# Essays on Financial Management Assignment

2BM 010 FINANCIAL MANAGEMENTSEMESTER 1 2007- 08ASSESSMENT 1 – 2500 words 50% Master Budget (GB19 and GB20)Total ProductionProduct% AllocationUnits Total Sales £14,010,506650000GB1955%357500Manufacturing COGSs£10,578,750GB2045%292500Total contribution£3,431,756650000Fixed Costs£1,350,000Operating income£2,081,756GB19 Direct Labour cost per unit£5.00Direct materials per unit£7.50Variable Maintenance cost per unit£0.15Variable production overhead per unit£2.50Total fixed cost for GB19Per UnitMfg. COGS per unit£15.15£742,500£2.08Fixed cost allocation55%Fixed cost per unit£2.08Total sales for GB19Total cost per unit incl. fixed costs£17.23£7,040,962.50Mark-up on Mfg. COGS30%Sale price£19.70GB20 Direct Labour cost per unit£3.00Direct materials per unit£12.00Variable Maintenance cost per unit£0.15Total fixed cost for GB20Per UnitVariable Production overhead per unit£2.50£607,500£2.08Mfg. COGS per unit£17.65Fixed cost allocation45%Total sales for GB20Fixed cost per unit£2.08£6,969,543.75Total cost per unit incl.

fixed costs£19.73Mark-up on Mfg. COGS35%Sale price£23.831) GB19GB20TotalTotal Contribution£1,624,838£1,806,918.75£3,431,756Indiv. Contribution£4.55£6.18Total Op. Income£882,338£1,199,418.75£2,081,756Indiv. Op. Income£2.47£4.102)A) Assuming the 55%/45% product ratio remains constant, break-even occurs where Total Contribution = Fixed Costs. Thus Sales_BE = Sales_Total * Fixed Costs / Total Contribution = £5,511,517.46B) Assuming that fixed cost allocation remains at 55%/45%, we use a similar formula to calculate per-product break-even: GB19:£3,217,500 in sales. GB20:£2,343,214 in sales. 3)A) The exact impact on mark-up margin of a £1.00/hour wage increase cannot be calculated unless we are also told what the current hourly wage is, and thus can compute the percentage increase in labour costs this represents.

Obviously, the mark-up margin will decline, since the costs of manufacture are increasing without a corresponding increase in sales revenue. B) In a theoretically perfect competitive market, manufacturers are "price takers" with no price-setting power, producing identical goods. Under these idealized conditions, profit will ultimately be equal to "normal profit", i.e. the opportunity cost (valued at prime or a similar benchmark interest rate) of the fixed assets required tomanufacture the goods being sold; any profits beyond this level will induce new players to enter the market, increasing supply of the goods produced and thus lowering prices to their equilibrium level.

Contribution atequilibrium will equal the sum of fixed actual costs plus "normal profit"; prices at equilibrium will thus rise orfall as input prices (ingredients, labour, etc. ) and prevailing interest rates rise or fall. 4)At £19 for the GB19 and £22 for the GB20, the contribution of the products is £3.85 and £4.35, respectively. Since the product mix sold does not affect fixed costs, it makes sense to maximize sales of the GB20;accordingly, the company should attempt to persuade the client to accept 15,000 GB20's and 15,000GB19's. 5)For the GB19, the amount of raw materials required to manufacture 357,500 units was £35,750 more thanbudgeted - meaning that the actual direct material cost per unit was £7.60, £0.10 higher than budgeted. For the GB20, the amount of raw materials required to manufacture 292,500 units was £43,875 less thanbudgeted - meaning that the actual direct material cost per unit was £11.85, £0.15 lower than budgeted. The GB19's actual contribution per unit is thus £4.45, and the GB20's actual contribution per unitis £6.33.

Total actual contribution for the GB19 is £1,589,088, and total actual contribution for the GB20is £1,850,794.Since the opening stock and purchase quantities were as budgeted in both cases, it would appear thatthe variances were not the result of ingredient price changes. Instead, it would appear that the actualamount of material used in manufacturing GB19's is slightly more than was estimated in drawing upthe manufacturing budget, and the amount of raw material used in manufacturing GB20's is slightlyless than the estimate used for the budget.

This variance in quantity of material required could bedue to different amounts of wastage than estimated, differences in the number of defective units thatmust be discarded, or the actual amount of material in the products produced may be somewhat different from the amounts used in calculating the budget. 6)The indicated variances in the value of manufacturing stock used appear to be the result of differencesin the actual amount of material required to manufacture the given quantity of GB19's and GB20's, rather than of differences in the price paid for materials compared to the price budgeted.

Accordingly, the variances do not in and of themselves justify a change in direct-material costing method. Ofcourse, this does not mean that such a change would be a bad idea either. The simplest method for costing direct materials is the weighted average method, in which the totalcost of the ingredients used in a given period is divided by the total number of units produced inthis period. Materials held in inventory at the beginning of a period are valued at the previous period'sweighted average price.

This method works well for manufacturing where (A) substantial quantitiesof identical units are manufactured on a continuing basis; (B) the ingredients used are not perishable and so can stay in inventory for a long period; and (C) ingredient costs do not vary wildly over time; it provides a relatively stable basis for pricing and planning, and does not unnecessarily complicate matters. On the other hand, it does not provide the most accurate costs for lower-volume, non-uniform production, for ingredients that must be used within a short time, or for ingredients the cost of which is subjectto rapid and substantial changes. FIFO (First In, First Out) costing is a standard method when dealing with ingredients that must be usedquickly, that are volatile in price, or where specific manufacturing runs must be individually priced andcosted.

FIFO values each batch of materials at its net purchase price, and allocates this cost to production on the assumption that all of the first batch purchased is used, followed by the next batch, and so on. FIFO costing provides a higher degree of precision, but it also involves more complexity.