Introduction

Bahia Limited (BL) manufactures and distributes medical test kits for home/office use. You are a Partner with Uni Consulting, advisors to BL. Joe Boylan, has recently joined BL as CEO, and has arranged a meeting to discuss some new projects.

Performance Management (20 Marks)

Joe gives you his views on BLs prospects, This is an extremely exciting time for BL. Breakthroughs are continuously increasing the medical conditions that can be identified by self-administered tests, and consumers are becoming more health conscious. I agree with our Board that BL can create substantial shareholder value, if we achieve our primary strategic goals to develop new tests and get regulatory approval for them. Joe shows you BLs standard management accounting reports. These comprises 10 pages of highly detailed and accurate tabular Income Statements for each BL product which has regulatory approval, with actual financial results versus both the prior year and budget. As part of a handover process, Joe attended the annual performance management meetings between the outgoing CEO and his direct reports, but neither the management accounting reports, or any ad-hoc reports were tabled. Given the recent solid performance of BL, the meetings were informal and upbeat, with each executive chatting with the outgoing CEO about their highlights from last year and their impressions about next year. Competition for talented executives is high in the industry and given the Groups ambitious growth plans, the outgoing CEO awarded all the top-team generous above-market annual performance bonuses to minimise the risk of any resignations.

In light of the specific information provided, evaluate and make recommendations to improve the performance management process at BL.

Joe is faced with a key immediate decision regarding the possible outsourcing of a hypodermic needle used in several of BLs products. I am trying to assess whether outsourcing makes sense. We have a requirement for 230,000 needles next year and this is likely to grow over time. We received a quote of 2.60 from a new supplier based in China. The price will be fixed for two years. I have set out below for you our recent costs for manufacturing the component internally. Based solely on quantitative considerations, calculate the expected impact on BLs profits if the production of hypodermic needles was outsourced next year.

Direct Materials	268,750
Direct Labour	150,500
Variable Overhead	107,500
Depreciation	32,000
Production managers salary	65,000
Allocated support costs	40,000
Total Costs (for manufacture of 215,000 needles)	663,750

Notes:

BL has been notified that the cost of materials will increase by 5% effective immediately. Just-in-time purchasing is employed so material held in stock can effectively be ignored.

Half of the direct labour staff and cost required is provided by casual staff whose employment can be terminated at BLs discretion. The remaining staff can be redeployed to fill vacancies elsewhere in BL at their existing salaries if production ceases.

If production ceases, the production manager could fill a vacancy at another plant which is currently being advertised at her existing salary of 65,000; however she would need to also be paid a special additional allowance for travel costs of 8,000 per annum.