Financial Analysis & Decision Making

  You are the finance and cost analyst of ABC Holdings plc, a manufacturing conglomerate with a number of different divisions. One of the divisions is a small motorcycles manufacturer with the following production costs: Model A Model B Units produced 10,000 20,000 Unit street price (£) 2,750 3,000 Direct manufacturing labour hours per unit 2 4 Machine Hours per unit 8 8 A single cost pool is used for manufacturing overhead. For 20x1, the manufacturing overhead was £6.4 million. ABC Holdings plc allocates manufacturing overhead costs to products on the basis of direct manufacturing labour-hours per unit. The company’s accounting department now proposes that two separate pools be used for manufacturing overhead costs: • Machining cost pool ( £ 3.6 million in 2011) • General plant overhead cost pool ( £ 2.8 million in 2011). Machining costs are to be allocated using machine-hours per unit. General plant overhead costs are to be allocated using direct manufacturing labour-hours per unit. Required: 1) Calculate the overhead costs allocated per unit to each model of motorcycle in 20x1 using the current single-cost-pool approach of ABC Holdings plc. 2) Calculate the machining costs and general plant overhead costs allocated per unit to each model of motorcycle assuming that the accountant’s proposal for two separate cost pools is used in 20x1. 3) What benefits might arise from the accounting department’s proposal for separate pools for machining costs and general plant costs? 4) The R&D department has proposed investing in new product, a small variance of Model B that will need an initial investment (detailed below). Together with the sales department they estimated potential cash flows from sales (detailed below). Given that the product cycle is expected to be short (only 3 years), the CFO has asked you to consider if the investment should go ahead. In addition, should the investment go ahead the company would need to raise some finance for that investment. Write a letter to CFO explaining whether the investment should go ahead (and why) and what sources of finance could the company use (include all possible advantages and disadvantages and make your opinion clear): New machinery Investment 800,000 Year 1 350,000 Year 2 250,000 Year 3 50,000 5) The CFO has asked you to consider which method of budgeting would be the preferable one to use in the motorcycle business going forward, irrespectively of what that division was doing so far. In addition, the CFO is highly concerned about the implications of the increasing inventory may have to the working capital of the company and its overall budgeting plans. The CFO did mention that a rough example could help him understand your proposals. Write a report explaining which budgeting process would be the preferable one for the motorcycle part of the business and why. You also need to explain what implications the increasing inventories (which are unknown to you) may have to the working capital and the overall budgeting of the motorcycle business. Please do your best and follow the guidelines and grading rubric. I have also included the detailed guidance for this report in word format. Please refer to the Word document when completing the report and ensure you're using the figures as shown in the Word document when doing the calculations (especially for model A and model B). Thank you.