STRATEGIC MARKET ANALYSIS You have been asked to join the Strategic Management Committee of Jupiter Australia as the management accounting representative. The main task of the Committee is to carry out ongoing reviews of the profitability and viability of various product lines across all of the divisions of Jupiter Australia. You are very surprised to see that TeaserMalts chocolate confectionery, one of the most iconic Jupiter brands, is under review. The TeaserMalt chocolate balls are sold through major supermarket chains in Australia and New Zealand and has been the clear market leader in its category since the product was introduced to Australian markets more than 40 years ago. Over the last few years a number of competitor products which are close imitations of the original TeaserMalt chocolate ball have been released on the market, and these competitors have started to have an impact on the market share of TeaserMalts. The major competitor is the brand ChockoBalls which retails at a significantly lower price than the TeaserMalts. Market research indicates that price is a significant factor in why consumers are switching from TeaserMalts to ChockoBalls. Whilst the overall market for Chocolate Ball confectionery continues to grow rapidly, in the last two years TeaserMalts sales have fallen from 80% of the total market to 60% of the market. In the same time competitor ChockoBalls has grown from zero to 25% (see chart below). The total unit sales of chocolate ball confectionery in the Australia and New Zealand market for 2014 was equivalent to 100 million 50 pack units*. Whilst the TeaserMalt product is still profitable the Strategic Committee is concerned about the downward trend in sales and profitability. Jupiter has a base expected return on investment of 25% (calculated as Gross profit divided by Total Assets). *Adjusted for different pack sizes on offer estimated 5 billion individual choc balls The Marketing Department advises you that since their arrival on the market ChockoBalls has been discounting heavily and appear to be given a more favoured position on the major supermarket shelves. Marketing representatives have queried this and been advised by the supermarkets that prime shelf space is given to brands that deliver the highest profit to the supermarket. They advised that until recently, in the Chocolate Ball confectionery category, this had been TeaserMalts, but this was not the case at the moment. As the Management Accounting representative you have provided the Strategic Management Committee with the following breakdown of revenues and costs for the 'TeaserMalt' product line for the just completed 2014 calendar year: TeaserMalt ChocolateBalls Total AssetsTeaserMalt Factory - Bendigo, Victoria $52m Total Sales (Volume)(50 pack units) 60m Regular Retail Price (per unit) (price sold in supermarket) $4.95 Retail Margin (per unit)(Supermarket Gross Profit per unit)(30%) $1.4850 Gross Sales Value (per unit) (Price received by TeaserMalts) $3.4650 Supermarket Rebates (unit)(Paid by TeaserMalts to Supermarkets) $0.15 Net Sales Value $3.3150 Prime Costs $1.25 Manufacturing Costs $1.20 Logistic Costs $0.65 Total Costs (per unit) $3.10 Gross Profit (per unit) $0.2150 Total Gross Profit $12,900,000 ROTA 24.81% The Return on Total Assets (calculated by dividing Gross Profit by Total Assets) for TeaserMalts for the 2014 year was 24.81%. This is marginally below the required ROTA of Jupiter which is 25%. If the product continues to lose market share it may not be viable. The Marketing Department has carried out research into the chocolate ball confectionery market which indicates that by discounting the recommended retail price of TeaserMalts by $0.40 per unit to $4.55 per unit*, unit sales of TeaserMalts will increase by 25% from their current level. In an attempt to simultaneously lower TeaserMalts product costs the research and development (R&D) team have identified that by slightly altering the ingredients quality and mix a saving of 20% of prime costs can be made. However, the Chair of the Strategic Management Committee advises that even after allowing for the 20% savings in prime costs, discounting the product by $0.40 per unit will mean that the product will no longer achieve the firm's long term required return on total assets (ROTA) of 25%,. The CEO argues that if this remains the case, the previously successful TeaserMalts product line may have to be discontinued. You advise the Committee that you are aware that the 'TeaserMalts' manufacturing facility in Bendigo is currently running at 69% of its practical capacity and that the warehouse facility (logistics) is running at 54% capacity. You are also aware that whilst the TeaserMalts product's Prime Costs are 100% Variable, other Manufacturing Costs and Logistic Costs are made up of 90% Fixed costs and 10% Variable costs. You ask if you can be given time to prepare a report for the Strategic Management Committee on the Management Accounting cost and profit implications of the changes proposed by Marketing and R&D based on the budgeted costs and increases in sales and production. *Remember that the manufacturer does not receive the retail price. The discounted wholesale price will be $3.0650 per