Question

Task

Background

In modern strategic management accounting it is important to use appropriate performance measurements and control concepts, underpinned by theories and models applied in a variety of marketing settings and also to incorporate the inter-related nature of the performance measurements and control concepts and the specific business environment(s). It is necessary for effective management of profit and not-for-profit organisations to analyse the elements of performance measurements and control and the role of different elements in achieving financial objectives.

Information

Suppose you have recently been appointed as a financial consultant at North Pole Plc. Your first task is to report to CEO about, Santa division one of the companies promising unit. The Santa division, had budgeted a net profit before tax (PBIT) of £3 million per annum over the period of the foreseeable future, based on a net capital employed of £10 million. The plant replacement anticipated over this period is expected to be approximately equal to the annual deprecation per year. These figures compare well with the organisation’s required rate of return of 20% before tax.

Santa division management is currently considering a substantial expansion of its manufacturing capacity to cope with the forecast demands of a new customer. The customer is prepared to offer a five-year contract providing Santa division with annual sales of £2 million. In order to meet this contract, a total additional capital outlay of £2 million is envisaged (being £1.5 million of new fixed assets plus £0.5 million working capital). A five-year plant life is expected. Operating costs on the contract are estimated to be £1.35 million per annum, excluding depreciation. This is considered to be a low-risk venture as the contract would be firm for five years and the manufacturing processes are well understood within Santa division.

Required

In your report to the CEO, you are required to demonstrate a critical appreciation of expansion plan of Santa division management. You are suggested to base your report on the above data, and keeping in mind the FEEDER approach, i.e. Find, Elaborate, Evaluate, Develop, Extract and Report, you must address the following areas:

1. The impact of accepting the contract on the Santa divisional Return on capital employed (ROCE) and Residual Income (RI) indicating whether it would be attractive to Santa’s management.

2. Explain the basis of the calculations in the statements you have produced and discuss the suitability of each method in directing divisional performance management toward the achievement of corporate goals.

3. “Divisional performance evaluation should be based on a combination of financial and non-financial measures using the balanced scorecard approach”. Making special reference to Kaplan and Norton (1992) article and statement above include in your report a critical assessment of “balanced scorecard” approach as a divisional performance measure for North Pole Plc.

Guidelines

Performance measurement and control in organisations has never been of greater importance than in the current global business environment where business success is determined by the quality of risk management and the viability of the investment decisions being taken by the organization. This assignment is designed to test your critical understanding and analytical skills in describing and applying performance management techniques.

You are required to demonstrate a critical appreciation of a range of performance management and control strategies and concepts by preparing a business-style report intended for the company CEO. The approach for this assignment is the FEEDER approach, i.e. Find, Elaborate, Evaluate, Develop, Extract and Report. Do your own research to find useful financial and other information that you think are relevant and to your analysis.

The solution should demonstrate the following qualities:

1. Answering the central focus of the question requirements.

2. A critical appreciation of relevant literature and its use to support argument, substantiate calculations and other aspects of the assignment.

3. Taking ownership of the content, being prepared to debate and argue a personal position, and providing evidence of evaluative skills. A submission made up of extracts from published sources which is descriptive or simply just theoretical regurgitation is not acceptable.

4. Ability to analyse relevant theoretical concepts in a critical manner, evaluation of material.

5. Logical flow of ideas and treatment; imaginative approaches; appropriate selection of real world factors related to the company under scrutiny.

6. Evidence of additional personal research, and the ability to analyse material from a variety of appropriate relevant perspectives.

           

Summary

The question belongs to Finance and it discusses about writing a report addressing critical appreciation of expansion plan of a company.

Total Word Count 2392

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