Referring to the following images, I could use some help with answering this ADVANCED MANAGEMENT ACCOUNTING revision question worth 20 MARKS.

Question 3

It is now October 200 and Brenda, who has become more confident in planning ahead for the business, has produced a budget for the next twelve months trading to October 2001. This highlights a period of 35% spare capacity from November 2000 to January 2001 inclusive. She has established that for an extra investment of $35,000 she could buy equipment which is more flexible than the newly purchased plant, in that it can be used to produce cog mechanisms of a slightly different design, in addition to the current cog mechanism. These slightly different cog mechanisms are suitable for use in automated waste collection vehicles.

IDENTIFY the types of information which Brenda would need to consider in making a decision to purchase the additional equipment, the likely sources of information, and any other factors which you feel she should consider. (20 MARKS)

Endeavour Twoplise Ltd. Endeavour Twoplise Limited is a manufacturing company that was established over 50 years ago by Uhe Twoplise famly. It has been cwned and managed in recent years by Endeavour Twoplise Junior, the son of the founder. Endeavour has no family to inherit the business and so, due to Il health, he has decided to sell l lo Brenda Forthright. Brenda has no experiance of the company's manufacturing process, but ehe is a very astute businesswoman. As a prelude to investing in the business, she has carried oul exlensive research into the envirorment in which the company trades and inta its commercial operations. Her investigations have given her same interesting infarmation. The Product The company produces one product, a metal cog mechanisn which is used In ready-mix conorete vehicles to maintain a 'turning' action of the tub whilst the concrele is in transit. This lurning action during transit is vital in order to preserve the required conalstency of the concrete for tipping direclty into customer's prepared locations. The cog mecharism has to meet stringent quality and safety slandards and needs regular replacement during the life af a ready-mix concrete vehicle. The tooling of the machanlsm requires expensive specialised equipment. The Compettive Environment There are only three major manufacturers of the type af vehicle which uses the compsny's product, but these vehicles are purchased by a substantially (arger number of ready-mx concrete supplters. Endeavour Tvwoplise Linited is one of only a few manufacturars in the UK who manufacture the cog mecheniam. Sales have been fairly constant over the last 4 years, follawing a downturn in the racessionary period of the late 1980s/early 1990s. Prior to period, this the product was in great demand during the building boom of the 19406. The Company's Resources Endeavour Twopiise Limiled owns a large plot of land, part of whlch has been developed to provide wall-maintalned factory premises and part of which remains undeveloped. The land was bought and developed in 1977 and no revaluation has taken place since that date. The factory is large and provides room for expansion of production within the existing building. Its localion is ideal for distribution of products to consumers and for obtaining raw materials. Brenda feels that the site is likely to be worth considerably more thal ts balance sheet value. The company owns a lorry and a delivery van, both of which are in gaod condilion. Unfortunalely, the equiprment used in the manufacture of the cog mechanism is old and In need of immediate replacement. Brenda has made extensive enquirtes and has established that new equlpment would cosl 110,000. She would retain the cld equipment as a back up, since 1 has no resale velue and there is sufficient factory space to store it. Brenda has a number of busine5s contacts and feels confident that she will have no dificulty in reising the additional funds needed lo purchase the new equipment. The company employs four permanent operatives in the factory and hires temporary labour If required, Samuel is the factory supervisor and he also works an the machines. He has been wilth the company since he Jeft school and is due to retire in two years' time. He tends to be set in his ways and dislikes ge. This was shown when Toby, a young operalive who joined the company two years ago, tried to Iniliate changes to the production process which he fel: would irnprove efficlency. Sam was most indignanl and threatenod to ieave if Endeavour made such changes. Since Sam and Endeavour