Task 1. Provisions and accruals (pass/fail: worth 2.5%)
i) Provision
During 2031, two of your robots have malfunctioned injuring their owners. Each of the injured parties is seeking $200,000 of compensation.
In response to the claim for compensation you have received the following advice from your legal counsel:
1. For the first claim, there is a 90% probability that the business will be found liable if the case goes to court.
Your legal advisers believe that if you seek an out-of-court settlement it is highly probable that an agreement could be reached for W$50,000.
2. For the second claim, the advisers believe there is only a 10% probability that the business will be found liable as there is evidence that the owner of the robot carried out some ‘do-it-yourself’ modifications to the robot which are contrary to the ‘User Instructions’ which were provided with the product.
You have been advised that you should not seek an out of court settlement for this claim.
Your legal adviser will charge you W$5,000 per case. This will be paid upon resolution of the cases, which is expected to be some time next year.
A further $10,000 of legal costs are expected to be incurred next year defending the business against the second claim described above.
What provision should be recorded in the financial statements at 31 st December 2031 in relation to these claims?
Task 2. Relevant Cost Analysis of a Special New Order (graded: worth 45%)
The Board of Directors has asked you to evaluate an opportunity to export robots to a potential new overseas retail customer, ‘Big Store Inc.’. ‘Big Store Inc.’ would like to buy 100 robots from your company in 2032 at a special retail price (i.e. before retailer’s discount) of W$4,000 per robot. Further information is provided below:
1. The robots for this contract with ‘Big Store Inc.’ will require some modifications from the standard robot which your company produces and this will involve additional fixed production overheads of W$15,000 to cover the cost of hiring the special equipment required for this purpose.
2. The contract will require some ‘special component’ materials in addition to the standard components. The company has a stock of 1,000 units of these special components in inventory which were purchased some years ago but which have been regarded as surplus to requirements and have been fully ‘written off’ in the accounts. These ‘special components’ originally cost W$600 per unit and they currently cost W$800 per unit to purchase. If not used for this project, the inventory of ‘special components’ will be sold for sales proceeds of W$300 per unit. One ‘special component’ will be required per robot. 100*300 if they use 1000 components
3. Also, an extra W$5,000 of staff training will be required to ensure that production staff are able to use the special equipment required for this contract.
4. If the contract goes ahead, this will require one of your existing production staff to oversee the project as a project manager on a full time basis. This means an additional production employee will need to be recruited to cover the project manager’s current duties. 10000, the acuter labour cost
5. The project will require the use of some of the company’s factory space which is currently surplus to requirements and would otherwise be sub-let, which would bring in income of W$30,000 in 2032.
6. For costing special projects such as this, your company has in the past applied a standard allocation of W$1,200 per unit in order to cover the company’s existing direct labour and production overhead costs. A recent investigation into the nature of the company’s existing direct labour and production overhead costs has revealed that these costs should be regarded as fixed costs. Apart from those costs specifically required for this contract (as referred to above), no extra direct labour and production overheads will be required providing your company produces no more than 4,000 robots per annum. 0
7. One of your company’s sales staff estimates she spent 25% of her time in 2031 working on this project which included travelling for meetings with ‘Big Store Inc.’ executives. The costs she incurred on travel and subsistence in relation to these meetings amounted to W$5,000 which is included in ‘Overheads’ in 2031. 0
Required:
Prepare a report for the Board of Directors in which you advise whether the above order
should be accepted. You should specifically address the following requirements:
a) Explain the principles of relevant cost analysis.
b) Calculate the total relevant cost and revenues of this order.
c) Explain the reasoning for your treatment of each item referred to in the information above as either ‘relevant’ or ‘irrelevant’ in your analysis as appropriate. Make clear any assumptions made.
d) Discuss three further considerations which you believe should be taken into account before a final decision is made.
e) Advise management on whether the order should be accepted.
Word limit: 1,200 words (excluding tables and appendices)
Task 4. a) Financial Analysis (graded: worth 45%)
The Board of directors has asked you to perform a review of the financial performance and financial position of the business based on the company’s 2033 financial statements and key financial ratios, and using any other available information which you consider to be relevant.
Required:
Prepare a report for the Board of Directors in which you analyse the company’s financial performance and financial position and which specifically addresses the company’s profitability, efficiency, liquidity and stability.
Word limit: 1,200 words (excluding tables and appendices)
