600 words are requiered for this question

600 words

BACKGROUND Mettricks Itd is a small business, based in Liverpool, operating within the education sector. It specializes in sourcing scientific equipment from a variety of local suppliers which it then sells on to schools in Manchester area to support the science curriculum that they are teaching to. Mettricks was set up by Gavin Skinner in August 2019. Gavin had previously spent 20 years working within educational supply businesses, and had decided to use his expertise, contacts, and experience to strike out alone. Gavin used 105,000 of his own savings, and 45,000 of bank financing from The HSBC Bank. The bank was happy to lend Gavin the money based on a sound business case forecasting that Mettricks would break-even within the first year of trading Once the financing had been secured, Gavin busied himself setting up the business. He found warehousing and office premises and set about securing supplier relationships so that he could source inventory. He also recruited a warehouse manager and IT manager, together with a part-time office manager and a salesperson whom he intended to pay on a commission basis. As is common practice in this sector, revenues originate from a combination of online orders (via a bespoke website designed by the IT manager) and a catalogue sent directly to schools. Gavin's extensive contact list in the industry meant that the business could start with a healthy-looking customer database. By the end of 2019 all the pieces were in place and Mettricks commenced trading in January 2020. It is now the end of the first year of trading and Gavin is keen to understand how the business has been doing financially. Gavin freely admits that numbers are not his thing. The office manager has recorded all transactions throughout the year but is now seeking the help of an accountant to make sense of these numbers and perhaps give the business some advice on the way forward. You have been contracted by Gavin to help with this. From the raw transaction data, you have produced a trial balance (Exhibit 1). As requested by you, the office administrator has also provided a schedule of the various business costs in terms of their behavior (Exhibit 2). You intend to use this to produce management accounting information in a format suitable to support decision making within the business. 2. On sending this new P&L data to Gavin, you receive an email from him (Exhibit 3). Draft a briefing note for Gavin responding to his four questions. (50 MARKS) Exhibit 1-Statement of Profit or Loss for Mettricks for the year ended 31 December 2020. Statement of profit or loss 789,000 Revenue Less: Cost of sales Opening inventory Purchases 516,000 Carriage inwards -Closing inventory 9,000 (105,000) (420,000) 369.000 Gross profit Expenses: Office rent Carriage outwards Telephone Gas and electricity 82,500 50,250 12,000 16,725 7,500 IT Publishing and printing Insurance 6,000 12,750 Wages and salaries 118,500 Sales commission Depreciation Van expenses Finance cost 23,500 9,750 6,000 2,100 (347,575) Profit for the year 21 425 Exhibit 2 - Costing Schedule from the office manager Carriage inwards Carriage outwards Office rent Telephone Gas and electricity Publishing and printing Insurance Wages and salaries Sales commission Depreciation Van expenses Finance cost Variable (with purchases) Variable (with sales) Fixed Mixed cost (but mainly fixed) Mixed cost (but mainly variable) Fixed Variable Fixed Fixed Variable Fixed Fixed Fixed Exhibit 3 - Email From: Gavin Skinner To: An accountant Date: 10 February 2021 Subject: Management accounting P&L Thank you for the management accounting schedule that you sent over to me, together with the operating leverage calculation. I must admit I am struggling to understand what this new P&L tells me that the draft accounts you sent last week do not. After all the top line revenue and bottom-line profit are the same! So, I do have a couple of questions that I have listed below. Perhaps you could respond to them... 1. I've read up a bit on operating leverage, and I understand that it's got something to do with risk, and in particular how my profit is impacted by changes in volume. Could you explain exactly what the ratio is telling me please, and perhaps demonstrate what will happen to my profit if sales volumes, say, increase by 4% and decrease by 4%. 2. I have also been reading about break-even point and margin of safety calculations. They sound very useful! Can you calculate these for me based on last year's data and comment upon them? If we need to achieve a profit of 30,000 in the coming year, how many unites we need to sell? 3. One of the advantages of variable costing and contribution approach is that the date can be used for the cost volume profit analysis. Can you provide two other benefits of variable costing and contribution approach? 4. Finally, I was talking to my friend Martin about pricing policy. He suggested that cost plus pricing is a good way of guaranteeing that all your costs are covered, and you are making a profit. I must admit that all i have done with my prices is to mirror the ones that my competitors charge. Apparently a 'mark-up' of 70% on cost of sales is the average for this industry (seems high to me!). If I switched to cost plus pricing and used the average industry mark up. I wonder if you could let me know how this might impact my profits overall