1 CASE STUDY: BRAY LTD Bray Ltd is a family owned clothes manufacturing company based in Sandy, Bedfordshire, England.

The owner, Mr Adam Bray retired on 30 th November 2010. During his management the company had grown steadily at the rate of 2 to 3 percent each year. When Mr Adam Bray retired his daughter Orla Alice Bray took over the business. Soon after taking over the business Orla decided to expand the business. Within weeks she had successfully negotiated a five-year contract with a large clothes retailer to make range of sports and leisure wear items. The contract will result in an additional 2m in sales revenue during each year of the contract. company are as follows: Managing Director: Production Manager: Company Accountant: Budgeting Manager: Miss Orla Alice Bray Mr San Nathan Miss Una McAdams Mrs Christina Usher To fulfil the contract, Bray Ltd acquired new equipment and premises. The key personnel of the

The materials used for making the garments are normally made by Bray Ltd. The company manufactures three different types of clothes materials; nylon, silk and cotton. Bray Ltd is frequently faced with the problem of whether it should manufacture components which are required for production or whether it should buy them from outside suppliers. The company had to make the priority depending on the scarcity of resources. Sometimes the machine capacity is available but labour is scarce. In other times the labour is available but machine capacity is scarce. In both cases, the limiting factor makes it impossible to manufacture the clothes material required. Mr San Nathan, the production manager, normally base the choice of The information in Table 1 is commonly used to making the clothes material or buy from outside suppliers on the availability of machine hours and labour hours. decide on whether to make or to buy.

2 Table1 Component Cotton Machine Hours required per roll 12 Labour Hours required per roll 2 Direct Material Cost per roll 24 Labour rate per hour. 2 Variable Overhead Rate per Labour Hour 0.50 Fixed Overhead Cost per roll 10 Suppliers quoted price per roll 35 One roll of clothes material equals 50 meters. Silk 10 12 45 3 3 15 147 Nylon 16 8 42 1.50 2 9 110

On the 12th of December 2011 one of the regular customers made a request for a special order for 100,000 garments for a special event in the middle of February 2012. The garments are ordered to be made and Orla had arranged a meeting with the production manager, Mr San Nathan. From the meeting with San, Orla learned that the material required to make the garment, Fleece, is not produced by the Bray Ltd. In addition, she gathered the following information: The company has a stock of 50,000 kg of chemical A which was bought at 10 per kg but now would cost 12 per kg. Its disposal value is 8 per kg. This material is used in the production of the companys existing product range. The company has a stock of 200,000 litres of material B which was bought at 20 per litre but would cost 25 per litre to buy now. If it is not used on this contract, it will have to be disposed of at a cost of 10,000 plus 2 per litre. The company has a stock of 200,000 litres of material C which originally cost 25 per litre but is 30 per litre now. If not used on this contract, it could either be used in producing another product in place of Material N (which would otherwise have to be bought at 15 per litre), or used on a contract in place of material P (which would cost 20 per litre).

3 The company has a stock of 50,000 metres of Fleece which originally cost 5 per metre but is 8 per metre now. If not used, it will have to be disposed of for 10,000. The companys work force is paid on a fixed salary basis at a rate of 500 per person per week. Because of the recent cancellation of a major contract, the company has 300,000 direct labour hours available. Additional direct labour time can only be made available by ceasing production of order number X123 (see Table 2), details of which are set out below and incurring a penalty cost of 50,000. Table 2 Order number X123 Selling price per unit Material cost Labour cost (2 hours) Variable overhead Fixed overhead Profit per unit 15 25 10 5 80

55 25

f. The companys overheads are variable and fixed. Overheads are charged to production at a rate of 7.50 per direct labour hour. San requested Orla to invest in new equipments. This would improve the production capacity. San provided the projected cash flow for this investment (see Table 3). Table 3 Year 1 Investment 100k Inflow Disposal Year 2 10k Year 3 12k Year 4 14k Year 5 19k Year 6 25k Year 7 30k Year 8 35k Year 9 20k 10k

