Table of Contents

Merits and Disadvantages of the three possibilities....................................................................................3

1.1 Flotation on the LSE's Main Market...................................................................................................3
1.1.1 Merits on the Possibility of Adopting the Flotation on the LSE's Main Market...............................3
1.1.2 Demerits on the Possibility of Adopting the Flotation on the LSE's Main Market..........................4
1.2 Flotation on the Alternative Investment Market...............................................................................5
1.2.1 Merits on the Possibility of Adopting the Flotation on the Alternative Investment Market...........5
1.2.2 Demerits on the Possibility of Adopting the Flotation on the Alternative Investment Market.......6
1.3 Investment in Private Equity..............................................................................................................6
1.3.1 Merits on the Possibility of Adopting the Investment in Private Equity.........................................7
1.3.2 Demerits on the Possibility of Adopting the Investment in Private Equity.....................................8
2.0 Financial analysis relating to investment strategy.................................................................................9
2.1 Assumptions....................................................................................................................................10
3.0 Financial Analysis for internal management........................................................................................10
3.1 Absorption Costing..........................................................................................................................10
3.2 Marginal Costing..............................................................................................................................10
3.3 Distinguishing Absorption and Marginal Costing.............................................................................11
4.0 Prepare the statement, with explanations, showing the highest profit could be achieved from the
limited amount of skilled labour available within the constraint stated...................................................13
4.1 Steps to Improve Profitably Considering the Labor Shortage..........................................................17
5.0 Calculation of the variances for March................................................................................................18
5.1 Variance Analysis.............................................................................................................................18
3.2 Material Variance............................................................................................................................19
3.3 Labour Variance...............................................................................................................................19
3.4 Fixed Overhead Variance.................................................................................................................20
3.5 How a flexible budget will help Analytics Electronics identify the budget variance?.......................22
References.................................................................................................................................................24
Merits and Disadvantages of the three possibilities

The main sources of funding for Analytic Electronics include Floatation on the main

market of the LSE, Flotation on the Alternative investment market and Private equity

and AIM float. To assist the board in making a wise choice, this report will examine the

advantages and cons of each alternative.

1.1 Flotation on the LSE's Main Market

The procedure of listing a company's shares on the main market of the London Stock

Exchange (LSE) is referred to as a flotation. This makes it possible for the business to

obtain money by selling shares to the public. This money can then be used to fund

expansion, pay off debt, or provide existing shareholders access to their investment with

strict listing requirements, transparency, and strict corporate governance norms, The

Main Market is one of the biggest and most prestigious stock exchanges in the world

(Arnold, 2008).

1.1.1 Merits on the Possibility of Adopting the Flotation on the LSE's Main Market
1. A major benefit of listing on the LSE's Main Market is greater access to financing,

as strong liquidity and a sizable investor base make it simpler for businesses to

raise cash through the sale of shares (Arnold, 2008). This financial availability

may be essential for achieving growth plans and other strategic goals.

2. Due to its affiliation with respectable and financially stable companies,

companies listed on the LSE Main Market enjoy improved reputation and

credibility (PWC, 2021). A company's ability to recruit clients, partners, and staff

as well as strengthen their negotiating position with suppliers and lenders can all

benefit from an increase in reputation.

 3. Since institutional investors are drawn to the market due to its transparency and

repute, more visibility brought on by a listing on the LSE Main Market may result

in better valuations (Doidge et al., 2004). Institutional investors may have a

favorable effect on a company's stock price and general market perception,

which may improve that company's capacity to raise money and pursue growth

possibilities.

1.1.2 Demerits on the Possibility of Adopting the Flotation on the LSE's Main Market
1. For businesses listed on the LSE's Main Market, high listing fees, regular

reporting obligations, and regulatory compliance can be a major burden. These

charges could include consultation fees, underwriting fees, listing fees, as well as

costs for upholding corporate governance norms and transparency (Levi & Li,

2014).

2. Companies listed on the LSE's Main Market may worry about losing control

because shareholders now have a voice in the operation. The company's long-

term strategic vision can be jeopardized as a result of heightened scrutiny and

pressure to achieve according to short-term performance expectations (Faccio &

Lang, 2002).

3. Companies listed on the LSE's Main Market may face difficulties due to their

increased sensitivity to market fluctuations since these variables may have an

impact on their stock price, including changes in the economy, geopolitical

situations, or industry-specific trends. The company's valuation may fluctuate as

a result of its increased exposure to market volatility, which could hinder its

capacity to raise money or pursue strategic goals (Weston et al., 2003).

