Analysis of pricing policy and investment appraisal: A case of Bryson Limited

As a financial analyst for a management consultancy, your firm has recently tasked you to advise Bryson Limited, a manufacturer in the United Kingdom which manufactures and sells hairdryer. Bryson Limited is currently operating at maximum capacity, producing and selling 30 000 units of its product each year.

The details for the current activity level is listed below:

The finance director of Bryson Limited needs your advice on their selling price policy. The sales price of $60 has been derived as above from a cost-plus mark-up pricing policy. The price was viewed as satisfactory, since current demand permits full capacity operation.

You have been asked to analyse the effect on costs and profit of an increase in the selling price.

The sales department has provided you with the following projected sales volumes, at their respective alternative selling price:

You have collected the following information after analysing the effect that changes in production volume have on cost behaviour

• Direct material: cost per unit will increase by 20% for all units produced in the year if activity decreases to 15 000 units and below per annum, due to loss of bulk discount.

• Direct labour: savings in bonus payments will reduce labour costs by $3 for all units produced in the year if activity decreases to 15 000 units and below per annum.

• Variable production expenses: no changes in the unit cost.

• Fixed production expenses: if annual production volume was below 20 000 units, then a machine rental cost of $50 000 per annum could be saved.

• Sales commission: to be maintained at rate of 10% of selling price.

• Fixed selling expense: a reduction in the part time sales force would result in a $4 000 per annum savings if annual sales volume falls below 25 000 units.

• Administration and General expenses: to remain unaltered within the range of projected sales volume.

• Inventories: the company has no stock keeping policy.

Using Marginal Accounting approach,

The finance director of Bryson Limited has recently proposed to the board with an expansion plan to produce hair straightener. This will involve the purchase of new machinery; the initial outlay will be $4 million for the purchase of production machines. This outlay will be financed from the company’s retained earnings, which could have been invested in a 5 years corporate bonds with a yield to maturity of 10%. An additional $200 000 installation is required to integrate the new machines to existing ones in the production line. The existing machines were acquired at a cost of $5 million five years ago.

Although the cash flows arising from this new product line is not easy to estimate, you have projected three sets of cash flow scenarios – pessimistic, probable, and optimistic. The director wish to appraise all three scenarios in order to assess the impact of each.

There is no scrap value for the machines at the end of useful life.

The company has a 10% cost of capital.

(a) Calculate each scenario’s Payback Period. (6 marks)

Calculate each project’s Net Present Value (NPV). BRIEFLYdiscuss the result under the

different scenarios. Your answer has to be in 1page only with line spacing 1.5. Citation and referencing is required. (15 marks)

Calculate each project’s Profitability Index (PI). BRIEFLYdiscuss the result under the

different scenarios (8 marks)

Critically evaluate the strengths and weaknesses of both the Net Present Value and

Payback Period methods as a basis of evaluation for this project. Provide support for

your answer. Your answer has to be in 1page only with line spacing 1.5. Citation and referencing is required. (10 marks)

• The proposed new production comprises different classification of cashflows. Identify one for each of the following;

• Incremental cash flow

• Sunk cost

• Opportunity cost

The finance director of Bryson Limited believes that adopting a culture of responsible investment helps deliver performance and creates value to owners and other stakeholders. Some of these benefits may not be integrated into conventional investment appraisal method, such as the Net Present Value approach applied to this new production proposal.

You have been tasked to incorporate potential impact of this project on the Environmental, Social and Governance (ESG) aspects of the business, alongside the traditional financial measures applied in this investment appraisal.

Explain responsible investment, and discuss how environmental, social and governance (ESG) factors are addressed, in association with the proposed new production project. Provide support for your answer. Your answer has to be in 1page only with line spacing 1.5. Citation and referencing is required.

Critically discuss THREE non-quantifiablepotential benefits that could result from Bryson

 Ltd’s ESG responsible investment in part (a). Provide support for your answer. Your answer has to be in 1page only with line spacing 1.5. Citation and referencing is required.