MAF 680

INTEGRATED CASE
STUDY
FREEZING OUT PROFITS

Prepared for;
Pn. Jamaliah Said
Prepared by;
Aiman Fashehah Ahmad 2011764107
Umi Umairah Abdul Muluk 2013850578
Nur Emilia Aniza Rahmat 2013948343
Farah Nadiah Hamzah 2013702633
Siti Hajar Ja’afar 2014887978

Group ACB11BLC
Table of Contents
I. Introduction……………………………………………
………... 2

II. Issues ………………………………………………………….3

III. Potential Action &

Recommendation……………………………………………. 4

IV. Strategy to keep Secconz……………………………………..5

V. Ethical Issue……………………………………………………..6
 i. Introduction

Cold Cuts Ltd (CC) is the only Singapore’s refrigeration parts manufacturer. The
company supplies to various refrigerator maker from all over the world. Their main
client is Secconz, one of Singapore’s fridge makers. CC owns two manufacturing
plants, in Singapore and China. The Managing Director of CC is Mr. Dali whom
oversees both operation in China and Singapore. He will report to CC’s Board of
Directors which is led by its Chairman.

CCs’ mains products are Fuzzy Frost (FF) and Fuzzy Frost Alpha (FFA), an
upgraded version of FF. FFA is a very competitive product which it enables
perishable items to be stored longer than conventional fridges. Due to its innovative
capability, it receives a lot of positive orders from its customers. Furthermore, since
its introduction into the market for the past two years, CC is making a lot of revenue
by charging premium price from Secconz.

CC is still producing both products, whereby Singapore’s plant focus on developing

FFA while China’s plant focus on developing FF. The company main concern in
developing China’s plant is to reduce the cost of FF production due to China’s
cheaper labour costs. This move was very successful as the plants still making out
profits since its opening two years ago.

However, CC is having a difficulty when their main customer, Secconz asked for
price reduction and their plant in China are being investigate for anti-dumping
activities. At the same time, CC are facing ethical dilemma situation where the
investigator officer is taking advantage of their current situation by asking for bribery
to resolve the anti-dumping issue.

Therefore, this report is prepared to evaluate and analyse the current situation of
CC and provide some potential action and recommendation to resolve these issues.

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 ii. Issues

Price reduction asked by major customer - Secconz

Secconz is the biggest customer of CC and is the only local company in Singapore.
Mr. Nelly, Supply Manager from Secconz asked Mr. Dali to reduce the selling price
because they are facing competition from China which are able to produce a similar
product like a CC at much cheaper prices. After all, CC still charged the same price
for the two years even though the investment in the new machinery on FFA
component has already been recover and the both parties are coming towards the
end of the second year of the supply contract. If CC is not reducing their selling
price, Secconz will consider to manufacture FFA in house and CC may lost their
main customer. As a result, it will affect CC’s business in the long run and Secconz
will become their new competitor in the market. Meanwhile, if CC reduce their price,
their profitability may decrease.

Anti-dumping activity investigation towards their plant in China

The issue arises when the China’s authority visited their plant in China for Anti-
dumping activities. It happens when the US International Trade Commission begin
to investigate their export from China to US in which they claimed that the pricing
for CC’s product are much lower than the fair value. The purpose of their
investigation is to discourage importation and sale of foreign-made goods at prices
substantially below domestic prices or below its cost of production for the same
items. If the government officer found their plant in China to be guilty, they will either
have to ceased their operation or will be imposed to pay a huge anti-dumping tax
on them. It will give a negative impact for CC as their business may bankrupt
because their plant was ceased to operate. On the other hand, if CC are not asked
to close down the operation, they have to pay a huge anti-dumping tax. Meanwhile,
Mr. Rithisak believes the investigation officers want some bribes to solve the
problem.

