The cosmetics division of Valles Global Industries (VGI) sells a special type of organic perfume that is highly sought after. This perfume sells for $150 per 75 ml bottle. For many years, they have sold in Asia through a Seoul-based importer by the name of Park Beauty Products. Their contract with Park Beauty Products is up for renewal and VGI has decided to look at options. You are in charge of making a recommendation.
Option 1: Continue to sell through Park Beauty Products by selling them the perfume in bulk loads of 750 liters at a cost of $150 USD per liter. Let them handle everything at their cost. VGI receives a net payment of $15 USD per bottle.
Option 2: Sell a license for production to SohnCo Fragrances of Seoul, Korea. They will also manage marketing and distribution of the perfume. SohnCo Fragrances will charge VGI a fixed fee of $2 million USD per year to cover marketing costs. SohnCo Fragrances will pay VGI $25 USD per bottle of VGI products it sells in Asia.
Option 3: Create a new enterprise, VGI Asia, by building a small plant for $15 million USD. Annual fixed costs are estimated to be $1.5 million USD and variable costs are $0.60 per bottle.
USD—United States Dollar
Develop a five-year forecast for each of the three options. Assume there is no inflation and do a pre-tax analysis. Develop a cash flow forecast assuming sales remain variable at somewhere between 1, 700,000 bottles and 2,000,000 bottles per year. Make and support a recommendation as to which of the options to employ.