1.2 Flotation on the Alternative Investment Market
The process of listing a company's shares on the Alternative Investment Market (AIM) of

the London Stock Exchange is referred to as flotation on the Alternative Investment

Market (AIM). The LSE's Main Market has strict listing standards, and AIM is a sub-

market created expressly for smaller, developing businesses that might not be able to

achieve them (Wright et al., 2013). These businesses can acquire cash more easily and

affordably by issuing shares to the general public by using AIM (Levi & Li, 2014).

Smaller businesses can more easily adhere to the listing standards because to AIM's

lower regulatory requirements and continuing reporting duties compared to the Main

Market (Levi & Li, 2014; Wright et al., 2013). AIM-listed companies are able to

concentrate more on growth and innovation than on complicated regulatory compliance

thanks to this flexibility. The capacity to draw in a wide variety of investors and generate

capital may be hampered by AIM's potential for lesser liquidity and visibility than the

Main Market (PWC, 2021).

1.2.1 Merits on the Possibility of Adopting the Flotation on the Alternative Investment
Market
1. Comparing listing on the Alternative Investment Market (AIM) to the LSE Main

Market reveals various benefits. First off, the AIM is a more affordable option for

businesses wishing to obtain cash due to its lower expenses and regulatory

regulations (PWC, 2021).

2. The AIM permits more latitude in corporate governance and continuing reporting,

allowing businesses to put more of their attention on growth and innovation as

opposed to compliance (Levi & Li, 2014).

 3. Like the LSE Main Market, the AIM offers access to a broad spectrum of possible

investors, including institutional and retail investors (PWC, 2021). This ensures

that businesses looking for funding have access to a wide range of potential

investors.

1.2.2 Demerits on the Possibility of Adopting the Flotation on the Alternative Investment
Market
1. As shares may not be as easily bought or sold without affecting their price, it may

be more difficult to raise capital on alternative markets than on the LSE Main

Market, which makes it less appealing to investors (Arnold, 2008).

2. Alternative markets, like the AIM, often have lower prestige and visibility than the

LSE Main Market. This may lead to a smaller pool of possible investors and a

decrease in investor interest, which may limit the amount of capital that can be

generated (PWC, 2021).

3. As retail investors become more prevalent in alternative markets, volatility may

increase as a result of their shorter investment horizons and potential greater

sensitivity to market sentiment, which could affect share prices and the ability of

the company to raise capital (Levi & Li, 2014).

1.3 Investment in Private Equity

Private equity (PE) investing is putting money directly into privately held businesses

rather than publicly traded ones. Private equity firms collect money from a variety of

sources, including institutional investors and high-net-worth individuals, and use this

money to buy or invest in businesses with the intention of making a profit over time

(Gompers & Lerner, 2001). These investments frequently concentrate on businesses

with significant growth potential, operational upgrades, or businesses that could profit

from strategic reorganization. In order to add value through operational improvements,

financial engineering, and strategic direction, private equity firms actively participate in

the management and decision-making of the businesses in which they invest (Harris et

al., 2005). According to Kaplan and Strömberg (2009), PE firms typically invest for 5 to 7

years before seeking to exit the investment through an IPO, a merger or acquisition, or

a secondary sale to another investor.

Private equity investments can give companies access to significant resources,

priceless knowledge, and strategic alliances that can foster growth and expansion

(Gompers & Lerner, 2001). As PE investors frequently want a sizable ownership

position and have the ability to affect the company's direction and decision-making, it

may also result in a loss of control (Gompers & Lerner, 2001).

1.3.1 Merits on the Possibility of Adopting the Investment in Private Equity

1. Private equity (PE) investing is putting money directly into privately held

businesses rather than publicly traded ones. Private equity firms collect money

from a variety of sources, including institutional investors and high-net-worth

individuals, and use this money to buy or invest in businesses with the intention

of making a profit over time (Gompers & Lerner, 2001). These investments

frequently concentrate on businesses with significant growth potential,

operational upgrades, or businesses that could profit from strategic

reorganization.

2. To add value through operational improvements, financial engineering, and

strategic direction, private equity firms actively participate in the management

 and decision-making of the businesses in which they invest (Harris et al., 2005).

According to Kaplan and Strömberg (2009), PE firms typically invest for 5 to 7

years before seeking to exit the investment through an IPO, a merger or

acquisition, or a secondary sale to another investor.