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iii. Potential Action & Recommendation

Price reduction asked by major customer - Secconz

i. CC shall cut the overhead cost in manufacturing and revise the pricing to
decrease its overhead costs by implementing Lean Manufacturing or Six
Sigma. These programs are designed to eliminate non-value-added
activities which is created when CC are manufacturing their products.
These programs help to increase CC’s productivity because it eliminates
waste, defects and poor-quality products.

ii. CC shall review their Standard Operating Procedures to re-evaluate

operational processes from the bottom to the top, identify and eliminate
unnecessary steps and making changes that shorten the manufacturing
process such as number of labours or processing time.

iii. CC shall invest in advanced technology which has the capability to make
the manufacturing process faster that helps to lower the production costs in
the long run. Mostly, machinery that uses less material can also lower the
costs. However, it is important to do cost benefits analysis before
purchasing the new equipment. CC may use the Return on Investment by
computing the gain from the investment less the cost of the investment
divided by the cost of the investment to decide whether or not to invest.

Recommendation

We recommended for CC to cut the overhead manufacturing cost and revise the
pricing strategy in order to retain Secconz as their main customer and maintain their
profitability in the long run.

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Anti-dumping activity investigation towards their plant in China

i. Mr. Dali should communicate with the Accountant to resolve this issue. They
should prepare a proper documentation and meet the investigation officer in China
to explain on how they calculate the pricing and why it is much lower than the
market price.

ii. CC shall be prepared to pay a huge anti-dumping tax. CC may allocate some
money for these circumstances and may account it for contingent liability in their
financial statement if they are found guilty.

iii. CC should be alert with issues raised by European Union and World Trade
Organization (WTO) in relation with anti-dumping agreement to ensure they
comply to the rules and keep informed with the current issues.

iv. CC may increase their price for international market to avoid any legal actions
related in anti-dumping activities. The price should be in the range of international
average fair value of the same product

Recommendation

In our opinion, CC should seek for legal advice, revise their product price and refer
with the “Anti-Dumping Agreement” in order to resolve this issue.

MAF 680 INTEGRATED CASE STUDY 5

iv. Strategy To Keep Secconz
Quantitative Analysis

Cost Volume Profit Analysis (CVP)

CVP analysis is used to determine how changes in costs and volume can affect a
company's operating income and net income. However, there are several assumptions
made when applying CVP including:

 Sales price per unit is constant.

 Variable costs per unit are constant.
 Total fixed costs are constant.
 All product produced is sold.
 Costs are only affected because activity changes.

Besides that, CVP analysis also requires that all the company's costs, including
manufacturing, selling, and administrative costs, must be identified as variable cost or
fixed cost.

The most important aspect when using CVP analysis is the calculation the contribution
margin and the contribution margin ratio. The contribution margin represents the amount
of income or profit the company made before deducting its fixed costs. In other words, it
is the amount of sales dollars available to cover (or contribute to) fixed costs. When
calculated as a ratio, it is the percent of sales dollars available to cover fixed costs. Once
fixed costs are covered, the next dollar of sales results in the company having income.

Advantages Disadvantages

 CVP analysis can be used to assist in
finding the most profitable combination
between selling price, cost and volume,
which makes calculations of expected
profit at different sales levels in easier
way. Managers can measure the
breakeven point and the margin of
 It may be difficult to managers who are
not detail-oriented and precise which
leads to an inaccurate projection.
 Variables cost per unit may not be
constant.

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 safety assessment.  Difficulty to classify fixed and variable
cost.
 CVP analysis can assists in
establishing prices of product.

 CVP analysis helps in evaluating the

effects of cost volume changes, in
order to review expected profit if
certain costs incurred.

CVP may assist and guide CC to understand the relationship among cost-volume-profit
and then help CC to forecast their profit at various levels of output in order to determine
their pricing correctly.

Target Costing

Target costing is a system which a company plans in advance for their selling price,
product costs, and margins that it wants to achieve for their product. With target costing, a
firm are able continuously monitoring products from the moment they enter the design
phase and onward throughout their product life cycles. It is one of the most important
tools for achieving consistent profitability in a manufacturing environment. Below are
some general steps to implement target costing.

i. Establishing the target price in based on market needs and competition;

ii. Establishing the target profit margin;
iii. Determining the allowable cost that must be achieved; this cost should motivate
all personnel to achieve;
iv. Calculating the probable cost of current products and processes;
v. Establishing the target amount by which current costs must be reduced.

The determination of the target costing relies heavily on the comprehensive and detailed
financial planning and statement analysis. Every firm has relationship between prices,
volumes and revenues; costs and investments. The management team should explore
other tools like value engineering and quality function deployment.

