Question 1 - Sustainability
Premier Investments' Board Policies include statements concerning Business Sustainability and Ethical Sourcing.
Prepare a report which identifies and summarises the key environmental and social concerns relating to Premier Investments' operations. As part of your report, suggest three potential objectives relating Premier Investments' commitment to business sustainability and three potential objectives relating to the firm's commitment towards ethical sourcing. For each of these objectives, identify at least two measures that could be used as part of the firm's management accounting system to measure the firm's progress towards achieving these objectives (the template below should be used for this task). This table should be presented within the body of your report and your recommendations should be thoroughly discussed.
This report must be supported by reference to a range of relevant academic and other research sources.
Question 2 -Transfer Pricing
Peter Alexander sells a range of different hand creams. The following presents hypothetical information concerning the production of these hand creams. These hand creams are produced by Fragrance Ltd and shea butter is a key ingredient of the hand creams. The shea butter is produced by the Shea Butter Department who extracts and refines the oil from roasted shea nuts. The shea butter is provided to the Mixing Department who combines the shea butter with the other ingredients. The Shea Butter Department can sell the finished refined shea butter to external customers. The market price is $40.00 per kilogram. The following table summarises the cost to the Shea Butter Department to produce each kilogram of shea butter.
Shea Butter (1 kg)
Direct Materials $10.00
Direct Labour $5.00
Variable Overhead $3.00
Fixed Overhead $1.00
Required:
1. The manager of the Mixing Department argues that their department should not have to pay anything for the shea butter they receive internally from the Shea Butter Department. They argue that there is no point because it is an internal transaction and putting a price on the transfers decreases their department's profitability. Discuss whether you agree with this statement.
2. Assuming the transfer price for shea butter sales between the Shea Butter Department and Mixing Department was established through negotiation between managers, identify the likely range of possible transfer prices. Is this method of establishing a transfer price appropriate? What other techniques are available? Overall, which is the most appropriate for this situation and why?
3. Calculate the transfer price for shea butter sales between the Shea Butter Department and the Mixing Department if cost-plus pricing, based on absorption cost with a 30% markup, is used.
4. Illustrate how the application of the general transfer price rule for shea butter sales between the Shea Butter Department and the Mixing Department would result in different prices depending on whether the Shea Butter Department had spare capacity or otherwise.
Ensure that your answers for the above are discussed and supported by relevant calculations/workings.
Question 3 - Capital Investment Analysis
The following discussion presents hypothetical information relating to a new proposal designed to improve the profitability of Just Jeans. The management team of Just Jeans have just received a new proposal from one of the firm's marketing managers. The proposal outlines a new investment to create a Custom Finish Lab. Through the lab, online customers will be able to select an option to personalise their jeans in a range of finishes including blast wash, scrape wash, faded wash, and ripped and scuffed.
It will cost $1,650,000 to establish the lab. This cost will be depreciated on the straight-line basis over the 7 year life of the lab.
Customers will be charged $35.00 to use the custom service. In the first year of the lab's opening, 35,000 customers are expected to use the custom service. It is expected that usage rates of the service will increase by 10% p.a. over the life of the lab (the price will not change and will remain at $35.00 per customer over the life of the lab). The custom lab is expected to increase jean sales by $550,000 in the first year of operation. This will increase by 12% p.a. over the life of the lab. On average, cost of sales for these jean sales is expected to be 60% for every sales dollar.
The cost to run the lab will include staff costs ($900,000 p.a.), materials costs ($210,000 p.a.), marketing costs ($46,000 p.a.), and other costs ($25,000 p.a.). These costs will increase by 6% p.a. over the life of the project.
The firm's tax rate is 30%. The firm has a required rate of return of 16% on all investments.
Required:
1. In relation to the above proposal, calculate the:
1. Annual after tax cash flows and annual after tax profit.
2. Payback period.
3. Net present value and internal rate of return.
4. Accounting rate of return.
2. Provide an overview of the key environmental and social factors that Just Jeans should consider in evaluating the proposal.
3. Based on an assessment of financial considerations and other factors, provide a recommendation as to whether Just Jeans should go ahead with the proposal. How sensitive are your recommendations to changes in projections of the financial impact of the new capital investment?
Ensure that your answers for the above are discussed and supported by relevant calculations/workings.