Carey, Knowles & Towers-Clark: Accounting - A Smart Approach, 3rd edition Management Accounting: Case Study Company Coco Company Coco is a luxury chocolate manufacturer, which has recently been performing well. The board of directors is considering how it should expand the business and is looking at a number of options. First, the directors need to produce a budget for the coming year and ensure that the business can maintain its profitability. The marketing and production directors have given you, the management accountant, details of estimated product sales volumes and proposed sales prices, as well as expected raw material and factory costs. They plan to produce 20 chocolate bars in every direct labour hour. The sales director is confident that he could increase sales prices with a small decrease in sales volume. The marketing director would like to expand the product range by buying in fruit and nut chocolate bars from a supplier but has asked you to estimate what it would cost the company to make them instead. The managing director has ambitious plans to buy a moulding machine to save labour and packaging labour costs. Table MA.1 Dark Milk White Raw material costs Volume chocolate bars 80,000 140,000 60,000 Selling price per bar £ 2.00 1.80 2.00 Cocoa grams per bar 170 130 0 £4 per kg Sugar grams per bar 30 40 70 £2 per kg Table MA.2 Indirect costs* £k Rent 18.2 Utilities 13.8 Factory administration 12.7 Marketing and sales 47.4 Administrative salaries 38.5 *Factory indirect costs are currently allocated on a blanket rate. Packaging is estimated at £200 per 1,000 bars. Direct labour costs are expected to be £10 per hour. © Mary Carey, Cathy Knowles, Jane Towers-Clark 2017. All rights reserved. Milk millilitres per bar 0 30 130 £1 per litre Carey, Knowles & Towers-Clark: Accounting - A Smart Approach, 3rd edition REQUIRED: a) Prepare a budget based on the information in Table MA.1 including total sales revenue, raw material and packaging purchases, and direct labour costs. Estimate the net profit, using the assumptions for indirect costs in Table MA.2 . How could a management accountant assure himself that these estimated numbers are realistic? b) Calculate a product profitability for each type of chocolate bar (dark, milk, and white) assuming that manufacturing costs are allocated on a blanket rate. Advise the board of directors on their product strategy. c) Assess the proposal of the sales director to improve company profitability by increasing sales prices and reducing sales volume, as in Table MA.3 . What other factors might affect pricing decisions? d) Using the information in Table MA.4, advise the marketing director on whether it would be more beneficial to make fruit and nut bars rather than buy them in from another company for £1.70 per bar. What other considerations need to be taken into account? e) The managing director has given you some estimates on which to base your calculations for the new moulding machine. If the business invests £300,000 in equipment, he forecasts that they could save 50% of direct labour costs and 25% of packaging costs; but utility costs would increase by 5%. By calculating the net present value over the next five years using a discount rate of 7%, advise the board whether it should invest in this project. You should also outline the limitations and non-financial factors that need to be considered. Table MA.3 Sales director’s volume and price assumptions Increase price Dark chocolate bars 10% Milk chocolate bars 5% White chocolate bars No change Table MA.4 Fruit and nut: raw material costs Per bar Quantity Cocoa, sugar, and milk Assume 50% of milk bar Fruit 50g per bar Nut 50g per bar Direct labour, packaging, Cost per bar: use same and factory overhead assumptions as other chocolate bars Decrease volume 10% 5% No change Cost £4 per kg £8 per kg © Mary Carey, Cathy Knowles, Jane Towers-Clark 2017. All rights reserved.
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