MAF 680 INTEGRATED CASE STUDY 7

 Advantages Disadvantages

 Assures that products are better  Time consuming –requires of detailed

matched to their customers’ needs. cost data

 Aligns the costs of features with  Behavioral issues may arise – conflict
customers’ willingness to pay for them. between department

 Reduces the costs of products  Too much cost consciousness may

significantly affect the business

Even though target costing may look so complex, many manufacturing industries
implement target costing in their production since its give an opportunity for them to
maximize their profit while capturing customer’s value. CC may use the combination of
target costing with other strategic management accounting techniques such as just in
time, total quality management and business process re-engineering so that the
company in competitive advantage and keep the company sustainable in the market.

Qualitative Analysis

SWOT Analysis

SWOT is a useful model to understand organization Strengths and Weaknesses, and for
identifying both the Opportunities and the Threats. The application of SWOT analysis is to
gain the information from an environmental analysis and separate it into internal
(strengths and weaknesses) and external issues (opportunities and threats). Then, SWOT
analysis determines what factors may assist the organization in accomplishing its
objectives and overcome or minimize the obstacles. The SWOT analysis of CC can be
summarized as follow:

STRENGTH WEAKNESSES
 Specializing in refrigeration  The price of the component offered by
components. The company developed CC to Secconz is quite high
its own brand of refrigeration process  CC does not have a proper pricing
technology known as Fuzzy Frost strategy
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 Alpha system (FFA)
 FFA product has a good quality as
compared to other plant produce in
China
 Their products were exported
worldwide
OPPORTUNITY
 The continuous business relationship
with Secconz will give another
profitable year for CC as Secconz is
their main customer
 CC will able to upgrade FFA
technology and consider investing
new advanced technology to capture
a new market as well as meeting the
expectations of Secconz
 The cost of manufacturing is higher
 The technology of FFA is getting
obsolete
THREAT
 The competitor produces same
product with a cheaper price in China
 Any improvements became subject
to easy copying
 Secconz might produce a similar
technology in-house in the future

From the analysis above, the main weaknesses of CC are the price charged to Secconz.
If CC wants to retain Secconz as their main customer, they should consider offering the
product at a lower price to Secconz by reducing the cost of factory overhead to maintain
their profitability. This is also to prevent Secconz from producing their own similar product
in house where they might end up being the competitor to CC in the future. In addition,
the strength of CC is that they are having the FFA technology that makes them
outstanding from the other competitors.

Balance Scorecard (BS)

The BS is a tool that translates an organization’s mission, objectives and strategies into
performance measures that focused around a number of different perspectives. It
includes financial, customer, internal business and learning and growth perspective. Its
provides a balanced picture of overall performance highlighting activities that need to be
improved. Below are the four perspectives in BS for CC in order to measure their
performance:

OBJECTIVES GENERIC INITIATIVES

MEASUREMENTS
Financial perspective Sales growth, increased Cutting overhead cost in
market share manufacturing and revise the
What must CC do to create pricing strategy. It means that
sustainable economic value? CC have to increase the price
MAF 680 INTEGRATED CASE STUDY 9
 in the Europe Market to avoid
anti-dumping tax levy and at
the same decrease the price
in local market for continuous
sales growth.
Customer perspective Customer satisfaction In order to maintain their
measure, number of regular largest customer (Secconz),
What do our customer customers retained CC should reduce the price
requires from us and how are that they currently offered to
we doing according to these Secconz and at the same
requirements? time maintain the quality of
the product. This is to ensure
that Secconz is satisfied with
the service offered by CC and
not considering producing
similar technology in-house.
CC should always seek for a
satisfactory arrangement in
order to meet Secconz
requirement in the future to
maintain a good relationship
between them.
Internal Business perspectiveIncludes measurements for The FFA technology that is
innovation, operations. (Utilize developed by CC facing a
To satisfy our stakeholders, innovation to advance and rapid obsolescence. There is
what must be our levels of improve internal processes to not much alteration since its
productivity, efficiency and keep business moving forward) invention and any
quality? improvements became
subject to easy copying. To
overcome this problem, CC
should consider investing in
R&D programs in order to
enhance their technology and
come out with latest
innovation to compete with
European technologies.
Learning & growth Include measurement for: Apart from pricing strategies
People – employee retention, issue, CC also facing the
How does our employee training, skills, morale problem of anti-dumping
performance management activities. CC should consider
system, including feedback to to send their employee for a
employees, support high course on:
performance? a) Anti-dumping issue
(example: APEC Training
Courses). This is to ensure
that the employee updated
with the current issue relating

MAF 680 INTEGRATED CASE STUDY 10

 Anti-dumping.

