a realistic business scenario

This assessment item continues on from Part 1 of the STPL Case Study

he following case study has been developed to provide you with a realistic business scenario from which you can develop the necessary decision making skills to meet the learning outcomes of this subject. The case study will form the basis for Assessment Item 2 and 3.

Background

Sara Tea Pty Limited (STPL) is a 100 percent privately owned business. Incorporated in 1972, the company manufactures and distributes four core products to Australian supermarkets, bakeries, cake shops, restaurants, and delicatessens. The company’s products include decorated maca-sponges (desert style cake that is a combination of a macaroon and a sponge), cheesecakes, celebration cakes, and assorted pastry products. The company’s mission is to ‘bring joy to all our consumers’.

The business supplies maca-sponges in three sizes. The large maca-sponge weighs 1.5kg in and serves up to 24 people. The medium maca-sponge serves 10-12 people and weighs 800 grams. The smallest, and the most popular, maca-sponge weighs 300 grams and serves 5-6 people. Maca-sponges can be purchased as simple base cakes or as decorated products. Sales of the undecorated maca-sponge cake account for approximately 95 percent of all sales.

Competition

Historically STPL was the first mass producer of maca-sponges in the world and by the year 2000 controlled 96 percent of the total Australian market. During STPL’s founding years, competitors tended to be small local delicatessens or bakeries that could not service a national market. In contrast, STPL was able to supply Australia’s two largest supermarket chains with high-quality maca-sponges in the volumes demanded by them. Further, the large volume of maca-sponges supplied by STPL (400,000 units in 2010, 520,000 units in 2011) allowed the business to establish reliable and efficient distribution networks. Additionally, the entrepreneurial flair of the business owner, Mrs Esmeralda Watson, enabled STPL to grow a large and efficient production plant. By 2011, the business occupied a factory and warehouse of over 5,000 square metres and operated 12 ovens capable of cooking 10 large maca-sponges each. The automation process within the production plant meant qualified chefs were no longer required to prepare the product which allowed the use of low-cost labour, particularly inexpensive teenage workers. 

By 2015 the monopoly enjoyed by STPL had been eroded. Specifically, a new mass supplier of maca-sponges had entered the market and was competing with STPL on price and quality. This new competitor, Nona Pty LTD (NPL), claimed to have a superior packaging process that meant its products had a longer shelf life than STPL products. This was further supported by promotional literature that stated that they used qualified chefs and superior technology which utilised the latest cooking techniques.

Business Context

The consolidation of the Australian sugar industry saw STPL’s four small sugar suppliers consolidated into a single sugar supplier, CRS Ltd. With the loss of competition amongst sugar wholesalers, the price that STPL paid for this major ingredient rose sharply.

The simultaneous reduction in the number of Australia’s small and medium supermarket outlets and the further consolidation of the market in the larger supermarket chains, namely Dangerway/Furworths and Holes/Lyer, diminished the ability of STPL to influence its major customers and made the firm more dependent on maintaining their relationship with these major retailers. As a result, during this period, STPL became a price taker rather than a price setter.

During 2017 Holes/Lyer and Dangerway/Furworths commenced installing bakeries into their supermarkets. These bakeries are capable of producing maca-sponges in-store and consequently, they promote them as baked fresh today. The supermarket chains however also continue to purchase maca-sponges from STPL and their competitor NPL.

Finally, the business has been significantly influenced by changing health and safety standards. Specifically, consumers are becoming more conscious about what they eat and where their food has come from. This issue has been magnified by the increased regulation of safe work practices and food handling processes. These pressures have generated significant additional costs for STPL as its factory and warehouse were not purpose-built food production facilities, having been converted from what was originally a crop chemical mixing plant.

Operations

STPL’s core operation is the production and distribution of maca-sponge bases to the Australian retail market. The business does not currently have a new product development process and has only sought to implement new products on an ad-hoc basis. For example, in 2014 STPL produced the first ‘Vegemite Maca-Sponge’ a vegemite flavoured maca-sponge. This product, however, proved unsuccessful and was quickly abandoned before there was any damage to the brand name. In 2015 the business imported a meringue making machine that adds colour and different flavours to products. Sales of these products have been very successful and STPL wants to continue investing in other machines that might add variety and value to their product lines.

