Pricing Strategies

Write an essay on estimations and comparisons the risks.

The ratio provides an in-depth knowledge about the market price of steel and tubes. It has been observed that the pricing strategy for its steel product is high in comparison to the price prevailing in the market and other competing firms. It is noteworthy to underpin that the organisation may find it difficult to penetrate into the market into other nation market since it has high pricing policies. It is important to determine that market pricing is an important factor in determining the company’s market penetration strategy. If the business is dependent on the heavy manufacturing plant it needs to re-consider its pricing strategies (Hull, 2014).  

It has been observed that the cost of overhead has been very high for 15m bars. It is understood that the indirect cost of overhead is higher than the direct cost of allocation. The reasons for such misstatement are the improper allocation of cost of overhead under various heads of direct and indirect costs. The direct cost allocated for the direct cost of 15m bar is observed as $909 which is seen as the highest in compare to the 9m and 12m which is only $715 and $ 860.

The company has already set its pricing strategies at a higher level and if it further increases its allocation of the overhead price then the company will lag behind in competition in compared to the other companies in the market. As the price will exceed the competitor’s price.  (Sage, 2015).

Improper allocation of selling general and administration expenses: It is understood that improper allocation of selling and administration expenses creates an unwanted burden over the cost of allocation, which is ultimately reflected in the selling and distribution overhead. The table reflects that the amount of selling and distribution overhead. It has been stated that the company does not follows a standard form of profit allocation and this leads to improper revenue generation of the business. The identification of such risks could poses a threat for the company as in the long run direct cost though tends be uniform but the indirect cost is variable element. This may fail to provide the organisation a clear picture regarding the financial stability. (Sadgrove, 2015).

Moreover, the companies dealing with multiple lines of product, it is observed that the product dealing with the lowest size of the like 9m bars has more number of sale than the higher size of products like 15m bars. In this way we can see that the company will be able to increase the gross profit ratio if it increases the sale of the 9m bars as the sale of such category of items will further increase. On the other hand if the company decrease the price of the 15m bars then it will be able to increase the sale of such products to some extent can earn more profits.

Cost Efficiency and Profitability

It is assumed that the competitors also charge the profit rate more or less similar to the rate of the organisation. From the above stated chart it has been observed that the cost of 12 m bars and 15 m bars used to maintain the moderate difference from the selling price in relation to the competitors. Whereas, the cost of 9m bars is very close to the selling price of the competitors. Hence, it can be stated that the production cost of 9m bars are not at par with the average industry cost. The above stated analysis states that such factors could be considered as one of their potential business risks (Kendrick, 2015).

We can also observe that the in case of the 9m bars the difference with the competitors price is the highest with difference of amount $417.50. This is a large gap when compared to the competitors prices. In order to bridge the difference the company needs to see the various costs allocating in the direct and indirect overheads and reduce the cost of production. It is evident that the competitors are still able to earn huge amount of profits even by setting the prices lower than Steel & tubes. The difference of the competitors price in case of 12m and15m bars is $ 300 and $287.50. So even if the company reduces the prices to some level still it will be able to properly allocate its profits and compensate the lower profit earned with the 9m bars.

The operating performances of the roofing product segment are evaluated in accordance to the cost efficiency & profitability, material usage and labour efficiency of each roofing product.

From the broader aspect, the performance of any product or service is judged by the profitability parameter. The ultimate goal of every business is to optimize its profit. On the other hand, the amount of profit use to depend on the production cost and the profit policies of the organization. Therefore, to measure the performance of the operation, both the cost of production, related expenses and the profit or loss, generated from the operation should analyzed with utmost care.

The amount of cost, sales and profits of the roofing products are compared in the following graph:-

From the above graph, it is clear that the cost of goods sold of Albany is lowest and Upper Hut use to have the highest cost of goods sold. The cost of Manukau and Hamilton are moderate and almost at par with each other.

