Accounting
Management Decision Making
Group Presentation Assignment (10%)
Due Date: 4th May 2025 11.59pm (NZ time)
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Fruity Pop Limited produces organic juice bottles made from locally sourced ingredients. The juice bottles are sold in 250ml glass bottles in supermarkets and organic stores throughout New Zealand.
The company has been very successful producing its products and would like to manufacture a greater variety of juice bottles, including 600ml and 1.5 L bottles.
As the financial manager in the Finance Department of Fruity Pop Limited you are required to present an argument to the Board of Directors that either supports OR does not support expanding their product range in the future.
Use all the information provided to support your argument.
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Fruity Pop Limited has provided you with the following information related to the current sale of the juice bottles: As at 31 December 2024
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Information
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Original
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New
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Annual Fixed Costs
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$500,000
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Variable Cost per energy drink
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$1.80
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Selling Price per energy drink
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$4.00
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Contribution margin per juice bottles
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$2.20
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Relevant Range
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0 - 500,000 juice bottles
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Breakeven point in units
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227,273 juice bottles
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Profit at 460,000 juice bottles
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$512,000
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Margin of Safety in units
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222,727 juice bottles
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Margin of Safety percentage
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49.49%
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Fruity Pop Limited is looking at expanding their operations to produce a wider range of juice bottles with different flavours. The company has conducted market research that indicates there is demand for these products.
To achieve this goal, Fruity Pop Limited would need to purchase new machinery for the factory.
Current situation:
1. The current machinery is seven years old and has a remaining useful economic life of two year.
2. The machinery is becoming less reliable and sometimes breaks down causing delays to the production schedule for the juice bottles.
3. Labelling of products using the existing machines will not meet new safety standards requirements.
4. The existing machinery produces 460,000 juice bottles per year.
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5. The current machine cannot produce juice bottles with different flavours or 600ml bottles.
6. Relevant range is currently 500,000 juice bottles.
7. The business is repaying an existing loan (3.5%) of $120,000. It pays $6,000 per month, plus interest. The loan will be fully repaid by the end of December 2024.
8. Bank Balance as at 31 December 2024 is $45,000 in funds.
9. The secured limit of the overdraft is $50,000.
New situation - purchase new machinery:
1. Additional staff would need to be employed and trained.
2. The new machine can produce three different flavours. They are also capable of producing both 600ml and 1.5L juice bottles.
3. The new machine can produce labels that will be up to date with the new safety standards requirements.
4. The economic life of the new machinery is estimated to be eight years.
5. The cost of buying the new machinery would be $390,000. This could be
financed using a loan at a fixed interest rate of (4.5%) per annum. The loan will be repaid over a period of 7 years. The first year of the loan would require
interest only to be paid.
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The new information below relates to the decision to increase the capacity of Fruity Pop Limited by buying the new machinery:
• Annual fixed costs would increase by $180,000.
• Variable costs per energy drink would increase by 7%.
• Selling price per energy drink would increase by $1.60.
• Relevant range would increase to 800,000 juice bottles annually.
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Use ALL the information provided, to answer the seven questions below. Compare your new answers to the initial answers where appropriate.
Aim to do each question on a separate slide.
QUESTIONS:
1. Using the definition of a strategic decision, explain why Fruity Pop Limited ’s decision to purchase the new machinery for the factory, qualifies as a strategic decision. (4 marks)
2. Fruity Pop Limited aims to produce 800,000 juice bottles.
i) Using the definition of relevant range, explain the concept of relevant range and its effect on Fruity Pop Limited. (2 marks)
ii) Explain if it is possible for Fruity Pop Limited to sell 800,000 juice bottles before the expansion plan and after the expansion plan. (2 marks)
3.
i) Give an example of a likely variable cost for Fruity Pop Limited.
ii) Using the definition of variable cost, explain why your example is a variable cost for Fruity Pop Limited. (3 marks)
4.
i) Calculate the new sales price, new variable cost, and new fixed cost.
ii) Calculate the new break-even point in units. Show the formula and working.
iii) Using the definition, explain the meaning of the break-even point using your calculation from ii). (8 marks)
5. Calculate the expected annual profit from the sale of 800,000 juice bottles.
Show the formula and all working. (3 marks)
6.
i) Calculate the margin of safety in units and percentage if 800,000 juice bottles are sold. Show the formula and all working. (6 marks)
ii) Using the definition of margin of safety, explain what margin of safety percentage means for Fruity Pop Limited. (2 marks)
7. Recommend whether Fruity Pop Limited should or should not upgrade the factory machinery.
Fully explain FIVE pieces of information that supports your decision.
At least ONE piece of information should be classified as financial information.
Compare your calculations and use the information given in the assignment to answer the questions.
You must:
7.1 Make a decision - expand or not expand. (1 mark)
7.2
(a) State FIVE pieces of information that the Board of Directors should
consider when making the decision to upgrade the factory machinery. Clearly identify each of the five pieces of information as either:
i. Financial information, or
ii. Non-Financial information. (5 marks)
(b) Explain how each piece of information identified in 7.2 (a) influences your decision. (10 marks)
Note:
• Dollar amounts must be rounded to TWO decimal places. (1 mark)
• Percentages must be rounded to TWO decimal places. (1 mark)
• Units are to be rounded up to the next whole number. (1 mark)
• Appropriate units must be used correctly. (1 mark)