are Long-standing friends, Endeavour backed Sam on thal cocasion and no changes were made. Toby is still working for the cormpany, but this incident has made him rather frustrated. The only other full time employee is Andy Bucket, an accounts assistant, who was employed six months ago, because of Endeavour's deterlorating health, to lake some of the workload fram his shouldere. The company has an overdraft faclity to support ils cashilow requirements. Brenda has negaiated a 30,000 overdraft facllty to ba availeble la the contpany when she takes over as owner. The Company's Systems Andy is quite a bright yaung man and Is keen to use hts inltiative. He has a frlend who, until recently, was studying accouniling on a day-release basis at the local coilege and this friend recommended to Andy that it would be helpful If the company set up a budgeting system. During the six months in wihich Andy has been with the company, he has menaged to construct a budget for the period to 30th June, 2000, with advice from his friend and Information from Endeavour and the company records. Unfortunately, shortly after the hudget was completed, Andy's friend decided to change jobs. He moved out of the area and so Andy no longer has his advlce to guide him. Consequently, although the budget has been constructed, nothing has been tiane with i. The budget idenlifled the levels of produclion required each month to meet expecled demand. The current slele of affairs is that production tends to jog along at a steady rate regardless of demand and, in addition, purchases of ravw materials tend to be on a 'hit and miss' basis. It is mainly by good luck rather than good managenent that sufficlent raw materials are available. In Endeavour's opinion, If he can see the men working dillgently In the factory, he ls satisfed thal the business is doing akay and so far he has managed to negotiale additional overdraft facilitios whenever the company has been shont of cash. Hawever, the bank has said thal any further borrowing by Endeavour would have to be supported by budgets and monitoring information. The Future Basad on her analysis, Brenda is oplimistic about the company's prospects. She feels that the long awaited upturn in the construction industry is imminent and that demand for the product will increase considerably in the medium to long term, She has llus agreed to buy the business and take over lls management in June 2000. She has already lacked carefully al Ihe budget which Andy has produced and is fairly confident that he budgeted balance is a reasonable assessment of the company's assels and liabilities as at 30th June 2000 (see Appendix 1). Brenda has considerable experience of accounting, having worked for a number of years in thls field, and has been slle to buitd upon Andy's eflorts. Together they have sel about the task of gathering information which will be useful in the planning of the finel four rmonths' trading up to 31st October 2000. The results of their labours are as foliows: Estimated Production Data 250 Estiknated selling price per cog mechaniem Eslimated materials usage per cog mechanism. one kilogram 45 Estimated cost of materials per kilo 65 Estimsted production wages and varlable overheads per cog machanism 3000 Eslimated fixed averheads per manth Ocl Sept Aug July 80 110 115 110 Estimated sales of cog mechanisms 70 110 120 100 Estinated production of cog mechanisms 3 60 100 110 100 Estimeted purchases of raw materials (kitos) Purchase of New Equipment Brenda has decided that the new equipment will be delivered in July and pzid for In August. She has made arrangements for the compeny to isue 10% debentures to the value of 130,000 to be repald In the year 2007. Interest on the debentures will be pald by two six-monthly instalments, In arrears. E130,000 will be credited to the company's bank account on 1st August 2000. Depreciation July to October 333 Buildings 15.200 (includes depreciation on new equipment) Machinery 5,400 Vehicles Credit terms All sales are on credit and (wa months' credit is allovwed. All purchases of raw malerials are on credlt and are paid for one month following purchase. Wages, variable and fxed overheads are paid in the montis in which they are incurred. Proposed Dlvldond Since Brenda will make a considerable investment In purchasing the business, she intends to propose a dividend of 5% in October 2000, APPENDIX 1 Budgeted Baance Sheet of Endeavour Twonlise Limited as at 30th June 2000 Cost Depreciation to date NBV Fixed Assets 20,000 100,000 120,000 Land & buildings 6,000 44,000 50,000 Machinery & equipment Motar vehlcies 36.000 142.000 52.000 222,000 16,00 80,000 Current Assets 4,500 Slock of caw materiais (100 kilos) Slock of finished goods (110 cogs) 12,100 00061 35,600 Deblors (May: 5,900, June: 13,100) Creditors (amounts due within one year) 3,900 Trade credilars for raw malerials 17.250 Bank overdraft 21.150 14,450 156,450 Capital and Reserves: 100,000 Ordinary share capital (1 shares) 56,450 Retained profits 156,450 Note; finished goods stocks are valued at marginal cost for budget purposes Endeavour Twoplise Ltd. Endeavour Twoplise Limited is a manufacturing company that was established over 50 years ago by Uhe Twoplise famly. It has been cwned and managed in recent years by Endeavour Twoplise Junior, the son of the founder. Endeavour has no family to inherit the business and so, due to Il health, he has decided to sell l lo Brenda Forthright. Brenda has no experiance of the company's manufacturing process, but ehe is a very astute businesswoman. As a prelude to investing in the business, she has carried oul exlensive research into the envirorment in which the company trades and inta its commercial operations. Her investigations have given her same interesting infarmation. The Product The company produces one product, a metal cog mechanisn which is used In ready-mix conorete vehicles to maintain a 'turning' action of the tub whilst the concrele is in transit. This lurning action during transit is vital in order to preserve the required conalstency of the concrete for tipping direclty into customer's prepared locations. The cog mecharism has to meet stringent quality and safety slandards and needs regular replacement during the life af a ready-mix concrete vehicle. The tooling of the machanlsm requires expensive specialised equipment. The Compettive Environment There are only three major manufacturers of the type af vehicle which uses the compsny's product, but these vehicles are purchased by a substantially (arger number of ready-mx concrete supplters. Endeavour Tvwoplise Linited is one of only a few manufacturars in the UK who manufacture the cog mecheniam. Sales have been fairly constant over the last 4 years, follawing a downturn in the racessionary period of the late 1980s/early 1990s. Prior to period, this the product was in great demand during the building boom of the 19406. The Company's Resources Endeavour Twopiise Limiled owns a large plot of land, part of whlch has been developed to provide wall-maintalned factory premises and part of which remains undeveloped. The land was bought and developed in 1977 and no revaluation has taken place since that date. The factory is large and provides room for expansion of production within the existing building. Its localion is ideal for distribution of products to consumers and for obtaining raw materials. Brenda feels that the site is likely to be worth considerably more thal ts balance sheet value. The company owns a lorry and a delivery van, both of which are in gaod condilion. Unfortunalely, the equiprment used in the manufacture of the cog mechanism is old and In need of immediate replacement. Brenda has made extensive enquirtes and has established that new equlpment would cosl 110,000. She would retain the cld equipment as a back up, since 1 has no resale velue and there is sufficient factory space to store it. Brenda has a number of busine5s contacts and feels confident that she will have no dificulty in reising the additional funds needed lo purchase the new equipment. The company employs four permanent operatives in the factory and hires temporary labour If required, Samuel is the factory supervisor and he also works an the machines. He has been wilth the company since he Jeft school and is due to retire in two years' time. He tends to be set in his ways and dislikes ge. This was shown when Toby, a young operalive who joined the company two years ago, tried to Iniliate changes to the production process which he fel: would irnprove efficlency. Sam was most indignanl and threatenod to ieave if Endeavour made such changes. Since Sam and Endeavour are Long-standing friends, Endeavour backed Sam on thal cocasion and no changes were made. Toby is still working for the cormpany, but this incident has made him rather frustrated. The only other full time employee is Andy Bucket, an accounts assistant, who was employed six months ago, because of Endeavour's deterlorating health, to lake some of the workload fram his shouldere. The company has an overdraft faclity to support ils cashilow requirements. Brenda has negaiated a 30,000 overdraft facllty to