Exhibit E Case Study
They focus on selling cement or urinating, preparing and delivering ready-mixed concrete. There are little generated by using agents and dealers who sell a broad array of building products sourced from several suppliers. 2. If we assume 2004 prices of 45. 91 Euro met, what does the new break-even level do to the utilization rate, given its new capacity level? What can you say about its effect upon Agate’s pricing? If 2004 prices is 45.
91 Euro met and the investment is 10. 7 million Euro, Aged needs sell another more 233,000 metric tons to make up this investment.
And adding two new dry-process kilns could raise energy efficiency and productivity, allow the utilization of organic waste for fuel and reduce organic pollutants. Those improvements will reduce costs, so Aged can decrease its price and get the same profits. 3. It is expected that the dry-process technology will help achieve an increase of 22% in production cost efficiencies, compared to current level.
How might such an increase affect price competitiveness? Aged can reduce its price since its cost decrease and other companies do not have such cost efficiencies. T Agate’s price must lower than its competitors.
Cement or concrete buyers enjoy guaranteed low price, so they will buy more commodities from Aged since it has lower price, which means Aged has stronger competitiveness than other companies. 4. Assuming that Agate’s sales by 2008 will have grown at the forecasted global market rate increase of 22.
6% over those of 2004, what will be its production and utilization rate? From the Exhibit D and E, in 2008, the sum of non-residential and non-building of total market is 71. 96 met. If Agate’s sales by 2008 will have increased 22. 6 percent over the 2004, the total market share of Aged is 34. 2 percent. Thus, the sum of Aged could be around 24.
met. But in Exhibit E, the sum of non-residential and non- alluding of Aged is only 9. Matt. So if the growth of 22. 6 is true, its utilization rate Nil be 2. 63.
If Aged does capture 20% market share in the markets of Lebanon, Kuwait and SAC, as estimated, at what sales – units and revenues, will it break-even? What is the B/E market share? If Aged capture 20 percent market share in the Lebanon, Kuwait and IAC, it will sell 1. Matt cement. In the reading, its expected investment will be $6. 3 million, which means if its price is equal to $3. 25 per ton, Aged will break-even.
So Aged can gain profits when cement’s price is higher than $3. 5 met. On the other hand, if its price n Lebanon, Kuwait and I-JACK is equal to the other market, $60 met, it only needs 105,000 metric tons or 1. 08 percent market share to make a break-even. And as reading says, cement is strictly a commodity whose price is uniform in a given market. Thus, when Aged capture 20% market share in the markets of Lebanon, Kuwait and IAC, it may be the largest industries occupying the most cement share and can formulate its price for the whole market in the Middle East.
D. In case Aged reduced price by 10%: 1 . What effect would such price reduction have on gross margin?
Capacity utilization will increase, resulting in an increase in market share and a reduction in unit costs. Thus, with the larger market share and lower cost, even though the price decrease, it may also generate more net income. Therefore, its gross margin may also increase.
2. By how much must sales increase to avoid a loss in gross profit? If unit costs do not change, sales need to increase at least 11 percent to make up price reduced. However, the unit cost would be reduced due to capacity utilization augment. Thus, sales may increased no more than 11 percent to avoid a loss in gross refit. What can you say about the potential implications to such price reductions, upon the industry and the market? Agate’s competitors had better position to compete on price since they offered fewer support services and they employed a transactional approach.
So when Aged reduced price, its competitors could also reduce more prices for more market share and may gain more profits. However, market share is limited, so for whole market, the consequence is lower price and lower revenues. The industry would fall into vicious competition and no one can get more profits than before. 2.
Based on your analysis, is Agate’s contemplated expansion into Lebanon, Kuwait, and AAU advisable or inadvisable? Argue your position. Recommend Aged to expand into Lebanon, Kuwait, and AAU.
Firstly, Lebanon, Kuwait, and I-JAKE have a not yet fully developed cement market. It has a large amount of demands. Secondly, the markets in regional are nearly saturation, Aged need new market to extend its market. Thirdly, as the balance sheet shows in 2004, Aged has more liquid assets on hand, and it needs use them and make benefits. Therefore, expanding the new market in Lebanon, Kuwait, and AAU is a good idea as the next development step.