4 San explained that the new equipment would increase the cash inflow on a yearly basis. He predicted the savings based on his experience. The expected total additional cash inflow from the project would be 135,000. In addition, the company could also save on the maintenance cost of 5,000 a year if the new equipment was bought. However, San highlighted that the disposal of the equipment is quite This would increase the lifespan of the equipment for expensive, i.e. 10,000 in year 9. Alternatively, the equipment could be upgraded at a cost of 50,000 in year 9. another 5 years (from Year 10 to Year 14). The expected cash inflow would be at a constant rate of 20,000 a year for the 5 years. In order to assess the budget for purchasing the new equipment, Orla had a meeting with Mrs Christina Usher, the Budgeting Manager. According to Christina the overhead costs are over-absorbed as the company uses a blanket rate based on either labour hour or machine hour. According to Christina there are six production lines: 1. Weaving 2. Knitting 3. Dye and print 4. Cutting 5. Stitching 6. Packaging Weaving is machine intensive and the weaving machine is required to be set up after 1,000 yards of weaving. During the set up the machine are halted from production. There are about 4 machines in the department. There are 8 members of staff working on these machines. All the machines are set to run 24 hours a day for 7 days a week, i.e. 24/7. The knitting is also machine intensive. Each knitting machine needs to be set up only when a problem occurs with the machine. There are 2 knitting machines and they are set to run continuously every day, i.e. 24/7. There are 6 members of staff in this production line for checking, controlling and maintaining the machine. The machine is required to be set up for different types of fabrics.

5 After the knitting, the fabric is taken to the dyeing process. This is where the fabric is coloured and printed accordingly. There are 6 machines in this production line; three for dyeing and three for printing the pattern/picture on the fabric. There are 20 staff members in this production line. The machines are required to be set-up in accordance to the production requirement. Once the dyeing and printing are completed, the fabric is then taken to the cutting department where the materials are cut in accordance to the order received. The cutting department consists of three sections; design, cutting and quality control. There are 3 designers, 3 quality control inspectors and 4 production line workers to do the cutting. Once the fabric is cut according to the order, they are transferred to the stitching department. There are 15 tailors working at this department. In addition, there is a supervisor and a couple of quality control inspectors. taken to the packing department. the warehouse ready for delivery. Christina suggested that a proper absorption of overheads would reduce the unit cost of the finished product. Thus, the company could sell clothing at a lower price that could attract higher volume of sales. following variance analysis to Orla: Sales price variance Sales quantity variance Materials price variance Materials usage variance Labour rate variance Labour efficiency variance Variable overhead spending variance Variable overhead efficiency variance Fixed overhead variance 46,000 Favourable 14,000 Unfavourable 943 Favourable 3,450 Unfavourable 2,185 Unfavourable 5,750 Favourable 874 Favourable 2,300 Favourable 5,000 Unfavourable This in turn would improve the cash flow as well as boosting the profitability of the company. In addition, Christina provided the are 5 quality control inspectors in this section. The finished clothing is then The packing is mainly done by machines. There The packed product is then stored in

Orla arranged a meeting with the company accountant, Miss Una McAdams to assess the prospect of purchasing new equipment for San. Una explained that the problem is cashflow as the companys bank account is overdrawn for the last two years. Una

6 is concerned about the solvency of the company as the annual financial statement of Bray Ltd is showing that the company is facing cashflow problems. This came as a shock to Orla because, according to the sales department, the companys sales have increased by about 2m. Una gave the financial information of the business is given below. Statement of Financial Position as at 30th November 2011 000 Non-current Assets Premises Plant and equipment Current Assets Inventories Trade Receivables Total current assets Total Assets Equity Share capital Reserves Non-current liabilities Borrowing loans Current liabilities Trade payables Taxation Short-term borrowings overdraft) Total equity and liabilities 7,360 4,057 11,41 7 3,420 4,280 7,700 19,11 7 2,000 8,268 10,26 8 3,675 2,245 193 2,736 5,174 19,11 7 5,240 2,375 7,615 2,386 2,540 4,926 12,54 1 2,000 7,813 9,813 2010 000

