To Trim or Not to Trim: That is the Question Case Study Solution

amounting to 1681.7. Therefore, it can be determined that, it should not drop all 50 products and instead it should increase its marketing expenditure on those products with sales revenues lesser then their variable cost.

Additionally, conducting the same calculations under 12% discount factors would give an NPV amounting to 1513.8. If the company decides to drop all 50 products then the NPV lost would also be 1513.8 and the cost saving in the form of fixed cost saved at 50% would amount to 69.5. It would generate a revenue loss amounting to 1444.3.

Moreover, the discount factors considers the value of time, in which, today’s $1 would be relatively greater then tomorrows $1. This could be caused by inflation, various political factors, environment and the volatility of the market. Therefore, the management of the company uses discount factor to generate present value of an investment return in the future, so that they could make appropriate decision regarding the acceptance or rejection of the potential investment.

Exhibit-1

Exhibit-1

Question No: 4
If the company finds a buyer for all 50 products then, it can be evaluated that the variable cost of production for all 50 products amount to 125.8 and the fixed cost associated with these product, after saving, amounts to 69.5. Hence, the total cost amounts to 195.3, for all 50 products. Furthermore, it was recommended that, it would at least charge a 20% profit margin on each product sold. For which, the average product cost was calculated by dividing the total cost with the total number of products,which amounts to 3.906 and charging a 20% profit margins would amount to 4.6872, which was the average selling price of each product sold. Therefore, it can be determined that, the company should sell all its products to the buyer at 234.36, with respect to the cost of 195.3 and charging a 20% profit margin.

Exhibit-2

Exhibit-2

Question No: 5
An issue is facing the management’s incentive system, in which country sector heads and their sales organizations were evaluated on the basis of sales minus local country costs. However, it was assessed that, these items were most influenced by the manager on the income statements. It was evaluated that, the manufacturing cost of each country was different from one another, this can be attributed to the external factors acting upon them with respect to that country. For example, a certain country manager could be faced with higher labor cost, as per the labor laws imposed by that country, increasing their cost of manufacturing in that country, as compared to other countries. Hence, the increased manufacturing cost could have significant adverse impacts on the performance evaluation of that country’s manager, which would also adversely affect their incentives or bonuses. Therefore, it was recommended to the company that, it should use cost to sales ratio of each country’s revenues to effectively evaluate the performance of that country’s manager. This would motivate them to increase their sale revenuesin their countries to enhance their respective performances, with respect to the external factors faced by them, which would either inflate or deflate their cost of manufacturing.
Question No: 6
After analyzing the case, it was recommended to Thomas Ebeling, the CEO of Novartis pharmaceutical that, he should not consider dropping all the 50 products, as it would cause the company to lose revenues amounting to 1681.7 at 8% discount factors and 1444.3 at 12% discount factor. Furthermore, the company should not drop the 15 products amounting towards generating $2.4 million in sales, as it would distract the company away from its mission and strategic objectives and it could also diminish the image of the company in the market. This might decrease its future sales growth and compromise its ability to ensure its going concern in the highly diverse and competitive market. Therefore, after evaluation of the cost and revenues of the company’s products, it can be recommended to Thomas that, he should focus on those products that have sales lesser than their variable costs and increase its marketing expenditure on those products. That would enhance their appeal among the customers and increase the amount of sales revenues generated from these products. Doing this would increase the overall revenues generated from its diversified product portfolio…………

 

 

 

 

 

 

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