Section A

Question 1)

a)

Project A
Particulars	Year 1	Year 2	Year 3	Year 4	Year 5
Selling price @ £ 45 Per unit	36000000	3960000	4257000	3001500	1125000
Variable costs production @ £ 35 per unit	2800000	3080000	3311000	2334500	875000
Research and development costs	100000	0	0	0	0
Fixed production costs	115000	115000	115000	115000	115000
Annual cash flow	39015000	7155000	7683000	5451000	2115000

 

Project B
Particulars	Year 1	Year 2	Year 3	Year 4	Year 5
Selling price @ £ 50 Per unit	3225000	3365000	3565000	3925000	5075000
Variable costs production @ £ 40 per unit	2580000	2692000	2852000	3140000	4060000
Research and development costs	200000	0	0	0	0
Fixed production costs	115000	115000	115000	115000	115000
Working capital payable	130000	0	0	0	0
Annual cash flow	6250000	6172000	6532000	7180000	9250000

 

b)

Product A

Annual investment in machinery= £ 2,000,000 or £ 2 million

Residual value = £ 130, 000

Net investment = (£ 2,000,000 - £ 130, 000)/ 5 = £ 374, 000

Product B

Annual investment in machinery= £ 2,000,000 or £ 2 million

Residual value = £ 200, 000

Net investment = (£ 2,000,000 - £ 200, 000) / 5 = £ 360, 000

(i) Payback period

Project A
Years	Annual cash flow	Discounted cash flow	Cumulative discounted cash flow
0	374000	-374000	-374000
1	39015000	34526549	34152549
2	7155000	5603415	39755964
3	7683000	5324704	45080668
4	5451000	3343200	48423868
5	2115000	1147937	49571805
Discounted payback period	0.01

 

Project B
Years	Annual cash flow	Discounted cash flow	Cumulative discounted cash flow
0	360000	-360000	-360000
1	6250000	5530973	5170973
2	6172000	4833581	10004554
3	6532000	4527004	14531558
4	7180000	4403628	18935186
5	9250000	5020529	23955715
Discounted payback period	0.07

 

(ii) Net present value (NPV)

Project A
Years	Annual cash flow
0	374000
1	39015000
2	7155000
3	7683000
4	5451000
5	2115000
Present value of future cash flow	49945805.24
Initial investment	374000
Net present value (NPV)	49571805.24

 

 

 

 

 

 

 

 

 

 

Project B
Years	Annual cash flow
0	360000
1	6250000
2	6172000
3	6532000
4	7180000
5	9250000
Present value of future cash flow	24315716.31
Initial investment	360000
Net present value (NPV)	23955716.31

c)

Among the various existing investment techniques, the two commonly utilised appraisal methods considered by the business to ensure investment association decision-making by the business organisation include the net present value (NPV) and payback period (PP). NPV signifies distinguishing between that the present value structure of the aggregate cash inflows and cash outflows implication over the particular period. On the other hand, PP implies the determination of the required period related to the investment return for repaying means of its initial investment structure (Zhao and Zhang, 2019). The major advantages related to NPV calculation include incorporating time valuation of money, undertaking enterprise's cost of capital, simpler process, and accounting for the uncertainty inherent projections means. Besides, the major disadvantages of NPV comprise accuracy relies on inputs quality, avoids hidden costs such as organisation and opportunity costs, avoids qualitative factors, and is not adequate for comparing projects' differences (Knoke et al. 2020). On the other hand, the major advantage of the payback period comprise the fact of the simpler term of determining the required period and does not pose more complexity and subsequently provides help for analysing the project's reliability extent (Burkhanov, 2020). The disadvantages of PP signify completely avoiding time valuation of money and failing to generate detailed pictures and avoiding other factors also.

From the selected two investment appraisal methods, it is concluded to evolve selecting Project A in comparison to Project B. Concerning the payback period, a project with shorter PP is subjected attractive and hence Project A with 0.01 PP is recognised better irrespective of Project B. Besides, the option with a higher term of NPV is considered ideal for the company and hence company with higher NPV is regarded better for the company with that of the lower one (Peymankar et al. 2021).

d)

Sunk costs refer to the cost structure that was considered in the past and subsequently not likely to change in the future. A sunk cost regarded differs from the business’ future costs including decisions related to product pricing or inventory purchase costs. Furthermore, this cost is specifically excluded in terms of determining future investment costs as it was likely to remain similar irrespective of the adequate decision result (Guenzel, 2020). Working capital refers to the difference between the corporation's current assets and current liabilities structure. The implication of working capital helps to determine both the company’s operational efficiency and short-term financial health. Furthermore, the changes concerning working capital must require to be considered while determining NPV calculations of the project in terms of additional investment needs of the business. Residual values relative to capital budgeting investment decisions determine how much an individual is likely to sell an asset structure after the enterprise finished utilising it or once the asset-acquired cash flows refer no longer able to be appropriately predicted (Müller and Zeinhofer, 2021). The residual value for investment appraisal extent is determined as the distinction between the firm's profitability and cost of capital structure and hence regarded to include.

