Managerial accounting homework (done )
Company Information
Fashion Designers Ltd manufacture specialist leather products and sell their products to exclusive retail outlets all over the Middle East. The company was established five years ago in Jeddah and is performing well to date. Fashion Designers Ltd have three main product lines; handbags, wallets and suitcases. The following financial information has been provided.
Financial Information
! Handbags Wallets Suitcases Selling Price per unit SAR 1,000.00 SAR 500.00 SAR 1,500.00 Direct Materials (leather) cost per meter SAR 430.00 SAR 230.00 SAR 500.00 Meters of materials(leather) required per unit 2 1 3 Direct Labour hour cost per unit SAR 30.00 SAR 15.00 SAR 32.00 Sales commission per item sold SAR 10.00 SAR 5.00 SAR 13.00 Variable manufacturing overhead per unit SAR 15.00 SAR 10.00 SAR 17.00 Number of labour hours per unit 2 1 3 Budgeted sales in units 240 270 100 ! Additional Information:
a) Other costs: Production manager annual salary SAR 60,000 Annual marketing costs SAR 12,000 General Expenses SAR 5,000 Annual Fixed manufacturing overhead (excluding depreciation) SAR7,000 (20% relates to handbags) !
b) The company bought specialised equipment 5 years ago which cost SAR120,000. The useful life of this equipment is 10 years. Depreciation is allocated to manufacturing overhead expenses. !
c) The company had 3 handbags and 10 meters of leather in stock at the end of June. !
d) Company policy is to maintain 25% of the following months sales level as closing inventory for finished goods. !
e) Company policy to maintain 25% of next months production needs as closing inventory for direct materials. !
f) Budgeted sales of handbags for the next six months are as follows: July August September October November December 20 36 60 20 20 20 !
g) Cash collections on sales are as follows: 60% in the month of sale 40% in the month following sale Receivables at the end of June were SAR 3,000 !
h) Cash payments on purchases are as follows: 55% in the month of purchase 45% in the following month Payables at the end of June were SAR 5,000
i) The closing cash balance in June 2016 was SAR 40,000 and it is company policy to maintain cash at this level at the end of each month. !
! Requirement:
Your group has been employed as the management accountants for Fashion Designers Ltd and have been asked to prepare a report to the board of directors outlining the following:
a) Using the information above, calculate the following:
• Which product is performing the best?
• Calculate the overall break-even point in sales value for the company and the break-even point in sales value for each product line.
• If the selling price of handbags is increased to SAR 1,500 per unit, what will be the increase in overall profit.
• What level of sales (value) must the company achieve to make a profit of SAR 200,000.
• Using the original information presented, draw a CVP graph outlining the costs, break-even point and profit and loss area for Fashion Designers Ltd and comment on the overall performance of the company.
! b) The company is considering eliminating sales commission and increasing
salaries by SAR40,000. Outline the implications of making this decision on the overall break-even point in sales value and the overall profit or loss for the company. Should the company proceed with this decision?.
! c) The company is considering discontinuing the manufacture of suitcases and
have asked you to advise them on this decision. (40% of annual marketing costs relate specifically to this product and SAR2,000 of general expenses is directly attributable to this product).
! d) Using the information above, prepare the master budget for handbags only
for the quarter ending 30th September 2017.
! e) Outline the advantages and disadvantages of traditional budgeting and advise
the company on whether they should consider implementing ‘the balanced scorecard’ system.