Please clarify

Question

The case has assumed that profitability will reduce < $15 mn . But given the projected price per envelope, quantity projected to be sold, & cost per envelope - the client remains profitable in either case.

1 . Price per envelope remains : $ 1

2. Cost per envelope has been deduced to be $ 0.7 per envelope

3. Quantity sold: 50 mn, 100 mn & 75 mn in previous year, current year & next year respectively

3. Taking the above numbers

Profits in previous, current & next year: $ 15 mn, $30 mn & $22.5 mn

So client can anyway maintain the profit.

Is there anything i am missing here?

Answer 1

Anonmymous A is correct, total market in the current year is 100 mn USD, and our firm has a market share of 50% (see both the first blue box and the pie chart). I was wondering though whether this case could be solved by lowering the production volume instead. We are producing below our current capacity already (conveniently, our max capacity would be enough to cover the needs of the entire market in the current year). However, starting from next year our max capacity will already be higher than the size of the entire market. Couldn't a strategy involve selling surplus equipment (machinery to other markets in the same business abroad with fewer technological disruptors - emerging markets whilst selling plant/land to other businesses that are not operating in the market but that are operating in the US), lower our production (hence total costs - specifically, we could reduce both COGS and labour costs by about 25% as this is what is expected as a market trend overall) and invest the proceeds of the sale to either buy a competitor (hence increasing market share without incurring in price wars and complicating things with the regulator - see the monopoly bit), enter a different market abroad (see "hard question" bit) or increase our R and D investments (currently at about 3,4% of total costs - see long term solutions)?

Conveniently, if we acquire a(ny) competitor and increase our market share to 60%, and if we assume the same cost structure of the consolidated company (that is, we can lower per unit costs of the acquired company to that of the client) whilst lowering by 25% the expenditure of COGS and labour costs of the resulting firm, we come to total profits of 14 mn USD which is pretty close to our target.

Please remember that costs are optimised at our current production level, not at a reduced one: we can lower variable costs by producing less.

Answer 2

Total market is 100mn, not client's quantity sold - I think

Answer 3

I think it is also safe to assume that a 25% reduction in market share of secured envelopes due to infringement by substitute product could lead to 25% decrease in market share of Customlope