Calculating costs and benefits

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Reference no: EM13136715 , Length: 3590 Words

Task 1: Individual Assignment - Problem Solving Assignment 
Top Juices Pty Ltd Case Study 
You have been operating a single "mango surprise" juice product business since you established a 
fruit juice manufacturing business in 2007. Your product has been sold to high quality restaurants. 
You are able to supply your product to your customers all year round, which gives you a competitive 
advantage. Gaining market share has required an extensive amount of personal selling by you and 
your staff visiting restaurants at times convenient to them; usually late afternoons including 
Saturdays. 
Long term contacts with suppliers from fruit cooperatives throughout Australia (see Table 1) have 
been necessary to secure a supply of mango puree and pulp. This diversity of supply source has 
provided you with an extended ripe mango season. However, it also has been necessary to have 
refrigeration units to store the puree and pulp so that Top Juices achieves its "all year round" 
strategy of "Mango surprise" juices for restaurants. 
For 5 years, the sales growth has been good but sales growth has been limited in the past 2 years. 
Market research suggests that Top Juices will need to offer a wider range of juices to achieve 
significant growth. Your investigations have found suppliers of other fruits and vegetables in 
Victoria, New South Wales and Tasmania to support this expanded product range goal. However, 
the expanded range of product will require two additional refrigerated units to ensure that Top 
Juices has a year round support of its range of juice products for its customers. 
The introduction of more juice products will require Top Juices to identify and pay for new 
distribution outlets to accommodate restaurant market growth because you and your staff do not 
have the time now to service the existing customers as well as undertake a personal selling approach 
to new customers. Also, there is a limited supply of mango puree and pulp, due to its seasonal 
availability, and you do not want to reduce your current capacity for supplying your core business 
product ("mango surprise") to your existing customers. You therefore decide to consider 
introducing one additional product, Pineapple and Mango juice, at this point in time. 
Another issue concerning you is the current cost of electricity. The purchase of additional 
refrigerated units to house the extra Pineapple juice concentration and the running costs of these 
new units will increase Top Juices costs. 
To achieve these goals, you will need to apply for a business loan. Your lender has asked for a 
detailed business plan to support your annual master budget and capital investment budget when 
you submit your loan application. 
The following information in Table 2 and Table 3 has been gathered after conducting some market 
research and discussion with potential suppliers. The purchasing and running costs (cash outflows) 
for two new alternative refrigeration units are provided in Table 6. The cash inflows during the 
period are based on forecast sales of the Pineapple and Mango juice. 
Table 1: AUSTRALIAN MANGO PRODUCTION AREAS AND HARVEST WINDOWS 
Location 
Harvest Window 
Darwin Late August - September 
Kununurra Late September - October 
Katherine Mid - September - November 
Burdekin / Bowen November - December 
Mareeba / Dimbulah December - February 
Carnarvon December - February 
Bundaberg January - February 
Northern NSW Late January - March 
Gingin (WA) Late January - March 
Source: Williams,R. et al.2012. Industry Situation Statement - Mango. http://www.hin.com.au/resources/industry-situation-statement-mango 
accessed 25 February 2014 on page 5 in Australian Mango Industry Strategic Investment Plan 2014 /15 - 2018/19, published June 2013 by 
Australian Mango Industry Association (AMIA) and Horticulture Australia 
Page 3 of 9 
Task for Assessment Task 1: Individual Assignment - Problem Solving Assignment 
Top Juices Pty Ltd Case Study (continued) 
You need to know the following information so you can make decisions about the future direction of 
your business. You also need to provide the following information as part of your business plan to 
support a loan application. 
1. Information needed to be included in Top Juices' Financial plan: 
a. What is the breakeven point in sales units and dollars for our current single product 
"mango surprise" juice? 
b. What costs are relevant for us to consider for the introduction of the second 
product, Pineapple and Mango, option? 
c. Is the production of the second product viable? 
d. What would be the new breakeven point for each product? 
e. What are the estimated monthly figures for each operating budget and each 
financial budget within my master budget for the period April 2014 to March 2015? 
f. Which one of the two types of refrigeration units should be purchased to enable 
adequate refrigeration of the extra juice concentrate? 
You have identified two types of refrigeration units with different life expectancy 
and efficiency ratings. You plan to use a NPV discounted cash flow analysis in your 
capital long term budget (using 7% cost of capital) to provide the information you 
need to make your decision about the optional purchases. You should explain why 
you would use a NPV analysis and not another analysis method. 
