Josiah Doncaster Ltd

Topics: Variable cost, Fixed cost, Costs Pages: 5 (1749 words) Published: October 9, 2010
Revised 11/03/2010

Josiah Doncaster Ltd
On the 4th of March, the Board of Josiah Doncaster met for the second time in three weeks. The main item on the agenda, as before, was what decision to take on the proposed New Product Strategy, which arose out of the Consultant’s Report commissioned by the Marketing Director. Established in 1740, the company had built up a world-wide reputation for fine household china. Its management was paternalistic, very conservative financially, and committed to preserving company traditions. Yet over the last 10 years the company had extended its product range into industrial porcelains for high-voltage insulation, and it had been very successful. Bill Hawkins, the newly-appointed Marketing Director, opened the meeting with an aggressive presentation. At 35, he was a good 20 years younger than anyone else on the board; and with a Harvard MBA, he was the only member of the board with formal management training. “I hope that certain members of the board have reconsidered their positions since our last meeting. As far as I am concerned, my recommendations of three weeks ago still stand. Let’s go through them once again, shall we? What are the main facts from the Consultant’s report? Let’s take them one by one, shall we? a) b) c) d) e) f) g) h) At a £45 selling price per filter unit, and a market size of 1 million units, the present market size is £45 million. One company, Western Ltd., has an estimated 85% market share. The market does not like working under a monopoly, and especially as Western Ltd. do not give volume discounts. The number of buying points is estimated at 20,000, of which 220 in Birmingham, 150 in London, and 70 in Manchester, take 55% of the total. There are 35 manufacturers of equipment powered by compressed air, who dominate the market; and 15 major suppliers of air compressors. Western’s don’t make a thing themselves -- they assemble bought-in parts. So could we. There is no technical barrier to our entry into this market. Their estimated fixed costs are thought to be £1,000,000; with variable costs estimated at £27 per unit. Total cost/unit on sales of 850,000 is thought to be £28.20. Our fixed costs are estimated at £1,800,000; but our variable costs are clearly lower than theirs. We estimate them at £21.20 per unit. On any kind of volume the total cost of our ceramic core is down to 50p each; their sintered bronze core costs them £6 to buy in. We have a patented technological edge over Western in the ceramic core. They can only filter down to 64 microns with the sintered bronze; whereas we can tailor ours down to any desired filtration level. Finally, we have a name which is known and respected. Everyone has heard of Doncaster. We have a 200-year reputation for quality.

i) j)

... So I say let’s make our move. Look here ... ”He went over to the new flip chart, which was mounted on an easel, by the Adam fireplace. Pointing, he said,

Written by the late Hugh Murray, and revised by Laura Cousins with permission from his estate

“Page 1. Strategy: Exploit the anti-monopoly feeling of the market, our cost advantage, and our product superiority, by launching our Filter Unit against Western. Page 2. Tactics: Price 10% below Western. Give 25% bulk discount. Personal selling to the key buying points, and the equipment manufacturers. Sell to the rest by direct mail and trade journal advertising. Page 3. Targets: 10% of the market in Year 1. 15% of the market in Year 2. 25% of the market in year 3. Page 4. Costs: Sales in units 100,000 150,000 250,000 Fixed cost/unit £18.0 £12.0 £7.2 Variable cost/unit £21.2 £21.2 £21.2 Page 5. Total cost £39.2 £33.2 £28.4 Profit/Loss: The average price per unit is £34.8; our estimated position is a £4.40 loss/unit year 1 i.e. £ 440,000 loss a £1.60 profit/unit year 2 i.e. £ 240,000 profit a £6.40 profit/unit year 3, i.e. £1,600,000 profit. Conclusion: The downside risks are small. Break-even is at 13% of the market. With all we have...
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