RCP Ltd has Operated Successfully for Many Years Manufacturing Highly Specialized Components for the Computer: Managerial Finance Assignment, HU, Singapore

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University HARVARD UNIVERSITY (HU)
Subject Managerial Finance

Section A: Answer TWO questions only

 Question 1

 RCP Ltd has operated successfully for many years manufacturing highly specialized components for the computer industry however recent changes to immigration policy have led to the company facing a shortage of labor. The board of directors is meeting to discuss this problem and you have been asked to prepare some working notes to help your boss prepare for the meeting.

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The budget for the forthcoming year shows the following:

BUDGETC1001C2001C3001
Demand (units)25,00015,0005,000
Selling price per unit$280$240$220
Materials per unit$45$45$25
Variable overheads per unit$26$33$24
Direct Labour (hours) per unit6 hours5 hours7 hours

Other additional information relating to these products is as follows:

Labour cost is $10 per hour.

Sales commission of 5% of the selling price will be paid to the sales team. This is not included above.

Total fixed costs are estimated to be $850,000.

Due to the labour shortages the total labour hours available for the coming year will be 230,000 hours.

Required:

a. Calculate whether the budgeted sales can be met given the labour shortage.

b. Calculate the contribution made by each of the THREE products.

c. Calculate the contribution per unit of the limiting factor made by each of the THREE products and rank each product given the labour shortage.

d. Calculate the total profit which the company would achieve assuming the shortage in labour cannot be overcome and that the company’s objective is to maximise profit. 

e. If RCP Ltd were committed to supplying 1500 units of product C3001, what would the company’s total profit be?

Question 2

Elite plc has budgeted to produce and sell 20,000 units. The selling price per unit is $40, the variable cost per unit is $24, and the fixed overheads of Elite plc are $120,000. The following additional information was also obtained for the budget period:

Fixed costs will rise to $140,000 if sales are above 23,000 units.

Fixed costs will fall to $96,000 if sales fall below 17,000 units.

Variable costs will fall by 5% per unit if sales are greater than 19,999 units since Elite will qualify for bulk purchase discounts. This discount applies to all products purchased by Elite.

Actual results for Elite were as follows:

Sales (23,200 units)$913,000
Variable costs$528,000
Fixed costs$272,000

Required:

a. Prepare a budget for the following sales levels: 16,000, 20,000 and 24,000 units.

b. Prepare a control statement that compares actual results with the approved fixed budget of 20,000 units and discuss how useful this information is.

c. Prepare a control statement that compares actual results with a flexed budget based on actual activity (23,200 units) and comment on the possible reasons for any variances.

Question 3

Image Limited has been manufacturing commercial photo copiers for over 50 years and the directors are currently considering introducing 3D copiers to the company’s product range. The 3D copier would come in two specifications each involving a different cost base because of the quantity of material and direct labor needed.

The sales and production teams commissioned a feasibility study which has come up with the following estimates:

The projected sales (units) for the 3D copiers are as follows:

Year 1Year 2Year 3
Deluxe model5,600 units6,800 units8,000 units
Standard model4,000 units4,800 units5,600 units
Deluxe model Standard model
Selling Price per unit$4,000$2,000
Material cost per unit$2,200$1,000
Labour time per unit60 hours30 hours
Labour cost per hour$14$14

 

  1. The majority of the equipment needed for the new manufacturing line will be purchased in year 0 at a cost of $ 20,000,000. At the end of three years this equipment will have a resale value of $0 However the production directors has decided that some specialised pieces of machinery should be leased at a cost of $60,000 per annum. This will be paid at the end of each year.
  2. Factory power costs are expected to rise by $300,000 in year 1, $400,000 in year 2 and $ 500,000 in year 3 as a direct result of undertaking this project.
  3. Overheads will increase by $500,000 in year 1, $600,000 in year 2 and $ 700,000 in year 3as a direct result of undertaking this project.
  4. Central overheads of $110,000 will be apportioned to this project each year.
  5. The existing premises has sufficient space to house the new production facilities.
  6. The company has received an invoice for the feasibility study of $40,000 but has not yet paid this.

The company’s cost of capital is 10%. Discount factorsfor 10% are:

Year 1: 0.909; Year 2: 0.826; Year 3: 0.751

Required:

 a. Calculate the net present value for the new project.

b.Calculate the payback period for the new project.

c.Discuss the analysis produced for parts (a) and (b). Your discussion should
cover the advantages and disadvantages of each of the appraisal techniques used and give a recommendation to the Board of directors on whether the project should be undertaken.

Section B: Answer TWO questions only

Question 4

After attending a recent finance seminar you were asked by some colleagues to explain some of the terms used in the Finance Director’s presentation. Having only recently completed your module in accounting you have decided to draft some notes before you explain the terms to your colleagues.

Required:

a. Explain what each of these financial statements tells the reader about the financial position of a company:

  1. Statement of Financial Position (Balance Sheet)
  2. Income Statement
  3. Cash Flow Statement

b. Explain why effective cash management is considered more vital for businesses than earning high profits

Question 5

You hold a small investment in Baker plc, a listed company that manufactures components for the telecom industry. You have obtained their annual report and are trying to calculate some key financial ratios that you had studied in your university programme.  This information is given below:

 20162015
$m$m
Revenues250225
Cost of sales10090
Selling and distribution expenses2525
Administration expenses1312
Taxation3430
Profit for the year after tax7868
Total Equity670560
20162015
No. of ordinary shares100,000,00090,500,000
Share price$8.50$6.80

 Question 5 

Required:

a. Using the figures above, calculate:

  1. Return on equity
  2. Gross profit percentage
  3. Operating profit percentage
  4. Earnings per share
  5. Price Earnings ratio

b. Discuss what each of the above ratios tell you about your investment.

Question 6

Your friend has starting designing and making wedding dresses and has asked you to help her prepare the financial forecasts for her first year of trading. At the moment she has done this in her free time working from her house however she is now considering resigning from her job to concentrate on her new business full time.

The forecast details were as follows:

Annual rent (for larger premises)                                      $50,000

Material costs perdress                                                         $1,000

Labour costs per dress                                                             $550

Other variable costs per dress                                                 $100

Other annual fixed costs                                                    $15,000

Each wedding dress takes approximately a week to make so your friend could produce 50 dresses in the year however because of the seasonality of demand she thinks that she will only be able to make 30 wedding dresses per year.

Required: 

a. Explain the terms fixed and variable costs and why it is important for a company to understand how its costs behave?

b. If the selling price of each wedding dress is $5,000 what is the contribution per wedding dress?

c. If the selling price is $5,000 how many wedding dresses will need to be produced in order to breakeven?

d. If your friend wants to earn a profit of $100,000 in the year and maintains a selling price of $5,000 per wedding dress then how many wedding dresses will she need to produce?

e. Given your calculations above what advice would you give to your friend on her new business venture?

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