problem1) Strategic Management Accounting
You have joined the cross-discipline Strategic Management Committee of Venus Foods as the management accounting representative. Venus Foods is a multinational food manufacturer which operates in the Fast Moving Consumer Goods (FMCG) market. The key issue facing this top level management group at the moment is how to improve profitability in several key product categories.
The product currently under discussion is the ‘Healthy and Delicious’ line of pre-packaged refrigerated meals sold through the delicatessen sections of the major supermarket chains. The product has been a great success story for Venus Foods however lately it has come under increased price competition and sales and market share have fallen dramatically. The major competition comes from a brand manufactured by a multinational rival named ‘Quik & Eezy Meals’.
The Venus Foods Marketing Department has provided the following information about the pre-packaged refrigerated meals market:
As the Accounting representative you have provided the Committee with the 2013 breakdown of revenues and costs for the ‘Healthy & Delicious’ product:
Healthy & Delicious
Total Assets ‘Healthy & Delicious’ Factory $10m
Total Sales (Volume) 3.5m
Regular Retail Price (per unit) $7.95
Gross Sales Value (per unit) $6.00
Supermarket Rebates (per unit) $1.00
Net Sales Value $5.00
Prime Costs $2.00
Manufacturing Costs $2.00
Logistic Costs $0.50
Margin (Gross Profit) $0.50
Total Margin $1.75m
% Margin on Sales 10%
% Return on Total Assets (ROTA) 17.5%
The Marketing Department advises that market research conducted has found that the loss in sales volume can be attributed to aggressive price discounting by the ‘Quik & Eezy’ competitor. Marketing believe that if Venus can lower their price by $0.50 that they will claw back much of the lost market share and could expect to increase sales by 20% in the coming year. The Research and Development and Purchasing Departments believe that by introducing new products, which use less expensive ingredients, the product’s prime costs can be reduced overall by 10%.
The CEO of Venus Foods, who is the Chair of the Strategic Committee, advises that even allowing for the 10% reduction in prime costs, discounting the product by $0.50 per unit will mean that the product will no longer achieve the firm’s required return on assets of 15%. She argues that if this is the case, this previously successful product line may have to be discontinued.
You advise the Committee that you are aware that the ‘Healthy & Delicious’ manufacturing facility is currently running at 60% of capacity and that the warehouse facility (logistics) is running at 50% capacity. You are aware that the whilst the ‘Healthy & Delicious’ products Prime Costs are 100% Variable, the product’s Manufacturing Costs and Logistic Costs are made up of 75% Fixed and 25% Variable cost. It can be assumed that this cost break-down will hold consistently across the industry including for any ‘Healthy & Delicious’ competitors.
You ask if you can be given time to prepare a report on the cost and revenue implications of the budgeted increase in sales and production estimated by the Marketing Department.
(i) Using excel prepare a ‘before and after’ comparative analysis of the revenues and costs of the ‘Healthy & Delicious’ product line incorporating the 20% predicted sales increase and the 10% predicted savings in prime costs.
(ii) Prepare a brief report for the Strategic Management Committee outlining the key points of your findings. Include some discussion on the likely impact of the changes on the cost structure on both Venus Foods and its main competitor and the competitive implications that this may have on the market (assume 90% of the predicted ‘Healthy & Delicious’ sales increase is made at the expense of ‘Quik & Eezy’ sales).
problem2) Income statement (Manufacturing Statement and Profit and loss
Jupiter Manufacturing Co is a wholly owned subsidiary of Venus Foods. Jupiter manufacture a range of breakfast cereals for the Australian and export markets. The company utilises a traditional manufacturing cost flow inventory and accounting system.
Trading data for Jupiter Manufacturing Co for the 2013 financial year was as follows:
Purchases of Raw Materials & Ingredients 10,654,000
Direct Labour 1,677,000
Indirect Labour (including salaried supervisors) 1,680,500
Direct Manufacturing Overhead (including depreciation) 2,625,500
Other Manufacturing Overhead 1,847,000
Factory heat, light and power 1,567,500
Administration Salaries and Costs 1,175,500
Freight Inwards 870,500
Freight Outwards 969,500
Sales Revenue 29,623,500
Accounting & Audit costs 286,000
Interest & other charges 1,100,500
Sales & Marketing Expenses 1,187,500
On June 30th 2013 selected account balances of Jupiter Manufacturing Co were as follows:
Account: June30 2013 June 30 2012
Cash & Receivables 8,624,500 6,795,000
Plant & Equipment (at cost) 5,865,000 5,865,000
Land & Buildings (at cost) 8,500,000 8,500,000
Accounts Payable 1,320,500 1,113,000
Raw Material Inventory 386,500 426,000
Finished Goods Inventory 452,000 235,000
Work in Process (WIP):
Raw Materials 132,000 202,500
Direct Labour 48,500 56,000
Manufacturing Overhead 427,500 505,500
Total WIP 608,000 764,000
Jupiter Manufacturing Co is incorporated and operates in Australia and pays tax at the Australian corporate rate of 30%. There are no adjustments for accruals or prepayments required.
