Introduction To Accounting
Description of the Assessment
Imagine you are a new graduate employed on a management training programme with a large manufacturer of cleaning equipment, Bust that Dust plc. You recently finished a six week secondment to the accounting department of Bust that Dust plc and are currently on the first week of your time with the marketing department. You have noticed that the staff in marketing do not seem to have any respect for the company’s accounting staff and regularly refer to them as ‘bean counters’, but you have valued your time in the department and believe you have accumulated some valuable business knowledge and skills, which includes being able to prepare budgets.
The Marketing manager, Ms Yen, has told the team that she plans to draw up a new marketing strategy that reduces current prices by 10% but which should increase sales volumes in the future by 15%. As an added incentive she proposes offering customers an extra one month’s credit, which she believes costs nothing.
Everyone in the department seems very keen on the new strategy and has told the marketing manager that it is a brilliant idea, but you are not so sure. You realise that the accounting department will evaluate this plan and produce forecast information, which may make the marketing department look ill-informed.
You have decided to email the marketing manager pointing out the financial consequences of her new plan, but you are conscious of your trainee position and realise that you are going to need to provide evidence to validate your opinion.
In preparation you have found the following information:
Sales revenues are currently £2.5 million a month and produce a contribution of 30p per £1 of sales revenue. Eighty percent of customers are credit customers and take one month to pay. The remaining customers pay immediately, by cash on delivery. The raw materials are bought and the product made in the month before sale, i.e. October’s sales are produced in September.
Variable raw material costs account for 10p per £1 of sales revenue. Fixed costs are £680,000 a month, of which 20% is depreciation. This also doesn’t include the annual lease payment for the factory of £1,200,000 paid in December every year. Besides raw materials, the business’s only other variable costs are production costs. Suppliers of raw materials are paid two months after purchase and the other variable production costs are paid during the month of production.
The business’s balance at bank at 1 July is expected to be £10,000.
Possible future position
Ms Yen is proposing lowering prices by 10%, and increasing credit terms offered to customers. The changes to sales volume, price and payment period, were they to occur, would commence with sales made from 1 October 2018. (Don’t forget that Sales made in October would require production in September)
It is predicted that production and sales volumes (both cash and credit) would be increased by 15%, from current levels, and selling prices would be decreased by 10%. In addition, credit customers would be allowed to pay two months after the sale, although cash customers still pay on demand
Apart from the increased credit period for customers, all working capital policies would remain the same as at present.
You assume that the business can purchase raw material inventories and produce the following month’s sales in the month immediately preceding those sales.
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