Marketing is conducted through four sales representatives, each of whom is a relative of the business owner, Mrs Esmeralda Watson. These sales staff have had little formal training in marketing with the most senior of the sales team holding only a diploma in marketing. Mrs Watson’s nephew, Shaun Lamb, is the operations manager at the manufacturing plant with over 15 years’ experience in that role.  In recent years, he has not been as motivated to work as he was when he commenced with STPL. He often comes in late and is very reluctant to adopt any ideas that staff or customers suggest.

The manufacturing plant operates on three 8 hour shifts. Cleaning and maintenance occurs over the weekend. Production begins with the addition of raw materials which are first measured and checked for quality. Whilst the raw materials are being weighed the machines are started to ensure the ovens are warmed up ready for the baking process.

Recipe ingredients are then loaded into mixing bowls and the automated process mixes the different batches. During the mixing process cooking trays and storage boxes are manually prepared. Once mixing is completed the mixture is then spread onto the cooking trays. After spreading, the trays are manually loaded into the ovens and cooked. Once cooking is complete the maca-sponges are manually removed from the oven and placed on cooling racks. After the maca-sponges are cool they are shrink-wrapped and boxed ready to be transported to the warehouse from where the products will be distributed to customers.

The various cooking processes on the factory floor are overseen by a core team of seven supervisors who have varied years of experience. The seven supervisors manage a staff of 60 people who are predominately teenagers. Staff turnover in the organisation is very high, with the average length of employment only 6 months.

STPL takes great care in using generous amounts of the best quality ingredients to make their high-quality products perfectly. The owner prides herself on going the extra distance to ensure that the ingredients used are sourced from Australia wherever possible, and if unavailable only from approved overseas suppliers.

STPL conduct their own distribution by road transport. STPL owns a fleet of 5 trucks that are fully serviced and maintained by in-house mechanics. Mr Sherlock Watson, Esmeralda’s husband, is the head of STPL Logistics and has progressively strengthened the performance of the company’s trucking fleet. Mr Watson has been so successful that the STPL fleet are now doing additional contract work, distributing products for other companies, and generating further income for the company. The management of the business has developed a goal for the coming years which it has encouraged staff to adopt. ‘Our company will be recognised for delivering superior quality products. We will bring joy to our customers’. STPL Management has set some aspirational goals they hope to achieve by the year 2025:

• We will be the leading supplier of maca-sponge products to Holes/Lyer and Dangerway/Furworths.

• Sales in Victoria, NSW and Queensland will be 60% of the total market share.

• We will have the largest product range supported by leading innovative processes ensuring profitability and satisfaction of customer’s needs.

• Our reputation will be built on delivering a quality service to our customers where they will be delighted in the products they consume.

• We will be recognised as an employer of choice with motivated and challenged employees.

• We will be identified by our corporate citizenship and sponsorship of eligible charities. Our ethical and environmental standards will set the standards for other organisations.

However, in 2019 STPL has the following issues to contend with:

• The factory and processing machines are ageing. This makes it difficult for STPL to compete with the output of competitors with newer technology.

• STPL has been affected by quality issues. In December 2019 there was a major product recall because of packaging issues.

• The original converted factory is consistently causing problems. Only one of the last five inspections passed the minimum standards and that was after three attempts. Closure by regulatory authorities has been threatened on three occasions.

• The majority of management are members of the owner/founder’s family. Family feuding and personal disputes have plagued any attempt at conducting strategic management discussions. These personal family issues have divided company management and distracted them from focussing on growing the business.

• SPTL has been unable to secure any long term contracts with Holes/Lyer and Dangerway/Furworths.

Mrs Watson has appointed you into the role of Management Accountant. You have been tasked with resolving the issues identified and enabling the business to grow to meet its 2025 aspirational objectives.

Question 1   (15 marks)

Marty, the marketing manager, would like you to assist in providing information for a marketing strategy he is proposing at the annual general meeting next month. He is focusing only on the maca-sponge and wants to know the optimal product mix. Below is an estimate of the costs of the three sizes of the maca-sponge.

