ACC70304 Cost-Volume-Profit (CVP) Analysis Assignment 3: ABC Pte Ltd Case Study for Strategic Decision Making

Case Study

You are the Chief Financial Officer of ABC Pte Ltd, and are given the following information:

ABC Pte Ltd manufactures flower vases. Although the maximum production capacity is 50,000 pieces, the current production level is 35,000 vases due to low sales level. Additional information on cost and revenue pertaining to the production and sales of 35,000 vases are given as follows:

PART A

Question 1.A

Work Required:
What is the contribution margin per unit in $ and contribution margin ratio of the vases?

Your answer should include detailed calculation of contribution margin per unit in $ and contribution margin ratio.

Type your calculation and answer here.

Question 2.A

Work Required:
Calculate the break-even point in $ and in units for ABC Pte Ltd.

Your answer should include detailed calculation of break-even point in $ and in units

Type your calculation and answer here.

Question 3.A

In order to fill up the capacity, the Chief Marketing Officer proposed to reduce price by 10%, and couple with aggressive advertising which will increase fixed costs by $10,000, the sales will improve by 30%.

Work Required:
Should the company adopt this sales strategy? Support your answer with appropriate calculations.

Your answer should include detailed calculation of revised profits, and comparison of revised profits with current profits. You should also give a recommendation with reasons.

Type your calculation and answer here.

Question 4.A

The company has decided not to adopt the above sales strategy in view of the disruption to the market price.

A customer has offered to buy 15,000 vases at a price of $25 per unit. Extra packaging costs for the order would be $1 per unit, while fixed overheads will not increase due to the availability of capacity.

Work Required:
Should ABC Pte Ltd accept this order? Support your answer with computations.

Your answer should include detailed calculation of calculation and comparison of the profits of accepting the order versus rejecting the order. Then give a recommendation with reasons.

Type your calculation and answer here.

Question 5.A

Rather than accepting the special order of 15,000 vases, ABC Pte Ltd may choose to reduce its capacity to 35,000 units permanently, and the fixed overheads can be reduced by 30%. Unutilised facilities can be rented out at $25,000 per month. The additional packaging cost of $1 per unit still applies.

Work Required:
Should the company accept the special order, or should it reject the order and reduce its capacity permanently?

Your answer should include detailed calculation and comparison of the profits of accepting the order versus rejecting the order and reduce the capacity permanently. Then give a recommendation with reasons

Type your calculation and answer here.

Question 6.A

Work Required:
f) Discuss the qualitative factors that the management of ABC Pte Ltd should consider before making a decision whether to accept the special order or to reduce its capacity permanently.

Your answer should include qualitative factors that the management should consider before making decision

Type your answer here (indicative word count approximately: 300 words)

General Instruction: To complete all tasks in Part B, you will need to review the case study below.

Case Study

ABC Pte Ltd is currently considering investing in a machine costing $200,000 to automate the production line for vases. Using capital asset pricing model (CAPM) and weighted average cost of capital (WACC), you have determined that the required return by the shareholders is 12%. The production department has estimated the following cash savings per year due to the automation of production line.

At the end of year 4, it is expected that the machine will be scrapped for $20,000.

PART B

Question 1.B

Work Required:
Assuming no tax impact on this investment, should the company invest in this machine? Why?

Your answer should include detailed calculation of net present value of this investment. Then give a recommendation with reasons

Type your calculation and answer here here (indicative word count approximately: 300 words)

PART C

Referencing is needed for Question 1.C. For more details on referencing, please refer to the platform:

Question 1.C

As the Chief Financial Officer of ABC Pte Ltd, you are well aware that capital asset pricing model (CAPM) is widely used for estimating expected returns for assets given the risk of those assets and cost of capital. It is simple and allows for easy comparisons of investment alternatives. However, it is not without its shortcomings.

Work Required:

Advise the Board of Directors regarding the shortcomings of CAPM.

Your answer should include detailed discussions of various shortcomings of CAPM.