Nutri Sip (NS) Pvt. Ltd. is a company specializing in
health and energy drinks. Their beverages are mass-produced and widely
distributed to the general market, with additional direct sales to sports
clubs, corporate clients, and hotels. NS currently offers five unique energy
drinks. Despite facing intense market competition, NS has achieved steady
revenue growth. However, its profit margins are below expectations, resulting
in limited retained earnings.
To streamline operations, NS is organized into four
functional divisions: Production (including R&D), Marketing, Finance, and
HR. Each division is led by a senior manager who reports directly to the CEO.
Except for the main office, all other operations run in rented buildings.
According to a recent Health Association survey,
younger consumers are increasingly choosing health drinks over sugary
beverages. This shift in consumer preference offers a promising opportunity for
NS to grow its market share.
In response, NS’s board recently decided to launch a
new product’ Vita Edge’ aimed
specifically at young sports enthusiasts and athletes. This new product segment
will be marketed with endorsements from national and international sports
celebrities. The production department has estimated the following cost and
revenue structure for this proposed product line.
| Details | Cost and Revenue Details |
|---|---|
| Direct cost | $ 20 per unit of Vita Edge |
| Fixed cost (annual) | $ 45,000 |
| Selling price | $ 25 per unit of Vita Edge |
Table 1
Questions to answer
a) With reference to Nutri Sip (NS), explain the term
‘fixed cost.’ [2 marks]
b) With reference to Nutri Sip (NS), explain the term ‘capital
expenditure.’ [2 marks]
c) Using the information from Table 1, calculate the
number of units of Vita Edge to be sold to
breakeven. Clearly show your answer with working and formula [ 3 marks]
d) NS aims to achieve an annual profit of $45,000 by
selling 9,000 units of Vita Edge. What should the selling price per unit be,
assuming that fixed and variable costs remain constant? Show your calculations
clearly, including the formula used .[3 marks]
e) NS is looking to start the production of Vita Edge in 3-5
months’ time which requires new production facilities and significant capital
investment. Discuss two potential sources of finance and recommend the most
suitable option for NS. [10 marks]
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