ASSESSMENT BRIEF
Q1. Cost-Volume-Profit (CVP) Analysis and Pricing Decisions
Kien Sneakers currently operates in the men’s and women’s price market segments. Assume that the company’s income statement for 2022 is as follows:
Men’s Women’s
Sales Volume 20,000 25,000
Revenue €1,200,000 €1,250,000
Cost of sales €600,000 €700,000
Distribution Cost €100,000 €112,500
Gross margin €500,000 €437,500
Marketing and Sales €100,000 €100,000
General administration cost €300,000 €275,000
Net profit €100,000 €62,500
Required:
Using this data, calculate the break-even point in volume and value for both men’s and women’s market segments.
(5 marks)
What quantity of men’s sneakers would Kien Sneakers need to sell to generate a profit of €150,000 from that market segment?
(4 marks)
Calculate the company’s margin of safety in 2022 in each market segment in percentage terms.
(5 marks)
Kien Sneaker’s marketing team is convinced that a 15% reduction in the selling price of women’s sneakers would cause annual sales to increase by 5,000 units. Use this data to calculate the price elasticity of demand for women’ sneakers and use this to estimate the profit-maximising price.
(6 marks)
(Total: 20 marks)
Q2. Decision Making under Risk & Uncertainty
2.1 Kien’s marketing manager has been asked to develop a new promotional strategy for the company, which has been facing stiff competition from some new entrants. After much research she has narrowed down the choice to three strategies and has constructed the decision tree shown below – which includes the payoffs and probabilities she has managed to estimate – but it is incomplete. She has identified three alternative promotional strategies (and their upfront cost): customer referral programme (€35,000); causes and charity (€30,000); branded gifts (€50,000). The impact on turnover in either case depends on the ‘reach’ of the promotional campaigns which could be high, medium or low. The payoffs represent the increase in annual sales turnover in €000s over a one-year period (excluding up-front costs).
Required:
Complete the decision tree by calculating the value of any missing elements (shown as A, B, C, D, all marked with a *).
(4 marks)
Use the decision tree to advise the marketing manager on the best option to choose, assuming the company wishes to maximize expected annual sales turnover, net of upfront costs.
(3 marks)
2.2 The business manager of Kien Sneakers wishes to analyse three strategic options available to the company (Cost-cutting; Diversification; Expansion) under four possible UK macroeconomic conditions: Recession, Low Growth, Medium Growth and High Growth. He has summarised available information in the following pay-off matrix (with impact on company profits in the next year in €000s).
Macroeconomic Conditions
Recession Low Growth Medium Growth High Growth
Cost-Cutting 100 130 170 200
Diversification -120 50 240 300
Expansion -250 30 300 500
Required:
Which option should Kien Sneakers choose based on of the following criteria? Indicate what attitude to risk each represents.
Maximax (2 marks)
Minimax (2 marks)
Construct a potential regret matrix and use it to determine the best option according to the minimax regret criterion.
(5 marks)
The business manager decides to access the latest macroeconomic predictions from the Bank of England. This provides him with the following probabilities: Recession (15%), Low Growth (30%), Medium Growth (35%), and High Growth (20%). Which option is preferred according to the expected monetary value (EMV) criterion? What attitude to risk does this represent?
(5 marks)
Write a brief note to the business manager of Kien advising him of the best option to choose, giving your reasons.
(4 marks)
(Total: 25 marks)
Q3. Investment options
Kien Sneakers has identified two possible three locations (Hoxton or Hounslow) for its new warehouse. The finance manager has estimated the upfront costs and associated cashflows (as shown below).
Hoxton Hounslow
Year 0 (€25,000) (€50,000)
Year 1 €15,000 (€5,000)
Year 2 €15,000 €5,000
Year 3 €7,500 €10,000
Year 4 €5,500 €15,000
Year 5 €3,000 €20,000
Year 6 €2,000 €30,000
Calculate the payback period for each relocation option and suggest which of them (if any) is worthwhile if it is the company’s policy not to accept any option with a payback period longer than 4 years.
(4 marks)
Suggest reasons why it would be unadvisable for Kien Sneakers to base the ‘go-ahead’ decision purely on the payback period method.
(4 marks)
Kien Sneakers now asks you to undertake a financial appraisal of the two location options. The planning period for the appraisal is six years; assume no salvage value at the end of that period. The finance manager believes that Hoxton is a less risky choice than Hounslow. On this basis, he believes that Hexagon Sounds should use a discount rate of 9% for Hoxton and 10% for Hounslow.
Calculate the Net Present Value (NPV) for each location. Which location would you advise according to this technique? Explain your reasoning.
marks)
(Total: 20 marks)
Q4. Individual and group decision making; organisational structure
Using your experience in the Sneakers Inc business simulation game and the theory covered in the module, answer the following questions (the total word limit for this question is 450 words, divided equally between the three parts):
4.1 Choose two group decision-making techniques and discuss their advantages and disadvantages in relation to specific decisions taken in the Sneaker Simulation Game. (5 marks)
4.2 Compare individual and group decision making and provide examples from the Sneaker Inc Simulation game to illustrate your arguments. (5 marks)
4.3 What would you differently if you had to play the simulation game again as a group and why? Please note that this is a reflective question about your own contribution to the game rather than that of your colleagues (5 marks)
(Total: 15 marks)
Q5. Social and environmental impact (the total word limit for this question is 600 words, divided equally between the two parts)
5.1 Provide a summary of the environmental impact of sneakers.
(10 marks)
5.2 What would you recommend sneaker companies to do to become more sustainable? In your answer provide examples of what different companies are doing.
(10 marks)
(Total: 20 marks)
In your answer, you can use information from the articles listed below. You are expected to conduct additional research on the subject.
