Roxor Watch Company Pty Ltd (A Case study in Marketing

Accounting)
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 2 years ago and its
Australian subsidiary was incorporated in Year0.
In Year2, 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 the Art
(see Appendix II). He decided to leave the basic segment to the small
manufacturers in Hong Kong, Taiwan and Korea. As Roxor was a not 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 three 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 Year2, Ronald test marketed the three product types in all 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 regulary a trend first
noticed 2 years ago.
Roxor International shipped all watches to Australia when it began 2 years
ago, and in Year0 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

The performance of Roxor watches from Year0 to Year2 for District 1 (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 completion 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:
Year1
?

TYPE B:

TYPED:

Year2

+48%
+30%

+51%
+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 the further the 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 Year2, 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 Year2 Roxor price for the similar product, the Seiko name was so
well recognized, 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 fourth coming year(Year3) is given in Appendix VI.
David obtained the following product costings, at Year3 expected prices, from
the Cost Accountant at the Melbourne assembly plant:

Product
Type:

Component Cost p.u.

Labor Costs
p.u.

10.00

10.50

12.00

6.00

6.50

7.00

Variable Prod. O/H p.u

1.00

1.00

1.00

17.00

18.00

20.00

Internal Transport p.u.

Warranty Inspection
p.u

0.50

0.50

0.50

0.90

1.00

1.15

Packaging and Instructions p.u.

0.30

0.30

0.35

1.70

1.80

2.00

Variable Assembly
Costs:

Non Assembly
Variable Costs:

Stock Holding Costs:

(3% of V. Production
Costs)

Total Variable Costs:

0.51
19.21

0.54
20.34

0.60
22.60

Other Costs
(a)
(i)

Variable Non-product Related

Base

Transport Costs:
Petrol and oil
per kilometre
Drivers overtime
per overtime hours
Insurance of consignment
per consignment value
Consignment handling per weight of consignment

(ii)

Paper Costs:
Data processing
Secretarial
Invoicing

No. of statements printed

No. of reams paper used
No. of invoices

It was considered that the transport costs should, for convenience, have a
common base of the costs of a gram weight transported per kilometre.
The Cost Accountant derived the the varriable transport overhead standard
recovery rate was $.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 meaning
fully 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 the invoice. The cost per
invoice equivalent was calculated as $.12. The 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 summarized 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 Year2:
a. The development of 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 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.
2. Ronald Tan decided to introduce Code Q and Code R products in Year3. 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 Year3. Their report is summarized in Appendix VIII.

David also asked his cost accountant to provide cost information
regarding the assembly and other costs involved in having to market
their code products (in addition to the regular lines). This information is
summarized I in Appendix IX. The Cost Accountant warned that in total
the number of units handled by District 1 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 Year3 period.
3. David decided to market the following types and quantities of products in
Year3:

Product
Type:

Price
$

Expected Value of
Demand

40.00

10,000

50.00

6,000

25.00

4,000

unit
s
unit
s
unit
s

Since the CAFM report indicated that certain specific promotional efforts
were needed to achieve the expected demand levels (see Apendix XI on
details for product types D,Q, & R), David wished to know the likely
financial results of his decision. David asked the Cost Account 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: (i)
(ii)

Transport: 80,000 Gram-kilometres

Paperwork: 18,000 Invoice Equivalents

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

(c) That the market value of the Fixed Assests specific to the segment
equals $1,000,000.
Use the Budget Model and compete the expected segmental
contribution for District 1, for Year3.
4. District 1, having the previously developed budget model, was then given
the following report by the CAFM, the marketing research consultants:
We see an opportunity in your segment. It is forecast that if $5,000 were
spent on advertising the superior quality of the product Q, 2,000
additional units would be sold.
However, 1,000 fewer units of D would then be sold. The change in
segment sales would add 2,000 more Gram-Kilometres of transportation
and 1,000 added invoice equivalents. This opportunity has arisen due to
the improved transmitting capabilities of radio stations in District 1.
Using the budget model calculate how much incremental net-contribution
the district would receive for every dollar of additional promotional costs
spent Year3.
5. 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 market value of the Fixed Assets in the segment equals
$1,000,000)
As the Marketing Accountant, provide David with the information he
requires.

