Workshop 2 QuestionsBMAN21040 Intermediate Management Accounting

BMAN 21040- Intermediate Management AccountingWORKSHOP 2 – Semester 1Question 1 – Break even time analysisYummy Ltd built a reputation for its drinks combining the taste of beer with the energy boost provided by a sports drink. The company is planning to manufacture and sell a drink (‘Wheatylive’) which combines the health benefits of a wheatgrass shot with those of a biolive yoghurt drink.Management are aware that any competitive advantage the company gains is likely to be eroded quickly by competitors, therefore break even time is an important factor in whether to continue with their plans for the new drink.The cash flow data below have been provided by the development, production and sales department, and relate to the new product, which is currently under development.In order to produce ‘Wheatylive’, new production equipment will be needed, as the current production lines cannot be adapted to produce the new product. Also included in the direct costs are the costs estimated for a major marketing campaign which will focus on selling the product to health clubs.Amounts in £’000Notes:The depreciation expense referred to relates to the additional depreciation on the machinery purchased for this project.The allocated overhead costs referred to relate to head office costs, which will are not expected to change in totality if the new product is launched. Yummy Ltd has a policy of allocating the head office costs across all products in their range.The additional interest costs referred to relate to the loans taken out specifically to finance this project.The firm’s cost of capital can be approximated to 12% per annum. The table (below) shows the present value of a single payment received n years in the future discounted at x% per year:Discount Table showing PV of £1 Cash Paid/ Received at End of Year (12% rate)Required1.Calculated the break-even time for the ‘Wheatylive’ dri nk.2.What other factors might Yummy Ltd’s management consider before makinga decision about whether to launch this new product?Question 2: Naff Toys Ltd (target costing)Naff Toys Ltd are currently planning to add a new children's game to their ‘Animal Antics’range. They have conducted a major market research exercise on "Angry Rhinos" a game where 2/4 battery operated rhinos charge at each other in a jungle setting, the object being to push the opponent over. The marketing report has identified a large market in the 8 -12 age range, however to guarantee the necessary market share the selling price must not exceed £15.00 per unit, and to contribute the company's long term profitability plan each unit must generate a profit margin of 40%.T he following information on potential customers’ requirements and value functions has also been compiled in this exercise and are listed in the following table:The total of the Hard (Use/Mechanical) functions were weighted 45% and the total of the Soft (Value/Convenience) functions were weighted 55%.REQUIRED:a)Calculate the target cost and value index for each of the above functions andidentify the functions where cost reduction efforts should be targeted. Value index: This is a measure that can be used to indicate how much of a product’s value relates to particular functions/inputs. It is calculated as:Projected actual cost of function(% weighting of type of function –hard or soft x % weighting within hard or soft category x target cost of product overall)Where the value index is significantly greater than 1, it means that the projected actual cost is greater than the target cost and so value engineering might be focused on that particular function, as an area where there might be scope for cost reductions.For example, hard functions have a 45% weighting. Within the hard functions, 40% of the importance of the hard functions is ‘move rhinos’. So the overall weighting of the ‘move rhinos’ function is (45 x 40)/100 = 18%. Once you have calculated the overall target cost of the product, you can multiply it by 18% to get the target cost of the ‘move rhinos’ function. This can then be compared with the projected actual cost of this function which is £1.75 (in the table above).b)Discuss the advantages of using the value index over conventional productcosting in cost reduction exercises using examples from the question to illustrate your answer.c)Describe how Activity-Based Costing can be integrated with functionalanalysis and the potential advantages which may result.。