Finance for Decision Making Assignment Sample

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Introduction

Financial decision making is an important factor of business management. In this report, the Pedaltrain Ltd. is a UK-based company that manufactures high-tech exercise cycles. This report also analyzes the break-even points and margin of safety estimations, and the appropriateness of the absorption costing system and activity-based system. This report also analyzes the incremental budgeting process for the company and its drawbacks in financial performance. For students seeking cheap assignment help, understanding these financial concepts can be crucial for their academic and professional success.

a) The calculation of break-even points and margin of safety

Break even sales
As per the use of contributions margin per unit and the total fixed cost helps to compute the breakeven sales for each product
Unmodified cycle
Particulars	Unit
Break even sales ( 11510750/£675 per unit )	17053
Modified Cycles
Break even sales ( 11510750/£1000) per Unit	11511
Combined break-even sales
It has been computed for the sales mix assumptions and presenting the combined break-even sales
Unmodified cycles ( 55% of 17053)	9379
Modified cycles (45% of 11511)	5180
Total break-even sales	14559

Table 1: Break-even sales

The estimation of break-even analysis for the company recommended that the company is required to sell arounds 14559 units to break even.

Computations of margin of safety (Can be computed on the difference between the expected sales and the overall break-even sales)
Sales in expected value (Sales revenue for 2022)	71340000
Break even sales (14559 units *£1500 selling price in average )	21838500
margin of safety ( 71340000-21828000)	49501500
as a percentage of expected sales and the margin of safety
£49501500/£71340000	69.39%

Table 2: Margin of safety

Finance for Decision Making Assignment Sample

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John Taylor 7 Years | MBA

The analysis of margin of safety suggests that the business has effective buffer against the fluctuations of sales, with a value 69.4%, it indicates that the business can handle 69.4% reduction in sales before encountering financial losses. In addition, the above analysis estimates that the pricing and sales mix remain constant, and the fixed cost of the business is not modified. These factors can fluctuate and impacting the margin of safety and break-even point.

Recommendations

The business can consider analyzing the new markers or improving product offerings to decrease dependence on one product line. They can also regularly monitor pricing and sales mix to confirm they are stay in the prediction line. By refining and reviewing regularly its margin of safety and break-even analysis, Pedaltrain can better guide the fluctuations of the market and make good decisions to develop the profitability and growth.

b) The appropriateness of the absorption costing system to an activity-based system to manage the overhead cost of the business

Absorption costing is a favorable process to comprehend the full cost of generating a product. On the other hand, activity-based costing can deliver a more proper cost of production. As per the opinions of TUOVILA, (2024), the “Absorption Costing System” refers to the managerial accounting technique to capture all of the costs related to the manufacturing of a specific product. On the other hand, “Activity-based Costing (ABC) suggests a particular costing method that assigns overhead as well as indirect costs to related services and products (KENTON, 2024). However, changing from the “Absorption Costing System” to the ABC can facilitate Pedaltrain Ltd. in this regard. For instance, certain complexities in the production system of Pedaltrain Ltd are often witnessed like assembly, welding, and painting. However, changing to ABC can facilitate the company to identify as well as assign the overhead costs to these particular activities. It is evident that the ABC costs more influentially manage the overhead costs concerning the divested product range. Absorption costing helps the business to confirm that its products are priced to protect the production costs and be competitive in the market. ABC uses numerous cost drivers to allocate costs to products, distribution channels, and consumers. It also helps businesses to determine activities that don't add value and decrease inefficiencies. Absorption costing is used to comprehend the full cost of generating a service or product. Absorption costing can help companies top comprehend their profitability also if products are not sold during the same period of manufacturing.

