QUESTION 1 [30 MARKS] (a) The Galbraith Company manufacture a variety of electric motors. The business is currently operating about 70 per cent of capacity and is earning a satisfactory return on investment International Industries - Holborn has approached the management of Galbraith with an offer to buy 120,000 units of an electric motor. Holborn manufactures a motor that is almost identical to Galbraith 's motor but a fire at the Holborn plant has shut down its manufacturing operations. Holborn needs the 120,000 over the next four months to meet commitments to its regular customers; Holbom is prepared to pay 19 each for the motors, which it will collect from the Galbraith plant Galbraith 's product cost, based on current planned cost for the motor, is: w Direct materials Direct labour (Variable) Manufacturing overheads Total 20 Manufacturing overheads are applied to production at the rate of 18 a direct labour hour. This overheads rate is made up of the following components: 6 8 Variable factory overhead Fixed factory overhead - Direct Allocated Applied manufacturing overhead rate 18 In determining selling prices Galbraith adds a 40 per cent mark-up to the product cost. This provides a suggested selling price of 28 for the motor. The marketing department, however has set the current selling price at 27 to maintain market share. The order would, however require additional fixed factory overheads of 15,000 a month in the form of supervision and clerical costs. If management accepts the order, 30,000 motors will be manufactured and delivered to Holborn each month for the next four months. Page 2 of 9 REQUIRED 0 Prepare a financial evaluation showing the impact of accepting the International Industries order. What is the minimum unit price that the business's management could accept without reducing its operating profit? [12 Marks] m) State clearly any assumptions contained in the analysis of (a) above and discuss any other organisational or strategic factors that Galbraith Company should consider. Page 21, Q + $ QUESTION 5 [20 MARKS] The table below gives information extracted from the annual financial statements of Management Plc for the past year. Management Plc-Extracts from annual accounts Inventories: raw materials 108,000 work in progress 75,600 finished goods 86,400 Purchases of raw materials 518,400 Cost of production 675,000 Cost of goods sold 756,000 Sales 864,000 Receivables 172,800 Payables 86,400 REQUIRED (a) Calculate the length of the working capital cycle for assuming 365 days in the year) [6 Marks] (b) Explain your understanding of: 'A company overtrading'. What are its causes and consequences, and what warning signals can be determined from an analysis of the profit and loss account and balance sheet? [6 Marks] (c) Ajmal Trading is a retailer of liquor barrels. The company has an annual demand of 30,000 barrels. The barrels are purchased for stock in lots of 5,000 and cost $12 each. Fresh supplies can be obtained immediately, ordering and transport costs amounting to $200 per order. The annual cost of holding one barrel in stock is estimated to be $1.20. Calculate the ordering costs and the annual holding costs if: 0 The order quantity is 5000 barrels [4 Marks) () The company adopts the EOQ as its order quantity. [4 Marks)
