Ashrav Machines Private Limited (AMPL) was started as Joint venture company in 2017 by a leading group head quartered at Mumbai, engaged into the…

Ashrav Machines Private Limited (AMPL) was started as Joint venture company in 2017 by a leading group head quartered at Mumbai, engaged into the business of automatic washing machine product segment. The company received state-of-the-art technological know-how from a well-known Japanese company named Suzutsu Inc which was its JV partner. The company had acquired superior technology through JV, and its sales were expected to grow at 10 per cent per annum. The Company has two types of customer base, retail customers and dealership customers. The company experienced a significant growth in its sales during the first 5 years of its operations, and its actual growth rate averaged about 30 per cent per annum. The company had cost and technological advantages, and therefore, could keep its prices significantly lower as compared to its competitors. Over this period, the company established its name, and its products became well-known in the market. As the competition intensified in the washing machine market, and the general market slow-down conditions engulfed the entire economy, AMPL started experiencing a decline in its sales from the beginning of FY 2022. The company identified poor inventory management on the retail front like piling up of inventory stocks, very high import of raw material, high selling price, etc. & poor receivables management on the dealership front like poor credit policy & collection process, bad debts, etc. as a major issue causing financial problems and decline. The company decided to work out a plan to reduce the inventory levels and rejig the receivables process and come out with feasible solutions. The concerned leadership teams in the company presented the following plans: (1) Exploring selling the washing machines at discounted price. The company plans to offer a 5% average discount on its current price thereby resulting in a discounted price of 15,675 per machine. However, this didn't create any significant impact on sales as expected. The previous studies on market behavior to price responses in this category of product suggested less sensitivity to price reduction or discounts in the lower range. However, a price reduction above 10 per cent indicated a significant association with the increase in demand. Using these findings as the basis of their argument, the marketing team proposed a plan to provide discounts of up to 12 per cent. It provided an estimate of about 1,000 units to be sold every quarter during the year after implementing the suggestion of proposed discount. (2) Owing to the recent trends observed in the exchange-sales scheme in the television and other electronic segments, the company wants to explore this scheme for the washing machine segment as well. Upon subsequent research, the marketing team argued that there was a good chance of an exchange scheme becoming popular provided the customers were offered an attractive exchange scheme as most of the existing machines owned by the households did not have new features which the company's product offered. The marketing team gave an estimate of selling about 4,650 units in the next one year, provided the scheme offered, off-setting - 3,000 to 4,000 of the prices to customers who purchase the company's product in exchange for their existing machines. The actual deduction, however, would depend on the condition of the machines and for that, the company estimated that an average offset of 3,500 per machine would be needed. (3) The third proposal pertains to an all-round reduction in inventory levels. If the production takes place as per the sales plan, the total inventory holding period of the company works out about 31/2 months. Of this, the finished goods holding period alone is 2 to 21/2 months. The company, therefore, must hold finished goods for this period to sell its products in the market. Recently, due to a slow-down in the market, this period had increased to 4-41/2 months. As a result, the working capital requirements of the company have increased significantly. The company recently explored the possibility of selling the goods to its customers under a scheme which would deliver the machine after 11/2 months of placing the order. A pilot test was carried out with a select group of customers. Based on the results of this pilot study, the proposed scheme would offer the following package to a customer: on paying an advance of 3,000, the customer could order the product which would be delivered after 11/2 months of time. As per the terms and conditions of the scheme, the customer would pay - 9,500 at the time of delivery of the product. Through this scheme, the customer would get a benefit of 4,500 for this waiting period. The field tests had indicated that a section of customers would not mind waiting for 1 to 11/2 months and taking this benefit. The marketing team gave an estimate that about 400 machines could be sold per month through this scheme. (4) The current dealership sales of the company are - 3,65,00,000 and it has a present policy of extending 60 days credit but most of its dealers in the recent period have stretched payments and the average collection period was about 120 days. Ninety per cent of the firm's sales are on a credit basis. Out of this, 15 per cent is sold to the customers whose financial position is not very sound and the entire bad debt losses amount to about 2 per cent of sales to these customers. The cost of Sales is 80% and the current collection expenses amount to 5,00,000 per year. After consulting the marketing and accounting staff and analyzing the status of the competition, the company has decided to change its credit policy for the dealership customers. Policy A: To offer cash discount to motivate customers to pay early. The new credit terms would be “2/15, net 60”. A quick study of sample customers indicated that about two-thirds of them might like to avail cash discounts. This change in policy would not change the expected sales, but the average collection period is likely to be reduced to 80 days for the remaining customers. There will be no changes in bad debts, but the collection cost will be reduced by 30% to the existing collection expense. Policy B: To relax its credit standards by 20 Days to expand its sales. This is expected to increase sales by 10 per cent. The marginal customers, which would also include new customers, are not expected to take advantage of cash discounts and are likely to continue to take on an average of 150 days to pay. In the case of these customers, bad debt losses are expected to increase to 2.5 per cent on the sales to financially unsound customers, which will remain the same in proportion. The company would enforce collections with more vigour and diligence. It is expected that collection expenses will increase by - 1,00,000 per annum. The company generally requires a rate of return of 15 per cent from its investments and assume 360 days in a year. Based on the above scenario, answer to the following MCQs: