ACLASS PLASTICS PTY. LTD.
AClass Plastics Pty. Ltd., located in South Australia, is a low-cost producer of plastic moulded kitchenware. AClass Plastics has enjoyed the financial success associated with their dominant market position. However, Anna Lyst, Management Accountant of AClass Plastics, has become concerned over the deterioration in the firm’s financial performance during the last three years. During the last three years, AClass Plastics has managed to increase the sales of its Glamour range of products relative to its AClass range (plastic plates and cups). Because the Glamour range generates a return on sales of at least 40% while the AClass range generates a return less than 30%, Anna Lyst can’t understand why the increase in sales in its Glamour range hasn’t translated into a higher sales margin %.
Four years ago, Iva Nidear, the Sales Manager, suggested that AClass Plastics could maintain their market share and boost profitability by extending their product range (the AClass products) into new product lines (the glamour products) because they offered premium-selling prices over their existing product range. Despite the lack of support from some of the managers, AClass Plastics implemented Iva Nidear’s recommendation and introduced two premium products (the glamour range):
1. Glamour Containers: Introduced three years ago, these are modern-looking airtight storage containers that can be used to store a range of different foods.
2. Glamour Bowls: Introduced one year ago, these serving bowls are made with high quality plastic with gold flecks and compete favourably with the latest Italian-made bowls.
Both products are sold in up-market department stores such as David Jones and specialty retail outlets and are comparable to the latest Italian-made bowls and containers.
Anna Lyst had just seen the financial results (see Exhibit 1) for the most recent financial year and was extremely disappointed and commented:
The Glamour Bowls and Glamour Containers do seem more profitable than our traditional kitchen product range, but overall profitability is down. Perhaps this is the tougher global competition I have been reading about. At least our latest product line, Glamour Bowls, is showing promising returns at such an early stage, with a return on sales greater than 50%. Perhaps we should follow Iva’s advice and introduce even more new innovative premium-selling products. Based upon Iva’s market research, consumers are willing to pay higher prices for a range of other potential specialty products. While most of our sales of traditional kitchen products (our AClass range) have been in South Australia, a majority of the sales of our newer product lines has been in Victoria and New South Wales. This is most likely due to our intense marketing campaigns in those geographical areas. This has had a substantial impact on our transportation costs, which now constitute 35% of the $22,500 selling & distribution costs.