3. Private equity investments can give companies access to significant resources,

priceless knowledge, and strategic alliances that can foster growth and

expansion (Gompers & Lerner, 2001). As PE investors frequently want a sizable

ownership position and have the ability to affect the company's direction and

decision-making, it may also result in a loss of control (Gompers & Lerner, 2001).

1.3.2 Demerits on the Possibility of Adopting the Investment in Private Equity

1. Companies may lose control while working with private equity investors since

these investors frequently demand a sizable ownership position in the firm, giving

them the ability to affect the company's strategic direction and decision-making

procedures (Gompers & Lerner, 2001).

2. Private equity firms frequently demand exorbitant management fees for the

ongoing oversight and direction they give to their portfolio companies, as well as

carried interest, which is a percentage of the investment gains. These costs may

have a significant impact on the company's overall return on investment (Metrick

& Yasuda, 2011).

3. The median investment horizon for private equity investors is between five and

seven years. They may try to sell their stake after this time through an IPO,

merger, acquisition, or secondary sale. This can push the business to look for

new funding sources, which might take more time and work to find (Kaplan &

Strömberg, 2009).
2.0 Financial analysis relating to investment strategy
To appraise the two options available to the firm, it was necessary to determine the

appropriate discounting factor which would be used when appraising using net present

value (NPV). The appropriate discounting factor is the WACC of the organization which

takes into consideration all the sources of capital available to the firm.

The WACC was computed using cost of equity, preference share and bond. The cost of

equity was calculated using the dividend discount model (DDM) and capital asset

pricing model (CAPM). The Ke based on DDM was 16.53% while that based on CAPM

was 13.68%. The computed cost of debt of bond is 4.95%. this was computed based on

the assumption that the bond is an irredeemable debt. The computed cost of preference

share gave a value of 10.41%. These three costs of capital gave a WACC of 11.29%

when Ke is measured using DDM and 9.861% when Ke is measured using CAPM. The

proposals were appraised using the WACC computed when Ke is measured using

CAPM.

After all computation, option 1: Thorpe Park gave a positive NPV of £27.988million while

option 2: Beeston gave a positive NPV of £25.857million. while both are positive, it is

advisable to pick option 1 due to its higher NPV. If the company has enough fund it can

invest in both projects. On the other hand, when the project was appraised using IRR,

option 1 have a rate of 47.47% while option 2 gave a rate of 47.98%. this means option

2 has a higher rate of return and should be invested in first. This is contrary to the

advice given based on NPV.

Management should consider other factors relating to the project before deciding on

which to take as they both give a positive NPV and close IRR.

2.1 Assumptions
i. The increase in revenue is attributable to the projects alone.

ii. The bond is an irredeemable debt.

iii. Cost of equity computed using CAPM was used since it’s the preferred

method of the investment manager.

iv. The industry average beta is applicable to analytic electronic.

3.0 Financial Analysis for internal management

3.1 Absorption Costing
A technique for allocating both fixed and variable manufacturing costs to each unit of

production is known as absorption costing, commonly referred to as full costing (Drury,

2013). This strategy ensures that all manufacturing costs are included in the cost of

goods sold for financial reporting and tax purposes. Fixed expenses are distributed

across all units produced in absorption costing, which may have an impact on the cost

per unit and the reported profit. This approach is crucial for giving a thorough picture of

the whole cost of production, but it might not be as helpful for internal decision-making

because it can be affected by changes in production levels (Drury, 2013).

3.2 Marginal Costing

When determining the cost per unit, the method known as marginal costing, often

referred to as variable costing or direct costing, solely takes into account variable costs,
whereas fixed costs are classified as period costs and are deducted from revenue in the

period they are spent (Horngren et al., 2011). As it enables management to comprehend

the incremental cost of producing extra units and assess the contribution margin, which

is the difference between sales income and variable expenses, this strategy is

particularly helpful for internal decision-making and performance evaluation. Marginal

costing is a useful management tool because it offers insightful information about cost

behavior and the potential effects of various production and pricing methods (Horngren

et al., 2011).

3.3 Distinguishing Absorption and Marginal Costing

Absorption and marginal costs perform different functions and might produce various

reported profits, it is crucial to distinguish between them. Making better informed

judgments about pricing, production, and cost control can be facilitated by management

by having an understanding of the distinctions between these two costing

methodologies.

