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SCENARIO 2 As a member of the finance department...




SCENARIO 2 As a member of the finance department in your company you are given the following annual budget by the production department for the production, sales and profits of a new product the Samson. The company is still to make its final decision on whether or not to produce the Samson. All units produced are presumed to be sold. Annual Production & sales units 130,000 $ $ Sales (130,000u x $27 per u) 3,510,000 Variable Costs Direct Material (130,000u x $0.20 per u) 26,000 Direct Labour (130,000u x $3.0 per u) 390,000 Variable overheads (130,000u x $4.50 per u) 585,000 (1,001,000) Fixed Costs Production costs 455,000 Factory Rent 308,500 Research & Development 1,600,000 (2,363,500) PROFIT 145,500 . The current budget for the Samson does not meet the company?s target profit policy for new products of $200,000 per annum. Market research has so far determined that the demand for Samson is elastic, such that an increase in price of $1.00 will lead to a fall in demand of 5,000 units. The research also found that there are two main rival products the Hercules and the Aphrodite which pursue ?market penetration pricing? of $30 and ?market skimming pricing? of $35 respectively. Task 2 You are required to design an appropriate spreadsheet model which will enable the budget to be analysed (using all the costs given) so that decisions on pricing and production can be made. To evidence your design you must present hard copies of: a) The spread sheet model showing ALL the formulae used b) A flexed budget showing the amount of units and selling price at the breakeven point c) A flexed budget showing the maximum profit that could be made assuming a maximum production and sales capacity to be determined by you. d) Any other flexed budget(s) which will be helpful to you in determining the price and amount of units of Samson to produce e) Advise the company of your choice of the price the Sampson should be sold at and how many units should be produced and sold in the coming year. [P 3.1] In order to achieve the merit 2 criteria in this assignment, you must a. Describe the relevant theories and techniques that have been applied in making your decisions in Task 2(e) and justify why these theories and techniques were used. Task 3 a) On a separate page, list eight (8) separate categories of users of accounts (decision makers) b) Explain which three of the categories of decision makers listed in (a) would need the information you provided in Tasks 2& 3. [P 2.3] SCENARIO 2 (continued) Upon viewing your work in Tasks 2&3 a Junior manager in the marketing department insists that the selling price of the Samson was wrongly computed given the following additional information: The Samson is a NEW product thus, the initial budget is for a ?one time? production run for only one year, after which its future will be reviewed. Fixed production costs and factory rent can be absorbed at $9.15 per unit and $6.15 per unit respectively The research and development cost represents amounts already spent on the Samson including market research and should NOT be relevant to a future decision. Five supervisors whose wages are included in Fixed production costs are to be taken from other departments to produce Samson for the upcoming year, and moving them would cause a loss in contribution of $260,000 during the production of the 130,000 units of Samson. The Junior manager suggests either an ?opportunity cost plus approach? should be used at the company?s usual mark up of 40% OR a ?marginal cost plus? approach should be used with a mark up of 250% as the initial production is only temporary. Task 4 Using the necessary information from Tasksabove, you are required to: a) Explain what ?relevant costs? are b) Explain how the ?Opportunity Cost Approach? to pricing is done and calculate this cost of the Samson c) Explain how ?Marginal cost plus? pricing is done and calculate this cost of the Samson d) Describe the advantages and disadvantages of the ?Opportunity Cost Approach? and ?Marginal cost plus? pricing, [P 3.2] In order to achieve the distinction3 criteria in this assignment, you must: Use information from the task above to explain if you agree or disagree with the Junior Manager [D 3]


Paper#6281 | Written in 18-Jul-2015

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