Material Usage Efficiency

Manukau use to have highest sales figures. Next in the list are Albany, Upper Hut and Hamilton. The gross profits of the products also follow the same trend.

It can be explained from the analysis that from the cost perspective, though, Albany and Manukau include lower cost than Hamilton and Upperhut, these two products generate more sales amount and provide more gross profit than the other two products. It implies that Hamilton and Upperhut are less profitable for the For further analysis, the gross margin ratio and the operating margin ratio are presented below along with graphical representations:-

The above charts denote that Upperhut has generated net deficit after the deduction of other non-operating expenses. Though Albany has provided high gross profits, it has also generated deficit. It indicates that the non-operating expenses of the business are not properly allocated or spent effectively.

The cost & profit can be effected by various factors. In the above charts, it has been observed that the cost of goods sold of Hamilton and Upperhut is higher than the other two products, but, both the products has failed to generate high sales volume to cover the additional costs.

The major part of the cost of goods sold is consisted by the cost of materials. Hence, to determine the actual reasons for the higher costs, the material usages for each product should also be analyzed (Mattes et al., 2013)

The production capacity and the actual production of each products are compared below:-

 Apart from the capacity, the material wastage of the four products are also scrutinized in the following chart:-

The graph indicates that Albany and Uppercut have the higher percentage of wastage in comparison to other products.

The labour cost also has to be analyzed, as apart from material, manufacturing cost includes higher amount of labour cost also.

The following chart & graph helps to represent the labour efficiency of each product:-

Amongst the four products, there is no idle time and labour overtime for Hamilton. The not very high. Whereas, the idle time rates of Albany and Upperhut are very high and the differences with the labour overtime are also very high (Wu et al., 2013).

The above analysis shows that the wastage of Albany and Upper Hart has been the highest and rate of variance in terms of capacity and production is also high. Due to this variance of capacity and production amount although the company is able earn gross profit but it incurs net loss. Another reason for this difference in profit has been seen due to increased amount of idle time for both Albany and upper hart. It has been observed that the labours are inefficient due to the idle time and variance in case of both Albany and upper hart. The wastage further implies that the labours are not able to properly utilize the available resources.

Action plan for new product:

The sections of the company Albany and upper hart are not utilizing the resources efficiently. It has been observed that the gross profit margin of the Hamilton section is the lowest and company should take effective action in order to control the various cost constraints in order to maintain the costs related to materials and direct labor. It has been also seen that the cost of goods sold of the upper Hutt is highest and it should take measure to control the cost components for the same. Whereas cost of goods sold of Albany is low.  In terms of materials usage it has been observed that Upper Hutt utilizes highest amount of resources and gives least amount of production.

The study highlights that Steel and tube ltd has ignored the areas of strategic planning for the last three years. It is evident that the operating results are obtained and lack of administration is major elements to be considered. On the other hand it is note the absence of proper planning procedure is contributing factor of the down turn of the business (Laguna, & Marklund, 2013).

• The directors and the owners should review the existing mode of functional operations and develop a strategic planning approach for long term business perspective.
• Once the goals have been set the directors and the executives concerned with the day to day operations of the business. The owner concerned must hold up meeting with the staff members to discuss the goals and objective of the business.
• An implementation plan must be developed by the business to keep a track of the policies in order to measure the functional operation personality of the business so that it can ensure that the results are within the objective of the business.

The present budget that has been placed for operations is not reflecting the true affair of the business. Such leads to the financial measure, which is not in line of the current activities of the operations.

• Once the areas of strategic planning are implemented, a new budget should be developed to align with the financial strategies and plan which needs to be addressed to obtain the financial outcomes for long-term business plans.
• Forecasting the both the elements of the statement of profit and loss account and cash flow statement should be prepared on monthly basis to ensure the that the short term plans for strategic planning are in accordance with the objectives of the business.
• After trading for a period of six months under the new strategic plan, an in depth review of the operations results should be determined to assure that the co-operation will yield result to business profitability.

