Accounting for Competitive Marketing

A Case Study in Marketing Accounting

Roxor Watch Company Pty Ltd

Roxor Watch Company Pty Ltd in Australia is a subsidiary company of Roxor International, the parent
company having its headquarters in Geneva. The Australian company is considered one of the
"territories" of the parent company for its reporting purposes. Appendix I shows the various territories
around the world. The company was established in 1979 and its Australian subsidiary was
incorporated in 1980.

In 1982, Roxor International in Geneva recruited Ronald Tan a marketing whiz-kid who had launched
the popular "Quasar" brand of electronic watches for his Singapore based company. The traditionalist
within the firm wondered where all the Swiss experts were, but reluctantly had to agree that the
company much needed the injection of some oriental know-how in the marketing of electronic
watches.

Ronald segmented the market at the customer level by the functions (or operations) an electronic
watch can perform. He subdivided the watches into six types - basic; standard; popular; advanced;
superior; and State of Art (see Appendix II). He decided to leave the "basic" segment to the small
manufacturers in Hong Kong, Taiwan and Korea. As Roxor was not a known brand name in the
electronic watch industry, it could only compete with those manufacturers on price - and he was
certain that Roxor was unable to embark in a price-war at this stage. Ronald therefore decided to
compete in the next 3 levels:

• Type B: Standard
• Type C: Popular
• Type D: Advanced

He drew up his plans, taking into account all possible aspects of the marketing mix: product; price;
promotion; and physical distribution. He knew his products had no technological advantages when
compared to the products of the two leading Japanese brands: Seiko and Casio. He therefore decided
to give the customers a price advantage and promote the Roxor brand as a "quality Swiss product at
a reasonable price due to production efficiencies". The "Swiss-made" tag still, amazingly, seemed to
carry some brand recognition and customer loyalty.

In late 1982, Ronald test marketed the three product types in all the territories and found that the
competition was too great in North America and Far-East Asia. In the Middle-East the customers
seemed reluctant to purchase electronic watches and preferred the mechanical watches. All the big
Japanese names were not performing that well in the region where the status mechanical watches
like Rolex, Dunhill and Patek-Phillip had captured the petro-dollar market. In Europe and Australia
Roxor performed well. The European market was mainly in the EEC countries with certain favourable
trade quotas being given to Roxor. The Australians, on the other hand, still seemed to be upgrading
their electronic watches very regularly - a trend first noticed in 1979.

Roxor International shipped all watches to Australia till late 1979, and in 1980 incorporated the Roxor
Watch Co. Pty Ltd in Melbourne to assemble the watches - mainly due to certain trade regulations. In
Australia there were only two districts:

• District 1: NSW; ACT; Queensland.

• District 2: Victoria; South Australia; Tasmania.

Page-1
The performance of Roxor watches from 1980 to 1982 for District I (NSW, ACT, Queensland) in
Australia is given in Appendix III. The Australian District 2 performance trends were very similar.

The manager of District 1, Mr David Smith was quite pleased with his performance in a very
competitive market. Although the competition was too intense in the Type C (popular) customer
segment - with even the leading brands starting to cut their prices heavily - the Roxor brand types B
and D had managed to hold their sales volumes and even have some growth. The growth percentages
(in sales volume) are given below:

1981 1982

• Type B: +48% +51%

• Type D: +30% +46%

However, these volume increases were partly made possible by price cutting, and it was only because
the variable costs also dropped appreciably due to new technologies was there some maintenance of
contribution per unit. It seemed now that further cost cutting was not possible for some time and any
more price reductions would adversely affect cash flow. Appendix IV gives the prices per unit of Roxor
watches and its leading competitors in Australia. Appendix V gives the historical contribution per unit
of Roxor watches.

The problem that David faced in 1982, was that for the forthcoming year he had received advanced
knowledge that Casio was to cut its price on product type B and hoped to sell it at $27.00 per unit.
Thus, Roxor watches would have to be sold at the same price or perhaps a dollar lower. In addition to
that bad news, Seiko had apparently decided to cut $15.00 off its price for product type D and thus
sell it for $60.00. Not only would this be $5.00 less than the 1982 Roxor price for the similar product,
the Seiko name was so well recognised, that David thought that Roxor would have to sell at about
$20.00 less than the Seiko model in order to compete. The most probable pricing structure for the
forthcoming year (1983) is given in Appendix VI.

