Financial Decision Making

Assignment Task
Question 1
Required (LO3)
Cost-volume-profit analysis
For many years, Hobson Ltd have manufactured and sold a beauty product named
Simple Select. This product’s retail selling price is £26. 31,700 Simple Select’s are
sold per year.
The marginal production cost of a Simple Select is £20. Hobson Ltd’s annual fixed
costs are £169,800.
With increasing competition in the market for beauty products, the sales director has
proposed a new strategy. This would involve the discontinuation of the Simple Select
and replacement with a new product, the Deluxe Select. This new product would
have a marginal production cost of £30.
Market research suggests that, if priced at £50 per unit, 12,000 Deluxe Selects could
be sold per annum. Actual sales volume could be 10% higher or lower than this
forecast. The shift to the Deluxe Select would result in additional fixed costs of
£50,000.
(a) Evaluate the current and proposed trading positions. Explain, using appropriate
calculations, whether Hobson Ltd should discontinue the Simple Select and
replace it with the Deluxe Select.
(15 marks)
(b) Critically evaluate the use of the CVP technique in financial decision making.
(10 marks)
(Total marks for Question 1 is 25)
Question 2
Required (LO2)
Capital investment appraisal
Learoyd plc is considering an investment in one of three projects. Each project
requires an investment of £240,000 and will have a life of three years.
The projects will generate the following net cash flows:
Project 1: £90,000 per year
Project 2: £100,000 per year
Project 3: £95,000 per year
Depreciation of £80,000 per year will be charged.
Page 4 of 9
(a) Calculate the accounting rate of return and payback periods of each of the
three projects.
(6 marks)
(b) Critically evaluate the approaches to investment appraisal used in part (a). As
part of your critical evaluation, identify what additional information might be
used to improve the approach to investment appraisal. Explain how this
additional information could improve the approach to investment appraisal.
(15 marks)
(c) Explain whether or not the company should proceed with the project. Illustrate
your explanation using the results of your analysis in part (a).
(4 marks)
(Total marks for Question 2 is 25)
Question 3
Required (LO4)
Financial statement analysis
Greggs plc is a leading firm in bakery and food retailing sector in the UK. A link to
Greggs plc’s recent annual report is provided below (click and then download the
document ‘Annual Report 2016’).
https://corporate.greggs.co.uk/investors/results-centre
With reference to appropriate financial ratios and an analysis of the information in
the annual report, analyse and assess the financial performance and position of
Greggs plc.
Your analysis should be undertaken from the perspective of a potential investor and
should include a consideration of:
• Profitability
• Liquidity
• Financing structure
(Total marks for Question 3 is 35)
Page 5 of 9
Question 4
Required (LO1)
Budgeting
“During recent years the business environment has become far more
complex, dynamic, turbulent and uncertain. Although organisations need to
be as adaptive to change as possible, the rigidity of the budget serves only
to stifle innovation and responsiveness to change. The need to comply with a
fixed plan, and to manage with resources which may have been allocated
more than one year earlier, act as impediments that prevent managers from
responding quickly to changes in today’s business environment” (Johnson,
2005)
Johnson, S. (2005) Beyond Budgeting, ACCA Student Accountant, May.
(a) Critically evaluate the view that the traditional approach to budgeting stifles
innovation and responsiveness to change.