Reference no: EM131748175

TASK 1 - Planning for profit and cost control

Objective - To enable the learner to prepare the budgeted profit statement and undertake cost-volume-profit analysis for decision making.

Anhad Sdn. Bhd. manufactures car alarms, and its trading results for the year ended 31 October 2013 are as follows:

	$'000	$'000
Sales (800,000 alarms)		7,200
Costs:
Materials: direct, variable	1,600
Labour: direct, variable	960
Labour: indirect, fixed	280
Other production overheads: variable	400
Other production overheads: fixed	640
Selling overheads: variable	480
Selling overheads: fixed	360
Distribution overheads: variable	280
Distribution overheads: fixed	120
Administration overheads: fixed	600
		(5,720)
Net profit for the year		1,480

Anhad is planning next year's activity and its forecasts for the year ended 31 October 2014 are as follows:

1. A reduction in selling price per car alarm to $8 per alarm is expected to increase sales volume by 50%.

2. Materials costs per unit will remain unchanged, but 5% quantity discount will be obtained.

3. Hourly direct wage rates will increase by 10%, but labour efficiency will be unchanged.

4. Variable selling overheads will increase in total in line with the increase in sales revenue.

5. Variable production and distribution overheads will increase in line with the 50% increase in sales volume.

6. All fixed costs will increase by 25%.

You are required to do the following:

a) Prepare a budgeted profit statement for the year to 31 October 2014 showing total sales and marginal costs for the year and also contribution and net profit per unit.

b) Calculate the break-even point for the two years and explain why the break-even point has changed. Comment on the margin of safety in both years.

c) Calculate the sales volume required (using the new selling price) to achieve the same profit in 2014 and in 2013.

d) A director comments that 'with these figures, all we have to do to work out our budgeted profit is to multiply the net profit per unit by the units we want to sell". Why is this statement incorrect?

TASK 2 - Investment appraisal

Objective - To enable the learner to evaluate and make choices between different projects in which to invest.

Satnam Berhad is considering diversifying their business activities and they are currently reviewing two proposals. Proposal A is to launch their own television station whilst Proposal B is a joint venture with Kaboor Limited to launch a satellite that would enable the African region to receive advertisements for both company's products.

The available data is follows:

Proposal A - TV Station

Initial set-up costs: $250 million

Annual running costs: $100 million

Estimated life of project: 5 years

Value of assets released at the end of the project: $40 million

Increased sales as a result of advertising products: $60 million in the first year, growing cumulatively by 50% each year for the following four years.

Project B - Satellite

Initial set-up costs: $700 million

Annual running costs: $50 million

Value of assets released at the end of the project: $10 million (Note: all the above to be shared 50/50 with Kaboor Limited)

Estimated life of the project is 6 years.

Increased sales for Satnam Berhad as a result of advertising their products in the African continent: $80 million in the first year, growing cumulatively by 20% each year for the following five years.

Funding for both projects would be at a cost of capital of 6%.

Relevant discount factors at 6% p.a. are:

Year		Cumulative
1	0.943	0.943
2	0.890	1.833
3	0.840	2.673
4	0.792	3.465
5	0.747	4.212
6	0.705	4.917

Required:

a) Using the net present value method of investment appraisal, critically evaluate the two proposals and make your recommendation to Satnam Berhad.

b) What other considerations should Satnam Berhad take into account in deciding which Project to pursue?

TASK 3 - Short term decision making

Objectives - To enable the learner to identify the relevant and irrelevant costs and benefits associated with each feasible alternative with the greatest overall net benefit to aid decision making.

Swagat Manufacturing Sdn. Bhd. needed to determine if it would be cheaper to make 10,000 units of a component in-house or to purchase them from an outside supplier for $4.75 each. Cost information on internal production includes the following:

	Total Cost $	Unit Cost $
Direct materials	10,000	1.00
Direct labour	20,000	2.00
Variable overheads	8,000	0.80
Fixed overheads	44,000	4.40
Total	82,000	8.20

Fixed overhead will continue whether the component is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price.

Required:

a) List the relevant cost of internal production and external purchase.

b) Which alternative is more cost effective and by how much?

c) Now assume that the fixed overhead includes $10,000 of cost that can be avoided if the component is purchased externally. Which alternative is more cost effective and by how much?