METAL BASHERS LIMITED This company produces steel fabrications for the construction industry. Steel girders and supports are cut to size and welded in the welding department and then painted in the...

an online exam will take a place on the 15th of September at 04:00 am London time for 3 hours, Harvard referencing style.






METAL BASHERS LIMITED This company produces steel fabrications for the construction industry. Steel girders and supports are cut to size and welded in the welding department and then painted in the paint shop before proceeding to the finishing department. Details of the overheads incurred by the 3 production departments are given below along with information on the two additional departments, the canteen and the service department. The canteen is used by all the employees of Metal Bashers Ltd. but the canteen employees are too busy to make use of the canteen facilities themselves. The service department repairs and cleans the machinery used in the 3 production departments. External catering equipment maintenance contractors service the canteen equipment. WeldingPaintingFinishingCanteenService Overheads£100,000£75,000£43,000£60,000£42,000 No. employees 15 5 6 2 4 % usage of service Dept. 40% 30% 30% Dept. labour hrs30,00012,50010,000 Metal Bashers is currently quoting for Job No 12359 which will require £1,500 of direct material, £2,000 of direct labour and £500 of variable overhead. It is estimated that Job 12359 will use 120 hours of labour in the Welding department, 50 hours in the Painting department and 25 hours in the Finishing department. Overheads are absorbed into jobs on the basis of direct labour hours in each department. The Selling price for jobs is the total production cost of each job plus 40% of cost. Required: 1. Calculate the overhead recovery rates for the Welding, Painting and Finishing departments. 2. Calculate the production cost and selling price of Job 12359. BUSINESS DOCUMENT This document is intended for business use and should be distributed to intended recipients only. PUZZLED LIMITED QUESTION Puzzled Limited would like to increase its sales during the year to 31 May 2021. To do so, it has several mutually exclusive options open to it as follows:- · Reduce the selling price per unit by 15% · Improve the product resulting in an increase in the variable cost per unit of £1.30 · Spend £15,000 on an advertising campaign · Improve factory efficiency by purchasing more machinery at a fixed extra annual cost of £22,500 · During the year to 31st May 2020, the company sold 20,000 units. The costs details were as follows:- £000s Sales 200 Variable Costs 150 Contribution 50 Fixed Costs 40 Profit 10 These cost relationships are expected to hold in 2020 Required: 1. Work out the unit cost position of the current situation to 31st May 2020 i.e. the contribution and the break even. 2. Work out the contribution and break even for each option. 3. Evaluate each option. 4. State which option you would recommend and why. 5. What other non-financial considerations should be taken into account in your decision? BUSINESS DOCUMENT This document is intended for business use and should be distributed to intended recipients only. MO JO EXAMPLE Mo and Jo are planning to run a one day introductory course to teach students the basic techniques of being a DJ. All students will be charged a fee of £125 to include refreshments, lunch and all materials. The maximum number of students that can be accommodated is 20. The estimated running costs are listed below:- £ Hire of premises150 Lunch10 per student Advertising300 Equipment hire100 Refreshments5 per student Course instructor fee400 Student materials10 per student Insurance50 Fixed: 150 + 300 + 100 + 400 + 50 = 1000 Variable: 10+5+10 = 25 per student Contribution: 125-25 = 100 BE: 1000/100 = 10 Profit for 20 stu: 20 – 10 x 100 = 1000 Loss for 5 stu: 5-10 x 100 = -500 Required: 1. Calculate the break-even point in terms of number of students. 12 2. Work out the following what if scenarios:- a. What if 20 students enrolled? b. What if 5 students enrolled? 3. What if the price was increased to £160 and an extra £10 was spent on better materials?\ Cont: 160 – 35 = 125 BE: 1000/125 = 8 a. What if 20 students enrolled? 20 – 8 x 125 = 1500 b. What if 5 students enrolled? 5 – 8 x 125 = -375 4. What if the price was reduced to £100 and advertising costs were cut by £100? FC: 900 VC: 25 Cont: 100 – 25 = 75 BE : 900 / 75 = 12 a. What if 20 students enrolled? 20-12 x 75 = 600 b. What if 5 students enrolled? 5-12 x 75 = -525 5. Based on the original break-even with SP at £125 and VC at £25. Mo and Jo have received an offer from a school to send 8 students on the course but they will only pay £80 per student. Should Mo& Jo accept this offer? 