BU7006 Strategic Financial Management Report for Steel Lite plc

This report analyzes strategic financial management for Steel Lite plc, a UK-based steel manufacturing company. The report addresses key financial decisions, including break-even analysis, make-or-buy decisions, and pricing strategies. The first section calculates the break-even point, emphasizing its importance for profit determination. The second section evaluates a make-or-buy decision, comparing the costs and contributions of in-house production versus purchasing from an external source. The third section examines the option of ceasing production and supplying units to another division, evaluating profit implications. Finally, the report explores various pricing strategies, such as cost-plus pricing, penetration pricing, price skimming, competitive pricing, and value-based pricing, highlighting their application and impact on business profitability and customer satisfaction. The report utilizes financial data to support its recommendations, aiming to provide valuable insights for Steel Lite plc's financial decision-making process.

1
Strategic financial management
Table of Contents
1.
2.
3.
4.
References
1.
The breakeven point is the level at which the company will be in the situation of no profit and
loss. For the calculation of the same, there will be need of the fixed cost and the contribution that
is made on each unit (Liu & Santos, 2015). This will be helping the management in deciding the
level at which the operations are required to be performed. In this, the fixed cost will be
considered and the level at which the same will be recovered is identified. The formula which
will be used is as follows:
Breakeven point = Fixed cost/selling price – variable cost
Particulars
Amount
Fixed cost
200000
selling price
10
variable cost
5
contribution per unit

5
Breakeven point
40000
The breakeven point is useful for the management as they will come to know of the quantity at
which profit will be made (Oe & Mitsuhashi, 2013). This is the level after which the profits will
be made and the company should manage its operations accordingly. In the given case the
company will be required to sell a minimum of 40000 units in order to save itself from any loss.
The profits will be earned once this level is crossed and sales are made at a higher level of
product.
2.
The company is currently selling 45000 units which are produced in-house. Now, it is having an
option to purchase the additional 5000 units from an external source at the rate of £40,000. The
sales will be increasing but with that, there will be a rise in the cost also. It is required that an
appropriate decision shall be made as to the order shall be accepted or not. This will be done
with the help of the determination of the contribution which will be earned by the company in
both the circumstances. All the data which is provided and the change which is taking place will
be evaluated to take the required decision in the best possible manner. In order to make the
decision the contribution statement has been provided below:
Particulars
Without order
With order
Units
45000
50000
Sales
450000
500000
Variable cost
225000
265000

Contribution
225000
235000
From the table, it can be noted that contribution by accepting the order amounts to £235000
which is higher than the other option. If the company does not accept the offer then its capacity
is going waste and no additional earning is made. By the acceptance of an order, there is an
additional earning of £10000 after deduction the cost which is incurred on the order. With the
help of this, it can be said that order shall be accepted as the same will be beneficial for Steel lite
plc.
3.
Company is having the option to cease the production and provide the units to the other division
for production. It is required that all the aspects in this shall be evaluated by which the best
decision in the interest of the company will be taken (The balance smb, 2019). This can be done
by identifying the profits which will be made in both the options. Under that, all the changes
which are taking place will be considered so that the appropriate results are attained and they can
be used in the making of the required decisions. The calculation in order to make the correct
decision is presented in the table below:
Particulars
Existing position
offer from division
Units
45000
45000
Sales
450000
450000
variable cost
225000
355000

