QUESTION 2 – Nyaope Detox Pharmaceuticals Pty Ltd [45 Marks]

Part (a)
Foreign currency risk: [1]
• Potential rand strengthening against foreign currencies will lead to low
realization of revenue, as NDT exports its products; [1]
• Potential rand weakening against the US dollar which will lead to material
price increase as materials are imported from US. [1]
Business continuity risk: [1]
• No apparent succession planning as the founder (i.e. Chester) has been the
financial and operational manager alone; [1]
• Risk of losing significant contracts as NDT has already experienced pricing
disputes with their customers, some of which pulled out already; [1]
• Failure to renew contracts with export customers didn’t increase risk of losing
these clients; [1]
• The pharmaceutical industry by its nature requires extensive research and
development, lack of which may result emerging products ( last research and
development was done in 2005 before the establishment of the company); [1]
• The rigor of production standards under license agreement pose risk of
discontinuation of production if NDT don’t comply with them; [1]
Legal and regulatory risk: [1]
• Possible litigation and increase of provisions because medicines are sold
with guaranteed results. [1]
Other risks:
• Increase in competition on supplies to government drug rehabilitation centres
as there is expansion of BEE accredited competitor; [1]
• Risk of loss of market share as one of biggest competitor is expanding in
Southern Africa. [1]
Any other valid point [1]
Max [12]
Part (b)
Five generic competitive strategies:

A low-cost provider strategy (½) in which the entity strives to achieve lower overall
costs than rivals and appealing to a broad spectrum of customers, usually by under
pricing rivals (1). A broad differentiation strategy (½) in which focus is on seeking to
differentiate the company’s products or services from rivals’ in ways that will appeal
to a broad spectrum of buyers(1). A focused low cost strategy (½) in which the entity
concentrate on a narrow buyer segment (or market niche) and outcompeting rivals
by having lower costs than rivals and thus being able to serve niche members at a
lower price (1). A focused differentiation strategy (½) where concentration is on a
narrow buyer segment (or market niche) and outcompeting rivals by offering niche
members customised attributes that meet their tastes and requirements better than
rivals’ products or services. And lastly, a best-cost provider strategy (½) this is a
hybrid strategy containing elements of low cost provider and differentiator (1) where
customers are given more value for their money by satisfying buyers’ expectations
on key quality/features/performance/service attributes while beating their price
expectations (1).
 Max [7]
NDT’s case:

NGOs depend mainly on donors’ monies and government grants for survival and all
of them are non-profit organisations. In most cases, it is difficult or even impractical
for centres like rehabilitation centres to recover their costs from the patients while
funding from donors are seldom based on actual costs incurred. [2**] Therefore,
NDT is operating in a highly price elastic market [1] as their client in most cases
simply can’t afford the prices for the drugs [1], hence disputes and cancellations of
supply agreements [1]. Therefore, under these conditions any strategy to be applied
by NDT to succeed and preserve market share and profitability should take
cognisance of cost [1], e.g. low cost strategy, however in the medical industry the
quality and effectiveness [1] of the product become more important than its price, we
therefore here suggest best cost provider strategy[1].
Max [6]
**markers should allocate the 2 marks should a candidate attempt to bring the practical realities of the NDT’s
operating environment into strategic perspective.

Part (c)
Actual units sold (11 900 000 / 85) 140 000 [1]

Closing stock units [140 000 * (2 856 000/(6 832 000+784 000))] 52 500 [1]

Actual production (140000+52500) 192 500 [1P]

Selling price 85.00 [1]

Variable costs
Raw materials (15.00) [1]
Direct labour (13.00) [1]
Variable production overheads (cal 1) (4.00) [1P]
Patents cost (cal 2) (0.71) [1]
Contribution per unit 52.29

Fixed costs
Production overheads (cal 1) 3 528 000
Other expenses 1 925 000 [1]
Patent costs (cal 2) 320 600
Finance costs 210 000 [1]
Total 5 983 600

BEP(units)= 5 983 600/52.29 114 431 [1P]

Calculations
1. Production overheads
Over recovered units (192 500-157 500) 35 000 [1]

Absorption rate (784 000 / 35 000) 22.4 [1P]

Actual production overheads 4 298 000 [1]

Fixed production overheads (22.4 (above) * 157 500) (3 528 000) [1P]
Variable production overheads [1] 770 000

Variable production overheads per unit (770 000/192 500[1P]) R4.00

2. Patent costs

Fixed (420 000 [1] – (0.71*140 000)[1]) 320 600

Max [17]
Language [2]
Layout [1]
Question 1 Total [45]