About the company
Dairy Commercial Holdings is based in North America. The gap in the provision of a wide range pasteurized dairy products created the need to form a dairy company in the area hence the formation of Dairy Commercial Holding. The primary line of business of the company is the production and sale of daily products such as ice cream, frozen desserts, milk packing, yoghurt, and chilled dairy products among others.
Products of the company are sold both in the domestic market and a number of neighboring countries. Dairy Commercial Holding is a public company that was formed by Brigham White in 2003. The owner raised capital from savings, note payable and bonds payable. In 2009, the company was listed on the stock exchange, thus making it a public limited entity.
Environmental scan factors
There are a number of models that are commonly used by managers to carry out environment scanning of their businesses. When making major business decisions, it is important to carry out an analysis of the possible impact of the decision on the business environment. Some of the models are PEST, SWOT and PESTEL.
Based on these approaches, some of the factors that managers will focus on comprise of political, economic, social – cultural, technological, environmental, and legal factors. Out of the six factors, economic and legal factors are the most important in making decisions on whether to continue or to stop the operations of the business (Bhattacharyya, 2011).
The economic factors will give information on the cost of production and the profitability of the company. It will further give information on various variables in the economy such as interest rate, exchange rate that are likely to affect future growth of the company.
On the other hand, legal factors give management information on the various laws that might affect their decision. Some of the important laws are consumer law and employment law. All the other factors are significant however, economic and legal factors will have more impact on making the decision to close or continue with operations (Siddiqui, 2005).
Evaluation of financial performance of the business
Total cost of workers in a month
= 100 * 20 * $70 = $140,000
Cost of other variable input in a month (20 working days in a month)
= $2,000 * 20 = $40,000
Total variable cost in a month = $140,000 + $40,000 = $180,000
Variable cost per unit = Total variable cost / total number of units
= 180,000 / 6,000
Total cost = fixed cost + variable cost
The integral of marginal cost gives the total cost. Thus, from the marginal cost, we can obtain the total cost.
Total cost = 30Q + C
Where Q = units of output
C = constant of integration and it represents the fixed cost
Assume that the value of the fixed cost (C) is $100,000.
Profit = Total revenue (TR) – total cost (TC)
Total revenue = price * units of output
= 32 * 6,000
Total cost = fixed cost + variable cost
= 100,000 + 180,000
Profit = 192,000 – 280,000
Based on the calculations above, a simple marginal cost statement can be generated as presented in the table below.
Dairy Commercial Holdings
Marginal cost statement
As at the end of the month of July, 2013
It can be observed that the company is making a loss. The sales revenue can adequately cover the variable cost of production but cannot cover the fixed cost of production. This implies that it will take the company a long period of time to recover initial costs of investment.
How to improve profitability
There are a number of ways through which a business can improve profitability. All these ways should be used jointly. The first plan is to reduce the variable costs specifically labor.
This can be achieved by reducing the number of workers for example from 100 to 70. Secondly, the management should increase the number of units it produces and sells. The break even number of units for the company is 50,000 units. Therefore, management should increase production and sales from 6,000 units to a minimum of 50,000 units for it to cover the total costs.
Circumstances under which the company should discontinue its operations
The decision to shut down is made by the management of a company when the revenues earned from the goods produced and sold cannot cover the variable cost of production. Based on the calculations presented in the table above, it is clear that the revenues can cover the variable costs of production. However, the revenue does not adequately cover the fixed cost of production. Thus, Dairy Commercial
Holdings should not be shut down in the short run. A major qualitative factor that management should consider before shutting down is the business surrounding. A favorable business environment will facilitate achievement of the various estimates provided in the cost benefit analysis (McGuigan, Moyer, & Harris, 2011). Other factors are the employee morale, schedule and other staffing related factors.
Bhattacharyya, D. (2011). Management accounting: Marginal costing and cost – volume-profit analysis. South Asia: Dorling Kindersley (India) Pvt. Ltd.
McGuigan, R., Moyer, R., & Harris, F. (2011). Managerial economics: Applications, strategy, and tactics. Mason, OH: South-Western Cengage Learning.
Siddiqui, A. (2005). Managerial economics and financial analysis. New Delhi: New age international (P) limited.