Coursework 2 Assignment Brief
Assignment Title: Case Study - Individual report
Submission Date and Time: Week 12 – Tuesday 11 April 2023, 5pm
Expected Return of Feedback and Marked Work: 14 days from submission
Assignment Weighting: 10 Credits
Word Count: 2,500
View guidance on word limits for written assignments here
Learning Outcomes Assessed by this Assignment: ML02 – ML05
ML02: Evaluate management accounting decision-making techniques and apply them in
relevant internal and external situations.
ML03: Synthesise diverse forms of economic information from both the environment and the
organisation to evaluate and propose solutions to business problems.
ML04: Critically appraise the need for financial information and adaption of techniques to aid
management decision making in contemporary business environment.
ML05: Discuss critically the criteria used to evaluate investments or capital projects and how
firms source funding for the same.
Assignment Detail:
CASE STUDY: Stones Limited
Stones Limited is a UK subsidiary of Collins Group whose head office is in Brazil. The company has
been operating in the UK for the past 15 years, providing a range of services to SME’s, namely
investment property funds. Over the past two decades, Stones has been a profit-making firm,
retaining its previous clients, in addition to capturing an increasing share of the market. However,
the finance director of Stones has recently got in touch with your professional consulting firm and
has engaged your firm to provide them with an explanation of the cash flow problem that Stones
Limited had been facing. The company is also dependent on the parent based in Brazil for and
when required.
Following recent meetings of the senior managements in London and Brazil, it has been agreed
that Stones Limited should do expand the business further and raise the required capital in the
UK, or perhaps in Europe, so as not to depend so much on cash coming from the parent company
all the time. Consequently, the management of Stones is considering the followings:
New information system
The current system that Stones uses to provide specialised services to its clients’ needs to be
updated. The company is considering an investment in a more modern system and one possible
project has been proposed as outlined below.
Star package
Draft figures
Year
New system’s costs
Cumulative working
capital
Sales Revenue
Less:
Segment 1
Segment 2
Overheads
£'000
0
12,500
850
1
2
3
4
5
550
1,500
750
5,200
250
6,800
650
5,500
3,600
(550)
(1,200)
(200)
(620)
(1,600)
(250)
(980)
(1,700)
(360)
(1,000)
(2,100)
(340)
(1,200)
(1,900)
(310)
All of the above estimates have been prepared in terms of present-day cost and prices. Assume
that cash flows arise at the end of each period. In addition
•
Revenues are expected to rise by 4% in price terms per year from year 1 (start of year 2).
•
Overheads and working capital are expected to rise by 4% per year from year 1 (start of
year 1)
•
The working capital is cumulative and will be recouped at the end of year 5.
•
The cost of Segment 1 and Segment 2 are expected to rise in line with inflation of 4% per
year from the beginning of year 1.
•
The cost of Digital Experts (DE), who have come from the Brazil have not been taken into
consideration in the forecast and are as follows:
Digital Expert 1 (DE1): Will be paid £120 per hour and expected number of hours for DE1 are
1,200hrs. The rate paid is expected to rise in line with inflation at 4% per year from year 2 and the
number of hours is expected to reduce by 3% per year, every year from year 2 onwards.
Digital Expert 2 (DE 2): Will be paid £110 per hour and expected number of hours for DE2 are
1,400hrs. The rate paid is expected to go up in line with inflation at 4% per year from year 2 and
the number of hours is expected to reduce by 4% per year, every year from year 2 onwards.
If Stones Limited invests in Star Package, then the discount rate that would be required to assess
the NPV would be 8%. The table above shows the estimated outgoings and inflows for the project.
Central Hub
The Sales Manager of Stones has just informed your company that they plan to open a centre in
the UK, Central Hub, with a possible start date of business on 1 March 2023. You have also been
informed that to start with, the company will only sell 2 new types of service packages, that of
Standard Level (SL) and the Premier Level (PL). The intentions here is to test the market and check
whether they can achieve break-even in the same period. A recent market research has suggested
that these two are the most popular systems and will be offered at £400 for SL and £500 for PL.
You have also been provided with the following information regarding the costs and estimated
sales for the period mentioned above.
Stones Limited intends to put in £7,000 as start-up capital and plan to sell a total of 1,500
(combined) of SL and PL for the same period. They are not sure which of the two types of service
packages will produce the most profits for Stones.
Total budgeted sales for each month are as follows: March 500, April 500 and May 500, of which
40% of each month will be for SL. You will be required to assess the best product combination of
sales for the period.
To help with the setup of the new Centre, the company has just concluded a deal with one of the
high street banks to get a loan of £35,000 on the 1st of March 2023. The interest on this loan will
be paid every month. The company will be required to make 12 equal payments to repay the loan
starting end of April 2023.
Financial information
As mentioned above the company plans to sell a total of 1,500 units of the service packages
between 1 March and May 2023. The fixed costs for the period are as below:
Rent
Cleaning
Loan Interest
General insurance
Light and heating
Local authority charges
Fixed cost specific to each
service package
Marketing
Admin costs
Staff Salary
£ 17,000
£ 1,600
£ 3,200
£ 7,600
£ 4,100
£ 4,250
SL
20,000
£ 9,000
£ 15,000
PL
£ 21,000
£ 10,000
£ 18,000
From their costs estimates, the variable costs of the services are £140 for the SL and £200 for the
PL. The fixed costs are for the whole period, so they are not affected by the level of service.
However, the variable costs will increase with services output (ie sales output multiplied with
variable cost per service package).
Revenue from the sale of SL and PL will be on the basis of 40% cash in the same month, and the
remaining 60% credit to be paid the following month.
Requirement:
You will be required to write a management report to the management of Stones Ltd directors,
discussing the following issues:
•
Provide an explanation on the different sources of funding the company can have and
their advantages and disadvantages. You should make recommendations as to how the
company can manage the same to help in the planned expansion program.
•
Analyse the investment proposal by using NPV and provide recommendations. You should
also briefly comment on other investment proposal techniques that Stones Limited may
use, and the limitations of using those techniques.
•
The use of management tools such as Breakeven analysis and Budgets.
•
A computation of your breakeven analysis and the cash budget for the first 3 months.
•
An evaluation of the estimated company performance or position during the same period.
•
A detailed Literature Review of the tools you have used such as breakeven analysis and
budgets and their importance to business.
•
Other issues for management to consider that you think are vital for them to survive and
make a profit.
Assignment Guidelines:
The rubric by which your report will be assessed is posted separately. It is important that prior to
you submitting your work, you read this and objectively assess your response against the rubric.
This will ensure that you have done enough to attain the marks you wish to achieve.
Layout
Your work should be word processed in accordance with the following:
• Font style, Arial, font size 12
• 1.5 line spacing.
• The page orientation should be ‘portrait’
• Margins on both sides of the page should be no less than 2.5 cm
• Pages should be numbered.