By using BS, it provides guidance and assists what CC should measure in order to
'balance' the financial perspective and how to maintain a longer relationship with
Secconz. The critical area is to reduce the selling price of the product as requested by
Secconz. Furthermore, BS enables the managers in CC to execute their strategies by
identifying what should be done and measured not only in financial perspective of CC
but also focus on the customer perspective, especially Secconz and internal business
growth.

MAF 680 INTEGRATED CASE STUDY 11

vi. Ethical Dilemma

The United States International Trade Commission has begun investigation on CC

exports from China to United States. They are saying that CC is pricing its products much
lower than the fair value. However, Mr. Rithisak, a plant manager in China said they
acted according to the law. If CC is found guilty, CC need to either close down or pay a
huge anti-dumping tax. This situation leads to an ethical issue that CC need to face. Mr.
Rithisak believes that they want some bribes to smoothen things out. The situation
become more complicated because Mr. Rithisak worries that even if they are not doing
anything wrong, the authorities might still shut them down.
Bribery

The most well-known global ethical dilemmas issue that always faced by multinational
companies is corruption and bribery. Corruption happened when someone received a
bribe and do something that they are prohibited from doing it. As for bribery, it regards as
payments or gifts to some people to get the information on government action or to
gained maximum business advantages. It is argued that multinational companies involve
in bribery by increasing the contract price. So, many developing countries suffered
because of the high price and the worst is many multinational companies tend to use poor
quality products or materials to cover the bribe and this lead to existence of inferior
products.

Dealing with the ethical dilemma

i. Assess the Risk Involved

In order to eliminate the risk of getting involved in bribery, the CC must educate the
employees about the risks involved. In most countries, bribery or acts of corruption are
punishable by law which can bring bad name to the company. It would affect the
profitability of business and can give huge impacts in the long run. On the other hand, CC

MAF 680 INTEGRATED CASE STUDY 12

 need to understand the working principles of doing business in other countries and steer
clear from any malpractices.

ii. Commitment from The Top Management

CC shall has to be a zero tolerance policy towards this practice across the entire
company. This can be ensured by stating clearly by the committed top management that
in an event that the bribery is caught, it can lead to severe implications which can also
involve imprisonment or heavy fines. There has to be personal involvement in this case
by the company seniors to make that sure that CC is not suffering from any malpractices
at the root level.

iii. Due Diligence

Before entering any kind of transactions, CC must thoroughly run a background check of
the investigator officer. In case there are any past history involving instance bribery or
corruption, it should not be ignored and must be considered as the main factor in decision
making process. This will make sure that CC have entered a clean transaction when it
comes to ethical business.

iv. Identify Procedures and Processes

CC shall maintain set of procedure whereby all the people in an organization will follow a
standard process to do things as prescribed by the company’s code of conduct. This will
also eliminate any chances of taking a “judgement call” on the basis of their own
understanding which can be harmful to the business.

MAF 680 INTEGRATED CASE STUDY 13

 v. References
Sharma P, (2014, May 13) How to Avoid Bribery in Business
[Web log post]. Retrieved September 25, 2017, from https://www.techpluto.com/how-
to-avoid-bribery-in-business/

Bhasian S. (2015) Lean Management Beyond Manufacturing: A Holistic Approach. Springer.

“Applying Lean Manufacturing To Six Sigma - A Case Study.” i Six Sigma - Six Sigma Quality
Resources for Achieving Six Sigma Results,
www.isixsigma.com/library/content/c020225a.asp.

Cost-Volume-Profit-Analysis. (2016). Retrieved September 23, 2017, from

https://www.cliffsnotes.com/study-guides/accounting/accounting-principles-ii/cost-
volume-profit-relationships/cost-volume-profit-analysis

Drury, C. (2013). Management accounting for business. London: Cengage Learning.

MAF 680 INTEGRATED CASE STUDY 14