Full costing, often referred to as absorption costing, allots both fixed and variable

manufacturing costs to each production unit. Because it guarantees that all production

expenses are included in the cost of goods sold, this method is utilized for financial

reporting and tax purposes (Drury, 2013). The allocation of fixed costs can be affected

by changes in production levels, which can modify reported profit. As a result,

absorption costing may not provide the most accurate information for decision-making.
While fixed costs are handled as period costs and expensed in the period they are

incurred, marginal costing only takes variable costs into account when determining the

cost per unit. As it enables management to comprehend the incremental cost of

producing additional units and examine the contribution margin, which is the difference

between sales revenue and variable costs, this method is useful for internal decision-

making and performance evaluation (Drury, 2013). Because of how fixed expenses are

handled, absorption and marginal costing produce different profit reporting. While fixed

costs are expensed in the period they are incurred in marginal costing, they are spread

across all units generated in absorption costing. Thus, the stated earnings under each

technique can vary as production levels fluctuate.

Assume, for instance, that a business produces 1,000 units at a cost of £10,000 for

fixed expenditures, £5 for variable costs, and £10 for selling each unit. The total cost per

unit under absorption costing would be £15 (£10 fixed cost + £5 variable cost), with

each unit containing £10 in fixed costs (£10,000/1,000 units). The profit would be £5 per

unit ($10 selling price -$15 cost per unit), with a total profit of £5,000 ($1,000 x $5 profit

per unit) from the sale of 1,000 units. However, only the variable cost of £5 per unit is

taken into account when using marginal costing. The total profit would be the

contribution margin less fixed expenses (£5,000 contribution margin - £10,000 fixed

costs), producing a profit of -£5,000. The total contribution margin would be £5,000

(1,000 units x £5 contribution margin per unit).

Let's look at another example where output levels alter to further highlight the

distinctions between absorption and marginal costing. With the same fixed costs of

£10,000, variable costs of £5 per unit, and a selling price of £10 per unit, let's say the
company decides to create 2,000 units rather than 1,000. The fixed costs per unit under

absorption costing would now be £5 (£10,000/2,000 units), resulting in a total cost per

unit of £10 (£5 fixed cost + £5 variable cost). The total profit would be £0 (2,000 units x

£0 profit per unit) and the profit per unit would be £0 (£10 selling price - £10 cost each

unit).

As opposed to this, the total contribution margin under marginal costing would be

£10,000. This is because there are 2,000 units and the contribution margin is £5 per

unit. The contribution margin less fixed costs (£10,000 contribution margin - £10,000

fixed costs) would equal the entire profit, which would be £0.

In this case, the reported profit is equal as a result of both absorption and marginal

costing. The two approaches nevertheless offer various perspectives for managerial

decision-making, though. While marginal costing stresses the contribution margin and

helps management comprehend the incremental profit earned by each additional

produced unit, absorption costing shows how the impact of fixed cost allocation on the

cost per unit.

4.0 Prepare the statement, with explanations, showing the highest profit
could be achieved from the limited amount of skilled labour available
within the constraint stated
For numerous reasons, it is essential to prepare a statement that estimates the highest

profit possible given the limitations of the available trained workforce. In order to ensure
efficient and effective resource use, it first enables management to steer the available

skilled personnel to the most lucrative product lines or projects (Blocher et al., 2019).

Knowing how much money different manufacturing methods could make given the

shortage of competent workers enables more wise choices to be made. To increase

overall profitability, management can decide wisely regarding production levels, pricing

tactics, and product mix (Atkinson et al., 2011). Also, management can locate

production bottlenecks by looking at how skilled labor shortages affect profitability.

Thus, they can create plans to get around these constraints and boost operational

effectiveness (Blocher et al., 2019).

Given the limitation of scarce trained labor, the statement gives useful information that

helps management to prioritize projects or products depending on their profitability. As a

result, the business is able to focus its resources on matters of the utmost importance

that have the greatest impact on overall profit (Atkinson et al., 2011). The contribution

margin per unit of any project or product, which is the difference between sales revenue

and variable expenses, should be determined by management before creating such a

statement. The contribution margin per unit should then be divided by the number of

hours of skilled labor needed for each unit to arrive at the contribution margin per unit of

skilled labor. This will enable the most effective utilization of skilled labor to be

determined (Blocher et al., 2019). Management should ensure that the constraint is not

exceeded by allocating the skilled labor hours available to the projects or products with

the largest contribution margin per skilled labor hour. Given the shortage of competent

personnel, the resulting statement will show the ideal production mix and the highest

profit possible (Atkinson et al., 2011).

