Performance Measurement In Organisations

ACFI2208 Performance Measurement assignment 1

Section A

Plummer plc (Plummer) is engaged in the production of Household goods for retailers in the UK.

Plummer Plc

Income Statement for the Year Ended 30 September 2019 and the previous year ended 30 September 2018

	2019£000	2018£000
Revenue	80,000	98,000
Cost of Sales	(51,600)	(62,400)
Gross Profit	28,400	35,600
Administration Expenses	(12,100)	(15,150)
Trading Profit	16,300	20,450
Finance Costs	(1,600)	(2,200)
Profit on Ordinary Activities Before Taxation	14,700	18,250
Taxation on Profit on Ordinary Activities	(2,938)	(3,648)
Profit for the Year	11,762	14,602

Plummer Plc

Balance Sheet as at 30 September 2019 and 30 September 2018

	2019	2018
Non-Current Assets	£000	£000
Intangible Assets	12,450	12,450
Property, Plant and Equipment	77,200	81200
Other Investments	7,800	7,800
	97,450	101,450
Current Assets
Inventories	8,700	7,500
Trade and Other Receivables	17,530	15,500
Cash and Short Term Deposits	3,400	4,650
	29,630	27,650
Total Assets	127,080	129,100
Current Liabilities
Bank Overdrafts	7,600	4,440
Unsecured Bank Loans	4,400	3,500
Trade and Other Payables	8,200	6,300
Current Tax Liability	5,320	4,360
	25,520	18,600
Non-Current Liabilities
Medium Term Bank Loans	12,000	12,000
Finance Leases	4,600	5,400
Provisions	3,000	3,000
	19,600	20,400
Total Liabilities	45,120	39,000
Net Assets	81,960	90,100
Equity
Called Up Share Capital	37,200	37,200
Share Premium	21,200	21,200
Other Reserves	9,400	9,400
Retained Earnings	14,160	22,300
	81,960	90,100

a) Evaluate the Profitability and liquidity position of Plummer for two years.

Your answer should include calculation of ALL relevant ratios and appropriate analysis of these ratios, for each year.

(350 words)

(20 marks)

b) If Plummer’s Market capitalisation is £170,000,000 in 2019 and £176,000,000 in 2018.

Evaluate the risk of bankruptcy for Plummer Plc at present.

Your answer should include an Altman (Z score) calculation for each year.

Your analysis should also highlight three limitations of these results for assessing Plummer’s risk of failure.

(200 words).

(18 marks)

c) International Dimension in Accounting – According to Nobes (1998), accounting practices may differ in different areas or regions.

State and Explain four factors that might make Plummer Plc’s accounting practices, in the UK, differ from that of a similar company in another country.

(200 words)

(12 marks)

(Total 750 words)

(Total 50 marks)

Section B

For Section B answer EITHER Question 1 OR Question 2. DO NOT attempt both questions.

QUESTION 1: Divisional Performance Measurement and Project Appraisal

Question 1 (a) Divisional Performance Measurement

Zeta is a decentralised manufacturing entity, operating within the electronics industry. Zeta prides itself on giving its customers a well-made product, which reflects the latest trends and technologies in the marketplace. Zeta has two divisions, Alpha and Beta.

Return on Investment (ROI) is the primary measure of each division’s performance. Each divisional manager has their annual bonus linked to their division’s ROI. However, the head office is considering the use of Residual Income (RI) as the basis for measuring bonuses in the future.

Division Alpha has been consistently profitable, with gross profit margins remaining at a consistent level for the last three years. The divisional pre-tax operating profit has been steadily growing in the previous three years. However, the division has not undertaken any capital expenditure on new investments in recent years.

The manager of Alpha is now considering investing in a new machine to use in production to replace its old machinery.

Alpha financials

Currently, the net assets of the division are £20m and the division’s profit before tax is £3.8m. Included within Alpha’s profit is an apportionment of head office costs of £0.6m. The division’s cost of capital is 5%.

Proposed investment

The replacement machine will have a net cost of £3m and an expected useful life of ten years. This replacement machine is expected to increase the controllable profits of Alpha by 12%.

Zeta has correctly evaluated the investment using the Net Present Value (NPV) technique. The NPV of the proposed investment is expected to be a positive £1.1m.

YOU ARE REQUIRED TO:

I. Calculate the ROI for Alpha before considering the proposed investment and after the proposed investment. (4 marks)

II. Calculate the RI for Alpha before considering the proposed investment after the proposed investment (4 marks)

III. Based on your calculations discuss the situation and discuss whether the head office should introduce RI for the calculation of divisional manager bonuses.