On the other hand, ABC can enhance costs based on the activities that produce them instead of on volume measures. Absorption costing is needed by the complies and IRS with “generally accepted accounting principles (GAAP)”. It also spreads fixed costs over the output units which can support the fluctuations of net income. ABC helps companies trace costs to typical activities, like depreciation. Absorption costing assigns costs to separate units, while ABC concentrates on company movements. ABC can enhance absorption costing by accounting for the real overheads finished in production. Absorption costing has been used when a business needs to comprehend the total cost of a service or product. On the other hand, ABC costing has been used when a business needs to determine the cost intensive activities. The drawback of absorption costing is it can skew profitability and foes not support to enhance operations and compares the product liens. The drawback of ABC costing is it can costly and complex to implement.

c) How incremental budgeting process can be improved in Pedaltrain to benefit employee motivation

At Pedaltrain Ltd. the current incremental budgeting process includes setting a percentage decrease in budget costs from the last year to represent the cost savings. While this process may deliver cost control sense, it has many limitations that can adversely affect employee motivation and make slack in the budget. 

Slack in the budget: Workers may pad their budgets to be responsible for possible uncertainties and cause budget slack.

Inappropriate cost analysis: Only decreasing cost by a percentage not managing the waste or underlying inefficiencies.

Poor involvement of employees: The top-down method of budgeting where targets are imposed on workers without their input can cause poor motivation and ownership.

It also includes enhancement in the incremental budgeting process

Zero-based budgeting: Adjust a zero-based budgeting process where each cost must be approved and justified. It can help to decrease inefficiencies and waste (Kazar et al. 2023).

Participative budgeting: It includes workers in the budgeting methods to enhance motivation and ownership. It can gain with the help of surveys, workshops, and regular meetings.

Rolling budgets: The company can execute rolling budgets which includes regularly analyzing and updating budgets to understand the changes in the environment of the business (Wilson, 2021).

Regular reviews of budget: Regularly amazing the budgets to determine the inefficiency and slack areas, as well as make adjustments as required.

The advantages of an improved budgeting process are that it can help the company to create more efficient and effective budgeting process that reduces the budget slack and improves employee motivation.

Enhanced employee motivation: The involvement of employees in the process of budgeting can cause to raise ownership and motivation.

Enhanced performance: Performance-based approaches can encourage workers to gain the target budgets and enhance overall performance.

Enhanced cost control: The approach of zero-based budgeting can support to decrease unnecessary costs and enhance cost control.

d) Suggestions for adjustment of the price of the cycles in the current market conditions and product cost estimations

Evaluating the estimation of product cost and market conditions, the pricing strategy has been evaluated for Pedaltrain’s cycles.

The evaluation of market condition include economic conditions, consumer demand and competition. The economy is stable, and there is no effective changes in the spending habits of consumers. The demand of market is increasing, with an estimated 5% yearly growth in sales revenue. The market of sanitary cycle has essential players who are providing advanced innovations and features.

The estimation of product cost includes fixed costs and variable costs

The production of fixed costs for overheads are 25% of the entire cost of sales. On the other hand, the variable costs for the unmodified cycle around 55% of the selling price. The variable cost for modifier cycle are 50% of the selling price.

The evaluation of pricing strategy

Current pricing of the business includes price for unmodified cycle is £1,500 and the price of modified cycle is £2,000.

The value-based pricing evaluating the unique quality, features and reputation of the brand. The cycles of the business are positioned as high-quality products, and the current pricing appears to reflect the value proposition.

The cost-plus pricing for unmodified cycle is £1,500 *1.82

=£2,730

The cost-plus pricing for modified cycle is £2,000 * 2

=£4,000

Recommendations

The company can evaluate premium pricing for limited-edition and customized cycles to0 generate the unique features and reputations of the business. They can regularly optimize the fixed and variable costs to confirm they stay with anticipations (Gutiérrez, 2021). If costs raise, evaluating adjusting costs to handle the profit margins. Increasing demand, stable market, and the position of premium product is important for the company to handle the existing pricing strategy.

e) Possible drawbacks in the financial performance and non-financial measures of performance

Financial performance criteria can be determined because they concentrate on the history and don't permanently deliver the full view of the performance of a business (Charles and Ochieng, 2023). On the other hand, non-financial measures can deliver context and connect with the strategy of the business. Financial measures can show a guide on short-term consequences, which can be harmful to other parts of the business.

