Page 4 - CIMA MCS Workbook May 2019 - Day 2 Suggested Solutions

CIMA MAY 2019 – MANAGEMENT CASE STUDY

As we are operating at full capacity whether we switch production from the houses to a hotel or
not then as long as there are no changes to the workforce there would be no incremental labour
cost.

If there were incremental changes, such as hiring a new person specifically to be involved in hotel
production, their salary and associated costs would need to be calculated and included as
relevant.

If overtime needs to be paid that would not have been needed for the houses production, it
would also be incremental and included in the relevant cost.

Overhead cash flows

Only if overhead cash flows increase or decrease as a direct result of making the switch would
they need to be included in the evaluation. A change in the way that overheads are allocated to
contracts would not lead to a relevant cost being incurred.

Transport costs

The costs of transporting parts to site for each option should be compared and any incremental
cost or saving included.

Other work

It should be checked that making the switch would only compromise the production of the five
houses and not any other work, as if other work is impacted, there may be lost revenues, saved
costs and other relevant cash flows to take into account.

Other considerations

Relevant costing only looks at the financial considerations in terms of cash flows. However, non‐
financial considerations should also be considered.

Leaving customers disappointed that we won’t be able to produce their houses, or that they
would be significantly delayed, may have an impact on our reputation and brand that we have
worked so hard to build. Currently, our customers are willing to wait for our products as they
know that they are of very high quality, but customers already wait up to a year and this switch
may end up meaning that they experience a further delay, which they may now consider to be too
long to wait.

We should also consider the fit with our overall strategy. Is hotel manufacture a long‐term market
that we feel will be beneficial in the long‐term or is it just a short‐term way of maximising cash
flows?

The needs of our institutional shareholders should also be taken into account. We pay out large
dividends each year. If the switch would mean that in the short‐term these dividends could not be
paid, it may upset these investors.

Finance Manager

88 KAPLAN PUBLISHING