Greengrass Ltd. is a private UK company formed in 2015 by Sarah Scott. The company manufactures a high-tech robotic lawnmower that is intuitive and is powered and charged by solar panels. It is ideal for medium sized gardens.
The company prides itself on product innovation, quality manufacturing processes and the premium nature of their mowers that enjoy a world-wide reputation with the environmentally conscious gardener.
The business manufactures one model of lawnmower but this can be modified to include a pest-repellent facility that deters cats, dogs and moles as well as garden vermin. A truly innovative feature!
Due to the high-end nature of the products the lawnmower currently retails at a price of £1,200 but the pest repellent modification enables a price of £1,800 to be charged. Approximately 35% of customers buy the product with the pest repellent feature. The variable costs of production for the unmodified mower are about 60% of its selling price whereas for a mower with pest repellent features the variable cost falls to approximately 50% of selling price.
The robotic mower market has a number of key players and although Greengrass products are seen as premium products in the market there are some competitors who adopt different pricing strategies. The competitor’s mowers contain advanced features and innovations and are generally seen as better value for money although the competitor models do not yet have the pest repellent facility and some of the intuitive features which have been copyrighted. In addition, the mowers are sold in customisable colours which is another prime selling feature.
The factory works a 40 hour week for 48 weeks per year and employs 25 people who are directly involved in the mower manufacture process on 5 identical production lines. The company prides itself on its machine utilization efficiency but as the majority of the process Is labour driven (welding, assembly, painting), overheads are absorbed on a labour hour basis. It has been estimated that a mower can go through the manufacturing process from start to finish in approximately 1.2 hours although there may be some possible delays due to bottlenecks and non-value added activities being incurred in the production process along the way. The business estimates that idle time is approximately 10% of the available time.
Statements of profit or loss for the year ended 31st January
Sales revenue 49,640 45,351
Cost of sales 33,749 31,814
Gross profit 15,891 13,537
Administration expenses 3,750 3,612
Operating profit 12,141 9,925
Interest 67 19
Profit before tax 12,074 9,906
Tax 2,505 2,050
Profit after tax 9,569 7,856
From the statements above it can be seen that sales revenue has increased over the last year and is expected to continue to grow by approximately 6% per year in the future. Approximately 30% of the cost of sales are related to fixed production overheads while the remaining 70% are classed as variable and directly related to output.
The current factory site exists in a small city in the south of England and is limited in terms of space and transport connections. The company knows that it may have difficulty in increasing capacity at the current site above 40,000 mowers per year. The directors of the company are proud of their growth and wish to maintain it. They recognise that measuring performance is critical and so are considering the ways that they can improve their performance measurement systems to ensure that they stay ahead in a fast moving industry where competition is fierce.
Produce a business report in good style, that reports on the following issues:-
Calculations on the expected level of sales that you believe need to be made to break even. Back this up with further calculations that show risk in terms of margin of safety. Ensure that you justify any calculation assumptions that you make and comment on the results obtained. (Note, that there are several ways that you can calculate break even and you can use a number of these on the case above.)
Discuss the issues that may arise in using the current absorption costing system based on labour hours. Discuss the appropriateness of changing to an activity-based costing (ABC) system for product costing and pricing for the business.
Provide recommendations as to the adequacy of the current prices that the company adopts in relation to the prices charged by its competitors. Suggest if the price should be adjusted in the light of current market conditions.
Discuss some of the alternative measures of performance that could be incorporated in the financial performance measures that the business uses at the moment.
Total 100 marks