AC415 - Management Accounting Coursework 1

Philly Ltd manufactures a portable high-definition music player (The ZX99) with high
specifications at a lower price than its rivals. The company has progressed from producing
music players that mainly played mp3s, because of the advent of smartphones which have
made budget mp3 players obsolete.
During 2022, the company operated at full capacity of 250,000 units, selling its music player for
£120. A new Managing Director (Vicky Anderson) has recently joined the company and has
asked you to advise on the company's selling price policy. The sales price of £120 was
previously viewed as satisfactory because the resulting demand enabled full capacity operation.
You have been asked to investigate the effect on costs and profit of an increase in the selling
price.
Appendix 1 shows costs and revenues of ZX99 last year (2022). The company is now planning
for 2023
Further information relating to 2023 can be found in the accounts of meetings between Vicky
Anderson and other senior members of staff (see Appendices 2-4)
The company will start 2023 with £800,000 as its bank balance. Tax of £800,000 is expected to
paid in Quarter 3, with dividends of £1,000,000 in Quarter 2 and £500,000 in Quarter 4.
Requirements
(a) Calculate the annual profit which is earned with the current selling price of £120 per
unit for 2022 (using only the data from Appendix 1)
(b) Assuming the same cost structure for 2023 (but subject to any possible amendments
from the appendices), prepare a schedule to show the annual profit which would be
earned with each of the three alternative selling prices referred to by the Sales
Director. Based on the figures calculated, recommend the selling price that should be
charged for the high definition music player, to maximise Philly Ltd’s profit. Calculate
the breakeven point (units) and the margin of safety (%s) at this profit maximising
level. (Ignore any potential bad debts and sales discounts, mentioned by the Sales
Director, when calculating profit)
(c) What other non-financial factors, both internal and external to the organisation, should
Philly Ltd consider when making the decision regarding the selling price. You may
use frameworks such as Porter’s Five Forces to help you
(d) Based on the profit maximising decision, prepare the production, material and labour
budgets (split into quarters)
Due Thursday 9 February at 10:00. This assignment should be typed Arial font size 12,
double spaced and at most 800 words (excluding tables and figures and calculations). The
submitted file should be a PDF.
If more than one assignment is handed in, then the grade will be based on best assignment.
When handed in, these are individual assignments and you are not allowed to seek help from
others. You can include your tables and calculations in an appendix at the back of your
assignment to exclude it from the word count. I must stress that this coursework is a learning
exercise as much as it is an assessment. The 2nd assignment will be similar to this one, based
on the same storyline but covering different lecture topics.
Appendix 1
The following data relates to costs and revenues of the ZX99 last year (2022)

£
Sales 120.00
Direct materials* 1 component pack @ £28.50 28.50
Direct labour 1.8 hours @ £13 23.40
Variable production overhead 1.8 hours @ £4 7.20
Sales commission 10% of sales price 12.00
Fixed production overheads 4,000,000
Fixed selling overheads 1,500,000
Fixed administrative overheads 1,000,000

All fixed overheads arise evenly throughout the year

*Each music player requires 1 set of components which are bought together from one supplier
Appendix 2
The following conversation took place between the Managing Director and the Sales
Director:

Vicky Anderson: we have been able to sell 250,000 units per annum, which is full capacity,
because of the fact that we sell a good value product but are we missing out by pricing the
product too low?

Gladys Knight: Possibly. If we price the product at £120 in 2023, we expect to sell 250,000
units, as was the case last year. However, my team have done some work on this and have
come up with the following estimates of sales volume based on 3 alternative sales prices:

Selling price £140 £160 £180

Annual sales volume (units) 200,000 160,000 110,000

Vicky Anderson: Ok, so pushing the price up will mean that we make more money per music
player, but of course we will sell less of them. We need to find out whether a change in price will
actually increase or decrease our expected profit.

Gladys Knight: Bear in mind that selling overheads would decrease by £100,000 per annum, if
annual sales volume falls below 240,000 units as we will be able to reduce our part-time sales
force. We still expect sales commission to be 10% of the sales price. All sales and admin costs
are paid for in the quarter that they arise.

Our sales of 250,000 units last year were subject to a slight seasonal variation, with 25% of our
sales falling in the 1st quarter, 30% of our sales falling in the 2nd quarter, 25% in the 3rd quarter,
with the remaining 20% in the final quarter. We expect the same seasonal variation to arise next
year (2023).

Based on past experience, 60% of our sales are settled in the quarter of sale with 37% of sales
settled in the following quarter. The remaining 3% of sales are expected to become uncollectible
(bad debts). Those customers who settle in the quarter of sale are entitled to a 2% discount on
the original selling price.
Appendix 3
The following conversation took place between the Managing Director and the
Production Director:

Vicky Anderson: We are reviewing our pricing policy with a view to pushing price of our music
player up so as to maximise the profit made from each unit.