ba availeble la the contpany when she takes over as owner. The Company's Systems Andy is quite a bright yaung man and Is keen to use hts inltiative. He has a frlend who, until recently, was studying accouniling on a day-release basis at the local coilege and this friend recommended to Andy that it would be helpful If the company set up a budgeting system. During the six months in wihich Andy has been with the company, he has menaged to construct a budget for the period to 30th June, 2000, with advice from his friend and Information from Endeavour and the company records. Unfortunately, shortly after the hudget was completed, Andy's friend decided to change jobs. He moved out of the area and so Andy no longer has his advlce to guide him. Consequently, although the budget has been constructed, nothing has been tiane with i. The budget idenlifled the levels of produclion required each month to meet expecled demand. The current slele of affairs is that production tends to jog along at a steady rate regardless of demand and, in addition, purchases of ravw materials tend to be on a 'hit and miss' basis. It is mainly by good luck rather than good managenent that sufficlent raw materials are available. In Endeavour's opinion, If he can see the men working dillgently In the factory, he ls satisfed thal the business is doing akay and so far he has managed to negotiale additional overdraft facilitios whenever the company has been shont of cash. Hawever, the bank has said thal any further borrowing by Endeavour would have to be supported by budgets and monitoring information. The Future Basad on her analysis, Brenda is oplimistic about the company's prospects. She feels that the long awaited upturn in the construction industry is imminent and that demand for the product will increase considerably in the medium to long term, She has llus agreed to buy the business and take over lls management in June 2000. She has already lacked carefully al Ihe budget which Andy has produced and is fairly confident that he budgeted balance is a reasonable assessment of the company's assels and liabilities as at 30th June 2000 (see Appendix 1). Brenda has considerable experience of accounting, having worked for a number of years in thls field, and has been slle to buitd upon Andy's eflorts. Together they have sel about the task of gathering information which will be useful in the planning of the finel four rmonths' trading up to 31st October 2000. The results of their labours are as foliows: Estimated Production Data 250 Estiknated selling price per cog mechaniem Eslimated materials usage per cog mechanism. one kilogram 45 Estimated cost of materials per kilo 65 Estimsted production wages and varlable overheads per cog machanism 3000 Eslimated fixed averheads per manth Ocl Sept Aug July 80 110 115 110 Estimated sales of cog mechanisms 70 110 120 100 Estinated production of cog mechanisms 3 60 100 110 100 Estimeted purchases of raw materials (kitos) Purchase of New Equipment Brenda has decided that the new equipment will be delivered in July and pzid for In August. She has made arrangements for the compeny to isue 10% debentures to the value of 130,000 to be repald In the year 2007. Interest on the debentures will be pald by two six-monthly instalments, In arrears. E130,000 will be credited to the company's bank account on 1st August 2000. Depreciation July to October 333 Buildings 15.200 (includes depreciation on new equipment) Machinery 5,400 Vehicles Credit terms All sales are on credit and (wa months' credit is allovwed. All purchases of raw malerials are on credlt and are paid for one month following purchase. Wages, variable and fxed overheads are paid in the montis in which they are incurred. Proposed Dlvldond Since Brenda will make a considerable investment In purchasing the business, she intends to propose a dividend of 5% in October 2000, APPENDIX 1 Budgeted Baance Sheet of Endeavour Twonlise Limited as at 30th June 2000 Cost Depreciation to date NBV Fixed Assets 20,000 100,000 120,000 Land & buildings 6,000 44,000 50,000 Machinery & equipment Motar vehlcies 36.000 142.000 52.000 222,000 16,00 80,000 Current Assets 4,500 Slock of caw materiais (100 kilos) Slock of finished goods (110 cogs) 12,100 00061 35,600 Deblors (May: 5,900, June: 13,100) Creditors (amounts due within one year) 3,900 Trade credilars for raw malerials 17.250 Bank overdraft 21.150 14,450 156,450 Capital and Reserves: 100,000 Ordinary share capital (1 shares) 56,450 Retained profits 156,450 Note; finished goods stocks are valued at marginal cost for budget purposes