packing price/unit
*****new case:
both 18 and 36 ounces are sold
18*y*(6/5)ounces of juice is sold
18 ounces pack:40% of total sales,s.p.=2.5/unit
36 ounces pack:60% of total sales,s.p.=4/unit
no. of units of 36 ounces pack=
{(3/5)*18*(6/5)*y}/36=(9/25)y
no. of units of 18 ounces pack=
{(2/5)*18*(6/5)*y}/18=(12/25)y
z=packing price/unit(18 ounce)
z+dz=packing price/unit(36 ounce)
as the raw material and manufacturing costs are same they have not been used to make the calculations simple.
profit in previous case=(2y-z*y)
profit in new case=(2.5-z)(12/25)y+{4-(z+dz)}(9/25)y
provided dz(which is my first query) as a % of z it can be calculated that which profit is more.
the second query was containing a typing mistake
ReplyDeletethe correct version is:
2.do the weights 18 ounces and 36 ounces include the weights of the juice only or juice with the container.
since,if container weights are included, effective weight of juice sold for the same selling price will **increase,decreasing the profit margin.
this is because of the fact that one plastic container can be significantly lighter than two
carton containers.
@ all … guys a request . The management of the juice producer who has hired you as a consultant is a mixture of MBA’s , Chartered Accountants , Arts grads and engineers. Your comments, questions and suggestions are directed at them. Putting so much mathematics into the solution is useless. No one understands it.
ReplyDeleteOn a side note when you sit in your MBA GD’s and PI’s this will not work. Try putting things in layman’s terms so it easily understandable. The mathematics should be kept in the background.
Putting everyone on the same page:
Here are the facts that we have been able to garner as of now:
1. Sales are increasing but profits have not been growing at the same rate
2. 60 % of the sales now are from the 36oz packing
3. The pricing of the 18oz carton was $2.00 . Initially the 36oz carton was supposed to be priced at $ 3.5 to provide an incentive to the consumer to buy it. However to recover the increased costs of the machine the prices were raised to $ 2.5 and $ 4.00 respectively.
4. The 18 oz cartons were packed in cardboard containers. The 36 oz cartons are packed in plastic containers. The costs of plastic is higher than cardboard
Some common questions that we feel lead nowhere :
There has been a lot of discussions on the production costs of the machine, the labour and maintenance costs. Tell me how will quantifying the costs help? It is stated that there are some costs which the company apportions to both its products equally. This is enough to crack the problem.
@ Paritosh…Dig deeper. You say that selling price is not in accordance to the cost price. Why is this? What element of costs is not adjusted. Why has this asymmetry crept in??
ReplyDelete@ gautam… good attempt. But remember there can be other reasons also. Dig deeper and try and arrive at the present issue this company faces. Read our and other earlier posts to get more data. But carry on you are on the right track.
@ gagan… excellent attempt gagan . You have more or less worked it out. I have 1 further question to ask you.. You say set the price accordingly. Why has this wrong pricing been set? What decision did the company take incorrectly and what does it indicate ??
And WELL DONE
@ Kunal… No there are no seasonal effects. Try and use the information given in this post + the framework to be used in the earlier post
@ Sumeat … Duhhh what have you written dood. Honestly I had to ask Adesh to help me understand your post. You don’t need to work out any x,y, or z . Think broadly and strategically. Come out with the problem diagnosis. Like what you have done in the last para.
But I’ll say 1 thing your conclusions and analysis are spot on. You have identified the problem perfectly. Well done and Kudos to you !!!!
Now if you are the consultant what will you tell the company to do . What are your recommendations??
And in layman’s terms please. Have pity on me . I am not an engineer : )
@ Ashwini .. No package weights are not included in 18 oz and 36 oz. How have you reached the conclusion that no. of units have dropped to whatever. It may be right , I don’t know . It will have to be worked out mathematically. Question is, is it relevant??
Rest of your conclusions and possible solutions I don’t understand. Too much x, y and z
oops.. sorry for the mathematics :D
ReplyDeletei hesitated while discussing it, but still gave it a try anyways.
thought maybe to make a thick report card as consultants do :D
coming to the case.
my recommendations to the company shall be :
in my opinion,
1.) change the price tag of the 18oz unit to 2.3$ and the price of the 36oz unit to 4.5$.
this will ensure that the "Consumer Choice" situation does not hurt the company's profits.
the idea is to do justice with both the products, the one that costs more should be sold at a reasonably good price. but still striking the balance between both the prices, so as to promote both products.
to promote and sell off a new product, the prices NEED NOT be miraculously low. even a slight benefit is enough to draw the 'smart' consumers' attention. so instead of buying two 18oz, the consumer will buy one 36oz juice, and still save 0.1$.
the prices were raised by half a dollar on each product. this way the overall price(on one 18oz and one 36oz) hike becomes
1.3$ as compared to 1$ with the previous price tags.
the extra 0.3$ will fill the coffers of the company and will ensure no more profit drops.
the second benefit of this price strategy is that both the products will sell almost evenly, so that the company's product mix stays well balanced.
by choosing to adopt the recommended solution, the company will boost its profits. and once the profits start soaring, the company can make new investment plans or do some meaningful CSR.
Happy profit making :)
p.s. 2.3$ and 4.5$ prices are suggestive. maybe 2.4$ and 4.6$ works better for the company :)
as 60 % sale is of 36 ounce.....so customers are not willing to buy 18 ounce pack..............so that product is not in sale.....hence that is causing loss.....