Section B

Question 2)

a)

Demand for 16, 800 liters

Manufacturing cost per litre of the product = £ 7, 320/ 16, 800 = 0.44 per litre

Demand for 21, 600 litres

Manufacturing cost per litre of the product = £ 7, 320/ 21, 600 = 0.34 per litre

b)

The ideology of "fixed costs" signifies to the cost structure is entitled to do not change concerning the decrease or increase in the number of services or goods produced or sold. In another word, fixed costs determine the expenses that require to be paid by the corporation independently relative to any form of particular business activities. Fixed costs comprise several numbers of expenses comprising insurance, interest expenses, rental lease payments, depreciation, interest expenses, and many more (Terziev and Redom, 2019). For instance, individuals while commencing new business likely to evolve with a certain fixed costs structure for management salaries and rent. On the other hand, semi-fixed costs refer to the cost structure that includes both variable and fixed elements. Furthermore, semi-fixed costs entitled to also evolve as the step costs structure for the business. A common example of semi-fixed costs signifies a salaried salesperson. An individual acquires fixed compensation amount (in the salary form) and a variable amount also (as a commission form) and aggregately the salesperson costs refer to semi-fixed.

Unlike fixed costs, variable costs reflect always fluctuating. In another word, variable costs ensure dependent on the production output extent of goods and services (Novák et al. 2018). Concerning this, the cost per litre of the product tends to increase with the increment in the number of made liters.

c)

Budgeted break-even sales = Fixed costs / Contribution margin

Contribution margin= Product price- Variable costs

Contribution margin= £ 12, 000 - £ 4, 560 = £ 7, 440

Budgeted break-even sales = £ 2,760/ £ 7,440 = £ 0.37 or £ 4,440

Margin of safety in percentage= Margin of safety values / Sales value

Margin of safety values = Actual sales values- break-even value

Margin of safety values = £ 12, 000 - £ 4,440 = £ 7,560

Margin of safety in percentage= £ 7,560/ £ 12, 000= 63%

d)

Break-even analysis evolves with various assumptions which are presented below.

• All costs subject to be divided into both variable and fixed components
• Sales or output volume is only assumed to be an appropriate factor relative to affecting costs structure (Belykh, 2018)
• Costs behavior emerges in linear form
• Aggregate fixed costs amount will remain constant at every output level, while variable costs fluctuate relative to direct output proportion
• The price paid for various inputs will remain similar (Horal et al. 2019)
• There will be no changes relative efficiency of machines and men concerning technological measures
• Costs and revenues are compared based on the business' common activity
• The product's selling price will remain constant at every sales level (Horal et al. 2019)
•  

Question 3)

a)

(i)

Particulars	2021 (£)	2020 (£)
Return on Capital Employed
Earnings before interest and tax (EBIT)	1411	2107
(/): Capital employed	14978	14107
Return on Capital Employed	0.09	0.15

 

(ii)

Particulars	2021 (£)	2020 (£)
Return on ordinary shareholders' funds
Earnings after taxation	871	1839
(/): Shareholders' equity	14978	14107
Return on ordinary shareholders' funds	0.06	0.13

 

 

 

 

 

 

 

(iii)

Particulars	2021 (£)	2020 (£)
Gross profit margin
Gross profit	5527	4860
(/): Revenue	11760	10800
Gross profit margin	47%	45%

 

Particulars	2021 (£)	2020 (£)
Net profit margin
Net profit	871	1839
(/): Revenue	11760	10800
Net profit margin	7%	17%

 (iv)

 

 

 

 

 

(v)

 

Particulars	2021 (£)	2020 (£)
Current ratio
Current assets	2499	1995
(/): Current liabilities	1298	847
Current ratio	1.93	2.36

 

b)

The various limitations of the ratio analysis approach are illustrated below.

