Part 1 - Case study - Fernhill
You are to compile a report for the manager of Fernhill, considering ALL the options available to Fernhill. You should fully consider the relevent and irrelevent costs. and the relevent time frame appropriate to the costs. In reaching your recommendations, you should also consider other factors of a financial and non financial nature. You should also note what additional information you would have needed and what assumptions you had to make.
Marking will be as follows.
A very good (B grade) report will present a clear analysis,summary and recommendations, base on clearly and accurately computed data using the power of well constructed spreadsheets. You will recognise types of cost and deal with them clearly and appropriately. Your report will be professionally presented and will ingrate other non-financial factors, any assumptions made and will appropriately consider the strengths and weaknesses of outcomes.
A bare pass (D grade) will use all of the data to given a usable outcome but will not recognise types of cost. Spreadsheets may be poorly constructed and unclear, with problems of inaccuracy and clarity. The report may be poorly presented with some understanding of other factors but not related to the case.
The weighting is as follows;
Recognition of types of costs 15%
Accuracy, clarity of computations 15%
Consideration of other factors 15%
Assumptions and consideration of information needs 15%
Analysis, summary and recommendations. 20%
Style, approach and presentation 20%
Case Study - Fernhill
You have an appointment as a consultant with Fernhill Ltd. The company manufactures in Scotland but has depots in Carlisle, Derby and Bristol. You are presented with the following budget for the year ended 31 December 2010.
Fernhill Ltd. Profit Statement £000
Depot Carlisle Derby Bristol
Sales 1100 440 660
Cost of Sales 575 230 345
Gross Profit 525 210 315
Warehousing costs
Freight 77 33 52.8
Supplies 44 17.6 26.4
Wages 74 29.6 44.4
195 80.2 123.6
Selling costs
Salaries 30
Commissions 22 52.8
Expenses 23
Agents' Commission 22
Sales Office & Management 24.5 9.8 14.7
Advertising 95 38 57
194.5 69.8 124.5
Administration 120 48 72
Total Cost 509.5 198 320.1
Net Profit/(Loss) 15.5 12 (5.1)
Other Information
Unit values Unit sales Sold (000's);
Sales price Variable cost Carlisle Derby Bristol
Alba £12 £5 33 13.2 19.8
Lomond £10 £4.50 44 17.6 26.4
Ness £8 £4 33 13.2 19.8
Carlisle Derby Bristol
Warehousing - Cost per unit - £
Supplies 0.4 0.4 0.4
Wages 0.65 0.45 0.45
Freight 0.7 0.75 0.8
Fixed Production Overhead is included in cost of sales and is estimated to be £160000.
Selling Costs
Carlisle - 6 salespersons earn £5000 each plus 2% commission on sales. Their expenses are £2000 per annum each plus 1% of sales.
Derby - Agents are used, and receive a commission of 5% of sales. Agents sell other products provided they are not in competition.
Bristol - salespersons are paid solely by commission - 8% of sales.
Sales office costs are; Carlisle £12000; Derby £4000; Bristol £8000. The remainder is the company sales manager's salary.
Local advertising costs are Carlisle £40000; Derby £5000; Bristol £15000. The remainder is national advertising.
Administration costs are £140000 incurred by company headquarters in Scotland, the rest being variable with order quantity achieved by depots. These orders are budgeted to be 32000 for Carlisle; 6000 for Derby; and 12000 for Bristol.
You are to compile a report to the marketing director which will contain the following;
1 A full analysis of company and depot profitability laid out in such a way as to clearly identify controllability of cost, at each depot. This should be prepared on a spreadsheet, and should also facilitate the following "what if" calculations.
2 An evaluation of the desirability of closing the Bristol depot.
3 The extra sales that Derby would need to generate to justify extra additional local advertising of ?15000 and to provide extra profit of ?10000. Average value of order remains constant.
4 The extra benefit or otherwise of changing the Derby agents for three salespersons paid on the Carlisle basis. This would result in 10% more orders but 15% more sales.
5 A change for the Bristol salespersons to the Carlisle system. The change would require a once only compensation payment of £5000 to each of them. It is unclear how turnover would react, so three situations are to be investigated;
Sales at 95% budget (=orders at 90%)
Sales at 100% budget (=orders at 103%)
Sales at 105% budget (=orders at 110%)
6 In addition to part one of the requirement, you should make use of spreadsheeting and other computing facilities where appropriate. Extra marks will be awarded for their innovative use.
7You should also state any assumptions that you make and non inancial or qualitative factors that should be taken into account.