	Maca-Sponge Sizes
	1.5kg	800 gram	300gram
Selling Price	$30.00	$25.00	$19.00
Costs:
	Raw materials	$10.00	$8.00	$3.00
	Direct labour	$7.00	$4.00	$2.00
	Overhead	$5.00	$4.00	$2.80
	Selling and Admin	$3.00	$2.50	$2.20

Each of the three products goes through the same manufacturing process which consists of mixing, spreading, cooking and then packaging ready to be sold. The time for each process, in minutes, is in the table below.

	Mixing	Spreading	Cooking	Packaging
	HOURS REQUIRED
1.5 kg	4	8	30	3
800 gram	10	3	20	2
300 gram	8	8	20	2
HOURS AVAILABLE	8,000	12,000	100,000	10,000

Required:

1. Formulate a linear program to determine the expected mix of maca-sponge, ensuring that the maximum profit is obtained. (8 marks)
2. State the optimal mix and resulting profit. Discuss your results (7 marks)

Question 2   (15 marks)

To assist Marty with his marketing proposal you have offered to provide him with a break-even analysis for the 3 maca-sponge sized cakes.  The costs are the same (refer to the cost estimation table in question 1).  Fixed costs are $525,000 and the sales mix in the same percentage allocation that you calculated in question 1.

1. Calculate the unit contribution for each product.  (2 marks)
2. What is the sales mix?  (2 marks)
3. Calculate the weighted average unit contribution margin? (3 marks)
4. What is the break-even sales revenue in dollars?  (4 marks)
5. How many of each type of maca-sponges must be sold to earn a target profit of $350,000?   Assume a constant sales mix. (4 marks)

Question 3   (10 marks)

Marty wants to propose that STPL makes icing sugar figurines to go on top of the maca-sponges. The machine is available, however, it is not always reliable and will often make defective figurines. The figurines would be 1,2,3,4, and 5 inches tall. Based on one day’s production there were a total of 130 of the 1 inch figurine, 256 of the 2 inch, 25 of the 3 inch, 396 of the 4 inch and 278 of the 5 inch.  

Required

1. What is the probability of selecting a 1 inch figurine from the defective bin? (2 marks)
2. What is the probability of selecting a figurine that is 3 inches or more from the defective bin? (2 marks)
3. How can probability information be used to assist management in making better decisions? (6 marks)

Question 4 (10 marks)

The Board of Management tends to focus decisions based on events occurring in the next month, only ever considering a longer-term question when they set budgets, which typically have focused on the previous year’s events. You would like to encourage the Board of Management to adopt a stronger strategic focus rather than be operational in their approach to decision making. Explain the difference between operational and strategic decisions. Ensure you provide examples and current thinking about the role each type of decision-making plays within an organisation. (10 marks)

Online submission via Turnitin is required for this assignment. Details will be provided by your subject lecturer.

RATIONALE

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SUBJECT LEARNING OUTCOMES

This assessment task will assess the following learning outcome/s:

• be able to apply decision theory to business situations.
• be able to explain the use of simulation in complex decisions.
• be able to demonstrate understanding of the application of statistical hypothesis testing to decisions, with particular emphasis on quality control and interpreting the significance of regression coefficients in cost estimation.
• be able to apply cost-volume-profit analysis and linear programming to product mix decisions.

The requirements of this assignment cover up to and including Topic 8 of the Online Learning materials. The assignment is designed to develop your problem solving, spreadsheet (Excel) design, and written communication skills. The questions require you to apply the knowledge and tools covered in the subject topics in order to demonstrate your understanding of the subject content and also to illustrate your capacity for strategic thinking. The assignment will also test your ability to communicate and explain the impacts of your findings whether through quantitative or written reports. The ability to communicate effectively has been identified by the accounting professional bodies as being critical to your future role as an accountant.

GRADUATE LEARNING OUTCOMES

This task also contributes to the assessment of the following CSU Graduate Learning Outcome/s:

• Academic Literacy and Numeracy (Application) – Charles Sturt Graduates consider the context, purpose, and audience when gathering, interpreting, constructing, and presenting information.
• Digital Literacies (Skill) – Charles Sturt Graduates use, create, communicate and share multimodal information in digital environments.