Harry Casey: Well, the amount of units you plan to sell will obviously have an impact on the
amount of units we plan to produce, and that in turn will impact on our production costs. If
annual production falls below 200,000 units, we would need to hire less machinery and that will
save us £200,000.
Furthermore, if annual production and sales falls below 200,000 units, this will reduce the bonus
payments we have to pay our labour force. This will have the effect of reducing the average
hourly rate we pay by 10% from last year’s hourly rate.

We will aim to keep production levels very close to quarterly sales levels, subject to movements
in opening and closing stock. We will start the year with 4,000 units of opening stock and we
plan to have the same number of units as closing stock at the end of the year. For all other
quarters, we aim to have closing stock of 10% of the following quarter’s expected sales
All labour and overhead (e.g. rent) costs are paid for in the quarter they arise.
As you know, we will also be planning a major investment in machinery of £2 million (in addition
to the fixed overhead expenditure) in the last quarter of the year, ready for use at the beginning
of the following year

I’m glad that we are considering pushing the selling price of the music player up. The pressure
we are under to keep production costs down influences the quality of staff that we can afford to
employ. We have many inexperienced staff and that is causing errors to happen on the
production line.
Appendix 4
The following conversation took place between the Managing director and the
Purchasing Manager:
Vicky Anderson: we are considering pushing the price of the music player up as we feel our
product is cheaper than similar products manufactured by our rivals. Inevitably, this will reduce
the amount of units that we sell, but we hope that this reduction will be minimal.
Bernard Edwards: in that case, bear in mind that if production falls below 150,000 units, we will
lose bulk discounts, meaning that our component costs will increase by 15% for all units
produced in the year.

Vicky Anderson: on the subject of components. What is our policy regarding their purchase and
payment?

Bernard Edwards: all components are paid for one quarter after we purchase them. The amount
of components we have to pay for in the first quarter of 2023 were the components purchased
in the previous quarter, which was 49,000 component packs. The aim is to keep opening stock
of components at 2,000 packs every quarter.

The following conversation took place between the Managing Director and the
Purchasing Manager at the end of the year, when analysing the difference between the
budgeted and actual profit:
Vicky Anderson: I’m a little concerned with the amount of money we have spent on the
components that we bought this year, in 2023. Are there any possible factors that contributed to
this.

Bernard Edwards: well, bear in mind that when the budgets were set at the beginning of the
year. The average price for those components was £28.50, but 2023 saw a general price rise
for the components, meaning that the average price on the market was nearer £30. Also, don’t
forget the fact that we had to make an emergency purchase of components in the final quarter
because of the number of components that had to be scrapped on the production line. You can’t
blame my department for that.
Appendix 5

Review 1

I will give my pros and cons here as the rest of my review is pretty long - as a user I am really
more worried about finding a device for my large song library than sound quality - so keep that
in mind, these devices are a rarity now phones are so popular.

Pros:
+ It is a light, nicely built player.
+ Physical scroll wheel is old school cool, if you want hipster points you'll get them!
+ Can handle a large library - with caveats
+ Nice user interface with some nice options (in line remotes)
+ Good audio quality with a high volume
+ Good Price
+ Will take large Micro SD Cards
+ No headphones or Micro SD card supplied, not a problem for me though I already have better
than typical throwaway headphones and its unlikely such a device would include more than 8-
16gb of storage. You do get decent freebies in the form of a case and screen protector already
applied - much more useful.

Cons
- Building a music library is a slow process and it seems to have some issue with large library’s
or files with unusual names
- Scrolling through large lists of songs or folders is painful - do not apply if you have one folder
jammed with 30000 mp3s. Device can even be slow to list many folders.
- Battery life is pretty short (10 hours) but the competition is about the same.
-

Review 2
When it works it's fine but I have had countless issues with the device reading all manner of
MicroSD cards. Until Philly can find a way of sorting this out (after all, having subsequently used
the same SD cards in other devices, there's no problem) I'd avoid. Not worth the hassle.

Review 3
First one I got bricked every time you plugged something into the headphone socket. Sent it
back & got a replacement which was working fine until today, no audio coming out at all now.
Device works, will turn on and select a track hit nothing through headphones except some
cracking.

Very disappointed. Thought I'd found a worthy replacement for my iPod but unreliability has
stopped that in its tracks.

Review 4
This is a great little player. I've had it in my car for work everyday for about 3 weeks. Sounds
great...Easy to use even when not looking at the device. I'm very happy with it. Pumps out loud
and clear with large headphones...Something my old iPod could never do. Using a 128g card
with no trouble

Review 5
Absolutely brilliant - was looking for a replacement for the trusty old iPod Classic 80GB and this
was recommended. Sounds immense - the superior sound is as clear as day over the iPod and
iPhone, even on a pair of Apple earbuds on MP3 files. With the Shure's and FLAC and WAV's it
is even better. Plus points - sound (nigh on perfect), build (solid) and interface (surprisingly
easy, even for me who has been wedded to Apple for 10 years). Minuses - no storage (buy your
own Micro SD with your choice of capacity - stores up to 128GB), no headphones and no
interface with a music management program (drag files from File Manager) backlight not the
best but you won't find a better HiRes player for the price. Highly recommended.