Reasons for Selling CPG:
Compared to other divisions within Bio-Tech, CPG does not enjoy a healthy profit margin. Besides, its profit margins also lag behind other competitors in similar industries. Plus, there is the uncertainty that CPG may not attract any buyers in the future. Thus, sale of an under performing division (CPG) might allow Bio-Tech to concentrate its resources on stronger divisions and generate higher overall returns.
In addition, the funds from the sale of CPG ($25 million) would help to finance the expansion of LPG & CPG. Thus, this will make CPG the ideal candidate to be put up for sale since there is little synergy between CPG and the others.
According to the Pecking Order Theory, this form of financing is favourable because internally generated funds are superior to new debt or equity as risk is minimised.
Since separate marketing channels are required for CPG, the disposal of CPG would mean a significant reduction in marketing expenses.
2.3 Reasons for Not Selling CPG:
CPG has experienced an unspectacular but steady sales growth over the past years as a result of stable demand for its existing products. The consistency in sales could also be due to the absent of legislation uncertainty for new products.
Besides, as R & D outcomes do not dramatically affect CPG's growth, it implies that there is little correlation between CPG and the rest of Bio-Tech. Thus, CPG would not only provide the benefits of acting as a cash cow during periods of downturn but also minimise risk for the company as well due to the low correlation.
As CPG mainly benefits from the by-products of Bio-Tech’s R&D effort only, allocation of this expense to CPG according to relative sales volume is unfair, causing over-allocation. In 1974, R&D expenses allocated to CPG was $2.1 million, which is about 41% of CPG’s EBIT. This suggests that CPG may be more profitable than what current figures reflect. Thus, a revamp of current accounting procedures should...