David obtained the following product costings, at 1983 expected prices, from the Cost Accountant at
the Melbourne assembly plant:

Product Type: B C D

1. Variable Assembly Costs: $ $ $

Component Cost per unit 10.00 10.50 12.00
Labour Costs per unit 6.00 6.50 7.00
Variable Prod. O/H per unit 1.00 1.00 1.00
17.00 18.00 20.00

2. Non-Assembly Variable Costs:

Internal Transport per unit 0.50 0.50 0.50
Warranty Inspection per unit. 0.90 1.00 1.15
Packaging and Instructions per unit 0.30 0.30 0.35
1.70 1.80 2.00

3. Inventory (or Stock) Holding Costs:

(3% of V. Production Costs) 0.51 0.54 0.60

4. Total Variable Costs: 19.21 20.34 22.60

Page-2
Other Costs

(a) Variable Non-product Related Base

• Transport Costs:
Petrol and oil per kilometre
Driver’s overtime per overtime hours
Insurance of consignment per consignment value
Consignment handling per weight of consignment

• Paper Costs:
Data processing No. of statements printed
Secretarial No. of reams paper used
Invoicing No. of invoices

It was considered that the transport costs should, for convenience, have a ‘common base’ of ‘the cost
of a gram-weight transported per kilometre’. The Cost Accountant derived that the ‘variable transport
overhead standard recovery rate’ was $0.80 per gram-kilometre.

Further, the order-processing paperwork costs were given a ‘common base’ of invoice equivalents. It
was seen that such costs cannot be meaningfully isolated by product or customer attributes. The
invoice equivalent becomes the measuring unit for paperwork costs caused by sales and is defined in
terms of the ‘time’ taken to prepare an invoice. The cost per invoice equivalent was calculated as
$0.12. The Accounts Receivable (or Debtors) of the district take one month on average to pay and the
Divisional Manager is responsible for all debtor collections. The cost of capital charge is 18% per
annum. David also commissioned ‘CAFM’ (Consultant Analysts for Management) an external
marketing research firm to provide him with historical estimates of the units sold by the main
competitors and to provide him with expected values and standard deviations of future sales units
(given the expected prices as in Appendix VI) by Roxor and its competitors. After much research,
CAFM (who had an excellent track record for accurate forecasts) submitted a report which is
summarised in Appendix VII.

Decisions Required

1. The Research and Development area of Roxor International informed Ronald Tan, the head
office marketing manager, of the following developments late in 1982:

(a) The development of a AM/FM Radio-watch (with micro-speakers on strap) that can
be produced for $17.00 per unit. It will have all the functions of a product D type
watch and include the radio. (Code Name: Q).

(b) A Product E type calculator-watch that includes 2 memories, and could be produced
for $30.00 (Code Name: M).

(c) A Product D type watch that would include, in addition to the regular functions,
sensors to tell the temperature, pressure, and humidity. It will also incorporate a
compass. The unit could be produced for $29.00. (Code Name: N).

(d) Due to technological advances a product A type watch that could be produced in high
strength plastic for only $6.00. (Code Name: R).

Give your views about the marketing strategy of the above new products. Take all elements
of the marketing mix (product; price; promotion and distribution) into account.

Page-3
2. Ronald Tan decided to introduce Code Q and Code R products in 1983. He then asked his
district managers to state if they felt that they would be able to market these products for the
advantage of the company as a whole. David Smith, being one of the district managers asked
CAFM (the marketing research consultants) to project the possible price and demand
expected values for 1983. Their report is summarised in Appendix VIII. David also asked his
cost accountant to provide cost information regarding the assembly and other costs involved
in having to market the code products (in addition to the regular lines). This information is
summarised in Appendix IX. The Cost Accountant warned that in total the number of units
handled by District I should not exceed 21,000 units, because beyond this point the fixed costs
will increase due to exceeding the relevant range.

Give your views on what products, with what prices, and in what quantities (if any) should
David Smith market in the 1983 period.

3. David decided to market the following types and quantities of product in 1983:

Product Type: Price $ Expected Value of Demand

D 40.00 10,000 units

Q 50.00 6,000 units
R 25.00 4,000 units

Since the CAFM report indicated that certain specific promotional efforts were needed to
achieve the expected demand levels (see Appendix XI on details for product types D, Q, & R),
David wished to know the likely financial results of his decision. David asked the Cost
Accountant to compute this. The following cost information was used in the calculation:

(a) That between the activity levels of 19,600 and 20,000 units, the following non-product
related activities would be required:
• Transport: 80,000 Gram-kilometres
• Paperwork: 18,000 Invoice Equivalents

(b) That the Fixed Costs of the Australian "Territory" and its divisions were as given in
Appendix X.

(c) That the market value of the Fixed Assets specific to the segment equals $1,000,000.

Use the Budget Model in the EVA (Residual Income) format to compute the "expected
segmental contribution" for District 1, for 1983.

4. David was not happy with the expected financial results computation in part (3) and informed
the Marketing Accountant that he wants to know how the various customer segments
contributed to district contribution, and what part of the district contribution was
"controllable" by him. (Assume that the fair value of the Fixed Assets in the segment equals
$1,000,000)

As the Marketing Accountant, provide David with the information he requires.

5. Before reporting the results to the corporate office in Geneva, David asked the Marketing
Accountant to provide him with a standard ‘segmental profitability report’ for District 1.

As the Marketing Accountant, provide David with the report he requires, and compare it to
the EVA report of requirement (4).