Analysis of staffing indicated that the degree of staffing was highly one of the benchmark, hence of the staffing and their productivity are major area of concern. Productivity is one of the elements of sales income in order to increase the productivity an increase or decrease in sales is necessary. When the staff roaster was reviewed in contrast to the daily trading it was viewed that the lowest number of staff were present during the highest trading days. This highlights that current policies for weekends was allowed for only one member to provide the service during the peak production seasons (Rao, 2014).

• A detailed structure of staffing and the responsibilities should be used to counter such issues to determine the viability of such operations. Key responsibilities should be shared with the staff members where possible.
• Creating a position of description for all staff members as the roles of all the members are to be documented with the position describing the areas to be agreed with each other staff members.
• Implementing the accountability through the key performance indicator for each of the staff members.

Gross margin of profit for the current year has been on declining from the previous year which is below the bench mark of the data given. Is has been observed that there is a substantial increase in sales and it appears that reduction will be due to stock issues (Ivers et al., 2013).

• Though the mark up on the stocks were adjusted twice during the current fiscal year to reflect the higher purchase price of goods for further analysis to increase the gross margin highlighted in order to increase the gross margin in freight.
• Included in the cost of goods sold to write off during the financial year as this can be recognised that destroyed stock are identified as an unaccounted losses is can be realised at stock undertaking.

The CEO needs to consider various types of internal and external risks for the financial year 2016. Tubes and steel needs to control various activities which generally include approvals, authorizations, performance reviews and segmentation of the various roles within the organization. The understanding of the internal risks ensures that the financial information obtained related to various products is accurate and reliable and facilitate in achievement of the various business objectives.  In order to implement good internal control the CEO of the company should monitor the cost constraints of all sizes of the steel bars which are needed for production. It also needs to consider the internal prices policies of 9m, 12m and 15m steel bars. For effective implementation of the internal risks the company needs to communicate the various risk at staff level and breakdown the internal controls.

The external risks are typically those risks which the companies don’t have any control and they are driven by the market forces. The company is likely to face the risks of increased completion in the steel industry such as Arcelor Mittal, Hebei Steel Group, Nippon Steel and Sumitomo Metal Corporation. Due to increased cost of production and the company is bound to face fierce completion in the steel section.  The company will also face competition from tyre companies such as Bridgestone, and Goodyear. The management of external risk has little to do with controlling he external factors and more to do with mitigating the risks. The CEO should always keep himself updated with the various potential market risks so that it is able to increase its returns and gross profit margin for the year 2016 (Österle, 2013).

Pricing forms an important part of profitability for Steel and tubes as business firms depends upon the products and price of the product. It is important to assure that pricing and selling offers more profit to the business.

• Implementing appropriate pricing policies and reviewing it on regular basis which must be in accordance with the line of cost.
• The executives and the managers must be taking the initiative about how establish balance between the pricing strategies and range of products.

In order to continuously improve the performance, Steel & Tubes needs to evaluate its operations or processes related to products, services and marketing strategies. In order to evaluate the performance of the business Steel & Tubes needs to adopt benchmarking strategies. It needs to compare its performance with various other companies in the market. The various performance metrics of the evaluation and benchmarking assists the business operations or processes to become more productive and efficient in their operations (Haney et al., 2013).

The single-measure based on the gap analysis is used as fundamental technique in the performance evaluation. The single output or input measures is based on the evaluation of the performance on the basis of financial ratios. The roofing products based on the financial rations suggests that fixed asset turnover (FAT) for the Albany product has been the highest with FAT ratio of 10.93, we also see the Hamilton products is lowest with only 5.25 units of FAT. The return on investment of roofing products states that the highest return that the company has been able to earn is from Albany and Manukau (Zhu, J. 2014).

The costing information further states that the company has born highest indirect cost for 15m bar. The company has also incurred the highest amount of selling and general expenses from 15m bar. Based on the available information the company needs to reduce the costs of the indirect expenses of the 15m bars and also control its production cost related to the 15m bars.

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