unit, down from $3.4650 per unit. Required: (i) Using Excel prepare a 'before and after' budget comparative analysis of the revenues and costs of the TeaserMalts product line. The analysis should incorporate the $0.40 cent drop in price, the 20% predicted savings in prime costs, and include the 25% predicted sales increase. Ensure you include in your analysis any impact of the budgeted production increase on other per unit manufacturing and logistics costs. (10 marks) (ii) It can be assumed that 90% Fixed 10% Variable cost break-down between variable and fixed costs will hold consistently across the industry (including for competitor ChockoBalls). Assume that 75% of the predicted TeaserMalts unit sales increase will be made at the expense of the unit sales of their main competitor ChockoBalls (meaning ChockoBalls unit sales will fall by 75% of the TeaserMalts sales increase). Assume that TeaserMalts and ChockoBalls have identical manufacturing and logistic costs structures at the commencement of the 2015 calendar year. Allowing for the change in sales volumes use Excel to calculate the expected impact of the drop in sales on the per unit product costs of ChockoBalls (5 marks) (iii) Prepare a brief report (maximum 300 words) for the Strategic Management Committee outlining the key points of your findings. Include some discussion on: a. the likely impact of the changes on the cost and profit structure of TeaserMalts (derived from your answer to (i)). b. the likely impact of the changes on the cost and profit structure of ChockoBalls (derived from your answer to (ii)).. c. Make a recommendation to the Committee on whether to go ahead with the planned changes. Include any other strategic advice that you consider relevant to the Committee's decision making (for example profitability for supermarkets). (Please ensure that your answer adequately addresses ALL of the points above) (5 marks) Question 3 Comprehensive Manufacturing Budget (30 marks) This question builds on prior studies and relates to learning material and objectives from Online Modules 1, 2 and 3. Links to specific resources provided for this question relating to Manufacturing Budgets and Excel spreadsheets can be found in the Online Topic Modules. You have been asked to prepare a 5 year budget forecast for the 'Cat 'n'Kitty' Dried Cat Food factory in Wodonga. The 'Cat'n'Kitty' division of the Jupiter Australia company utilises a traditional manufacturing cost flow inventory and accounting system. The following previous years 'Cat'n'Kitty' financial and trading data was provided as at December 31st 2014: 2014 Year data Sales (Units) 48 million Price (average 2014 price received) $5.50 Prime Costs (per unit) Ingredients & Packing (including various meats, vegetables, flavour enhancers, packaging costs)$2.2500 Direct Labour $0.1515 Variable Manufacturing Costs (per unit) $0.9875 Factory Management Salaries (per annum) $1,325,000 Factory Plant & Equipment Depreciation (per annum) $2,500,000 Sales and Marketing Costs (per annum) $10,497,000 Finance Costs (per annum) $5,625,000 Non-Factory Administration Costs (per annum) $3,450,000 Inventory on Hand (at valuation): Ingredients & Packaging (1,000,000 units)$2,475,000 Finished Goods (985,000 units)$3,340,000 'Cat'n'Kitty' maintains a target safety stock of raw materials inventory and finished goods inventory amounting to the equivalent of one (1) week of the current year's budgeted unit sales. At the end of the 2014 calendar year there were 985,000 completed units of 'Cat'n'Kitty' in the warehouse as Finished Goods. There was enough raw materials on hand to manufacture 1,000,000 units of 'Cat'n'Kitty'. The Research and Marketing Department at 'Cat'n'Kitty' predict that unit sales of the company's pet food will continue to grow indefinitely at a rate of 3% above the 2.75% current long term rate of inflation (budgeted 5.75% increase per annum). The company is budgeting to achieve a year on year price increase of 1% over the long term inflation rate (3.75% annual increase). The Wodonga Cat'n'Kitty plant was built in the year 2000 for a cost of $50 million and is being depreciated straight line over its 20 year expected useful life. All other costs including direct labour, ingredient costs, and other overhead and administration costs are expected to increase annually at the rate of inflation. The company pays tax at the Australian Corporate tax rate which is expected to hold at 30%. The inflation rate of 2.75% is expected to hold over the 5 year budget period. The 'Cat'n'Kitty' factory has been operating at its current site in Wodonga, Victoria since the late 1970s, with the current automated factory commencing operation 15 years ago. However due to the consistent growth in sales of the 'Cat'n'Kitty' pet food, the factory is nearing its practical manufacturing capacity of 55 million packets of cat food per annum. Required: (i) Using Excel develop a Sales, Production and Purchase budget as well as a budgeted Schedule of Cost of Goods Manufactured, Schedule of Cost of Goods Sold, and an Income Statement for each of the 5 years in the budget period (commencing January 1, 2015) (advice on the form of these budgets is linked through the online topic modules and in the