2. Issues needed to be considered for Top Juices' Operating Plan: How should you 
a. alter your relationships you have with your existing suppliers and customers?, 
b. develop your relationships with your new suppliers and customers?, 
c. develop, service, protect and support your products?, 
d. alter your plant layout and production process to accommodate the housing of the 
new refrigeration machinery?, and, 
e. organise a second production run for the second product? 
3. Environmental and social indicators measurements need to be considered for use in Top 
Juices' Environmental Management Plan. How and which of the following measures should 
you use to reduce operating costs (eco-efficiency) while maintaining your social 
responsibility: 
a. Input measures such as material, energy, water? 
b. Output measures such as emissions, waste? 
c. Product responsibility (product safety) measures?, and 
d. Labour practices and decent work (employee safety) measures? 
Page 4 of 9 
Task for Assessment Task 1: Individual Assignment - Problem Solving Assignment 
Top Juices Pty Ltd Case Study Prepare the following calculations and analyses for inclusion in the appropriate 
section of your Business Plan (as a summary in a tabular format) as well as in detail as Appendices. 
1. What is your Contribution Margin per unit for the Mango Surprise single product line? 
2. Prepare the following quarterly budgets for the 12-month period from 1 April 2014 to 31 March 2015 
based on the information in Tables 2, 3, 4, and 5 (ignoring the information for requirement 4). 
a. Sales dollars budget, 
b. Purchases budget [due to the seasonal purchasing pattern of the juice puree and pulp 
materials as provided in Table 1, you need to make the following assumptions. First, assume 
you purchase the fruit materials as set in Table 4. Second, assume you purchase sugar and 
bottles each quarter in the same quantity as the sales for the quarter. Third, assume you pay 
all materials in the month the purchases occur in; just-in-time purchasing (JIT)], 
c. Labour dollar budget, 
d. Selling expense budget, 
e. Administration fixed costs budget, 
f. Cash Budget based on you receiving 90% cash from sales in the month you sell the fruit juice 
and the other 10% in the month after the sale of the fruit juice. The bank account balance on 
31 March 2014 was $25,000, 
g. Projected Income Statement for the year ended 31 March 2015, and 
h. Projected Balance Sheet as at 31 March 2015 
The beginning balances for assets, liabilities, and equity are provided in Table 4 (ending balances in the 
Balance sheet as at 31 March 2014). 
3. Identify the relevant costs in Tables 2 and 3 for producing the second product (Pineapple and Mango). 
Do the incremental increases exceed the incremental costs for adding an additional product? (assume 
the higher or highest relevant costs if there should be two or more products). Use your calculations to 
support your answer in the appropriate section of your Business Plan. 
4. Calculate the weighted average contribution margin per unit if your relevant benefits/costs calculations 
(identified in requirement 3) support considering the proposed two product-mix strategy. Also, use the 
weighted average contribution margin per unit to calculate the expected profit based on the budgeted 
sales for each product provided in Table 2 
5. Using NPV analysis and the information in Table 6, calculate (using a 7% cost of capital) the discounted 
net cash flow for the two options being considered. Use your calculations to support your analyses and 
your long term decision between two options and be included in the appropriate section of your 
Business Plan; to purchase one of the two refrigeration units. In your Business Plan, you should justify 
your decision to use the NVP analysis by identifying one major limitation with the payback period and 
one major limitation with the internal rate of return (IRR)) alternative approaches. 
6. Appendix A provides photographs of the factory, fittings, the positioning of existing and proposed new 
equipments including the current equipment and light fittings. The factory has 14 fluorescent lighting 
tubes throughout the factory, which runs for 14 hours every day for operational and security purposes 
each day 7 days a week for 52 weeks. The refrigeration units run 24 hours each day 7 days a week for 
52 weeks. The factory does not have solar panels on the roof. You consult your electricity account and 
find there is a daily usage of 36 kilowatts per day. Investigate (a) the cost of installing Mono Crystalline 
solar panels on the roof of the factory, (b) the cost of installing LED lighting to replace the 14 fluorescent 
lighting tubes, and (c) the expected electricity savings benefit based on the usage mentioned above and 
the electricity rate for the local provider and installation cost analysis to support your answer in the 
appropriate section of your Business Plan. 