ReplyDeletesecondly...plastic container may be the reason for loss....as these are costly...
namrata nagpal
ReplyDeletehie everyone..
frst of ol the cost is definetely involoved in producing plastic containers which was one of the reasons for less profit .
next..why the manufacturer decided to change its strategy from 18 ounce cartons to 36 ounbce containers??
what were the present taxation policies involved behind this????
surely the cost has increased due to the new strategy which resulted in more of the sales but less of the profit..the cost was actualy hidden and was realised aftrwards....
This comment has been removed by the author.
ReplyDeletethnx for appreciation sir.
ReplyDelete2. 60 % of the sales now are from the 36oz packing
3. The pricing of the 18oz carton was $2.00 . Initially the 36oz carton was supposed to be priced at $ 3.5 to provide an incentive to the consumer to buy it. However to recover the increased costs of the machine the prices were raised to $ 2.5 and $ 4.00 respectively.
i think the reason would have been that ISOLATION PRICING schema was not been practiced.(I don’t know the exact term to be used here).
i mean they wud have thought that expense increase will be compensated and shud be distributed among different products of same brand(in this case 18 and 36 oz)…..because both were raised by .5 dollars.
Now what happened the sales of the product which was giving profit decreased and 36 oz packing shoot up to 60%.
What I have in mind is to alter the price of both the packing accordingly.
And there is no bad thing to earn a less profit for a while and make a commodity essential for customers…..and later increase it or the things may become normal(as the onetime expenses of machine will be counter balanced)think in long run….world is not gonna end up in 2012
;)
so there must not be any coupling what i think in this case.each product shud be independtly priced and above cp(not below it)..
certain pricing schema which may lure the customer must be introduced.
Lemme say sum facts
(I feel easy in rupees) (2.5 dollars=25 rs)
Per unit cost is shown:
18oz 25 rs=1.389 per oz(decrease it a little)
36oz 40rs=1.12 per oz (here we can increase it a bit)
Earlier it was:
18oz 20rs 1.12per oz
36 35 0.97 per oz
My recommendation:
18 oz 22=1.22per oz
36 oz 40=1.12 per oz(the introductory price scheme is still followed)
So compensation is there….as cost per oz for 18 oz is reduced.
So things are clear here, why to reduce the sale of 18 oz if it is profitable, and why not to increase the price tag of the 36oz if it is making you a loss!!
Lesson learnt: market is not sales driven it is profit driven.
;)
Think in long term 2012 is nothing…
@all… With this post we bring an end to this weeks case study.
ReplyDeleteCongrats to Gagan and Sumeet for cracking it and making it to the weekly hall of fame as winners of the first case study. The juice producer feels that the problem has been diagnosed pretty well and he will go along with the suggested solutions.
Please find below the recommended approach as per Harvard
Question
A major producer of juice is in the business of processing and packaging fruit juice for retail outlets. Traditionally, the producer has packaged the juice in 18-ounce carton containers. Recently, in response to demand from the market, the producer purchased a machine that packages the juice in plastic gallons (36 ounces). Over the next couple of years, sales continued to grow on average of 20% per year. Yet, as sales continued to increase, profits steadily decreased. The owner cannot understand why. He hires you to help out.
Recommended Solution
High Level Plan of Attack
• We know that sales have been increasing, so revenue is not an issue. The problem must be costs.
• Because of the change in packaging, the producer has incurred additional costs that are not accounted for, causing profits to decline.
Lay Out Your Thoughts
• Use the profitability framework. Gather information on the revenue side, but focus mostly on the cost side.
Dig Deeper: Gather Facts/Make Calculations
• Looking at the revenue side, how much did the producer charge for the 18 oz. carton? $2.00 per container.
• For the 36 oz. plastic gallons? For twice the size, the producer figured he would provide an incentive to buy by selling them at $3.50 per gallon.
• How was the cost of the new equipment accounted for in the price? The producer ended up raising prices across the board by $.50 on all packages, both cartons and gallons, selling at $2.50 and $4.00, respectively.
• What about cost of packaging? Does it cost the same to package the juice in cartons as it does in gallons? Well, I guess not. Plastic is more expensive than the paper carton we have traditionally used. Also, we had to hire more experienced labor to operate the machine because it is a little more complicated than the carton machine. We figured that because the demand was higher for the gallons – we would cover our costs through increased volume.
• What about overhead costs? All costs for the factory are added together and divided by the number of units produced.
o This should raise alarm bells. This is now clearly an issue of cost allocation. The price on the plastic gallons should be higher due to higher costs. Now you need to see to what extent this is affecting the bottom line.
Let's try to understand the trend in sales. What percentage of gallons versus cartons is sold? The more our customers notice the gallons, the more they like them. As the overall volume is increasing, plastic gallons have comprised 60% of the sales. The owner has been very pleased about that.
• It seems to me that it costs more to package in the gallons, yet the price is not higher on a per ounce basis. In fact, it's lower. Have you done any proper cost allocation to determine which type of product should carry which costs? No, we haven’t.
Key Findings
• The major finding in this case is the additional costs associated with the plastic gallons were averaged out over all units, including cartons. This resulted in a misallocation of costs and inappropriate pricing.
• The plastic gallon products have been priced at a lower rate than they should have been. Result: the more gallons the juice producer sold, the more profit the company lost out on.
Recommendations
• This firm should conduct a thorough analysis of activity based costing to determine the overhead costs and direct costs associated with each item in the product line. They should then use this data to price accordingly.
:)
ReplyDeletethankz
Congrats to you Sumeet...
:) thank you :)
ReplyDeletecongrats to you too...
heyyyyyyyyyyy!!!!!!!!!!!!!!
ReplyDeletecongrtzzzzzzzzz 2 both d winners...........