Ola Plc Case Study - Oil-based Product - Breakeven Point - Profit Before Tax - Accounting and Finance Assessment Answer

Assignment Task:

Ola Plc Case Study Accounting and Finance Assessment Answer

Case Study 

You have just been appointed to the newly created post of Senior Management Accountant with Ola plc Ireland’s largest manufacturer of an oil-based product. This is your first post since attaining your MBA in Managing for Financial Accountability.

The oil-based product is produced under the company’s own label and is produced in single container size. The product is sold to both supermarket chains and small retail outlets throughout Ireland. The company’s strategy follows the “cost leadership” model as the Managing Director is very pragmatic. As such, he feels that cost is a very important factor when people buy the product. However, this has lead to an increase in the number of quality issues in the manufacturing plant, “bottlenecks” during production, staffing problems and increased customer complaints over the last number of years. Overall the company’s profitability has been static in previous years despite attempts to expand the company’s market share and strict cost control.

The Managing Director is very aware of the potential threat of “globalisation” on a market that has few barriers to entry. He also realises that the introduction of the Euro together with the internet has made selling prices much more transparent within Europe over the past decade. As a result, he decided that he would like to introduce some basic managerial accounting techniques into his business and hence your appointment.

Based on Ola plc’s income statement for 2018 you have prepared budgeted income statement data for 2019 which is set down on the following sheet.

In order to make a very good first impression on the Managing Director you have decided to prepare a detailed report for presentation to him based on the foregoing budgeted income statement data for 2019 and which will include the following information:

(1) A statement of net income after tax assuming that the annual sales revenue’s of €45,000,000, i.e., 1,125,000 units are achieved.

(2) A calculation of the breakeven point in units.

(3) A calculation of the breakeven point in monetary value.

(4) A calculation of the target volume in units in order to generate a profit before tax of €6,000,000.

(5) A calculation of the target volume in monetary value in order to generate a profit before tax of €6,000,000.

(6) A calculation of the margin of safety % assuming that the annual sales of 1,125,000 units are achieved.

(7) A calculation of how many units must be sold to earn a profit after tax of €5,000,000.

(8) For 2020 the following changes are anticipated:

(a) The selling price will increase by 10%, and

(b) Variable costs will increase by 20%, and

(c) Fixed costs will increase by €2,500,000.

Based on these anticipated changes you will include a calculation of the breakeven point in units and revenue for 2020.

During one of your first meetings with the Managing Director following your appointment, he mentioned that he had attempted to prepare and use budgeting for management control and allocating responsibility within the company. However, due to material differences between budgeted and actual production quantities in the past he felt that the budgets were of limited value. As such, you have also decided to investigate this problem in an attempt to formulate a solution to this problem and with a view to including this solution in your report.

To make a good impression you also wish to advise the Managing Director on potential management accounting techniques that may improve the quality issues in the manufacturing plant, “bottlenecks” during production, staffing problems and increased customer complaints over the last number of years.

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