Critiquing the Approach Taken by AMX - Capital Investment Appraisal - Finance Assessment Answer

Internal Code: 1AGCEI

Finance Assessment Answer

TASK: You are newly recruited management accountant at AMX LTD, a luxury car manufacturer in the UK. Part A information You have observed that the Board of Directors allocates budgets on an annual basis using an incremental approach, adjusting for known inflationary pressures and then applying a 1% cost efficiency reduction. The factory is divided into production lines for each range of cars, with each production line having an allocated operational manager who has responsibility for managing the budget. The Budgets reports are produced by the Management Accounts department at the end of each month and discussed in monthly performance meetings involving the Budget Manager, the Director f Operations and the Director of Finance. Discuss different approaches to budget setting, critiquing the approach taken by AMX. A.2) Recommend improvements to the budget monitoring process, producing an improved revised budget report for December 2018. Part B) COSTING B.1) Critique different approaches to costing. Series 1 and Series 2 are both produced in the same factory and selling prices are calculated by adding a 40% mark-up on production costs. B.2) Using a traditional business-wide rate for all overheads based on labor hours calculate the unit costs and selling prices of the AMX Series 1 and Series 2 cars. B.3) Using an Activity Based Costing approach calculate the unit costs and selling prices of the AMX Series 1 and Series 2 cars. Part C CAPITAL INVESTMENT APPRAISAL AMX is considering whether to increase its borrowing and invest in expansion into the new market of Electric cars to increase returns to the business. There is already a Project Team in place, which has begun assessing the opportunity and would deliver the development if it receives board approval. Costs of the team to date are £250,000. Capital planning has already priced up the new machinery and the Product Development team have given an estimate of the costs of bringing products to market. The Sales manager has given a forecast of potential sales and a member of the management accounts team has provided costings. Production line machines have a 6-year lifespan. Details are as follows; Investments would be made in 2019 with sales commencing in 2020. Estimated sales, revenues and costs have been based on current government subsidies and incentives in place at the time of the report. There is no current indication whether these will improve or worsen over time. C.2) Analyse the proposed electric cars development, calculating the payback period and Net Present Value, making a recommendation whether or not to proceed with the investment considering all relevant factors.

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