BE167-7-SP-2023

BE167-7-SP TEST ANSWER SHEET

(Please use as many sheets as you need to)

Please enter your Student Registration number here: MUKAR56100

TYPE THE QUESTION NUMBER AND YOUR ANSWERS HERE

Q2a.

Based on the above calculations, McLaney should aim to produce and sell at least 75,000
watches and generate £7,499,250 in sales revenue in 2023 in order to break even. This means
that if they exceed this threshold, they will make a profit. However, if they sell less than
75,000 watches or generate less than £7,499,250 in sales revenue, the company will make a
loss.

Q2b.
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So the margin of safety for McLaney is 25,000 watches or £2,500,650 in sales revenue. This
means that McLaney can afford to sell 25,000 watches or generate £2,500,650 in sales
revenue less than they expect to and still break even. This can be considered as a buffer, the
company can sell less than their expected sales and still make a profit.

Q2c.

Therefore, McLaney needs to produce and sell 96,252 watches in order to earn a profit of
£500,000 in 2023.

Q2d.

First, we will calculate the break-even point under the new conditions:
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We can see that, with the new proposed fixed costs, McLaney will be able to generate a profit
of £498,880. This is less than the desired profit of £500,000. Therefore, the company may not
want to accept this proposal as the costs associated with the new proposal outweigh the
benefits.

Q2e.
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We can see that McLaney would make a higher net profit of £230,000 by accepting the one-
time offer from the University of Singapore as compared to the regular profit of £239,900.
Therefore, it would be beneficial for McLaney to accept this offer. Additionally, the company
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should consider the long-term benefits of this offer such as potential future orders from the
university or positive word-of-mouth advertising to its target market.

Q3 a.i

Q3. ii.

To calculate the payback period for the Colchester project:

Q3. iii.

For the Colchester project:

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Based on the above calculations, the Southend project has a higher NPV and a shorter
payback period than the Colchester project. Therefore, the University of Essex should invest
in the Southend project.

Q3b.

Based on the calculations for the Colchester and Southend projects, it appears that the
Southend project may be the more profitable option. The Accounting Rate of Return (ARR)
for Southend is 21.25% while the ARR for Colchester is only 18.6%. The payback period for
Southend is also shorter at 2.5 years compared to 3 years for Colchester. Additionally, the
Net Present Value (NPV) for Southend at a 12% cost of capital is £270,939.55 while the NPV
for Colchester is £169,902.58.

However, it is important to consider the current political crisis and rise in living costs when
making a decision. The Southend project has higher cash flows in the early years but the
expected profits in the later years are lower. Additionally, the Colchester project has more
consistent cash flows and expected profits over the 5-year period.
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It is recommended that the Vice Chancellor carefully consider these factors when making a
decision. It may be more beneficial to invest in the Colchester project despite its slightly
lower ARR and NPV, as the more consistent expected profits and cash flows may provide a
more stable source of income for the University in the long-term. Additionally, the Vice
Chancellor should also consider any potential risks and uncertainty related to the political
crisis and the rise in living costs and how it might impact the project before making the final
decision.

Q5.

As the Chancellor of the Exchequer of the UK government, I would likely adopt a

combination of both incremental and zero-based budgeting methods.

Incremental budgeting, which is the process of building a budget based on the previous year's
budget, is useful for maintaining consistency and predictability in government spending. It
allows for the continuation of important programs and services, and can be a good starting
point for the budgeting process.

However, zero-based budgeting, which is the process of starting from a "zero base" and
building the budget up from there, can be useful for identifying and eliminating inefficiencies
in government spending. It requires departments to justify all of their spending, rather than
just their increases, which can lead to a more efficient and effective allocation of resources.

An example of this approach could be the UK government's Comprehensive Spending

Review (CSR) process, which occurs every five years and uses a zero-based budgeting
approach to review all government spending and identify areas for savings.

In conclusion, by combining the incremental budgeting and zero-based budgeting method,

the government can achieve a balance between continuity and efficiency. This can help the
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government to maintain important programs and services while also identifying and
eliminating inefficiencies in spending, ultimately leading to better use of public resources and
more responsible fiscal management.

Q6.

The statement that "accounting is a practice that underlies and enables organizational action
and much of human activity" is accurate in that accounting plays a fundamental role in the
functioning and decision making of both organizations and individuals. Accounting provides
a framework for understanding and measuring financial information, which is essential for
guiding and influencing behavior in organizations and society.

One example of how accounting impacts organizational behavior is through cost behaviors.
Understanding the behavior of costs, such as fixed and variable costs, is essential for making
informed decisions about production and pricing. For example, a company that has a high
proportion of fixed costs may need to maintain a certain level of production in order to cover
those costs, whereas a company with mostly variable costs may have more flexibility in
adjusting production levels. This understanding of cost behaviors is important for companies
to make informed decisions about production and pricing, as well as for investors to evaluate
the company's financial health.

Another example is the time value of money, which is the concept that money today is worth
more than the same amount of money in the future. This principle is used in budgeting and
capital investment decisions. For instance, a company may use the time value of money to
determine the present value of future cash flows when making investment decisions. The
company will consider the time value of money when evaluating whether an investment is
profitable or not by comparing the present value of future cash flows to the investment's cost.
In budgeting, understanding time value of money is crucial for decisions like when to take on
debt or when to invest in a new project, as taking on debt or investing at the wrong time could
increase the cost of the debt or project.
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Finally, capital investment decisions are another area where accounting plays a crucial role.
Capital investment decisions involve the allocation of resources to long-term projects such as
the construction of a new factory or the purchase of new equipment. These decisions can
have a significant impact on an organization's financial health and future prospects.
Accounting principles such as net present value and internal rate of return are used to
evaluate the profitability of these investment decisions. This is important to ensure that the
organization is making sound financial decisions that will benefit the company in the long
term.

In conclusion, the statement that "accounting is a practice that underlies and enables
organizational action and much of human activity" is accurate. Accounting principles and
practices play a fundamental role in guiding and influencing the behavior of people in
organizations and society, impacting our lives as well as organizational and social
functioning and development. The examples of cost behaviors, time value of money,
budgeting, and capital investment decisions illustrate how accounting principles and practices
impact decision making in organizations and ultimately shape the overall financial health of
the organization.