Master of Business Administration
Financial Decision Making
Assignment
1. Improving business performance breakeven analysis
Breakpoint Company is considering launching a new product to sell at $100 per unit. The CEO has come to you with the following strategy proposals;
A. Buy machine A to make the product. Fixed costs would be $800,000 per year, but variable operating costs would be only $20 per unit.
B. Buy machine B. Fixed costs would be only $500,000, however the variable cost per unit is $60.
Required prepare a report to management highlighting the following;
1. Calculate the breakeven points using both machines
2. If the production and sales in the first year are10,000 units. Calculate the profit before tax using i) machine A and ii) machine B.
3. If forecast production and sales in the second year is 15,000 units. Calculate the profit before tax using Machine A and Machine B.
4. Which machine represents the high risk strategy and why?
2. Business Financing Decisions
Financial statement information is presented below for benchmark Ltd, a manufacturer. Benchmark is considering a change in its capital structure. Management has proposed issuing $150million of additional non-current debt. The non-current debt would be used to repurchase the company's ordinary shares. This purchase would reduce the company's equity by $150million. The interest expense on addition debt would be 9$million. The company's tax rate is 30% of pre-tax profit.
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Income Statement for financial year 2007 (in millions)
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Sales
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893
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Cost of Goods Sold
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-$552
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Opening expenses
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-$267
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Operating Profit
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74
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Interest Expense
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-$8
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Pre- tax profit
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$66
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Income Taxes
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-$20
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Net Profit
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$46
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Balance Sheet as at year end (in milllions)
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Assets:
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Current Assets
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$252
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Non current Assets
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$505
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Total Assets
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$757
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Liabilities:
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Current Liabilities
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$197
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Non current Debt
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$100
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Total L iabilites
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$297
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Equity
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$460
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Total L abilites and Equity
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$757
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Required prepare for management a report which
a) Calculate Benchmarks return on equity for 2007 as reported.
b) Calculate what Benchmark's return on equity would have been in 2007 if the company had issued the additional debt and had repurchased ordinary shares before the year began.
c) Based on these calculations, would the change in capital structure be good for Benchmarks shareholders? Explain your reasoning.
3. Relevant information for decision making special Order
Lansing Camera Company has received a special order for Photographic equipment that it does not normally produce. The company has spare capacity, and the order could be manufactured without reducing the production of the firm's regular products.
As the company's Operating Manager prepare a report for discussion at the management discussing calculating the cost of the special order and if the considering the following items;
1. Equipment used in producing the order has a book value of $2000. Lansing Camera has no other use for this equipment. If the order is not accepted, the equipment will be sold for $1500. If the equipment is used in producing the order, it can be in three months for $800
2. If the special order is accepted, the operation will require some of the storage space in the company's plant. If the space is used for this purpose, the company will rent storage space temporarily in the nearby warehouse at a cost of $18000. The building depreciation allocated to the storage space in producing the special order is $12000.
3. If the special order is accepted, it will require a sub assembly. Lansing can purchase the sub assembly for $24 per unit from an outside supplier, or the company can make it for $30 per unit. The $30 cost per unit was determined as follows
| Direct materials |
$10.00 |
| Direct Labour |
$6.00 |
| Variable costs |
$6.00 |
| Allocated fixed overhead |
$8.00 |
| Total unit cost for sub assembly |
$30.00 |
4. Management Accounting
Green cut is considering adding a new mulching lawn-mower to its product line. The new mower cuts grass into fine clippings eliminating bagging and disposal of the waste. The new product I intended to meet the needs of urban and environmentally conscious home owners.
Green cut wants to conduct a target costing exercise the cost at which the new product must be product must be produced. Market surveys indicate that retailers typically pay $300 and sell for $500 products with similar feature. Thus, the company expects the wholesale price for the new mower to be $300. Greencuts margin on sales is 26%.
A team of design engineers and finance professionals has determined the target manufacturing cost for producing the mulching mower. To meet that cost, the team must find ways to reduce costs without compromising quality. Someone on the team recommends some outsourcing components instead of manufacturing them. After studying the recommendation, the team concludes that the target costs can be met if those components are outsourced.
Required:
1. Calculate the target cost of the new mower and Greencuts required mark up.
2. In a report to management identify the types of costs that are relevant to the make or buy decision.
3. Discuss the non-financial issues that the management team should consider before it recommends outsourcing the components.