MARKING CRITERIA AND STANDARDS

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Assessment Item 3

The criteria described below will not apply to all parts of all questions but describe the standards expected where the question requirements are appropriate. It is expected that all students will complete their own work with no collusion with other students.

Criteria	High distinction	Distinction	Credit	Pass
Apply probability concepts to decision making	Completely correct application of rational-decision making techniques to business problems, including the ability to evaluate further information prior to decisions.	Mostly correct application of rational-decision making techniques to business problems, including the correct evaluation of further information prior to decisions.	Some difficulty in correctly applying rational-decision making techniques to business problems including, somewhat correct evaluation of further information prior to decisions.	Weakness in applying rational-decision making techniques to business problems and difficulty in evaluating further information prior to decisions.
Be able to use computer spreadsheets as an aid to effectively present mathematical problems.	Level of technical proficiency in using spreadsheets to prepare management accounting reports. Ability to use Excel to solve management accounting problems. This includes the ability to use appropriate Excel (or similar) analysis tools and functions, construct appropriate spreadsheet formulae and to effectively and appropriately print and present your material and results. Ability to present your answers effectively, appropriately, and neatly, using computers.	Use of appropriate formulae with no errors. Correct use of data input sections where appropriate. Excellent design allowing intuitive and easy comprehension of key data. High standard of formatting enhancing the logical presentation of the data output enhancing comprehension by report end-users.	Consistent use of appropriate formulae with very few (if any) minor errors. Correct use of data input sections where appropriate. Well designed and logical data output presentation. Good formatting allowing easy and effective comprehension by report end-users.	Use of appropriate formulae with few errors. Correct use of data input sections where appropriate. Logical data output presentation and formatting allowing easy and effective comprehension by report end-users.
Effectively and appropriately present your material and results and clearly convey your understanding of the results to the reader. All references and resources acknowledged and professionally presented using APA (6th or 7th ed) referencing.	The business report is well presented, logically argued, and well written in a manner that very effectively conveys the key outcomes and recommendations to the end-user. All references and sources acknowledged and professionally presented.	The business report is well written with references and sources acknowledged and output professionally presented.	The business report is well written with references and sources acknowledged and professionally presented.	The business report is clearly written with references and sources acknowledged and professionally presented.

PRESENTATION

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Preparation and submission requirements

This assignment requires a Microsoft Word document as well as a Microsoft Excel spreadsheet solution.  Both of these must be submitted online using Turnitin.

You must submit both a Word file AND an Excel file. Failure to submit both of the files by the due date constitutes non-submission and late penalties will apply.

Your spreadsheet solutions must be cut and pasted into the Word document. This Word document is what will be marked and returned to you. Remember that in the business world, the professional presentation of information is fundamental and accordingly, marks will be deducted for poor presentation. An electronic version of your source spreadsheet is required to enable markers to open the file and test your efficient use of spreadsheet formula by, for example, changing the values of input variables. Marks will be awarded on the basis of correctness of answers, appropriate use of spreadsheet modelling, effective worksheet design, and level of professional presentation.

Your business report should include:

1. a cover page addressed to your required audience;
2. an executive summary (refer to the note below regarding an executive summary);
3. a table of contents (linked to the headings in the report);
4. headings and subheadings clearly identifying what is being discussed;
5. brief explanation and purpose on what each question is addressing
6. a conclusion; and
7. referencing (using APA style).

A reference list is mandatory for this assessment item. It is important that you are aware of how to reference properly and a reference list must be provided, properly formatted using APA guidelines with a hanging indent. Please note that it is a submission requirement that you include a reference list and assignments which do not include a properly formatted reference list will incur up to a 5 mark penalty. 

Review the rules regarding plagiarism.  If you are not sure, contact your lecturer or Academic Skills advisor for advice. There is no excuse for presenting the work of others as your own; this includes cutting and pasting material from the web without properly referencing the source.

The CSU Library site provides an on-line guide to APA style referencing. This is the referencing style adopted by the School of Accounting and Finance. The guide can be found at https://www.csu.edu.au/current-students/learning-resources/build-your-skills/academic-skills-help/referencing 

Any difficulties in submitting your assignments online electronically using Turnitin should be immediately reported to the Subject Coordinator by email. Include your name and student number in the header or footer of all documents submitted. Retain a copy of your assignment for your records.