Appendix I.
of Roxor International

The Territories

Roxor International
(Europe)

North
America

Middle East

Far-East Asia

Appendix II:
Foundations they Perform
(A)
(B)
Bas Standar
Functions
ic
d
1. Time
x
x
2. Day, Date
x
x
3. Stop watch; lap
time
x
4. Dual Time
5. Alarm, buzzer
6. Solar powered
7. Finger-push
calculator
8. Language
Translator or
Emergency
call

Appendix III:
(Australia) Sales in Units
Product Type
B (standard)
C (popular)
D (advanced)

Appendix IV:
Per Unit in Dollars
Product
Product
Brand
Type
SEIKO

CASIO

Australia

Types of Watches and the

(C )
Popul
ar
x
x

(D)
Advance
d
x
x

x
x

x
x
x
x

(E)
Superi
or
x
x

( F)
State of
Art
x
x

x
x
x
x

x
x
x
x

x
x

District 1
Year0
2,500

Year1
3,700

2,000
5,000

500
6,500

Year2
5,600
9,500

Prices
Year0

Year1

Year2

50.00

75.00

70.00

50.00

120.00

80.00

75.00

35.00

30.00

ROXOR

45.00

40.00

35.00

65.00

65.00

45.00

150.00

110.00

90.00

200.00

180.00

100.00

40.00

40.00

35.00

50.00

45.00

80.00

65.00

55.00

Appendix V:
Unit of Roxor Watches
Product Type

Historical Contribution Per

Year0

Year1

Year2

B (standard)

16.00

14.00

15.79

C (popular)

29.00

24.00

D (advanced)

40.00

29.88

32.40

Appendix VI:
Structure for Year3
Product
Sundry Brands
Type
A

(on average)
22.00

Expected Pricing
Product Brand Name
SEIKO
CASIO
ROXOR
-

27.00

30.00

30.00

60.00

40.00

80.00

95.00

Appendix VII:
by CAFM ( for District 1)

26.00
( if
assembled)28.0
0

Sales Units Projections Done

Bran
d
Nam
e

Produ
ct

SEIKO

Year1
(Historical
)

Year0
(Historical
)
2,0
00
10,0
00
7,0
00
6,0
00
15,0
00
8,0
00
2,0
00
1,5
00

2,500

3,700

5,600

5,700

200

2,000

500

1,600

68

Type

C
D
CASI
O

A
B
C
E

ROXO
R

Year2
(Historica
l)

11,0
00
9,5
00

Year3
Exp.
Value

12,0
00
11,0
00

13,0
00
12,0
00

22,0
00
8,5
00
3,0
00
1,9
00

24,0
00
7,5
00
3,2
00
1,8
00

16,7
00
8,5
00
2,5
00
1,8
00

506
700
857
301
1
,000
600

575

Projected Price and Demand Expected Values for Code

Price

Code
Product Q

S.D

5,5
00

D
5,000
6,500
9,500
10,000
* These demand levels could only be achieved by specific
promotional efforts

Appendix VIII:
Products Q and R

Year3

Expected Value of
Demand

S.D

80.00
50.00
45.00

2,400 units
6,000 units
7,900 units

20.00

5,500 units

200

22.00
5,200 units
25.00
4,000 units
* These demand levels could only be achieved by specific

190

Code
Product R

600
1,400
2,050

140

promotional efforts

Appendix IX:
Incremental Cost Information if District 1 Markets
Products Q & R
Product Type
Q
R
1. Variable Assembly Costs
Components cost p.u. (incl
shipping costs from Geneva)

18.00

7.00

8.00

5.00

2.00

1.00

28.00

13.00

Internal transport p.u.

0.50

0.50

Warranty inspection p.u.

Packaging and instruction

0.16

0.50

0.11

1.16

0.61

0.84

0.39

Labor cost p.u.

Variable production overhead
p.u

2. Non-Asembly Variable Costs

p.u

3. Stock Holding Costs

(3% of variable production
costs)

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:
Fixed Costs

Australian "Territory"

Territory Total
Fixed overhead of
Melbourne
Assembly Plant
Lease cost of trucks
Driver's salaries for
period
Fixed overhead of Geneva
Division
Factory
District Branch fixed
overheads
TOTAL

Allocated/Actual
District 1
District 2

5,000
1,500

2,500
1,000

2,500
500

15,000

6,500

8,500

4,000

2,000

2,000

38,000
63,500

18,000
30,000

20,000
33,500

Appendix XI:
CAFM Report on
Promotional Efforts Required
Product Type
Exp. Demand Levels
(Units)

D
Q
10,0
6,0
00
00
4,0
28,0
Mail-box advertising ($)
00
00
2,0
8,0
Journal advertising ($)
00
00
Point of sale promotion
10,0
40,0
($)
00
00
Sales commissions will be 4% of
sales revenue

R
4,0
00
2,0
00
1,0
00
10,0
00

All Three
20,
000
6,
000
4,
000
-

Total
20,
000
40,
000
15,
000
60,
000