Recently we have been approached by Takahe Ltd, a New Zealand company similar to ours, in that they build trailers, like us but for the New Zealand market. Takahe Ltd has come up with a proposal on a new business venture, I will highlight the reasons and aspects that are concerned with this ventured and discuss the key points to be considered, including, relevant costs, other financial issues and costs and other non-financial issues.
A large proportion in the consideration of this proposal is the relevant costs which are involved. One of the major expenses with our current production is steel and the rising price of steel. For the first quarter alone, our usage cost for steel alone is budgeted to be almost 7.6 million dollars. A key element of the proposal of Takahe Ltd, is that together we will be able to import steel from China for 60% of the price that we are currently paying, which from Venter Pty Ltd prospective, again using the budget from the first quarter as a measure, is close to 4.6 million dollars. That is a saving of 3 million dollars.
The other 3 major expenses we have in regards to materials is paint, chassis and wheels, for the first quarter alone our budgeted usage expense for these costs are close to 49 million dollars. If we were to purchase the same amount of materials from the suppliers of Takahe Ltd, our cost would be close to 39 million dollars, a saving of 10 million dollars.
Another area, which would require further investigation is the fixed and variable costs of Takahe Ltd, as they pay 85 percent of our fixed and variable costs. Which for our budgeted first quarter would be a saving close to 25 thousand dollars.
When selling to the US market there will be no distribution, research and development costs, although for the first quarter the budgeted amount for our research and development is 4 thousand dollars, we do have a 12 thousand dollar contract that only begins in March. Also going into a new market and not having any distribution costs is a ideal opportunity.
There is however an increase in the amount paid out in commissions, we currently pay a 5 percent commission but if we accept the proposal of Takahe Ltd, we would need to pay a commission of 7.5 percent for the future sales in the US market. Although the budgeted sales commission for the first quarter (at 5 percent) is close to 1.35 million dollars and at a rate of 7.5 percent it would be higher, the amount saved from the acceptance of this offer would be greater than the 2.5 percent increase in commission.
Takahe Ltd has proposed that we manufacture 500 units a month for the US market under their proposal. Our current plant capacity only will allow us an additional 100 units per month. Therefore in order to accept Takahe Ltd’s offer we would need to offset 400 units, either by losing that share from our
