Markworth Products (MP)
Fall 2014, Section A
Alamgir Khandwala, 212357109
Mohammed Islam 212540191
Sobia Ali, 210515062
Summaiya Haque, 211992948
Date of submission: 9th November 2014
To: Mr. John Adam, President
Subject: Cost System and Capital Budgeting Improvement
Please find attached report for Markworth Products for recommendation regarding appropriate costing system as it grows as an organization and capital budget evaluation.
Introduction and Relevant Facts
Markworth Products (MP) is a new Canadian public company in the plastic packaging products industry. It develops technologically advanced machinery and moulds that give MP a competitive advantage over its competitors. John Adam has requested us to develop efficient costing system and improve capital budgeting process.
- MP does not have an efficient costing system in place to allocate the direct manufacturing costs and indirect manufacturing overhead costs for accurate prediction of product costs.
- The current approach for capital budgeting to evaluate new equipment does not meet the current industrial standards of accepted NPV practices
- Holding inventory for clients free of charge
- Potential market loss due to emphasis on reducing costs and value leadership
- Above average profits due to competitive advantage last temporarily as competitors imitate the technology
The plastic products industry is competitive and technology is becoming an increasingly competitive factor to improve product processes and performance. The industry is being pressurized to reduce the use of plastics and use higher-performance polymer materials in its applications to comply with standards of environmental concerns. MP has developed extensive R&D in place. However, due to changes in trade policies, MP has to compete in the global marketplace.
MP has competitive advantages over its competitors in terms of higher quality labour, management skills, and technological advantages. They continuously focus on improving products and processes, and stress new products through a policy in place that requires that 25% of annual sales must come from products produced in the past 5 years. Their set-up costs are also relatively cheap and inexpensive, where they use 5 moulding machines to produce 100 different products in each period compared to up to 20 machines based on older methods. Because of this advantage, MP’s growth rate exceeds the market growth rate.
Since MP does not have an efficient costing system, they cannot accurately determine product pricing. Thus, when it comes to mark up and mark down, their policy is inadequate. They also carry large inventory for their clients free of charge, which requires them to have a larger warehouse with additional inventory carrying costs and rent costs. Even though it takes 6 months to a year, their technology is copied easily.
Due to the Canadian market not being large enough and the trade policies in place, MP has an opportunity to expand to the global market and introduce new distribution methods in addition to their sales staff of 8. Also, constant technological improvements in the industry provide a chance for MP to achieve cost and value leadership.
There is increasing threat of competition through globalization and industrial requirements for constant technological improvements due to technology imitation. Moreover, due to industrial governing standards for proper plastic disposal, MP is pressurized to come up with efficient waste disposal solutions. Finally, the industry will have to face competition from substitute products and reduced growth.
Marketing Strategy: MP’s sales staff consists of only 8 employees and high competition in the global market, other sales strategies or