1,220 1,157 179 172 1,508 12,54 1

(all

bank

Income statement for the year ended 30th November 2011 000 11,365 1,042 2010 000 9,482 914

Revenue Operating profit

7 Interest charge Profit before taxation Taxation Profit for the year (81) 961 (386) 575 (22) 892 (358) 534

Bray Ltd. had paid dividends of 120,000 for each of the two years, 2011 and 2010. During the year (2011 or 2010), Bray Ltd. had sold a premise for 100,000; the original cost was 20,000. One of the equipments was scrapped at a cost of 1,000; the net book value of the equipment was 15,000. charged for the year is 81,000. The company also sold another The total depreciation equipment for 2,000; the net book value was 20,000.

Years 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

11.0% 0.900901 0.811622 0.731191 0.658731 0.593451 0.534641 0.481658 0.433926 0.390925 0.352184 0.317283 0.285841 0.257514 0.231995 0.209004 0.188292 0.169633 0.152822 0.137678 0.124034 0.111742 0.100669 0.090693 0.081705 0.073608

11.5% 0.896861 0.804360 0.721399 0.646994 0.580264 0.520416 0.466741 0.418602 0.375428 0.336706 0.301979 0.270833 0.242900 0.217847 0.195379 0.175227 0.157155 0.140946 0.126409 0.113371 0.101678 0.091191 0.081786 0.073351 0.065785

12.0% 0.892857 0.797194 0.711780 0.635518 0.567427 0.506631 0.452349 0.403883 0.360610 0.321973 0.287476 0.256675 0.229174 0.204620 0.182696 0.163122 0.145644 0.130040 0.116107 0.103667 0.092560 0.082643 0.073788 0.065882 0.058823

12.5% 0.888889 0.790123 0.702332 0.624295 0.554929 0.493270 0.438462 0.389744 0.346439 0.307946 0.273730 0.243315 0.216280 0.192249 0.170888 0.151901 0.135023 0.120020 0.106685 0.094831 0.084294 0.074928 0.066603 0.059202 0.052624

13.0% 0.884956 0.783147 0.693050 0.613319 0.542760 0.480319 0.425061 0.376160 0.332885 0.294588 0.260698 0.230706 0.204165 0.180677 0.159891 0.141496 0.125218 0.110812 0.098064 0.086782 0.076798 0.067963 0.060144 0.053225 0.047102

13.5% 0.881057 0.776262 0.683931 0.602583 0.530910 0.467762 0.412125 0.363106 0.319917 0.281865 0.248339 0.218801 0.192776 0.169847 0.149645 0.131846 0.116164 0.102347 0.090173 0.079448 0.069998 0.061672 0.054337 0.047874 0.042180

14.0% 0.877193 0.769468 0.674972 0.592080 0.519369 0.455587 0.399637 0.350559 0.307508 0.269744 0.236617 0.207559 0.182069 0.159710 0.140096 0.122892 0.107800 0.094561 0.082948 0.072762 0.063826 0.055988 0.049112 0.043081 0.037790

14.5% 0.873362 0.762762 0.666168 0.581806 0.508127 0.443779 0.387580 0.338498 0.295631 0.258193 0.225496 0.196940 0.172000 0.150218 0.131195 0.114581 0.100071 0.087398 0.076330 0.066664 0.058222 0.050849 0.044409 0.038785 0.033874

15.0% 0.869565 0.756144 0.657516 0.571753 0.497177 0.432328 0.375937 0.326902 0.284262 0.247185 0.214943 0.186907 0.162528 0.141329 0.122894 0.106865 0.092926 0.080805 0.070265 0.061100 0.053131 0.046201 0.040174 0.034934 0.030378