Bellona Ltd is a small business that produces a single product – a thermostat that is used in a range of kitchen appliances. Information relating to the thermostat is as follows:
All sales are made to kitchen goods manufacturers on credit. Bellona Ltd divides its customers into three separate categories with each having the following characteristics:
A new chief executive is concerned that sales have shown no significant growth for several years and is considering launching a marketing campaign to address the problem. A firm of marketing consultants has suggested that a focused campaign costing £0·80 million would increase sales revenue by £4·00 million. The business has sufficient spare capacity to accommodate this increase in sales. It is predicted that the increased sales would be distributed among the different categories of customers as follows:
Bellona Ltd has an overdraft on which it pays 10% interest per year. Required: (a) Calculate the effect on the profit of Bellona Ltd of launching the marketing campaign and briefly comment on the results. (Workings to nearest £000) (b) Explain why the management of trade credit can be a particular problem for small businesses such as Bellona Ltd.