From the statements above it can be seen that sales revenue has increased over the last year and is expected to continue to grow by approximately 6% per year in the future. Approximately 30% of the cost of sales are related to fixed production overheads while the remaining 70% are classed as variable and directly related to output.
The current factory site exists in a small city in the south of England and is limited in terms of space and transport connections. The company knows that it may have difficulty in increasing capacity at the current site above 40,000 mowers per year. The directors of the company are proud of their growth and wish to maintain it. They recognise that measuring performance is critical and so are considering the ways that they can improve their performance measurement systems to ensure that they stay ahead in a fast moving industry where competition is fierce.
Required:
Produce a business report in good style, that reports on the following issues:-
Calculations on the expected level of sales that you believe need to be made to break even. Back this up with further calculations that show risk in terms of margin of safety. Ensure that you justify any calculation assumptions that you make and comment on the results obtained. (Note, that there are several ways that you can calculate break even and you can use a number of these on the case above.)
(25 marks)
Discuss the issues that may arise in using the current absorption costing system based on labour hours. Discuss the appropriateness of changing to an activity-based costing (ABC) system for product costing and pricing for the business.
(25 marks)
Provide recommendations as to the adequacy of the current prices that the company adopts in relation to the prices charged by its competitors. Suggest if the price should be adjusted in the light of current market conditions.
(25 marks)
Discuss some of the alternative measures of performance that could be incorporated in the financial performance measures that the business uses at the moment.
(25 marks)
Total 100 marks
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