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)
Just need the answers for part (c) and (f)
Appendix 1 The following data relates to costs and revenues of the 2X99 last year [20201 1 2 Sales 120.00 Direct materials\" 1 component pack @ E33 33.00 Direct labour 1.35 hours @ 214.8 19.98 Variable production overhead 1.35 hours @ 22 2.9? Sales commission 10% of sales price 12.00 Fixed production overheads 4,000,000 Fixed selling overheads 1,500,000 Fixed administrative overheads 1,000,000 D All xed overheads arise evenly throughout the year *Each music player requires 1 set of components which are bought together from one supplier Appendix 2 The following conversation took place between the Managing Director and the Sales Director: Vicky Anderson: we have been able to sell 250,000 units per annum, which is full capacity, because of the fact that we sell a good value product but are we missing out by pricing the product too low? Gladys Knight: Possibly. If we price the product at 120 in 2021 , we expect to sell 250,000 units, as was the case last year. However, my team have done some work on this and have come up with the following estimates of sales volume based on 3 alternative sales prices: Selling price 140 160 180 Annual sales volume (units) 200,000 160,000 110,000 Vicky Anderson: OK, so pushing the price up will mean that we make more money per music player, but of course we will sell less of them. We need to nd out whether a change in price will actually increase or decrease our expected prot. Gladys Knight: Bear in mind that selling overheads would decrease by 100,000 per annum, if annual sales volume falls below 240,000 units as we will be able to reduce our part-time sales force. We still expect sales commission to be 10% of the sales price. All sales and admin costs are paid for in the quarter that they arise. Our sales of 250,000 units last year were subject to a slight seasonal variation, with 25% of our sales falling in the 1St quarter, 30% of our sales falling in the 2"d quarter, 25% in the 3Ird quarter, with the remaining 20% in the nal quarter. We expect the same seasonal variation to arise next year {2021). Based on past experience, 60% of our sales are settled in the quarter of sale with 37% of sales settled in the following quarter. The remaining 3% of sales are expected to become uncollectible (bad debts). Those customers who settle in the quarter of sale are entitled to a 2% discount on the original selling price. Appendix 3 The following conversation took place between the Managing Director and the Production Director: Vicky Anderson: We are reviewing our pricing policy with a view to pushing price of our music player up so as to maximise the prot made from each unit. Harry Casey: Well, the amount of units you plan to sell will obviously have an impact on the amount of units we plan to produce, and that in turn will impact on our production costs. If annual production falls below 200,000 units, we would need to hire less machinery and that will save us 200,000. Furthermore, if annual production and sales falls below 200,000 units, this will reduce the bonus payments we have to pay our labour force. This will have the effect of reducing the average hourly rate we pay by 10% from last year's hourly rate. We will aim to keep production levels very close to quarterly sales levels, subject to movements in opening and closing stock. We will start the year with 4,000 units of opening stock and we plan to have the same number of units as closing stock at the end of the year. For all other quarters, we aim to have closing stock of 10% of the following quarter's expected sales All labour and overhead (e.g. rent) costs are paid for in the quarter they arise. As you know, we will also be planning a major investment in machinery of 2 million (in addition to the xed overhead expenditure) in the last quarter of the year, ready for use at the beginning of the following year I'm glad that we are considering pushing the selling price of the music player up. The pressure we are under to keep production costs down inuences the quality of staff that we can afford to employ. We have many inexperienced staff and that is causing errors to happen on the production line. Appendix 4 The following conversation took place between the Managgin director and the Purchasing Manager: Vicky Anderson: we are considering pushing the price of the music player up as we feel our product is cheaper than similar products manufactured by our rivals. lnevitably, this will reduce the amount of units that we sell, but we hope that this reduction will be minimal. Bernard Edwards: in that case, bear in mind that if production falls below 150,000 units, we will lose bulk discounts, meaning that our component costs will increase by 15% for all units produced in the year. Vicky Anderson: on the subject of components. What is our policy regarding their purchase and payment? Bernard Edwards: all components are paid for one quarter after we purchase them. The amount of components we have to pay for in the rst quarter of 2021 were the components purchased in the previous quarter, which was 49,000 component packs. The aim is to keep opening stock of components at 2,000 packs every quarter. The following conversation took place between the Managign Director and the Purchasing Manager at the end of the year, when analysing the difference between the budgeted and actual profit: Vicky Anderson: I'm a little concerned with the amount of money we have spent on the components that we bought this year, in 2021. Are there any possible factors that contributed to this. Bernard Edwards: well, bear in mind that when the budgets were set at the beginning of the year. The average price for those components was 33, but 2021 saw a general price rise for the components, meaning that the average price on the market was nearer 34. Also, don't forget the fact that we had to make an emergency purchase of components in the nal quarter because of the number of components that had to be scrapped on the production line. You can't blame my department for that. 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. Appendix 5 Customer Reviews sssw 24s 4.4 out of 5 stars Sstar :Il 155 4star l:|'l 44 3am W 13 Zstar 7 istar Ul 16 Review 1 lwill give my pros and cons here as the rest of my review is pretty long - as a user I am really more worried about nding a device for my large song library than sound quality - so keep that in mind, these devices are a rarity now phones are so popular. Pros: + It is alight, nicely built player. + Physical scroll wheel is old school cool, if you want hipster points you'll get them! + Can handle a large library - with caveats + Nice user interface with some nice options (in line remotes) + Good audio quality with a high volume + Good Price + Will take large Micro SD Cards + No headphones or Micro SD card supplied, not a problem for me though I already have better than typical throwaway headphones and its unlikely such a device would include more than 8-16gb of storage. You do get decent freebies in the form of a case and screen protector already applied - much more useful. Cons - Building a music library is a slow process and it seems to have some issue with large library's or files with unusual names - Scrolling through large lists of songs or folders is painful - do not apply if you have one folder jammed with 30000 mp3s Device can even be slow to list many folders. - Battery life is pretty short (10 hours) but the competition is about the same. Review 2 When it works it's ne but I have had countless issues with the device reading all manner of MicroSD cards. Until Philly can nd a way of sorting this out (after all, having subsequently used the same SD cards in other devices, there's no problem) I'd avoid. Not worth the hassle. Review 3 First one I got bricked every time you plugged something into the headphone socket. Sent it back & got a replacement which was working ne until today, no audio coming out at all now. Device works, will turn on and select a track hit nothing through headphones except some cracking. Very disappointed. Thought I'd found a worthy replacement for my iPod but unreliability has stopped that in its tracks. Review 4 This is a great little player. I've had it in my car for work Wfor about 3 weeks. Sounds great...Easy to use even when not looking at the device. I'm very happy with it. Pumps out loud and clear with large headphones...Something my old iPod could never do. Using a 1289 card with no trouble Review 5 Absolutely brilliant - was looking for a replacement for the trusty old iPod Classic SOGB and this was recommended. Sounds immense - the superior sound is as clear as day over the iPod and iPhone, even on a pair of Apple earbuds on MP3 files. With the Shure's and FLAC and WAV's it is even better. Plus points - sound (nigh on perfect), build (solid) and interface (surprisingly easy, even for me who has been wedded to Apple for 10 years). Minuses - no storage (buy your own Micro SD with your choice of capacity - stores up to 128GB), no headphones and no interface with a music management program (drag files from File Manager) backlight not the best but you won't nd a betterijjgsplayer for the price. Highly recommended
