Scooters Ltd Case Study - Calculation Assumptions -  Accounting and Finance Assignment  Help

Assignment Task :

Speedyscoot Scooters Ltd. is a private UK company formed in 2013 by Simon Travis. The company specialises in the manufacture of lightweight scooters predominantly for the city commuter market. The company prides itself on product innovation, quality manufacturing processes and the premium nature of their scooters that enjoy a world-wide reputation.

Two models of scooter are manufactured, a conventional model and an electric model. The conventional scooter model currently retails at a price of £300 but there can be minor modifications to the scooter (lightweight components, lights etc.) that would enable a higher price to be charged, up to £400. The electric scooter retails at £800 for the unmodified model and can sell for as much as £1,100 with minor modifications such as titanium components or a high power battery unit. 

The mix of sales for Speedyscoot is approximately 70% conventional scooters and 30% electric scooters. The variable costs of production for a conventional scooter is approximately £150 and for an electric scooter is approximately £450. For the modified models the increase in variable costs is approximately £115 for basic scooters and £200 for electric scooters. It is usual for around 50% of the basic scooter customers to request modification whilst only 25% of electric scooter customers request modification and are willing to pay higher prices.

The scooter industry has several key players and although Speedyscoot’s products are seen as premium products in the market there are companies that seem to employ different pricing strategies than that of Speedyscoot. The competitor’s scooters contain advanced features and innovations and are generally seen as better value for money although the competitor models are not as iconic as the Speedyscoot design and do not enjoy the same premium product status.

The factory works a 40 hour week for 50 weeks per year and employs 20 people who are directly involved in the scooter manufacture process on 4 identical production lines. The company prides itself on its machine utilization efficiency but as the majority of the process Is labour driven (welding, assembly, custom painting), overheads are absorbed on a labour hour basis. It has been estimated that a scooter can go through the manufacturing process from start to finish in approximately 1.25 hours although there may be some possible delays due to bottlenecks and non-value added activities being incurred in the production process along the way.

From the statements above it can be seen that sales revenue has increased over the last year and are expected to continue to grow by approximately 3% per year in the future. Approximately 25% of the cost of sales are related to fixed production overheads while the remaining 75% are classed as variable and directly related to output. 

The current factory site exists in a small city in the north of England and is limited in terms of space. The company knows that it may have difficulty in increasing capacity at the current site above 34,000 scooters per year. The capacity constraints and the risk issues related to Brexit have moved the company to consider the options of moving the whole operation to a country in eastern Europe at a cost of approximately £50 million. Alternatively, the company could outsource manufacture of all of the scooter frames to a UK company that currently specializes in the manufacture of aluminium garden furniture. Speedyscoot would still paint and assemble the product in-house at its current premises. Both options would yield an effective increase in capacity of 10,000 scooters per year irrespective of the type of scooters being made.

Required:

Produce a business report to Simon Travis, in good style, that covers the following issues:-

1. Provide calculations on the expected level of sales that you believe need to be made to break even. Back this up with further calculations that show risk. Ensure that you justify any calculation assumptions that you make. Comment on the results obtained.

2. Explain the possible issues in using absorption costing to determine the prices of the scooters and discuss the appropriateness of changing to an activity based costing (ABC) system for product costing and pricing for the business

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