The drawbacks of financial performance measures are:

Limited scope: Financial measures only catch a limited factor of performance for the company, avoiding essential non-financial factors such as environmental impact, employee engagement, and consumer satisfaction.

Lack of context: Financial measures do not deliver context about the operations of the organization and make it problematic to determine the improvement areas.

Manipulation: Financial approaches can be manipulated with the help of accounting practices making it challenging to get a proper picture of the true performance of the company (Jarah et al. 2022).

Alternative options for non-financial measures of performance and examples are discussed below:

Employee engagement: Evaluate employee engagement with the help of “employee net promoter score (ins)”, focus groups, and surveys. For instance, Pedaltrain could follow the employee involvement and pursue an involvement rate of around 80% or higher.

Consumer satisfaction: Evaluate consumer satisfaction with the help of “net promoter score”, feedback forms and surveys. For example, the company could follow consumer satisfaction with their services and products, pursuing for 90% or higher satisfaction rate.

Innovation metrics: Analysis of innovation metrics like new product launches, patent applications, expenditure and research and development (R&D) (Zemlickienė and Turskis, 2022). For instance, Pedaltrain could follow their expenditure on research and development. It also pursuing for revenue around 10% or higher to annual R&D.

Environmental impact: Analysis of environmental effect through metrics like waste reduction, water usage, and energy consumption. For instance, the company can could include its energy consumption, aiming to decrease it by yearly 10%.

Quality metrics: Quality metrics measurement like on-time rate of the delivery, return rates and defect rates. For example, Pedeltraim could analyze the defect rate of their business products and aims to gain less than a 1% defect rate.

Conclusion

It has been concluded that the financial performance of Pedaltrain has been analyzed in this report. The break-even analysis and safety of margin of the company has been demonstrated that fixed cost of the business not changed, and the pricing and sales mix are constant in the business. The cost-plus pricing for modified cycle is higher than the unmodified cycles. The drawbacks of the financial measures have been including such as lack of context, manipulation and consumer satisfaction.

References

• TUOVILA, A., 2024. Absorption Costing Explained, With Pros and Cons and Example. https://www.investopedia.com/terms/a/absorptioncosting.asp#:~:text=Absorption%20costing%2C%20sometimes%20called%20%E2%80%9Cfull,for%20when%20using%20this%20method. 
• KENTON, W., 2024. Activity-Based Costing (ABC): Method and Advantages Defined with Example. https://www.investopedia.com/terms/a/abc.asp
• Zemlickienė, V. and Turskis, Z., 2022. Performance measurement in R&D projects: relevance of indicators based on US and German experts. Sustainability, 14(18), p.11737.
• Jarah, B.A.F., Al Jarrah, M.A., Al-Zaqeba, M.A.A. and Al-Jarrah, M.F.M., 2022. The role of internal audit to reduce the effects of creative accounting on the reliability of financial statements in the Jordanian islamic banks. International Journal of Financial Studies, 10(3), p.60.
• Kazar, G., Mutlu, U. and Tokdemir, O.B., 2023. Development of zero-based budgeting approach for multinational construction contractors. Engineering, Construction and Architectural Management, 30(10), pp.5217-5232.
• Wilson, T., 2021. Analyzing the Budget and Strategic Plan Relationship: A Case Study Approach.
• Gutiérrez, M., 2021. Making better decisions by applying mathematical optimization to cost accounting: An advanced approach to multi-level contribution margin accounting. Heliyon, 7(2).
• Charles, M. and Ochieng, S.B., 2023. Strategic outsourcing and firm performance: a review of literature. International Journal of Social Science and Humanities Research (IJSSHR) ISSN, pp.2959-7056.