You are a contract consultant to ABC Corp. They wish to grow â€“ they have options and alternatives and are seeking your counsel as to what action to take.ABC CorpHave been in business for 10 years selling Metromine Aâ€“ an industrial product useful in several industries. ABC has sales of $10mm â€“ with other businesses being their customers. Annual Pre-tax Income of $1mm â€“ has $2.5mm in cash and no debt. ABC sells a â€œunitâ€ of its product for $250.00 â€“ or 40,000 units currently. ABC controls 60% of the market (estimated at $16mm) and is the dominant player in its regional market. Sales in its market appear to have peaked â€“ and in order to grow, the easiest expansion would be to the much larger region to the South. That market is twice as large as ABCâ€™s current market â€“ and is controlled in nearly equal portions by 3 companies selling a product similar to Metromine A at prices very close to Metromine A pricing. Alternatives:1. ABC can re-tool its factory â€“ at a cost of $2 mm â€“ which would result in cost savings of 15%.2. ABC could offer Metromine BX â€“an entirely new product that would replace Metromine A. The new product could, conceivably, attract new users (as well as current customers) as its features far surpass the original. R and D of $3mm is anticipated, another $5mm to retool manufacturing (both for product and volume considerations) would be needed and the new product would open up markets 5 times larger than the current market in the current region alone â€“ let alone the larger southern region. The product sales price would be 15% more than the original product and the pre-tax income margin (pre-tax income as a % of sales price) would be about the same as on the current product.
3. ABC could approach one of the 3 dominant players in the southern region market with an acquisition offer of $10mm. Would you propose any of the options to ABC Corp? If so which one â€“ and why?
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