Page-4
 Appendix II: Types of Watches and the Functions they Perform

Functions (A) (B) (C) (D) (E) (F)

Type: Type: Type: Type: Type: Type:
Basic Standard Popular Advanced Superior State of Art

1.Time x x x x x x
2.Day, Date x x x x x x
3.Stop watch; lap time x x x x x
4.Dual time x x x x
5.Alarm, buzzer x x x
6.Solar powered x x x
7.Finger-push x x
calculator x
8 Language translator
or Emergency call

Appendix III: District 1 (Australia) Sales in Units

Product Type 1980 1981 1982

B (standard) 2,500 3,700 5,600

C (popular) 2,000 500 -
D (advanced) 5,000 6,500 9,500

Page-5
 Appendix IV: Prices Per Unit in Dollars

Product Brand Product Type 1980 1981 1982

SEIKO B 50.00 - -
C 75.00 70.00 50.00
D 120.00 80.00 75.00

CASIO A 35.00 30.00 -

B 45.00 40.00 35.00
C 65.00 65.00 45.00
E 150.00 110.00 90.00
F 200.00 180.00 100.00

ROXOR B 40.00 40.00 35.00

C 50.00 45.00 -
D 80.00 65.00 55.00

Appendix V: Historical Contribution Per Unit of Roxor Watches

Product Type 1980 1981 1982

B (standard) 16.00 14.00 15.79

C (popular) 29.00 24.00 -
D (advanced) 40.00 29.88 32.40

Appendix VI: Expected Pricing Structure for 1983

Product Type Sundry Brands Product Brand Name

(on average) SEIKO CASIO ROXOR

A 22.00 - - -
B - - 27.00 26.00
C - 30.00 30.00 (if assembled) 28.00
D - 60.00 - 40.00
E - - 80.00 -
F - - 95.00 -

Page-6
 Appendix VII: Sales Units Projections Done by CAFM (for District 1)

Brand Product 1980 1981 1982 1983 1983

Name Type (Historical) (Historical) (Historical) Expected Standard
Value Deviation

SEIKO B 2,000 - - - -
C 10,000 11,000 12,000 13,000 506
D 7,000 9,500 11,000 12,000 700

CASIO A 6,000 5,500 - - -

B 15,000 16,700 22,000 24,000 857
C 8,000 8,500 8,500 7,500 301
E 2,000 2,500 3,000 3,200 1,000
F 1,500 1,800 1,900 1,800 600

ROXOR* B 2,500 3,700 5,600 5,700 200

C 2,000 500 - 1,600 68
D 5,000 6,500 9,500 10,000 575

* These demand levels could only be achieved by specific promotional efforts

Appendix VIII: Projected Price and Demand Expected Values for Code Products Q
and R
Price Expected Value of Demand Standard Deviation

Code Product Q 80.00 2,400 units 600

50.00 6,000 units 1,400
45.00 7,900 units 2,050

Code Product R 20.00 5,500 units 200

22.00 5,200 units 190
25.00 4,000 units 140

* These demand levels could only be achieved by specific promotional efforts

Page-7
 Appendix IX: Incremental Cost Information if District 1 Markets Products Q & R

Product Type Q R

1. Variable Assembly Costs

Component cost per unit (incl. shipping costs 18.00 7.00
from Geneva) 8.00 5.00
Labour cost per unit 2.00 1.00
Variable production overhead per unit 28.00 13.00

2. Non-Assembly Variable Costs

Internal transport per unit 0.50 0.50
Warranty inspection per unit* 0.16 -
Packaging and instructions per unit 0.50 0.11
1.16 0.61

3. Inventory (or Stock) Holding Costs

(3% of variable production costs) 0.84 0.39

4. Total Variable Costs 30.00 14.00

* The Geneva Head Office factory will carry out the warranty inspection on code Products Q
& R and this cost is included in the component cost. The additional inspection of Code
Product Q is for assembly faults only. Such a check will not be done of code Product R.

Appendix X: Australian "Territory" Fixed Costs

Territory Total Allocated/Actual

District 1 District 2

Fixed overhead of Melbourne

Assembly Plant 5,000 2,500 2,500
Lease cost of trucks 1,500 1,000 500
Drivers' salaries for period 15,000 6,500 8,500
Fixed overheads of Geneva Division
Factory 4,000 2,000 2,000
District Branch fixed overheads 38,000 18,000 20,000
TOTAL 63,500 30,000 33,500

Appendix XI: CAFM Report on Promotional Efforts Required

Product Type D Q R All Three Total

Exp. Demand Levels (Units) 10,000 6,000 4,000 20,000 20,000

Mail-box advertising ($) 4,000 28,000 2,000 6,000 40,000

Journal advertising ($) 2,000 8,000 1,000 4,000 15,000
Point of sale promotion ($) 10,000 40,000 10,000 - 60,000

Sales commissions will be 4% of sales revenue

© Janek Ratnatunga

Page-8