Below is the solution to the question:
Contribution
A B C
£,000 £,000 £,000
selling price 45 35 39
variable
cost
Material -8 -6 -7
Labour -11 -8 -14
Expenses -5 -4 -4
Contributi
on 21 17 14

Contribution per limiting factor

21
A: = 1.91 2nd
11
17
B: = 2.125 1st
8
14
C: =1 3rd
14
Therefore, in order to achieve the highest profit attainable, service B should be provided

for first with the number of labour it needs. Then service A should be provided for next,

and the rest should go to service C.

Allocation table
contribution/labour
service labor cost cost Contribution
B 8000 2.125 17000
A 11000 1.91 21010
c 5000 1 5000

It is necessary to ensure that the allocation would be at least achieve 50% of the

budgeted sales, therefore the allocation needs to be tested. This would be achieved by
adding back all variable cost to the contribution based on the allocation table to

compute revenue.

Test for achievement of 50% of revenue

A B C TOTAL
contribution 21010 17000 5000 43010
add: variable costs
materials 8000 6000 7000 21000
labour 11000 8000 5000 24000
expenses 5000 4000 4000 13000
revenue 45010 35000 21000 101010

Based on the computation above the 50% criteria has been met so the highest profit
can be calculated.
Highest profit based on allocation.
SERVICE
A B C TOTAL
revenue 45010 35000 21000 101010
less: variable costs
materials -8000 -6000 -7000 -21000
labor -11000 -8000 -5000 -24000
expenses -5000 -4000 -4000 -13000
contribution 21010 17000 5000 43010
less fixed cost -6000 -15000 -12000 -33000
profit 15010 2000 -7000 10010
4.1 Steps to Improve Profitably Considering the Labor Shortage

1. Automation and Technology Adoption: Businesses can boost production

efficiency and decrease their reliance on skilled labor by investing in automation

and cutting-edge technologies (Autor, 2015). Higher output and cheaper labor

expenses may result from this, which would ultimately increase profitability.

2. Businesses may consider outsourcing or offshoring particular operations or

processes to countries with cheaper labor costs and more access to trained

workforce (Kedia & Mukherjee, 2009). This tactic might potentially lower total

manufacturing costs and lessen manpower shortages, which would increase

profitability.

3. Training and skill development: By improving their skills and productivity, firms

can make greater use of their current workforce by investing in employee training

and skill development (Tharenou et al., 2007). Higher output and better quality

could result from this expenditure, which could boost profitability.

4. Effective Labor Allocation: Businesses may make the best use of the skilled

labor that is available and increase overall profitability by examining the

contribution margin per unit of skilled labor and directing labor resources to the

most profitable goods or projects (Atkinson et al., 2011).

5. Flexible Work Arrangements: In a competitive job market, businesses can

retain competent individuals by implementing flexible work arrangements

including job sharing, remote work, or part-time work (Kossek et al., 2006). As a

result of this tactic, there will be fewer labor shortages, more employee

happiness, and ultimately higher profitability.

5.0 Calculation of the variances for March
5.1 Variance Analysis
According to Atkinson et al. (2011), variance analysis is an important management

accounting tool that helps firms comprehend the discrepancies between actual and

projected performance, pinpoint potential improvement areas, and make defensible

judgments. The material cost variance in the hypothetical situation provides insight into

how well the business controlled its direct material costs during production.

Given the normal material cost and production level, the material cost variance of £255

Adverse (A) shows that the actual material cost was £255 more than the projected cost.

This adverse variance may be the result of things like increased material costs, waste,

or production process inefficiencies.

With this information, management may use the variance analysis to pinpoint the

underlying reason behind the unfavorable material cost variance and implement

corrective measures. Investing in employee training to improve material handling or

negotiating better prices with suppliers are a few potential remedies (Blocher et al.,

2019). Another option is to adopt more effective production procedures to reduce waste.

Also, variance analysis is important since it sheds light on the performance of the

business and identifies areas that can be improved. To improve profitability and better

manage direct material costs in upcoming production cycles, the company should look

into the causes of the higher material costs and put remedial measures in place based

on the material cost variance (Solution in appendix).

3.2 Material Variance
The provided variations offer perceptions into the operation of the company and aid in

pinpointing areas that can be improved. The business was able to obtain materials at a

lower cost and employ labor more efficiently than anticipated, as shown by the favorable

material price variance (585F) and labor efficiency variance (325F). Though there is

room for improvement, the material use variance (840A), labor cost variation (213A),

labor rate variance (538A), fixed overhead variance (200A), and sales margin price

variance (1100A) are all negative. The business should look into the causes of the

increased material consumption, such as waste, quality problems, or inefficiencies in

the production process, in order to remedy the material usage variance. These

problems can be reduced, and profitability can be increased by putting into place

stronger inventory management procedures, quality control measures, or process

enhancements (see appendix for solution).

