Reference no: EM132331128

Assignment -

Ben has started a small consulting firm based in Melbourne CBD. He approached CIC Higher Education to recruit a group of accounting students willing to participate in part- time jobs. The work offered to students requires them to form groups of three and work under the leadership of a senior consultant from Ben's firm mandated to conduct consultancy project in a given client company. The Accounting Discipline at CIC Higher Education decided that Management Accounting students should get the job opportunity as it will help them to apply the methods and techniques they learnt in the unit and find reasonable solutions for business problems. The job requires analysis of a selected business case, to identify and propose sound solutions and critically evaluate the impact of anticipated changes in cost structure and product mix on firm performance and profitability.

Your team is offered to work on a firm called Australian Paper which is a member of the Nippon Paper Group. The senior consultant from Ben's consulting firm gave you a project file that contains details of the case company and its operations. From the records, you found out that a manufacturing facility of Australian Paper so called Maryvale Mill that is in Victoria's Latrobe Valley which began making paper in 1938. Maryvale Mill has marked considerable growth to include 5 paper machines, 3 pulp mills and 2 waste paper recycling plants. Australian Paper is a vertically integrated manufacturer of pulp, paper, envelopes and stationery. The plant is Australia's only manufacturer of office and printing papers, bag, sack, and industrial papers and a major supplier of Kraft liner board for the cardboard carton industry.

Australian Paper generally produces a wide range of products and iconic brands such as Reflex copy paper, Tudor envelopes and stationery, Olympic scholastic and business books, and Queens Slipper playing cards. For the current project, your task is to focus on four versions of new products that the company wants to introduce in the year 2020. These new products are known as Bag Kraft (BK), Sack Kraft (SK), Kraft Liner (KL) and High Performance Kraft Liner (HPKL). Products are sold in packs where a single pack consists of 100 pieces of items that are distributed to retail business firms. Budgeted sales volume for 2020 includes 3,000 packs of BK, 2,400 packs of SK, 3,600 packs of KL and 3,000 of HPKL. Budgeted annual fixed cost includes $240,000 for manufacturing and $70,000 for selling and administrative costs. The income tax rate applicable for paper products is 20 per cent. Additional budgeted total annual data for the four products is presented as follows.

	BK	SK	KL	HPKL
Sales Revenue	$360,000	$324,000	$540,000	$540,000
Variable manufacturing costs	180,000	180,000	288,000	330,000
Variable selling & admin. costs	90,000	60,000	144,000	120,000

Required: as part of the consultancy work, the senior consultant presented you to answer the following questions (treat each requirement independently, show details of your computations and explain the results).

1. Determine the budgeted net profit for the year 2020. (Hint: use contribution margin approach to income statement or variable costing statement).

2. Assuming the sales mix remains constant throughout 2020, determine how many packs of each product must be sold in order to breakeven.

3. Answer the following items for Australian Paper and interpret the results:

a. Calculate the projected safety margin in units for the year 2020 and explain the importance of this information for Australian Paper.
b. Compute the projected safety margin in sales dollars for the year 2020 and interpret the meaning of your answer.

4. Ben has asked that your team must conduct sensitivity analysis on the basis of the following changes. Melbourne has seen growth in population and small businesses are booming. The type of business that is expected to flourish is small cafes and snack bars. This will affect demand of materials required for producing Sack Kraft (SK) and are expected to increase variable manufacturing cost of SK by one third. Additionally, Australian Paper expects that fixed manufacturing costs will increase by $8,600 but fixed selling and administration costs remain the same. It is expected that budgeted sales volume, selling price per pack and all other variable costs will remain the same.

a. Taking into accounting the above change of circumstances, determine how many packs of each product should Australian Paper produce and sell in order to breakeven in the year 2020.
b. Assume the maximum demand for each type of product could reach 4,000 packs for 2020. However, the realistic estimate of maximum total number of packs that Australian Paper can produce is 13,000 due to limited financial resources. Australian Paper is targeting to maximise its profitability for 2020 by manipulating its sales mix. For this reason, the senior accountant has asked your team to come up with a proposed sales mix (or new proportion) for each of the four products. Provide explanation for your proposed sales mix.

2 Marks are awarded for the format of presentation (use of tables, supporting computations, explanation, no spelling and grammar errors, etc.)

(Hence: You are required to conduct research to support your answers for Q3 and Q4 with relevant theoretical concepts taken from books or published journal articles. Don't forget to use proper in-text citation and provide the references. Ask for assistance if you have difficulty in writing proper in-text citations and references.)