(250 words) (10 marks)

In recent years, performance measurement has moved towards a more comprehensive view of performance covering financial but also non-financial performance measures.

IV. Explain why non-financial performance indicators are useful in measuring performance. Your answer should suggest examples of non-financial performance indicators Zeta may use.

(125 words) (7 marks)

(Total 375 words)

(Total 25 marks)

Question 1(b) Project Appraisal

WayAway is a small regional airport. The management is deciding how to best utilise surplus land they hold. They have a choice of either project A or B; they cannot do both. Project A involves extending the existing passenger terminal to boost the capacity of the airport. This is expected improve passenger numbers, increasing the net revenue of the airport. Project B involves using the land to construct a storage facility which will lead to large cost savings.

The cash flows for the initial capital expenditure and the cash flows from savings and returns over the three years life of the projects are as follows:

Year	ACash flows£m	BCash flows£m
0	(130)	(13)
1	90	3
2	40	10
3	40	13

WayAway has a cost of capital of 10%.

YOU ARE REQUIRED TO:

I. Calculate the NPV, IRR and Payback Period for both projects A and B. (15 marks)

II. Discuss which of the projects the company should proceed with. Your discussion should include an explanation of each of the methods used and the advantages and disadvantages of each. (10 marks)

(375 words)

(Total 25 marks)

TOTAL QUESTION 1 750 WORDS 50 MARKS

OR

QUESTION 2 Risk and Uncertainty and Transfer Pricing

Question 2 (a) Risk and Uncertainty

Jessie Ltd sells waterproof ponchos, and the level of demand depends upon the weather conditions at a festival they will be trading at in the next few weeks. Jessie Ltd must order the waterproof ponchos before the festival and is considering how many to take to the festival that is running for a week.

The demand for ponchos can vary depending on the weather at the festival as follows:

Good weather conditions (low demand) 35% 200 units

Average weather conditions (average demand) 25% 300 units

Bad weather conditions (high demand) 40% 400 units

Due to supplier issues, Jessie Ltd must choose whether to purchase 200, 300 or 400 units of ponchos for the festival.

The price charged per poncho is £25, and the variable cost is £10 per poncho.

If the demand for ponchos exceeds the number of ponchos taken to the festival, then customers will have to be turned away. Jessie Ltd estimates that in this case, it would cost the company £300 in loss of goodwill, irrespective of the number of customers turned away. Any ponchos not sold at the end of the week will be given to charity at the end of the festival.

YOU ARE REQUIRED TO:

I. Prepare a payoff table showing clearly the profits that would be possible at all combinations of the number of ponchos ordered and the expected demand.

II. Using your payoff table, calculate the number of ponchos Jessie Ltd should take to the festival using the following decision criteria:

· Maximax

· Maximin

· Minimax regret

· Expected value

(13 marks)

III. Explain the concept of each of the four decision criteria in part (II) above. Your answer should link the three attitudes to risk to each decision criteria.

(375 words) (12 marks)

(Total 25 marks)

Question 2(b) Transfer Pricing

EvePaw is a producer of canned carbonated drinks. It has several divisions which supply materials to each other. Division M has offered to supply the Division P with aluminium cans at the transfer price of £0.13 per can. Division M calculates the transfer price based on full cost plus a 30% mark upon cost. Division M can also sell the cans to external customers for £0.14 per can.

The full cost has been estimated as £0.10 per can, 80% of this cost is variable, and the other 20% is fixed. If Division M transferred the materials internally to Division P they would make savings of £0.01 per can of variable packing cost.

Division P uses the cans to produce the carbonated drinks, which it can then sell to external customers.

YOU ARE REQUIRED TO:

I. Evaluate the transfer prices at which Division M should charge division P if the group’s objective is to maximise profit across the whole group for the following three scenarios:

· Division M has an external market for all of the cans it produces at £0.14 per can. (2 marks)

· Division M has the capacity to produce 25 million cans and has an external market for 13 million cans. (5 marks)

· Division P has found an external supplier that will supply as many cans as they require for £0.11 per can. Division M is still charging Division P £0.13 per can. Discuss whether Division P should buy externally and show the range of transfer prices that Division M could sell to Division P at. (6 marks)

The company is considering adopting a policy of allowing the managers of each division to negotiate with each other concerning transfer prices.

II. Discuss the benefits and drawbacks of negotiated transfer prices.

(I and II 250 words)

(6 marks)

III. Examine the international transfer pricing issues that could arise from transfer pricing decisions between international divisions.

(125 words)

(6 marks)

(Total 375 words)

(Total 25 marks)

TOTAL QUESTION 2 750 WORDS 50 MARKS

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