• The measure is only utilised for comparing purposes with other enterprises evolving with similar types and size (Sadi’ah, 2018)
• Ratio analysis avoids measuring the firm associated diverse human element
• The information related to ratio analysis signifies historic and not current
• Ratio analysis does not consider any external factors while calculating such as worldwide recession (Kadim et al. 2020)

c)

As opined by Kadim et al. (2020), ratio analysis is considered a significant measure with the help of which a company's financial performance can be evaluated over various periods. The various ratios considered to determine the financial position of Fefo Ltd include return on capital employed, current ratio, net profit margin, gross profit margin, and return on ordinary shareholders' funds.

The return on capital employed ratio helps to depict the company's efficiency regarding the efficient utilisation purpose of its resource structure. The year 2020 remains more efficient for the company regarding efficiency consideration of its resource structure with a higher ratio. Relative to return on ordinary shareholders' funds, 2020 refers better in comparison to 2021 in terms of evolving with a higher ratio and hence depicts better financial health of Fefo Ltd in this specific year. Gross profit and net profit margin are considered concerning the profitability ratios of the corporation which helps to determine its business performance in association with its revenue, gross profit, and net profit structure (Lee and Lee, 2018). A higher profit ratio is always favorable and hence year 2021 relative to gross profit margin and the year 2020 is recognised as ideal relative to net profit margin implication of the company. The current ratio refers to one of the significant ratios for determining the purpose of the company's liquidity performance. Although both the year evolves with a better current ratio, 2020 identifies evolving with a more efficient performance of Fefo Ltd regarding paying off its short-term liabilities considering the structure of its current assets.

Question 4)

a)

Production plan for Nano Ltd.
Particulars	Product X	Product Y	Product Z
Revenue
Sales	752400	2203200	2678400
Total revenue (A)	752400	2203200	2678400
Expenses
Materials	138600	518400	518400
Labor	172800	621000	691200
Fixed overheads	192000	192000	192000
Variable overheads	104400	388800	414000
Total expenses (B)	607800	1720200	1815600
Net profit (A-B)	144600	483000	862800

 

b)

Concerning to the production plan, the aggregate profit of Nano Ltd are determined undertaking following implication.

Aggregate revenue= £ 5, 634, 000

Aggregate expenses= £ 4, 143, 600

Profit= £ 5, 634, 000- £ 4, 143, 600 = £ 1,490,400

c)

 

Recalculation of production plan for Nano Ltd.
Particulars	Product X	Product Y	Product Z
Revenue
Sales	752400	2056320	2678400
Total revenue (A)	752400	2056320	2678400
Expenses
Materials	138600	483840	518400
Labor	172800	579600	691200
Fixed overheads	192000	192000	192000
Variable overheads	104400	362880	414000
Total expenses (B)	607800	1618320	1815600
Net profit (A-B)	144600	438000	862800

 

d)

The various non-financial factors which require to be undertaken by Nano Ltd. before evolving with any of the suggested production plan implications are subjected to provided below.

• Matching good practice and industry standards
• Considering both the current and future legislation requirements
• Enhancing relationships with customers and suppliers (Baranchikova et al. 2020)
• Enhancing staff morale, making subsequently easier to retain and recruit employees
• Anticipating and addressing future threats including intellectual property protection against its potential competition
• Developing business capabilities such as building experiences and skills relative to its new sections including robust management systems (Baranchikova et al. 2020)
•  
• Enhancing business reputation and subsequent relationships with the local existing community

e)

Both absorption and marginal costing serve as the two diverse approaches utilised for the inventory valuation purpose of the corporation. However, marginal costing is subjected better in comparison to absorption costing while demonstrating operational decisions for the business evolving with various implications (Nawaz, 2019). For instance, marginal costing is entitled to classify as variable and fixed costs, while absorption as distribution, production, and selling & administration. The main motive for considering marginal costing includes setting forth contribution to the production cost, while absorption only ensures an accurate and fair picture related to the company's profitability. Furthermore, marginal costing refers to evolution with break-even point and contribution per unit implication in comparison to absorption costing method and hence adequate information related to the businesses operational decision acquires (Nan, 2019).