Page 5 of 9 
Table 2 
Litre Bottles of Juice Drink 
Sales Budget for Quarters Mango Surprise Pineapple and Mango 
01 Apr-14 to 30 Jun-14 18,000 14,000 
01 Jul-14 to 30 Sep-14 12,000 8,000 
01 Oct-14 to 30 Dec-14 35,000 20,000 
01 Jan-15 to 31 Mar-15 40,000 28,000 
Total Sales 105,000 70,000 
Table 3 
Materials Quantity of input per bottle Material Cost per bottle 
Mango Surprise 
Pineapple and 
Mango 
Mango Surprise 
Pineapple and 
Mango 
Mango 35.00% 17.00% $0.72 $0.35 
Pineapple 0.00% 18.00% $0.00 $0.01 
Other juices 65.00% 65.00% $0.06 $0.06 
Sugar 
18 20 $0.01 $0.01 
Bottle 1 1 $0.75 $0.75 
Total costs $1.54 $1.18 
Manufacturing Variable Costs Mango Surprise 
Pineapple and 
Mango 
Labour Cost per 1 litre bottle of juice $0.55 $0.55 
Operating Variable Costs per 1 litre bottle of juice Mango Surprise 
Pineapple and 
Mango 
Selling expenses 
Distribution agent's fee per bottle $0.00 $0.60 
Delivery to customers per bottle $0.10 $0.10 
Total variable selling cost per 1 litre bottle of juice $0.10 $0.70 
Fixed or Committed Costs Quarterly Annualised 
Annual Fixed Administration expenses (e.g., salaries) $54,000 $216,000 
Interest paid on a 6% Interest only Bank Loan 
$525 $2,100 
Factory leasing costs (paid monthly) 
$7,161 $28,644 
Motor vehicle leasing costs (paid monthly) 
$5,865 $23,460 
Laptop Depreciation expense 
$300 $1,200 
Depreciation on existing Refrigeration equipment 
$1,000 $4,000 
Annual Telephone landline (paid monthly) 
$210 $840 
Broadband Internet service provider fee (paid monthly) 
$240 $960 
Business Insurance (paid in April) 
$675 $2,700 
Market selling price per bottle Mango Surprise 
Pineapple and 
Mango 
$5.00 $4.00 
Page 6 of 9 
Table 4 
Seasonal Purchasing of Juice Puree and Pulp Pattern as a Percentage Forecast Annual Sales 
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total 
1 Apr-14 to 30 
Jun-14 
01 Jul-14 to 30 
Sep-14 
01 Oct-14 to 30 
Dec-14 
01 Jan-15 to 31 
Mar-15 
0.00% 10.00% 40.00% 50.00% 100.00% 
Table 5 Balance Sheet as at 1 April 2014 
Assets 
Current Assets 
Cash in Bank $25,000 
Inventory of Juice puree and pulp and bottles $184,431 
Accounts Receivable $17,500 
Non-Current Assets 
Refrigeration equipment $40,000 
Less Accumulated depreciation -$24,000 
Laptop and MF Printer/Scanner $3,600 
Less Accumulated depreciation -$1,200 
Total Assets $245,331 
Liabilities 
Current Liabilities $0 
Non-Current Liabilities 
Long Term Bank Loans $35,000 
Equity 
Issued Shares (150,000 @ $1 each share) $150,000 
Retained Profit $60,331 
Total Liabilities and Equity $245,331 
Page 7 of 9 
Table 6 Two options for new additional refrigeration units 
Projected cash flows for two refrigeration units 
Cash flows 
Two Cold rooms, Blast Chillers, and Shelving provided by 
James Cold Rooms, Moruya, NSW (Option 1) 
Two Cold rooms, Blast Chillers, and Shelving Industry 
Electronics Technology Co., Ltd, Shaanxi, China 
(Option 2) 
Capacity to use of Pineapple concentrate Cash inflow Cash Outflow Cash inflow Cash Outflow 
30 April 2014 refrigeration equipment purchase ($80,000) ($68,000) 
April 2014 - March 2015 
$280,000 ($209,955) $280,000 ($209,955) 
April 2015 - March 2016 
$294,000 ($217,304) $294,000 ($217,304) 
April 2016 - March 2017 
$301,000 ($222,552) $301,000 ($222,552) 
April 2017 - March 2018 
$308,000 ($227,801) $308,000 ($227,801) 
April 2018 - March 2019 
$315,000 ($233,050) $315,000 ($233,050) 
Disposal benefits* (costs) ($2,000) 
April 2019 - March 2020 
$322,000 ($238,299) 
Disposal benefits* (costs) 
$8,000 
You receive advise from an electrician that the refrigeration units provided by James Cold Rooms (option 1) has an expected file of 8 years but an effective life of 6 
years for maximum efficiency whereas the electrician believes that the refrigeration units provided by Industry Electronics Technology (option 2) has an expected file 
of 5 years. The electrician also estimates that the residual (disposal sales value net of selling costs) value for option 1 equipment is $8,000 due to some useful life for 
other refrigeration uses to third parties but the disposal costs of option 2 equipment is $2,000 (the cost of disposal of the equipment because there is no market for 
the equipment. 
