BMAN21040 2018-19
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BMAN21040
SECTION A: WITHHELD
SECTION B
Answer any TWO questions from SECTION B (30 marks per question)
QUESTION 6
Manchester Graphene develops high-specification components for use in scaling up the manufacture of commercial-grade graphene for use in a variety of applications. The business is assessing the viability of a specialised new component to produce graphene on a large scale.
In determining the viability of the specialised component, it is important it meets a required target-cost before its design is finalised and approved for manufacture.
The following estimates have been assembled for the specialised component. Owing to the fast pace of technological advancement in the sector, it is expected to have a
product life-cycle of only three years.
Estimates for Target Cost Analysis:
|
Year 1 |
Year 2 |
Year 3 |
Estimated sales units |
65 |
100 |
150 |
Anticipated sales unit price |
400,000 |
300,000 |
300,000 |
|
|
|
|
R&D costs ofcomponent design |
7,000,000 |
7,000,000 |
7,000,000 |
Variable (material purchase) cost per unit |
250,000 |
200,000 |
180,000 |
Variable (processing ) cost per batch |
90,000 |
80,000 |
80,000 |
Units p/batch |
6 |
8 |
15 |
Fixed (production capacity) costs |
6,000,000 |
6,000,000 |
6,000,000 |
Fixed (marketing) costs |
1,000,000 |
1,000,000 |
1,000,000 |
Fixed (warehouse storage) costs |
500,000 |
1,000,000 |
1,500,000 |
The firm’s policy is that a new product should realize a target net operating income of 12% of sales revenue during the three year period. It is a target based on past levels of achievement by the firm itself, and benchmarks of performance throughout the industry. Failure to meet the net operating income target will indicate a need to re- design the product and/or the means of producing and marketing it.
Half of the variable (material purchase) cost per unit relates to generic materials that are commodities bought on world markets, and the remainder to specialized components made by selected suppliers. All of the variable (processing) cost per batch relate to proprietary manufacturing techniques that are crucial to the effectiveness of the component as judged by end customers. The fixed production, marketing and warehouse costs comprise shares of the total cost of providing these resources that are attributed to the new product.
REQUIRED:
a) Establish whether the proposed component will meet the required target income margin by clearly showing how you arrive at i) the total allowable costs ii) total anticipated life-cycle costs and iii) anticipated total operating income (current design)
[20 Marks]
And
b) Discuss the issues that should be considered when deciding which types of costs to cut so as to meet a target requirement.
[10 Marks]
Total: 30 Marks
QUESTION 7
ChipCo designs architectures and processors, licensing them to device manufacturers including Dell, Apple, HP and LG for use in various devices such as smart phones, tablet devices and personal computers.
Because it is a very large company with a dominant market share (approximately 70%), it expands primarily through seeking ways to increase the total size of the world market for such devices. This involves investing selectively in an “ecosystem” of innovative downstream companies focusing on developing the next generation of mobile infrastructures. It is these kinds of complementary products that may result in an expanding market for ChipCo’s devices.
ChipCo envisages a total cash investment in these downstream software firms of $400 million as of January 1st 2019. This would be in return for minority shareholdings in them. ChipCo’s general policy is to seek to sell the investments to private equity firms or other buyers after a period of 5 years.
From extensive analysis of the prospects of the individual software firms, ChipCo conservatively estimates its investments in the software firms will be valued at about $450 million as of December 31st 2023. In addition, ChipCo expects to receive dividends on its investments totaling $2 million annually, received at the end of each year from 2019 to 2023 inclusive.
If the software firms are successful, then a most-likely estimate is that total sales of devices will increase, yielding the following results for ChipCo and its competitors:
Forecast Incremental Volumes & Profitab ility for all device Sales: |
|||||
|
2019 |
2020 |
2021 |
2022 |
2023 |
Volume increase (units) |
385,000 |
500,000 |
636,000 |
591,000 |
568,000 |
Average selling price/unit |
260 |
240 |
220 |
220 |
220 |
Total revenues |
100,100,000 |
120,000,000 |
139,920,000 |
130,020,000 |
124,960,000 |
Variable production costs |
40,000,000 |
50,000,000 |
62,000,000 |
57,000,000 |
55,000,000 |
Contribution |
60,100,000 |
70,000,000 |
77,920,000 |
73,020,000 |
69,960,000 |
As % of total revenues |
60% |
58% |
56% |
56% |
56% |
Fixed production + sales costs |
38,000,000 |
46,000,000 |
50,000,000 |
50,000,000 |
48,000,000 |
Operating income |
22,100,000 |
24,000,000 |
27,920,000 |
23,020,000 |
21,960,000 |
22% |
20% |
20% |
18% |
18% |
|
As % of total revenues: |
The fixed production and sales costs in the table (above) are allocations based on the costing system of ChipCo. It is not expected that ChipCo will need to increase its production or distribution capacity to meet incremental demand between 2019 and 2023. The data for selling prices and variable production costs are expected averages for ChipCo and its competitors in the region.
Since ChipCo currently holds 70% of the logic device market globally, it is expected that this percentage will decline by roughly one percentage point per year for each year from 2019 to 2023. By investing in software developers, ChipCo unavoidably helps its competitors insofar as they too may gain in sales of logic devices.
The cost of capital rate used by ChipCo is 10% per annum and the relevant discount factors are as follows:
Table: Discount Factor at 10% per annum
Years |
Start 2019 End 2019 2020 2021 2022 2023 |
10% |
1 0.9091 0.8264 0.7513 0.6830 0.6209 |
REQUIRED:
a) Compute the Net Present Value of the estimated direct returns from the minority equity investments. Your computations should show clearly how you arrive at your answer. [7 marks]
And:
b) Compute the Net Present Value of the combined direct returns from the minority equity investments and the indirect returns of making the investments in software firms. Your computations should show clearly how you arrive at your answer. [8 marks]
And:
c) Where individual firms are highly specialized, a need may arise to coordinate the investment decisions of any one firm with those of others in a network or “ecosystem”. Examine how accounting might facilitate the coordination of
such investment decisions at “ecosystem” level.
[15 marks]
Total: 30 Marks
2022-01-14