ACCOUNTING FOR DECISION MAKER

Accounting for Decision Makers
Department: Leadership and Management
1.1 Assessment Information and Marking Criteria
1.1.1 Element 010 – CASE STUDY, 2400 WORDS (80%)
Case Study
You are the financial controller of Webster Plc, a manufacturer of massage equipment (“the Soother”) for domestic use, serving the UK and export markets. The company sells through a network of independent distributors both home and abroad.
The managing director has asked for your help in connection with a number of decisions the company is facing:
Part A: Long Term Investment:
Webster Plc is considering purchasing a new production machine. At present, it uses an old machine which can produce 8,000 “soothers” per week. This machine could be replaced with a new machine, which can produce 20,000 “soothers” per week. The new machine will cost £400,000. Removing the old machine and preparing the area for the new machine will cost €20,000. The new machine will occupy additional space in the factory which was planned to be rented out for £15,000 per annum payable in advance each year.
The company has already spent £40,000 on a market study to ascertain how many more “soothers” can be sold. Demand is expected to be 12,000 units per week for three years, after which a newer product will replace the “soother”. In the fourth year, the new machine would be sold for € 50,000. This sale is not expected to take place until later in the fourth year. Each “soother” sells for £7.00 and has a contribution to sales ratio of 0.2 per unit. The company works for 48 weeks in the year. Webster Plc normally expects a payback within two years and its cost of capital is 10% per annum.

Required: (1,500 equivalent)

Prepare a report to the Board of the Company which includes:
(a) Calculations of the payback and the net present value for the investment, based on the information given.

(b) A summary of the advantages and disadvantages of both the payback and NPV methods of investment appraisal, as applied to this case.

(c) A recommendation, with reasons, whether the machine should be purchased, including any reservations or non-financial considerations you may have about your recommendation.
Part B: Budgeting
The managing director has discussed with you her concerns over the lack of accuracy of the financial budgets that have been prepared for the last two years, as actual results have been significantly different. Traditionally, the company has adopted a “top down” approach where a small group of senior executives have taken sole responsibility for preparing the budget.
She has asked for your opinion on the advantages and disadvantages of a wider participation in the budgeting process.
Required: (900 words)
In the form of a memo to the managing director, summaries the main advantages and disadvantages of wider participation in the budgeting process, supporting your analysis with examples of current corporate practice.