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MMB053 - Managing Business Finance

Assessment Task - Case study report

Learning Outcome 1: Appraise the performance of a range of organisations using appropriate accounting ratios and the usefulness of financial accounting information for a range of stakeholders.

Learning Outcome 2: Demonstrate a critical understanding of the role of accounting information in the planning, control and decision making of a range of organisations.

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Assignment Description - Younibike cycles

Younibike cycles is a company formed in 2008 by Geoff Gold. The company specialises in folding bicycles predominantly for the city commuter market. The company prides itself on product innovation and the premium nature of the cycles that are sold around the world.

The cycles currently retail at a basic price of £1,000 however there can be minor modifications to this that would warrant a higher price, sometimes up to £1,400. The company also produces an electric bike that retails at £2,300 for the basic model and can sell for as much as £2,700 with minor modifications. The minor modifications take the form of racks, lights and lightweight parts.

The folding bicycle industry has several key players. Although Younibike command a strong position as the premium product in the market there are several companies that price slightly below their prices. The competitor bikes contain advanced features and innovations and are generally seen as better value for money although the competitor models are not as iconic as the Younibike design.

The mix of sales for Younibike is approximately 75% conventional bicycles and 25% electric bicycles. The variable costs of production for a conventional bike is about £500 and for an electric bike is about £900. For the higher priced models the increase in costs is approximately £150 and £200 for conventional bikes and electric bikes respectively. It is usual for around 60% of the conventional bike customers to request customization whilst only 30% of electric bike customers request customization and are willing to pay higher prices.

The factory works a 40 hour week for 50 weeks per year and employs 45 people who are directly involved in the bike manufacture process on 5 production lines. The company prides itself on its machine utilization efficiency but as the majority of the process Is labour driven (welding, assembly, custom painting) overheads are absorbed on a labour hour basis. It has been estimated that a bicycle can go through the manufacturing process from start to finish in approximately 30 minutes although there may be some possible delays due to bottlenecks and non value added activities being incurred in the production process along the way.

Profit and loss accounts for year ended 31/3

 

2019

2018

 

£'000

£'000

Turnover

31,158

28,325

Cost of sales

18,349

18,432

Gross profit

12,809

9,893

Administration expenses

10,680

9,233

Operating profit

2,129

660

Interest

10

8

Profit before tax

2,119

652

Tax

50

369

Profit after tax

2,089

283

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From the accounts above it can be seen that sales have increased by 10% over the last year. Sales are expected to grow by 5% over future years and this target has been embedded in the company's strategic plan. The increase in operating profit is attributable to cost savings from suppliers as well as some efficiency savings. The company envisages to maintain its operating profit margin at its current level, approximately 40% of its cost of sales are classed as fixed costs while 60% can be said to be variable and directly related to output.

The current factory site exists in a small city in the north of England and is limited in terms of space. The company knows that it may have difficulty in increasing capacity at the current site above 26,000 bicycles per year and is considering the options of moving the whole operation to a country in Eastern Europe at a cost of £6 million or to outsource manufacture of all of the bike frames to a company that currently specializes in the manufacture of go carts. Younibike would still paint and assemble the product in-house at its current premises. Both options woild yield an effective increase in capacity of 7,000 units per year.

Required:

Produce a business report, in good style, that covers the following issues:-

Part i) Provide recommendations on the selling price that should be charged for each model of bicycle produced.

Part ii) Provide brief calculations on the expected level of sales that you believe need to be made to break even. Justify your initial variables and your methods of calculation. Comment on the results obtained.

Part iii) Explain the possible issues in using absorption costing to control the manufacturing operations of the business and state the case for a switch to activity-based costing.

Part iv) Evaluate the potential issues that may arise of the alternative options to increase capacity and Justify the suitability of the business from moving to an absorption costing system to an activity-based costing system.

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