Cost Volume Profit Analysis and Investment Evaluation in the Retail Industry

Question 1: Cost Volume Profit Analysis in the Retail Industry

Question 1 Yousef Ltd manufactures and sells iron gates. The Executive Manager is reviewing the budget for the best-selling gates for next year because the company is studying how to maximise operational performance. The original budget provides that the estimated sales  This document is for Coventry University students for their own use in completing their assessed work for this module and should not be passed to third parties or posted on any website. Any infringements of this rule should be reported to  Assignment Brief Template Page 2 of 9 will be 80,000 units. With an average price of £50, the total sales will thus be £4,000,000. At this level of sales, the variable costs would be £1,600,000, while fixed costs would be £1,400,000. Eyad Alsaid, the Sales Manager suggests that if the price of the gates is lowered to £40, the sales volume is estimated to maximise by 50%. Naglaa Hassan, Marketing Manager, has a different point of view. She assumes that the best way to maximise the company's sales is to increase the marketing campaign in all of its current markets. She believes that a 20% increase in sales will require an additional marketing campaign at a cost of £200,000. The Board Director requested some figures and financial advice to help determine which of the three strategies would be adopted

: 1. Stay with the original budget

2. Adopt Eyad’s

3. Adopt Naglaa’s (Each alternative should be evaluated separately). Required: You are required for each of the three strategies to

: a) Using the Cost Volume Profit model, calculate:

 (i) The profit  

(ii) The breakeven point in £’s and units

(iii) The margin of safety  

(iv) The sales level that would be required if the company wished to make a profit of £1,400,000

b) Based on the calculated results for each strategy in part (a) above, assess and advise the Board Director on the strategy that they should adopt and the reasons behind it.

c) Critically assess the four basic assumptions of the Cost Volume Profit model used in part (a), with a special emphasis on the retail industry. This document is for Coventry University students for their own use in completing their assessed work for this module and should not be passed to third parties or posted on any website. Any infringements of this rule should be reported to Assignment Brief Template Page 3 of 9

d) Explain different methods of cost classification, and Detail how classifying cost in different methods helps to make management decisions in the retail sector (Support your answer with relevant examples).   . Question 2

Alsaid Ltd is a large retail company investing in a new project that contains the following information: Initial Investment £4,500,000 Life of Project 8 years Estimated annual cash inflow £800,000 per annum Residual Value £200,000 The company's capital cost is 7%, and the hurdle rate is used 9% when evaluating capital projects. Required:

a) Determine the financial viability of the investment by calculating the project’s: ? Payback ? Accounting Rate of Return ? Net Present Value (Using the cost of capital) ? Net Present Value (Using the hurdle rate)

b) Explain in detail the results of your calculations in part (a) above. Make sure that you specify whether the project should be executed. Justify your answer. (Candidates are encouraged to research what constitutes a reasonable return in today’s business environment). 

c) Critically assess the use of the above models in the retail industry given any unique industrial factors such as an enterprise size This document is for Coventry University students for their own use in completing their assessed work for this module and should not be passed to third parties or posted on any website.