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PART A Allan Rock is the owner of Animated production Ltd which produces a range of products. He hired you as a management consultant asking your advice on how to organise an effective budgeting system to facilitate control over his company’s activities. He made the following information available to you. All his products follow a similar production process and have the same cost structure. The products are made in batches that are started at the beginning of the month and are completed and taken into finished goods inventories at the end. There is no work in progress at the end of any month. The business is considering a change in its sales prices, volumes and credit terms. Current position Sales revenues are £0.3 million a month and produce a contribution of 40p per £1 of sales revenue. Variable raw material costs account for 20p per £1 of sales revenue. Fixed costs are £120,000 a month, of which £30,000 is depreciation. The business’s only variable costs are production costs.
Credit customers take one month to pay, trade payables for raw materials are paid one month after purchase and the other variable costs are paid during the month of production. At the end of each month the business has sufficient raw material inventories to meet the following month’s production and enough finished inventories to meet the following month’s sales.
Production and sales volumes would be increased by 50%. To generate the increased demand, selling prices would be reduced by 10% and trade receivables would be allowed to pay two months after the sale. Since neither the usage, nor the cost per product of raw materials and other variable costs would be affected by the proposed expansion, the contribution per £1 of sales revenue would fall to 30p. Apart from the increased trade receivables payment period, all working capital policies would remain the same as at present. The changes to sales volume, price and payment period, were they to occur, would commence with sales made from 1 December this year, but to meet the business’s working capital policies there would be effects on cash flows before that time. Required
(a) Prepare Animated production Ltd’s cash budgets for each of the months of October, November and December this year and January and February next year, on the assumption that the proposed expansion of sales goes ahead. (b) Write a brief report explaining how budgeting can facilitate the process of Animated production Ltd’s management control mentioning relevant advantages and areas were attention should be placed. (40 marks) Your report should address the following issues:
• Use and importance of budgeting within the context of the modern business environment. Word Limit: 1000 words excluding any tables, calculations or appendixes You will be assessed on:
• Preparation of the cash budget (10 marks) PART B Flight high ventures plc is a producer/retailer of gliding equipment. Their customer base at present is spread throughout the UK with no particular concentrated area of business. However, the business would like to look into expanding their business abroad with an ambitious 20% export target in 2 years time. Flight high plc’s sales turnover is growing at an impressive 10% yearly and they are looking at ways to improve their productivity even further. The company is planning to set up a new plant to cope with expansion plans. This will require an initial outlay of £4m. The costs will go into the construction of a state of the art production facility as well as towards the product development and marketing of a new product that has been developed from the Research & Development activities of the firm.
The R&D team have developed two ways of manufacturing the new product. One method requires a accounting and Financial Management lower initial cash outlay and a second method requires a higher initial outlay but would help in achieving better economies of scale. The methods are however mutually exclusive and a decision will have to be taken as to which method will be more appropriate.
*Depreciation is calculated by using straight-line method
In order to help the board of directors decide which option to pursue, write a report of 1000 words discussing the project. Make sure the following areas are covered:
1. Evaluate the R&D projects using Payback, ARR, NPV and IRR methods.
2. Make a firm recommendation on the R&D project the company should adopt based on the advantages and disadvantages of the various investment appraisal methods used and the current/future requirements of the firm. Word Limit: 1000 words excluding any tables, calculations or appendixes You will be assessed on:
• Calculation of investment appraisal methods (10 marks) General guidance: The report is to be written individually. The areas mentioned above must be covered in your report. The calculations required for the report will account for only 20% of your coursework mark. The emphasis must be on analysis and evaluation. Your reasoning must be supported through adequate research and rigorous referencing following the Harvard style of referencing. The Academic Skills Unit (ASU) provides a sample of this form of referencing. Please ensure while writing the report you clearly state all your assumptions and the reasoning behind them. Some of the required parts of the report do not have a single correct answer and the mark awarded will depend on the application of the knowledge and understanding that you will display in your arguments. Your answer should be in report format. Please use 1.5 or double line spacing and font size no less than 12. Submit one electronic copy via StudyNet. Display the word count (not including the references / bibliography, the appendices, and any tables, graphs or calculations you may use) at the FRONT page. State your name and ID number on the front page of the report and present your calculations in the form of an APPENDIX in the end of the report. |
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