Contribution
225000
95000
Fixed cost
200000
50000
Profit
25000
45000
It can be noted that the contribution is more in case of the existing case but the consideration will
also be provided to fixed cost in this case. It is because the same is reducing with a large amount.
If the company manufactures its units then the profit of £25000 is made but if production is
ceased and units are provided to other division then profit amounting to £45000 will be earned.
The company will be benefitted with the acceptance of the offer as the profits will be increased
and therefore the order shall be accepted. There will be need to consider certain other aspects
also in the decision making such as the quality of the product and also the reputation and faith of
consumers. It should be considered that the best quality will be provided to consumers otherwise
reputation will be harmed and this will affect the business adversely in the coming period.
4.
In the business, the products are sold at a specified price and it is required that it shall be set after
considering all the aspects. This will be the amount which will be charged from the consumers
and it should be decided in such manner that company is also benefitted together with the
satisfaction of customers (Li et al., 2013). In the setting of same, there are various strategies
which can be used and some of them are discussed below:
Cost-plus pricing: This is the technique in which the company will be taking the cost that is
incurred as the base to decide the price. A fixed mark-up will be added to the cost which will be
considered to be the gain of the company (Bdc, 2019). The derived amount will be the final price
which the customers will be required to pay.
Penetration pricing: This is the method which is used to enter and make a position in the
competitive market. Under this, the price in the initial period will be set at lower levels so that
the market can be captured as more people will be attracted with the lower price levels. Once the
market share is gained the prices will be increased and then the business will start to earn the
profits.

Price skimming: In this method, the prices will be charged at higher rates in the beginning period
when the competition is high and allow them to charge the same (Chen et al., 2012). By this
method, the cost will be recovered in the initial stage so that less impact of the competition will
be faced. By the help of this, the profits will be made at a high rate in the initial time.
Competitive pricing: This is the approach in which the price will be set by taking into
consideration the prices which are charged by the competitors. The price will be ascertained in
such manner that gains over other competitors are made and also the market is captured. This is
the method which can be used in the competitive market and for that proper analyzation of the
circumstances will be made.
Value-based pricing: The customers assume a certain value for the product based on its quality
and worth. The same will be taken into account and then the price will be set which will be in
accordance with the customer's opinion. The price that the consumers will be ready to pay by
considering the products worth will be the final amount to be charged.
All of these are the approaches which are available and that will be considered by the business.
They will be helping in determining such price for the product which will be affordable for the
consumers and also the company will be earning the profits. In the undertaking of all the
methods, there will be an undertaking of the required research and by that, the information which
will be needed is collected (Li et al., 2016). The data will then be evaluated and by considering it
with other factors there will be the setting of the price. It is generally affected by the various
market forces and factors and so it will be necessary that all of them are considered and the price
is set in such manner that least impact of any market condition is faced by the company. This is a
complex process as there are various risks which are involved in this. It is required to be ensured
that the data which is used in accurate and will be providing the best results. If the price which is
set is not proper then it will be adversely affecting the business. The consumers will not be able
to accept the price and by that loss will have to be borne by the company. Due to all these
reasons, it should be focused that the price shall be such which will be affordable by all and also
in the interest of the business.
References
Bdc. (2019). How to price your product: 5 common strategies. Retrieved from:
https://www.bdc.ca/en/articles-tools/marketing-sales-export/marketing/pages/pricing-5-common-
strategies.aspx
Chen, X., Li, L., & Zhou, M. (2012). Manufacturer's pricing strategy for supply chain with
warranty period-dependent demand. Omega, 40(6), 807-816.
Li, B., Hou, P. W., Chen, P., & Li, Q. H. (2016). Pricing strategy and coordination in a dual-
channel supply chain with a risk-averse retailer. International Journal of Production Economics,
178, 154-168.

Li, Y., Xu, L., & Li, D. (2013). Examining relationships between the return policy, product
quality, and pricing strategy in online direct selling. International Journal of Production
Economics, 144(2), 451-460.
Liu, J., & Santos, G. (2015). Decarbonizing the road transport sector: Break-even point and
consequent potential consumers' behavior for the US case. International Journal of Sustainable
Transportation, 9(3), 159-175.
Oe, A., & Mitsuhashi, H. (2013). Founders' experiences for startups' fast break-even. Journal of
Business Research, 66(11), 2193-2201.
The balance smb. (2019). Contribution Margin Income Statement - Breakeven Point in Dollars.
Retrieved from: https://www.thebalancesmb.com/contribution-margin-income-statement-393473