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Analysis of Investment Decisions, Management of Working Capital & Risk Assessment, and Budgetary Con

Part 1 - Analysis Of Investment Decisions

  1. Analysis of investment decisions (LO2)
  2. Management of working capital & risk assessment (LO1 & 2)
  3. Budgetary control (LO1 & 2)

All three parts should be completed and each part counts for 30% of total marks, with up to a further 10% to be allocated for presentation and Harvard referencing.

Wellfoods Catering is a company specialising in providing catering in offices, factories and public facilities.  One of its main clients is East General Hospital, a large publicly funded hospital serving East City and the surrounding region.  Wellfoods has a contract for a minimum of 10 more years to operate the catering at the hospital under which it provides 3 meals a day for each patient.  The operation is very labour-intensive since, when Wellfoods took over the patient meals operation, it carried on operating in exactly the same way as when it was managed by the hospital.   Wellfoods is paid a fixed amount per patient per day by the hospital.

The Boards of Wellfoods and its parent company (Tuck Inn Inc) are very dissatisfied with the financial performance of the hospital operation and are considering ways of restoring profitability.  The holding company has asked Wellfoods to consider using another member of the group, The Cook-Chill Company, to supply it with precooked meals, which it already does for many offices, factories and other sites around the country. The Cook-Chill Company will cook the food in its own premises, chill it and deliver it to the hospital where it will be reheated using specialised new equipment.  Wellfoods will have to buy this equipment and will run the reheating and distribution operation at the hospital.

You have been asked to analyse and report on this proposal.  You have been told  that the contract with Cook-Chill will be for 10 years and that the price will be $10.00 per  patient per day.  In order to operate the system, Wellfoods will have to buy new equipment at a total cost (including installation and commissioning) of $1.5m; the existing equipment will be scrapped, and it is anticipated that this will be sold for $100,000.  The new equipment will have a life of 10 years and will be depreciated at $150,000 per annum.  Only 25 staff will be needed in the new operation and they will require training before using the new equipment costing an average of $3000 each.  50 more staff will be redeployed to Cook-Chill (at the same salaries) but will have to be retrained at an average cost of $1000; Wellfoods will bear the cost of this. The remaining staff will be made redundant and will have to be paid off at an average cost of $5000. Other operating costs will be halved as a result of these changes.

Times are hard throughout the Tuck Inn group and so it requires all new investments to pay back within 3 years

Write a report on the proposal for presentation to the Board of Wellfoods (note that, even though it is a report, you must show all your workings).  The report should cover the following:

(a) Financial analysis to include the upfront investment cost of going ahead with the Cook-Chill proposal, the annual saving of cash running costs with the Cook-Chill option compared to the existing situation, and the payback period.

(b) Your overall assessment of the proposal, including any questions or issues that need to be investigated before a final decision on the proposal can be made   

The Magnificence Corporation has a current annual sales turnover of $120,000 and does all of its business on credit. The existing credit policy is to give customers 30 days in which to pay and nearly all customers avail of this facility.  Bad debts currently stand at 5% of turnover.

In order to increase sales, Magnificence Corporation is considering a more liberal credit policy.  Market research (which was commissioned at a one-off cost of $20,000) has indicated that, as the collection period is lengthened, sales revenue would be increased by the following amounts:-

The selling price of the only product manufactured by Magnificence is $10.00 with

variable unit costs (materials & labour) of $7.00; average total unit costs have been $8.50 in the past year.  Magnificence Corporation has an effective working business year of 360 days and a current cost of capital of 15%.

  1. Assuming that the changes to credit policy would have the expected effect, assess the impact on business profitability of each of the policy options
  2. Set out your views of the risks involved in implementing an extension in credit terms
  3. Write a brief report for management stating, with reasons, whether the proposal should be adopted and, if so which option should be chosen.
  1. Describe and critically assess the main stages in the budgetary process
  2. Explain the importance of budgetary control processes to the effective management of a modern hospital
  3. Critically evaluate the benefits and drawbacks of participatory budgeting (including the issue of goal congruence) in an effective budgetary control process.

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