1. Assess and evaluate the theoretical basis of financial strategic decision making
2. Analyse and interpret data, and by the integration of theory and practice, investigate and apply relevant tools to the assessment of a variety of business problems
3. Evaluate and synthesise the problem solving mechanisms from strategic financial decision making and assess the value to enhanced decision making of the application of relevant tools & techniques.
You are part of the finance team of Steel Lite plc; a steel manufacturing company operating in the UK with interests in a variety of activities. The following issues need to be prepared for the Board meeting at the end of February 2019.
A division of Steel Lite plc has a production capacity of 50,000 units in the UK. Currently the company is producing and selling only 45,000 units of product at a regular price of £10. The variable cost per unit for labour is £3.00 and for materials is £2.00. Annual fixed cost for the department is £200,000.
1. Identify the current break-even point in units, and discuss why the break-even point useful to management?
2. An approach has been made to Steel Lite plc to buy 5,000 units from the division. The buyer will pay all shipping and is offering £40,000 for the 5,000 units. This will not affect your domestic market. Evaluate whether Steel Lite plc should accept the order? Provide rationale for your findings, supported by your workings. The presentation of your workings should include a summarised contribution statement with and without this order.
The division of Steel Lite plc is in discussion with a company based in the U.S. who could manufacture your product on your behalf. Fixed costs would be reduced to £50,000 as products would need warehousing only.
The contract on offer is to produce the 45,000 units – the first 40,000 units at a cost of £8 per unit and then reduced to £7 for the additional 5,000 units up to the 45,000 units.
3. Assess whether Steel Lite plc should cease production? You should present your findings with supported workings again this should include a revised contribution statement for comparison with the existing position. You should identify any other issues to be considered when the company is reaching its decision, supporting your discussion with relevant literature.
4. Setting the price of a product can be a difficult and complex task. Discuss and critically evaluate the different pricing strategies that could be used when making such a decision.