 

 

Reference List

Baranchikova, S.G., Ershova, I.V., Klyuev, A.V. and Cherepanova, E.V., 2020, November. Optimization of the production plan taking according to the customers’ strategic importance. In IOP Conference Series: Materials Science and Engineering (Vol. 971, No. 5, p. 052014). IOP Publishing. https://iopscience.iop.org/article/10.1088/1757-899X/971/5/052014/meta

Belykh, V., 2018. Stochastic Analysis of the Break-Even of the Enterprise. Корпоративные финансы, 12(2), pp.142-152. https://elibrary.ru/item.asp?id=46661128

Burkhanov, A., 2020. INVESTMENT PROCESSES IN INDUSTRIAL ENTERPRISES AND INNOVATIVE DEVELOPMENT. Архив научных исследований, (23). https://tsue.scienceweb.uz/index.php/archive/article/view/2717

Guenzel, M., 2020. In too deep: The effect of sunk costs on corporate investment. Working Paper. https://www.mariusguenzel.com/s/Guenzel_SunkCost.pdf

Horal, L., Shyiko, V. and Yaroshenko, O., 2019, October. Modeling break-even zone using the integral methods. In 6th International conference on strategies, models and technologies of economic systems management, Ivano-Frankivsk National Technical University of Oil and Gas, Bukovel (pp. 24-25). https://www.atlantis-press.com/article/125917642.pdf

Kadim, A., Sunardi, N. and Husain, T., 2020. The modeling firm's value based on financial ratios, intellectual capital and dividend policy. Accounting, 6(5), pp.859-870. http://m.growingscience.com/beta/ac/4052-the-modeling-firms-value-based-on-financial-ratios-intellectual-capital-and-dividend-policy.html

Knoke, T., Gosling, E. and Paul, C., 2020. Use and misuse of the net present value in environmental studies. Ecological Economics, 174, p.106664. https://www.sciencedirect.com/science/article/pii/S0921800919311103

Lee, B.H. and Lee, S.H., 2018. A study on financial ratio and prediction of financial distress in financial markets. Journal of Distribution Science, 16(11), pp.21-27. https://www.koreascience.or.kr/article/JAKO201816357066079.page

Müller, J. and Zeinhofer, M., 2021. Notes on exact boundary values in residual minimisation. arXiv preprint arXiv:2105.02550. https://arxiv.org/abs/2105.02550

Nan, N., 2019. Comparative Analysis of Marginal Costing Method and Absorption Costing Method. https://www.webofproceedings.org/proceedings_series/ESSP/ICEMC%202019/ICEMC19118.pdf

Nawaz, M., 2019. An Insight Into the Two Costing Technique: Absorption Costing and Marginal Costing. BRAND. Broad Research in Accounting, Negotiation, and Distribution, 4(1), pp.48-6 https://brain.edusoft.ro/index.php/brand/article/view/382

Novák, P., Hrušecká, D. and Macurová, L., 2018. Perception of cost behaviour in industrial firms with emphasis on logistics and its costs. FME Transactions. https://publikace.k.utb.cz/handle/10563/1008101

Peymankar, M., Davari, M. and Ranjbar, M., 2021. Maximizing the expected net present value in a project with uncertain cash flows. European Journal of Operational Research, 294(2), pp.442-452. https://www.sciencedirect.com/science/article/pii/S0377221721000692

Sadi’ah, K., 2018. The effect of corporate financial ratio upon the company value. The Accounting Journal of Binaniaga, 3(02), pp.75-88. https://www.stiebinaniaga.ac.id/e-journal/index.php/Accounting/article/view/245\

Terziev, V. and Redom, K., 2019. Costs of Development of New Products. Knowledge–International Journal, 34. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3466366

Zhao, R. and Zhang, X., 2019, May. Analysis of Investment Decisions of SMEs. In 2019 International Conference on Management, Education Technology and Economics (ICMETE 2019) (pp. 427-430). Atlantis Press. https://www.atlantis-press.com/article/125908443.pdf

 

Production plan for Nano Ltd.
Particulars	Product X	Product Y	Product Z
Revenue
Sales	752400	2203200	2678400
Total revenue (A)	752400	2203200	2678400
Expenses
Materials	138600	518400	518400
Labour	172800	621000	691200
Fixed overheads	192000	192000	192000
Variable overheads	104400	388800	414000
Total expenses (B)	607800	1720200	1815600
Net profit (A-B)	144600	483000	862800
Recalculation of production plan for Nano Ltd.
Particulars	Product X	Product Y	Product Z
Revenue
Sales	752400	2056320	2678400
Total revenue (A)	752400	2056320	2678400
Expenses
Materials	138600	483840	518400
Labour	172800	579600	691200
Fixed overheads	192000	192000	192000
Variable overheads	104400	362880	414000
Total expenses (B)	607800	1618320	1815600
Net profit (A-B)	144600	438000	862800