Interact Resources folder and is also available in the Appendix to Chapter 9 of the text book). This budget must also take into account the manufacturing facility practical capacity production constraint. Your spreadsheet must include a data section which enables inputs (such as the inflation rate, budgeted cost and sales increases, and the production limit) to be simply altered and 'what if' analysis to be undertaken. (Excel resources are provided on your Interact site to guide students on the use of the 'IF' formula which can be used for the budget production constraint). (15 marks) Hint: All 5 years of each budget should be shown side by side (1 column per year) for ease of comparison by management. All of the budgets should be presented on one worksheet together, working down the page commencing with the Sales and then Production budgets. You should be able to drag the formula across for the whole of the budget if the first years are properly constructed with a data input section and using absolute referencing. This makes the process much quicker and easier. An Excel help file and video which deals with the formula required has been placed in the Resources folder in the subject Interact site to assist students (linked through Online Module 3). (ii) It is apparent that if sales continue to grow as forecast that the 'Cat'n'Kitty' factory will reach its practical production capacity of 55 million units in a couple of years. The CEO of 'Cat'n'Kitty' has the option of investing in new plant to expand the capacity of the factory or to simply limit costs and maximise profits within the 55 million production and sale limit. A consulting engineering firm has advised that an investment of $20 million dollars in new technology will increase the life of the current factory by 10 years and lift production capacity by 30% to 71,500,000 units per annum. It is expected that the upgrade will be completed by the commencement of the 2016 calendar year and the extra investment will be depreciated on a straight line basis over its 10 year useful life.. Using the excel model developed in part (i) calculate the impact on sales and profit if the option of upgrading the manufacturing facility is exercised and the practical production capacity of the factory is increased by 30% (Include the additional factory depreciation expense as a manufacturing cost. Submit results as a separate worksheet). (5 marks) (iii) Given your findings from part (i) and (ii) write a report for the CEO of 'Cat'n'Kitty' recommending whether to take up the option to upgrade the production facility. In your report consider all of the strategic and financial implications to the firm of reaching its production constraint and any implications or opportunities arising from upgrading the facility and having extra productive capacity. Your grade will depend on the accuracy and depth of your analysis, and your capacity to identify strategic issues which management should consider when making their decision (approx. 300 words). (10 marks) Question 4 Overhead Cost Allocation (15 marks) This question relates to learning material and objectives from Online Module 5. You have been seconded to one of Jupiter's sister companies Mazundai Ltd. Mazundai manufacture the Wouldn'tai range of small to medium cars. The company's production line is highly automated. For management accounting reporting purposes manufacturing costs are aggregated into two production departments, Manufacturing and Assembly. Mazundai operates two separate service departments, Maintenance and Robotics, which support the main production departments. The company has decided that the most appropriate basis to allocate Maintenance costs is the number of maintenance jobs the department is required to undertake. The allocation of the Robotics department costs is based on the number of computer driven automated and robotic machines in each department. Costs for the different cost centres were as follows: Manufacturing $910,000 Assembly $175,000 Maintenance $472,000 Robotics $675,000 Department No. of Maintenance Jobs No. of Robotic Machines Manufacturing 265 16 Assembly 75 52 Maintenance 42 10 Robotics 28 12 Answer the following questions using spreadsheet models: (i) Using the Direct Method allocate the service centre costs (2 marks) (ii) Using the Step Method allocate the service centre costs (4marks) (iii) Using the Reciprocal Method allocate service centre costs (6 markas) (iv) Discuss the implications of your results and why such an analysis is important (3 marks) (15 marks) Question 5 Costing Approaches (10 marks) This question relates to learning material and objectives from Online Modules 1 - 4. Describe the difference between actual costing and normal costing. (10 marks) Question 6 Activity Based Costing (ABC) (15 marks) This question relates to learning material and objectives from Online Module 6. New Moon Pty Ltd, a subsidiary of Jupiter Australia, manufactures two models of garden mulching machines, the Standard model and a more expensive Eco-green model. The standard model retails for $300 whilst the Eco-green model sells for 50% more at $450. Currently the cheaper Standard model outsells the environmentally friendly model at a rate of 10 to 1.