8x25 = 200 640 – 200 = 440 Accept 6. Draw a break-even chart. INVESTMENT APPRAISAL TASKS 1. ACCOUNTING RATE OF RETURN (ARR) Looks at the return on investment and compares this with a predetermined target level. ARR is based on accounting results rather than cash flows, = ARR = Estimated average profits x 100% Cost of the investment Problem CK is contemplating the purchase of a new machine and is looking at 2 alternatives:- Machine AMachine B Cost£50,000£90,000 Estimated scrap value£10,000£30,000 Estimated life5 years5 years Estimated future cash flows(profits) Year 1£12,000£ 2,000 Year 2£18,000£ 3,000 Year 3£30,000£15,000 Year 4£25,000£51,000 Year 5£ 5,000£ 35,000 Which machine should CK purchase? Solution:- AB ££ Total cash flows90,000 Value of initial investment50,000 90,000 / 5 = 18,000 / 50,000 x 100 = 36% Machine A: ARR = 18,000 / 50,000 = 36% Machine B? 2. PAYBACK Machine CMachine D £ £ Cost10,00010,000 Cash inflows year 11,0005,000 Cash inflows year 22,0005,000 Cash inflows year 36,0001,000 Cash inflows year 47,000 500 Cash inflows year 58,000 500 24,00012,000 What is the payback period? Machine C - not until early in year 4 Machine D? Which overall generates greater return? 3. Net Present Value Method A project would cost £39,500 and would earn £10,000 per year for the first 3 years and then £8,000 per year for the next 3 years. The cost of capital is 10%. Complete the table Should we invest? YearCash flowDiscount factorPresent Value £10% £ 0 (39,500)1.00 (39,500) 110,0000.909 9,090 2 3 4 5 6 4. INTERNAL RATE OF RETURN If a project earns a higher rate of return than the cost of capital, it will be worth undertaking (and its NPV will be positive). If it earns a lower rate of return it is not worthwhile (NPV would be negative) If the project earns a return exactly equal to its cost of capital, its NPV will be 0 and it will only just be acceptable. This method involves trial and error. Example: A project cost is £20,000 and the annual net cash flows are as follows:- YearCash Flow £ 1 8,000 2 10,000 3 6,000 4 4,000 IRR is a rate of interest at which NPV is 0 and the discounted present value of benefits adds up to £20,000 Need to find out what interest rate would give you an NPV = 0 Try 15% and 20% Complete the 20% column DiscountPresent Discount Present Factor 15%ValueFactor 20% Value Year Cash Flow 0(20,000)1.000(20,000)1.000(20,000) 1 8,0000.870 6,960 210,0000.756 7,560 3 6,0000.658 3,948 4 4,0000.572 2,288 NPV 756 (994) IRR is more than 15 but less than 20% We can work out the fall from 15% to 20% (756 + 994) = 1750 / 20-15% = £350 p.a for every 1% increase in discount rate Answer 17 .2 % INVESTMENT APPRAISAL METHODS PAYBACK METHOD ADVANTAGES DRAWBACKS ACCOUNTING RATE OF RETURN ADVANTAGES DRAWBACKS NET PRESENT VALUE ADVANTAGES DRAWBACKS INTERNAL RATE OF RETURN ADVANTAGES DRAWBACKS INVESTMENT APPRAISAL TASKS 1. ACCOUNTING RATE OF RETURN (ARR) Looks at the return on investment and compares this with a predetermined target level. ARR is based on accounting results rather than cash flows, = ARR = Estimated average profits x 100% Average cost of the investment Problem CK is contemplating the purchase of a new machine and is looking at 3 alternatives:- Machine AMachine B Machine C £000s £000s £ 000s Cost500500500 Estimated scrap value200100300 Estimated life5 years5 years5 years Straight line depreciation per yr608040 Estimated future cash flows (profits) Year 1160190 50 Year 2160180100 Year 3160170150 Year 4160160250 Year 5160150350 Which machine should CK purchase? Solution:- Step 1: Deduct depreciation from annual profits Machine A:Machine B:Machine C: Profits – depreiation Year 1160 –60 = 100190-80 = 11050-40 = 10 Year 2160- 60 = 100180-80 = 100100-40 = 60 Year 3160- 60 = 100170-80 = 90150-40 = 110 Year 4160- 60 = 100 160-80 = 80250-40 = 210 Year 5160- 60 = 100150-80 = 70350-40 = 310 800 500850 450 900 700 Step 2: Calculate annual average profits: Machine A:Profit after depreciation500 = 100 No of years 5 Machine B:450/5 = 90 Machine C:700/5 = 140 Step 3: Calculate average investment Add together initial cost of investment & resale value of asset and divide by 2 Machine A:500 + 200 = 700 = 350 2 Machine B:500 + 100 = 600/2 = 300 Machine C:500 + 300 = 800/2 = 400 Step 4: Calculate accounting rate of return ARR = Estimated average profits x 100% (step 2) Average cost of the investment (step 3) Machine A:100 x 100 = 28.57% 350 Machine B:90x100/300 = 30% Machine C:140x100/400 = 35% 2. PAYBACK Work out the payback period for the 3 machines Machine A: In year 4 month 2 Machine B: 500 – 190 = 310 310 – 180 = 130 2 years