Management Accounting Coursework - Group 20

Philly Ltd manufactures a portable high-definition music player (The ZX99) with high specifications at a lower price than its rivals. The company has progressed from producing music players that mainly played mp3s, because of the advent of smartphones which have made budget mp3 players obsolete.

During 2020, the company operated at full capacity of 250,000 units, selling its music player for 120. A new Managing Director (Vicky Anderson) has recently joined the company and has asked you to advise on the company's selling price policy. The sales price of 120 was previously viewed as satisfactory because the resulting demand enabled full capacity operation.

You have been asked to investigate the effect on costs and profit of an increase in the selling price.

Appendix 1 shows costs and revenues of ZX99 last year (2020). The company is now planning for 2021

Further information relating to 2021 can be found in the accounts of meetings between Vicky Anderson and other senior members of staff (see Appendices 2-4)

The company will start 2021 with 800,000 as its bank balance. Tax of 800,000 is expected to paid in Quarter 3, with dividends of 1,000,000 in Quarter 2 and 500,000 in Quarter 4.

Requirements

(a)Calculate the annual profit which is earned with the current selling price of 120 per unit for 2020 (using only the data from Appendix 1) (5 marks)

Answer: 6512.50

(b)Assuming the same cost structure for 2021 (but subject to any possible amendments from the appendices), make a schedule to show the annual profit which would be earned with each of the three alternative selling prices referred to by the Sales Director. Based on the figures calculated, recommend the selling price that should be charged for the high definition music player, to maximise Philly Ltd's profit. Calculate the breakeven point (units) and the margin of safety (%s) at this profit maximising level. (Ignore any potential bad debts and sales discounts, mentioned by the Sales Director, when calculating profit) (10 marks)

Option 1: 7610 $Option 2: 8207.68 $Option 3: 5140.78 $

Best Option : Option 2

(c)Are there any other non-financial factors to be considered when making the decision regarding the selling price. (25 marks)

(d)Based on the profit maximising decision, prepare the production, material, labour and cash budgets (split into quarters) (20 marks)

(e)Reconcile the budgeted profit chosen in (b) with the actual results for 2021 by means of variance analysis (10 marks)

(f)Suggest possible reasons for the difference between actual and budgeted results making recommendations of possible action by Philly Ltd to help improve future performance. (30 marks)

Answer only part F

Appendix 5 Actual results for 2021 The actual results for the year were as follows: Production 8: sales (units) : 172,500 units generating 27,600,000 Direct materials: 187,450 component packs costing 5,529,775 Direct labour: hours unknown (see note below) @ 10.50 per hour Variable overhead: hours unknown (see note below) @ 4.1 per hour Sales commission = 2,760,000 Fixed production overhead = 3,500,000 Fixed selling overhead = 1,900,000 Fixed admin overhead = 1,100,000 Your assistant has started to calculate some of the variances and has told you that there are no variances for sales commission, while the Labour Efciency Variance is 1,723,275 adverse. Unfortunater in making the calculations, your assistant has misplaced all the timesheets which recorded the actual labour hours