3.3 Labour Variance

For a specific production process, the suggested solution determines the labor cost

variance, labor rate variance, and labor efficiency variance. These discrepancies are

crucial for comprehending how the organization is performing in terms of labor costs,

and they can also be used by management to pinpoint areas for development.

The difference between the standard labor cost for the actual production accomplished

and the actual labor cost incurred is known as the labor cost variation. The actual labor

cost in this instance is more than what was anticipated for the given output level, as

shown by the adverse labor cost variance of 213 units. This may indicate production

process inefficiencies or higher-than-anticipated labor costs. The difference between the

actual and average hourly labor rates, multiplied by the actual labor hours, is known as
the labor rate variance. The real hourly labor rate is greater than the average hourly

labor rate in this example, which leads to higher labor costs. The labor rate variance in

this example is 538A.

The difference between the standard labor hours for the actual production accomplished

and the actual labor hours used, multiplied by the standard hourly labor rate, is known

as the labor efficiency variance. The labor efficiency variance in this instance is 325F,

which shows that fewer work hours were spent than anticipated for the production level,

which is a positive result.

As a result, the labor variances determined in this solution show that the actual labor

rate is greater than the standard rate, which helps to explain why labor costs are higher.

The production process is more efficient than predicted in terms of labor hours required,

according to the labor efficiency variance. The standard labor rate may be changed to

more accurately reflect the state of the labor market by management, who should also

look into the causes of the increased labor rate. The positive labor efficiency variance

also implies that efforts should be made to maintain or raise the level of labor efficiency

in the production process (see appendix for solution).

3.4 Fixed Overhead Variance

Calculating the fixed overhead variance, sales margin price variance, and sales volume

margin variance is the proposed solution. Understanding the discrepancies between a

company's budgeted and actual financial performance depends on knowing these

variations (Drury, 2013). In order to improve future performance, management can

discover areas where the organization has performed better or worse than anticipated

by examining these variations.

The difference between the budgeted overhead and the actual overhead incurred for

the attained production level is known as the fixed overhead variance. The fixed

overhead variance in this instance is negative (200A), indicating that the corporation

spent more on fixed overheads than was expected given the amount of productivity

achieved.

The difference between the actual sales revenue (calculated using the actual quantity

sold and the actual selling price) and the anticipated sales revenue (calculated using the

actual quantity sold and the budgeted selling price) is represented by the sales margin

price variance. Since the company's actual selling price was less than the projected

selling price, there was a decrease in revenue in this case because the sales margin

price variance is also adverse (1100A).

The difference between the budgeted sales margin and the actual sales margin, as

calculated using the budgeted quantity sold and the standard profit margin, is shown by

the sales volume margin variance. The fact that the sales volume margin variance in

this instance is positive (1500F) shows that the corporation sold more units than

anticipated, resulting in higher profit margins. To meet the planned levels, management

should concentrate on lowering fixed overhead expenses and raising selling prices,

according to the analysis of these variations. The business should also keep looking at

tactics that boost sales volumes because they have a positive effect on profit margins.

The organization can enhance its overall financial performance and profitability by

addressing these variations and making the required adjustments (see appendix for

solution).
3.5 How a flexible budget will help Analytics Electronics identify the budget variance?
An organization like Analytic Electronics may find and evaluate budget variations much

more easily with the use of a flexible budget. A flexible budget adapts to reflect the

actual level of activity achieved during a given period, as opposed to a static budget,

which is based on a set level of activity (Horngren et al., 2011). This makes it possible to

compare real outcomes and budgeted figures based on actual output level in a more

accurate manner. As a result, management is better equipped to identify the reasons

behind variations and implement the necessary remedial measures. The following are

some ways that flexible budgets aid in locating budget variances:

1. Separating Activity Level Variance from Other Variances: A flexible budget

allows for the separation of activity level variance from other variances, such as

price or cost variations. This makes it possible for management to assess how

changes in production levels would affect expenses and revenues (Drury, 2013).

2. Facilitating Accurate Comparison: Flexible budgets offer a more accurate

basis for comparison with actual results by changing the budgeted values to suit

the actual level of activity. This makes it simpler to identify the precise areas

where performance differs from the expectations set forth in the budget

(Horngren et al., 2011).

