Accounting ( Management accounting).

Accounting ( Management accounting).

Requirement: Assume appropriate monthly figures for the costs you identified in (01) above, clearly state your assumptions, and use your assumptions as well as the information provided above to prepare a statement of profit/loss for the first six months of Daisy Chen’s Business using Marginal costing. Based on your calculations discuss whether the business will be profitable in the first six months and also whether the prices Daisy suggests are appropriate.

The Case study

Daisy Chen is thinking of starting her own business and has come to you for advice. She believes it would be a good idea to buy used furniture for a low price and to redecorate them using a range of different materials including paints, pictures etc.  to sell at a higher price in a shop of her own. Daisy would initially like to buy and do up dressing tables, stools, and chests of drawers. She will do the designs herself but will need two employees to carryout the work on the pieces of furniture. She will also need a shop assistant, and a delivery driver. You have already met Daisy once and she has provided you with some information about her business.

 

Extra information that you have gathered during your first meeting with Daisy:

 

1. Daisy will buy her furniture from a range of sources. On average she thinks she can buy a used dressing table for £40, a used stool for £15, and a used chest of drawers for £ 35. She estimates she will have to pay a delivery cost of £10 per dressing table or per chest of drawers however, the delivery cost per stool is likely to be a lost less at £5 per stool because of its smaller size and also because it would be much easier to handle.
2. A tin of paint costs £6.00. Half a tin of paint will have to be used per dressing table or per chest of drawers, while one third of a tin of paint will be used on a stool. Other supplies such as pictures or embellishments will cost £ 5.00 per item of furniture. Lacquer costs £8.00 a tin and can be used in the same quantities per unit as the paint. Other supplies such as sand paper etc will cost £1.80 per unit  for each of the three types of furniture.
3. Daisy will pay her delivery man £400 per month, and he will work for two days a week , and her shop assistant £800 per month. She expects the decorators to work 20 hours a week paid at £8.00 an hour. It  is expected that 2 hours of labour time will be required to complete either a dressing table or a chest of drawers, and one hour for the completion of a stool.
4. Daisy will also have to rent a suitable shop, which is expected to cost around £700.00 per month. She will use her own van for the business, but the deliver driver will be responsible for making the deliveries to customers. Fuel costs will depend on the distance travelled, and are expected to be £300 per month.
5. Daisy also informs you that given the quality of the finish, based on a bit of market research she has already carried out, she thinks she will be able to sell each completed dressing table for £200, each stool for £45, and each chest of drawers for £170. Daisy’s expected sales for the first six months are:

	Month1	Month2	Month3	Month 4	Month 5	Month 6
Dressing tables	8	9	9	10	11	13
Stools	30	40	45	45	47	47
Chest of drawers	18	18	20	20	22	24

 

 

 Requirement:

 

Assume appropriate monthly figures for the costs you identified in (01) above, clearly state your assumptions, and use your assumptions as well as the information provided above to prepare a statement of profit/loss for the first six months of Daisy Chen’s Business using Marginal costing. Based on your calculations discuss whether the business will be profitable in the first six months and also whether the prices Daisy suggests are appropriate.

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