Margaret enjoys leathercraft, designing and making small things such as bracelets, wallets, and handbags. She has had success selling her products at the local market and has been having trouble keeping up with the demand for products, particularly during the busy summer seasons. She is now planning to turn her hobby into a business, Craft Leather, focusing on her handbag designs.

 

Her sales figures of handbags for the last year are shown below.

Handbags	Nov - Jan	Feb - Apr	May - July	Aug - Oct
Average sales per month	80	60	40	60

 

Margaret sells the handbags at around $60 each. Her major expense making the handbags is the leather material. On average each handbag requires 0.2 metres of leather. The leather costs $120 per metre, and the fittings cost $1.00 per handbag. All the leather and fittings must be shipped into Tasmania and takes a month to arrive.  Margaret will need to have enough material on hand at the beginning of each month for the next month’s production (note: this means the material costs will occur two months before the sales).

 

Margaret currently sources her leather from an environmentally accredited tannery in South Australia. Margaret makes mention of this in all her advertising material. She has seen cheaper leather from overseas on the internet, $100 per metre, but up until now her level of production has not been sufficient to warrant checking out alternate suppliers.

 

Margaret currently makes her products at home but will need more space if she expands her production and store her products. She has found a space in a cooperative Art Centre to establish a workshop. She can lease the space for $600 per month paid three months in advance and can cancel the arrangement at any time with only one months’ notice. The cooperative Art Centre also operates a shop and will display and sell her products on commission. She expects they will sell 40% of her handbags.  They will keep 25% of the sales price. Margaret plans to establish a stand in the Salamanca Market each Saturday. She will also set up an online presence to take orders for products. She anticipates this business arrangement will enable her to double her sales from the previous year if she works in the business full-time.

Other expenses are estimated to be as follows:

• Stall fee $100 per week
• EFTPOS $40 per month
• Advertising $50 per month
• Website administration $500 per annum
• Miscellaneous costs $30 per month

 

Margaret plans to commence the business 1 September 20XX. She anticipates it will take one month to get setup and source materials and another month to prepare goods for sales. She plans to start selling her handbags from 1 November 20XX.

 

Margaret has some funds she can contribute to the business to cover the setup costs for three months’ worth of materials and rent. Margaret also has some leatherwork tools she currently uses however she will need to purchase some equipment to be able to expand her production to the level required for the business. She will need to borrow money to finance the purchase. She estimates the equipment will cost around $40,000. The equipment has a useful life of 5 years with a residual value of $10,000. Her parents have agreed to lend her the money at a flat interest rate of 6%, interest to be paid at the end of each year. The principal to be repaid in five years’ time. If she buys the equipment, she will be able to expand her products but has no idea of future demand at this stage.

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Your Team is required to:

1. Use management accounting tools to prepare calculations to assess Margaret’s business concept.
   1. Prepare a sales, production, and materials budget for the first two years of operation.
   2. Using this information, prepare budgeted income statements for both years.
   3. Calculate the breakeven quantity of sales and margin of safety for both years (note the commission is a variable cost).  Present this information in units and dollars.
   4. Assuming the business will operate for five years.  Use your calculations for the profit for year one and two and then year two as the average operating revenue and costs for years three, four and five calculate the following details.
      1. Calculation of the Accounting Rate of Return (ARR),
      2. Payback Period, and
      3. Net Present Value for the equipment.

Your calculations should be prepared in an Excel workbook and you must use a separate excel worksheet for each main point above (a,b,c and d). Your worksheets will need to be linked where appropriate. Take care with your formatting and ensure all worksheets are clearly labelled. The workbook should be labelled Group X Part One.

 

2. Write a 500-word informal report to advise Margaret on the outcomes of your calculations above and also about possible factors that should be considered when assessing true ‘performance’.  These factors could be non-financial in nature (both positive and negative). Also include some information that Margaret should consider if she sources her leather material from an alternate supplier in the future.   

Answer rating: 100% (QA)

Title Informal Report on Margarets Craft Leather Business Concept Evaluation Dear Margaret I hope this report finds you well Our team has conducted a thorough analysis of your Craft Leather business c... View the full answer