The cash flow information reflects the years that each option would be retained and used by Top Juices for your long-term capital investment decision based on the 
electrician's advice. 
* the expected life of the equipment and residual value has been created for the specific purpose of this exercise only and should not be considered as an example for academic purposes. 
Page 8 of 9 
Criteria & Marking: 
The assignment covers all material relating to the following topics 
- Topic A: The Financial Accounting and Management Accounting Systems for a Sustainable Business 
- Topic B: Business Accounting and CVP Planning for a Sustainable Business 
- Topic C: Budgeting for a Sustainable Business 
- Topic D: Short term Decision Making and Long-term Decision Making for a Sustainable Business 
- Topic E: Environmental and Social Management Control, Marginal Abatement Cost, & Performance Measurement 
- Topic F: Business plan and Strategic report 
The task will assess your understanding of budget preparation, CVP analysis, accounting and budgeting concepts and your 
practical application, calculations needed for short term tactical decisions, as well as long term strategic and sustainabili ty project 
decisions, and your practical application within a performance measurement system and your understanding of business plan 
development. The business plan should include a discussion about the suggested performance measures. The assignment 
calculations may be completed using basic functions within an Excel spreadsheet software. However, the spreadsheet should be 
converted to a Word document as an appendix to business plan. A list of assessment criteria are provided below. Assignment 1 
relates to learning objectives 2, 6, 7, and 8. 
Task for Assessment Task 1: Individual Assignment - Problem Solving Assignment 
Content Possible 
Mark 
The case will be assessed on the following criteria: 
a) Collecting relevant information and calculating CVP analyses (new breakeven point) using the 
understanding of key concepts (provide a calculation summary in your business plan and 
details of your calculations in an appendix) 15 
b) Collecting relevant information and calculating budgets using the understanding of key 
concepts (provide a calculation summary in your business plan and details of your 
calculations in an appendix) 20 
c) Demonstrating an understanding the key concepts which underpin the cash budget and 
projected income statement and interpreting the information 5 
d) Collecting and using relevant information for adding another product using the understanding 
of key concepts (provide a calculation summary in your business plan and details of your 
calculations in an appendix) 10 
e) Calculating the weighted average contribution margin per unit 
10 
f) Calculating the expected profit based on the budgeted sales for each product and support the 
decision whether or not to adopt two product mix production stragey. 

g) Calculating the NPV analysis and use the analysis to support your decision between the two 
options 15 
h) Identifying and discussing one limitation for each of the payback period and internal rate of 
return (IRR) approaches 5 
i) Calculating costs and benefits of replacing the lighting and installing the solar panels and 
using the information as components of the Environmental Management Plan in your 
business plan and measures to monitor efficiencies. 5 
j) Using deductive and inductive reasoning to develop discussions, to support your loan 
application in the conclusions of your business plan 5 
k) Providing a professional presentation (e.g., proof-reading and using the appropriate format 
and presentation). The business plan should be prepared without any comments about how 
you achieved your calculations (e.g., do not write I divided x by y) but it should focus on the 
interpretation of the information and calculations to support your discussion. The 
information in your conclusions must be derived from your discussion in your analysis (body 
of the business plan). 5 

Page 9 of 9 
Appendix A - Photographs of the factory, fittings, the positioning of existing and proposed new equipments 
External view of the factory Office and front freezer room Proposed Type of additional refrigeration unit Proposed Shelving 
Entrance to main preparation area Main preparation area 
Possible LED lighting systems to consider 
Proposed area for two 
refrigeration units along 
the far wall of this room

Reference no: EM13136715

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