3. Finding Revenue and Cost variations Flexible budgets assist management in

finding both revenue and cost variations, which can offer important insights into

the company's overall financial performance. This gives management the

opportunity to address problems that cause unfavorable variations and

strengthen the causes of favorable variances (Drury, 2013).

4. Enhancing Decision-Making: Flexible budgets allow management to make

knowledgeable choices about resource allocation, cost control, and pricing

strategies by giving a more exact understanding of budget deviations. According

to Horngren et al. (2011), this may result in increased operational effectiveness

and financial success.

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Appendix

1a. cost of equity using DDM

D(1+ g)
Ke= +g
mp(1−f )
0.35(1+0.05)
= + 0.05
3.5 (1−0.09)
0.3675
= + 0.05
3.185
=0.1653 = 16.53%

Cost of equity using CAPM

Ke= Rf+β(Rm-Rf)
= 4.5+1.53(6)
= 4.5+9.18
= 13.68%

Cost of debt of bond

Kd= ∫
(1−t )
mv
Int= 8% x 100 = 8
8(1−0.35)
=
105
5.2
=
105
=0.0495 = 4.95%

Cost of preference shares

 10
Kpf=
96
=10.41%

Computation of WACC when Ke is calculated using DDM.

Ve Vd Vpf
WACC= Ke + Kd + Kpf
(Ve+Vd +Vpf ) (Ve+ Vd+Vpf ) (Ve +Vd+Vpf )
50 40 10
= 16.53 +4.95 +10.41
(50+40+ 10) (50+ 40+10) (50+40+ 10)
= 8.265+1.98+1.041
= 11.29%

Computation of WACC when Ke is calculated using CAPM.

50 40 10
13.68 +4.95 +10.41
(50+40+ 10) (50+ 40+10) (50+40+ 10)
= 6.84+1.98+1.041
= 9.861%
b. option 1: Thorpe Park
Revenue
Year Revenue increase Total
rate
1 201.545 1.11 223.715
2 201.545 1.2321 248.3236
3 201.545 1.367631 275.6392
4 201.545 1.51807041 305.9595
5 201.545 1.68505816 339.615

Increase attributable to option 1

Year revenue for the previous year increase
year revenue
1 223.715 201.545 22.17
2 248.324 223.715 24.609
3 275.639 248.324 27.315
4 305.96 275.639 30.321
 5 339.615 305.96 33.655

2. Contribution
Since variable cost is 40% of revenue, contribution = 60%
Year Revenue contribution rate contribution
1 22.17 0.6 13.302
2 24.609 0.6 14.7654
3 27.315 0.6 16.389
4 30.321 0.6 18.1926
5 33.655 0.6 20.193

Operating expenses
Year Contribution operating operating
expenses % expenses
1 13.302 10% 1.3302
2 14.7654 10% 1.47654
3 16.389 10% 1.6389
4 18.1926 10% 1.81926
5 20.193 10% 2.0193

Option 2: Beeston
Revenue
year Revenue increase rate total
1 201.545 1.12 225.7304
2 201.545 1.2544 252.818
3 201.545 1.404928 283.1562
4 201.545 1.57351936 317.135
5 201.545 1.762341683 355.1912

Increase attributable to option 2

Year revenue for the previous year increase
 year revenue
1 225.73 201.545 24.185
2 252.818 225.73 27.088
3 283.156 252.818 30.338
4 317.135 283.156 33.979
5 355.191 317.135 38.056

Contribution
Since variable cost is 47% of sales, therefore contribution is 53%
contribution Contributio
Year revenue rate n
1 24.185 0.53 12.81805
2 27.088 0.53 14.35664
3 30.338 0.53 16.07914
4 33.979 0.53 18.00887
5 38.056 0.53 20.16968

Operating expenses
Year Contribution operating operating
expenses % expenses
1 12.81805 10% 1.281805
2 14.35664 10% 1.435664
3 16.07914 10% 1.607914
4 18.00887 10% 1.800887
5 20.16968 10% 2.016968

Appraisal of option 1 using net present value (NPV)

Details year 0 year 1 year 2 year 3 year 4 year 5
£, £, £, £,
million million million million £, million £, million
capital outlay -20 2
13.30 14.765
Contribution 0 2 4 16.389 18.1926 20.193
- -
1.330 1.4765
operating expenses 0 2 4 -1.6389 -1.81926 -2.0193
fixed overhead 0 -3.5 -2 -1.5 0 0
 promotional cost 0 -0.5 -0.5 -0.2 -0.2 -0.2
working capital 0 0 -5 0 0 4
7.971 5.7888 13.050
CASH FLOW -20 8 6 1 16.17334 23.9737
DISCOUNTNG
FACTOR @9.86% 1 0.910 0.829 0.754 0.687 0.625
PRESENT VALUE -20 7.254 4.799 9.84 11.111 14.984

