BE167 ACCOUNTING AND FINANCE FOR MANAGERS

SECTION A

Students must answer TWO questions from this section

QUESTION ONE

Essex Fashion is a medium sized clothing factory that manufactures various designer dresses. The selling price of all kinds of dresses is £49.99 per unit. Suppose you have a management consultancy company; therefore, you have been appointed to review the possible risks and return of the factory. The variable costs for each dress are provided as follows:

The fixed manufacturing overhead as well as selling and administrative costs of the factory are £250,000 and £200,000 respectively. The Essex Fashion desires to produce and sell 35,000 units of dresses in the next year.

Required:

As a Chief Executive Officer (CEO) of the consultancy firm, you are required to calculate the following and write a report.

b)  What is the margin of safety?                                                                          [Marks 4]

c)   The CEO of the Essex Fashion wishes to earn a profit £150,000 in 2022. What is the required units she needs to produce and sell?                                                  [Marks 4]

d)  To enhance the factory’s performance, one of the managers at Essex Fashion suggested to spend more on advertisement both in electronic and print media. The estimated fixed costs increase by £50,000 per year (variable cost will remain same). The manager believes that such increase in fixed cost would help to boost the sales by 30% in coming year. Referring to the original data, calculate and recommend whether the factory should accept this proposal.                                                                            [Marks 8]

e)  A French organisation makes a one-time special offer to the Essex Fashion to purchase 3,000 units of dresses to celebrate the Bastille Day on 14 July. The French organisation also demands for some additional craft on the dresses which cost (material and labour) £5 per dress. In addition, the Essex Fashion will bear the shipping costs which would £2,000. For this one-time offer, the French organisation is willing to pay £42 per dress.

Do you think that the Essex Fashion should accept this one-time offer? Justify your answer with supporting calculations.

[Marks 10] [TOTAL 30 MARKS]

QUESTION TWO

Being Healthy is a medium size manufacturing company produces and sells a wide range of sports and gym equipment. Recently, it has recently signed a contract with the University of Essex to provide required equipment for the Essex Sports Centre. This new contract would require the company to invest £150,000 to purchase machineries to modernise its facilities. The Chief Executive Officer (CEO) of Being Healthy receives offer from two external companies X and Y. The CEO appoints your consultancy to recommend which company she chooses to purchase the machineries. The expected cash flows and expected profit of company X and Y are given below.

Required:

a)   Calculate for both projects (showing your workings):

ii.   The Payback Period                                                                                 [Marks 6]

iii.  The Net Present Value (NPV) considering 10% cost of capital.           [Marks 10]

b)  Relying on your calculations (in part a) and reflecting the current economic, social, and political environments, please write a report to the CEO advising which she project she should select and why. Your answer should be between 250 and 300 words.

[Marks 6]

[TOTAL 30 MARKS]

QUESTION THREE

Tom Brown is the owner of a small manufacturing company ‘Tom & Family’ that produces luxury households’ accessories. Tom believes that to expand his business, he must provide credit facilities to the customers who have been frequently purchasing from him for the last five years. He expects same from his suppliers. Believing in this, he introduced credit sales and purchase from July 2020. The following table provides the actual and forecasted sales and purchases of ‘Tom & Family’ .

§ Tom collects 70 per cent of sales for cash, 20 per cent after the month of sales and remaining amount after the two months of sales.

§ He pays 60 per cent of its purchases during the month of purchase, 40 per cent one month after the purchase.

§ Tom leases the factory premises for five years. Per month lease payment is £3,000.

§ Tom has borrowed £100,000 from a local bank. The annual interest in 12% per year. He monthly pays the interest.

§ Tom will renovate the shop in November to attract the customers for Christmas sales. It will cost him £10,000. The amount will be paid in equal instalment in November and December.

§ The opening cash balance in October is £15,000.

Required:

a)  Prepare the cash budget for ‘Tom & Family’ for the last quarter of 2020.   [Marks 20]

b)  Recently Tom has been facing cash flows problem because of the Brexit and Covid- 19 pandemic which increase the variable costs. Tom has approached you to provide him advice ‘how to overcome the short-term and long-term cash flows problem ’. Write a report on how he can introduce a good cash flow management system and possible sources of borrowings. Your answer should be between 400 and 500 words.

[Marks 10]

[TOTAL 30 MARKS]

SECTION B

Students must answer TWO question from this section

QUESTION FOUR

A company can ensure cost competitiveness either by reducing variable cost, fixed cost or by increasing selling price of products. Which strategies a company should follow and why? Critically evaluate your answer with relevant examples. [Words limit between 500 and 600]

[TOTAL 20 MARKS]

QUESTION FIVE

Which methods of budgeting (i.e., incremental or zero-based) you would practice if you were the head of the budgeting committee? Critically discuss your answer with relevant examples. [Words limit between 500 and 600]

[TOTAL 20 MARKS]

QUESTION SIX

Write short notes (not more than 100 words for each) on the following topic with relevant calculation and examples.

b)  Outline the characteristic of product costs and period costs.                          [Marks 4]

c)  What is a mixed cost? (You must draw the graph by yourself)                      [Marks 4]

d)  What is a sunk cost?                                                                                        [Marks 4]

e)  Explain all the steps of planning and control cycle.                                        [Marks 4]

[TOTAL 20 MARKS]