Using Excel prepare a schedule of cost of goods manufactured schedule, schedule of cost of goods sold and an income statement for the Jupiter Manufacturing Co from the information provided. Your Excel model should include a data input section and appropriate formulae.
problem3) Manufacturing Budget
Following the success of the report you prepared for the Strategic Marketing Committee of Venus Foods you have been asked to prepare a 5 year budget forecast for the ‘Ready to eat’ Food Division.
The company utilises a traditional manufacturing cost flow inventory and accounting system.
On June 30th 2013 the following financial and trading data was provided:
2013 Financial Year data (all costs are per unit)
Sales (Units) 26.8 million
Price (average) $3.50
Prime Costs (per unit)
Ingredients & Packaging $2.20
Other Manufacturing Costs (per unit) $0.45
Inventory on Hand (at valuation):
Ingredients & Packaging (1m units) $2,200,000
Finished Goods (515,500 units) $1,475,000
Sales and Marketing Costs 8,675,000
Head Office and Administration Costs 12,658,500
The ‘Ready to eat’ Food Division maintains target safety stock inventory of raw materials and finished goods to safeguard against any potential supply chain problems. Target Ingredients and Packaging Inventory is set at the equivalent of two (2) weeks of the current year’s budgeted unit production and Finished Goods Inventory levels are the kept at the equivalent of one (1) week of the current year’s budgeted unit sales. At the end of the 2013 financial year there was enough Ingredient and Packaging Inventory on Hand to manufacture 1 million units and there were 515,500 completed units of Finished Goods in the warehouse. The firm does not utilise a Work in Process inventory account.
In 2013 the ‘Ready to eat’ Food Division conducted the launch of several new products and the Sales & Marketing team believe that modern family pressures will see the ‘Ready to eat’ market continue to expand. Marketing expect that unit sales will grow at approximately 10% pa over the budget period. They also expect that the product will be able to achieve price increases of 2.0% pa above the annual projected inflation rate, which is estimated to hold at 2.25% pa over the budget period.
All other manufacturing costs including direct labour and ingredient costs are expected to increase at the rate of inflation. All manufacturing costs (including overhead) are assumed to vary directly with production (unless otherwise stated). Venus Foods pays tax at the Australian Corporate tax rate which is expected to hold at current levels.
The Venus Foods manufacturing facility is currently operating at approximately 75% of its practical capacity of 35 million units per annum. Senior management have determined that if the production facility is upgraded a 30% increase in practical capacity can be achieved. The upgrade can be completed by the end of the 2014 financial year. If the upgrade is undertaken it will cost the firm $500,000 per annum commencing in the 2015 financial year.
(i) Using Excel develop a Sales, Production and Purchase budget as well as a budgeted Schedule of Cost of Goods Manufactured, Schedule of Cost of Goods Sold, and an Income Statement for each of the 5 years in the budget period (commencing 2014) (advice on the form of these budgets will be provided on the subject Interact site and is also available in the Appendix to Chapter 9 of the text book). This budget must also take into account the manufacturing facility practical capacity production constraint. Your spreadsheet must include a data section which enables inputs to be simply altered and ‘what if’ analysis to be undertaken. (Excel resources are provided on your Interact site to guide students on the use of the ‘IF’ formula which can be used for the budget production constraint).
You should be able to drag the formula across for the whole of the budget if the first years are properly constructed with a data input section and using absolute referencing. This makes the process much quicker and easier. An Excel help file has been placed on the Interact site to assist students.
(ii) Using the model developed in part (i) find out the impact on sales and profit if the option of upgrading the manufacturing facility is exercised and the practical production capacity of the factory is increased by 30%.
(iii) Given your findings from part (i) and (ii) prepare a report for the management of the Venus Foods ‘Ready to eat’ Food Division recommending whether to take up the option to increase production. In your report consider all of the strategic and financial implications to the firm of reaching its production constraint and the alternative of having extra productive capacity. Your grade will depend on the accuracy and depth of your analysis, and your capacity to identify strategic issues which management should consider when making their decision.