Star Wars Themed Electric Tooth Brushes STRATEGIC MARKET ANALYSIS You have been asked to join the Strategic Management Committee of Mercury Inc. as the management accounting representative. The main...

Star Wars Themed Electric Tooth Brushes
STRATEGIC MARKET ANALYSISYou have been asked to join the Strategic Management Committee of Mercury Inc. as the management accounting representative. The main task of the Committee is to carry out ongoing reviews of the profitability and viability of various product lines across all of the divisions of the Mercury Inc. The Committee has been asked to review the profitability and viability of products manufactured by wholly owned subsidiary the Empire Group.Despite the rapid increase in sales of Star Wars themed merchandise as a result of the renewal of the Star Wars film series, one of the products under review is the Star Wars ‘Darth Vader’, ‘Kylo Ren’ and ‘Rey’ character toothbrushes. These new products were originally launched in 2015 on the release of Star Wars Episode VII and were re-launched with the Christmas 2017 release of Episode VIII The Last Jedi. The electric toothbrush manufactured by the Empire Group is sold through major department stores and supermarket chains in Australia and New Zealand and has been the clear market leader in its category since the product was first introduced to Australian markets more than 10 years ago as the Darth Vader-themed toothbrush.The Empire Group is not the only company licenced to manufacture and market Star Wars franchise products in Australasia. Major regional competitor Death Star Manufacturing has been producing a cheaper version of the Star Wars toothbrush which retails at a lower price and the competitor has recently taken significant market share away from the Empire product. Market research indicates that although the Empire Group’s toothbrushes are recognised as being a superior products, the lower price is a significant factor in why consumers are switching to the Death Star Manufacturing toothbrush. Whilst the overall market for Star Wars themed merchandise has continued to grow rapidly, in the last two years Empire Group’s electric toothbrush sales have fallen from 80% of the total market to 50% of the market. During the same period, major competitor Death Star Manufacturing has increased its sales of electronic toothbrushes from 10% to 40% of the market. Unit sales of all brands of Star Wars themed toothbrushes in the Australia and New Zealand market for 2017 calendar year stood at 6 million units.Whilst the Empire Group’s Star Wars electronic toothbrush is still profitable the Strategic Committee is concerned about the products overall profitability given the downward trend in sales. The Empire Group has a base expected return on investment in this sector of 20% (calculated as Gross Profit divided by Total Assets). Product lines which do not meet this Return on Total Assets (ROTA) benchmark may be discontinued.

As the Management Accounting representative you have provided the Strategic Management Committee with the following breakdown of revenues and costs for the Star Wars Toothbrush product line for the just completed 2017 calendar year:

Star Wars Electronic Toothbrush
Toothbrush Factory Total Assets	$40 million
Total Sales (Volume)	3.0 million
Regular Retail Price (per unit) (price sold in store)	$24.95
Gross Sales Value (per unit) (Price received by Empire Group)	$15.00
Prime Costs	$5.00
Manufacturing Costs	$6.20
Logistic Costs	$1.50
Total Costs (per unit)	$12.70
Gross Profit (per unit)	$2.30
Total Gross Profit	$6,900,000
ROTA	17.25%

The Return on Total Assets (ROTA) for the Star Wars Electronic Toothbrush for the 2017 year was 17.25%. This is below the required ROTA of the Empire Group of 20%. If the product continues to trade at current levels it will be deemed as unviable and discontinued.The Australasian Marketing Division of the Empire Group believes that Research and Development advances from within the world-wide Empire Group could improve sales of the Star Wars toothbrush product and its profitability outlook. Developments in digital electronics means that the company will have the capacity to include a feature where the character-based Star Wars toothbrush will be able to digitally record a name and then include it in a replayed sound bite every time the toothbrush is activated. It is planned that the toothbrush will play an adaption of a famous Star Wars catch-phrase from each character, Rey, Kylo Ren, and Darth Vader. For example, the Darth Vader version will broadcast “Luke, I am your toothbrush” every time it starts up. Purchasers will have the option of recording a different name to replace Luke with their own name if they wish. Initial engineering indicates that by making savings in packaging and other materials the underlying prime, manufacturing and logistic costs of the toothbrush will not change from its current $12.75 per unit.The Marketing Division have carried out some initial market research and believe that this added feature will make a big difference to consumers and will potentially increase unit sales by 30% in the first year. To achieve this sales increase Marketing advises that it is imperative that the product improvement is advertised effectively and have suggested that a marketing rebate of $0.80 per unit be paid to retailers which they must spend on direct promotion of the improved product.The Chair of the Strategic Management Committee has reviewed the marketing proposal and advised that even after allowing for the 30% sales increase, the increase in costs represented by the extra $0.80 in marketing rebates means that the products ROTA will fall to below 15% and will be well below the Empire Group required ROTA of 20%. The CEO argues that if this occurs the previously successful Star Wars Electronic Toothbrush product line may have to be discontinued.You are aware that following the recent drop in sales the Star Wars Electronic Toothbrush factory is operating at only 40% of its practical manufacturing capacity. You are also aware that whilst the Electronic Toothbrush product’s Prime Costs are 100% Variable, other Manufacturing Costs and Logistic Costs are made up of 90% Fixed costs and 10% Variable costs.You ask if you can be given time to prepare a report for the Strategic Management Committee on the Management Accounting cost and profit implications of the changes proposed by Marketing and R&D based on the budgeted costs and increases in both sales and production.Required:(i)Using Excel prepare a ‘before and after’ budget comparative analysis of the revenues and costs of the Empire Group’s Star Wars Electronic Toothbrush product line. The analysis should incorporate the 30% predicted sales increase and the added $0.80 per unit Marketing Rebate. Ensure you include in your analysis any impact of the budgeted production increase on other per unit manufacturing and logistics costs.(10 marks)(ii)Allowing for the change in sales volumes use Excel to calculate the expected impact of the drop in sales on the per unit product costs on our competitor Death Star Manufacturing.It can be assumed that the 90% Fixed to 10% Variable manufacturing and logistic cost break-down will hold consistently across the industry (including for competitor Death Star Manufacturing). Assume that 75% of the predicted unit sales increase of the Star Wars Electronic Toothbrush will be made at the expense of the unit sales of their main competitor Death Star Manufacturing (meaning Death Star Manufacturing unit sales will fall by 75% of the Star Wars Electronic Toothbrush sales increase). Assume that the Empire Group and Death Star Manufacturing have identical manufacturing and logistics cost structures at the commencement of the 2018 calendar year.
(5 marks)(iii)Prepare a brief report (maximum 300 words) for the Strategic Management Committee outlining the key points of your findings. Include some discussion on:a.the likely impact of the changes on the cost and profit structure of Star Wars Electronic Toothbrush (derived from your answer to (i)).b.the likely impact of the changes on the cost and profit structure of Death Star Manufacturing (derived from your answer to (ii)).