27.98
NPV 8

Details year 0 year 1 year 2 year 3 year 4 year 5

£,
million £, million £, million £, million £, million £, million
capital outlay -20 2
Contribution 0 12.81805 14.35664 16.07914 18.00887 20.16968
operating expenses 0 -1.281805 -1.435664 -1.607914 -1.800887 -2.016968
fixed overhead 0 -2.5 0 -2.8 -2.1 -2.1
promotional cost 0 -0.5 -0.5 -0.2 -0.2 -0.2
working capital 0 0 0 -5.5 0 4.125
12.42097 13.90798 21.97771
CASH FLOW -20 8.536245 6 5.971226 3 2
DISCOUNTNG
FACTOR @9.86% 1 0.910 0.829 0.754 0.687 0.625
PRESENT VALUE -20 7.768 10.297 4.502 9.554 13.736

NPV 25.857
Appraisal of option 2 using net present value (NPV)

Appraisal of option 1 using internal rate of return (IRR)

Year Cashflow dicount factor@ present value
50%
0 -20 1 -20
1 7.9718 0.667 5.3171906
2 5.78886 0.444 2.57025384
3 13.0501 0.296 3.8628296
4 16.17334 0.198 3.20232132
5 23.9737 0.132 3.1645284
 NPV -1.88287624

Positive npv: 27.988

Low rate: 9.86%
Negative npv: -1.883
High rate: 50%
NPVlr
IRR= LR+ ( HR −LR)
NPVlr−NPVhr
27.988
= 9.86+ (50−9.86)
27.988−(−1.883 )
=9.86+37.61
=47.47%
Appraisal of option 2 using internal rate of return (IRR)
Year Cashflow discount factor@ present value
50%
0 -20 1 -20
1 8.536245 0.667 5.693675415
2 12.420976 0.444 5.514913344
3 5.971226 0.296 1.767482896
4 13.907983 0.198 2.753780634
5 21.977712 0.132 2.901057984
NPV -1.369089727

Positive npv: 25.857

Low rate: 9.86%
High rate: 50%
Negative npv: -1.369
NPVlr
IRR= LR + (HR −LR)
NPVlr−NPVhr
25.857
= 9.86+ (50−9.86)
25.857−(−1.369 )

= 9.86+ 38.12
= 47.98%
3. Variance analysis
actual selling price per unit = 45400/1100 = £44
actual direct labour cost per hr = 14513/1075 = £13.5
actual direct material cost per kg = 13455/1170 = £11.5
Material cost variance = (SQ of production achieved x SP) – (AQ of material x AP)
SQ of production achieved= 1kg X 1100 = 1100kg
= (1100 X 12) – (1170 X 11.5)
= 13200 – 13455
=255A

Material price variance = AQ of material (SP-AP)

= 1170(12-11.5)
=585F
Material usage variance = SP (SQ of production achieved -AQ of material)
= 12 (1100-1170)
=840A
Labor cost variance = (SH for production achieved x SP) – (AH x AP)
SH for production achieved: 1hr x 1100 = 1100hrs
= (1100 x 13) – (1075 x 13.5)
= 14300 – 14513
= 213A
Labour rate variance = AH(SP-AP)
= 1075 (13-13.5)
=538A
Labour efficiency variance = SP (SH for production achieved – AH)
=13 (1100-1075)
=325F
Fixed overhead variance = BOH for production achieved – actual overhead
BOH for production achieved: 5 x 1100 =5500
= 5500 -5700
=200A
Sales margin price variance: (AQ x ASP) – (AQ x BSP)
= (1100 x 44) – (1100 x 45)
= 48400 – 49500
= 1100A
Sales volume margin variance: (AQ x SP) – (BQ x SP)
= (1100 x 15) – (1000 x 15)
= 16500 – 15000
= 1500F

Reconciliation of budgeted profit and actual profit.

£ £
BUDGETED PROFIT 15000
Variances:
material price variance 585
material usage variance -840
labor rate variance -538
labor efficiency variance 325
fixed overhead variance -200
sales margin price -1100
variance
sales volume margin 1500 -268
variance
ACTUAL PROFIT 14732