Sonbean Company Case Study

Write an essay advising the CEO of Sonbean Pty Ltd whether to accept or reject the proposal. Discuss the following issues that Sonbean Pty Ltd will have to consider in making the decision:

Relevant costs

Relevant costs are all costs and revenues that vary according to management’s decision alternatives. They represent all those costs that should be considered during decision-making. A cost is relevant when it occurs in future and differs among the alternative courses of action. Firstly, decision-making involves selecting alternative courses of actions based on future expectations and therefore relevant costs should have expectation of occurring in future. This means that costs that have already been incurred are considered irrelevant in decision-making.

A change in revenues can be caused by variations in selling price, sales volume or both. Therefore, the manager should consider the effects of reduction in selling price in both relative and absolute terms to understand the future prospects of the merger. The measure of profitability as a financial measure involves considering contribution and the net profits of the organization. Contribution refers to the difference between the total sales revenue and the variable expenses incurred to produce such revenues while divisional net profit refers to contribution less any proportion of common expenses such as administration, and marketing and distribution

It is determined by factors such as increase in sales, market share by product and customer base. Activity level as a measure of non-financial issue refers to the volume of input and output that will result from an alternative course of action. The level of activity includes measures such as units of labour, machine hours and units sold. The issues of productivity relate to the performance levels of a decision in terms of output per unit of input. Therefore, the merger decision should evaluate a product’s manufacturing cost, utilization of personnel and facilities against the number of units produced. The quality of products or services refers to the additional values that consumer pay for as price of a product. It is an important non – financial factor as it determines the number of repeated purchases and competitiveness. Therefore, quality of a product will depend on the number of defective products, number of warranty claims, and percentage of scrap and customer