ACC2005 Management Accounting

Case 39: Bolt Industries

Report





Ryan Dempsey



1

Table of Contents

Introduction.

2
Budgeting and Standard Costing System Table..

2
Acquisition Analysis

5
Profitability Analysis..

5
Return on Investment..

6
Payback Period..

7
Breakeven Analysis.

7
Evaluation..

9
Conclusion.

10
Appendix 1

11
Appendix 2

12
Appendix 3

13
Appendix 4

15
Bibliography

16


2

Introduction
Established 20 years ago, Bolt Industries is a family-run designer and manufacturer
of trailers and vans. The company is focused on finding effective solutions to their
customers problems and has made substantial investment into developing technological
innovations to become the leader in the production of refrigerated vans and trailers in
Ireland.
The company is currently seeking to improve its budgeting and standard costing
system and is also examining potential opportunities for expansion through an acquisition of
one of two possible forklift manufacturers in North America. The issues relating to these
two areas of Bolts strategic plan will be discussed further in this report.

Budgeting and Standard Costing System
As requested, and with regards to the current budgeting and standard costing
system, eight weaknesses have been identified along with potential consequences and
recommendations for improvement. These are presented in the following table for
consideration:
Weakness Consequence Recommendation
3 Key staff
members
developing
budget

When preparing the budget, it is
three key staff members who are
involved this could lead to
inaccuracies as it is not their area
of expertise. As only three people
develop the budget it is a narrow
minded view, and they cannot
take all views into consideration
to decide what is best for the
company. The Directors who
develop the budget manage
everyone else within the
company, therefore as they do
not design or develop the
products they may not have
enough knowledge regarding the
day-to-day business or the
processes involved.

Function managers
should be included in the
budget development to
ensure that they have the
expertise and knowledge
required to develop an
accurate and efficient
budget. The budget
development process
should allow time for
employees to voice
opinions and ideas that
could be useful when
developing the budget.
Sales director
using
judgement for
sales
estimates/
The sales director uses their own
judgement for sales estimates and
prices; however this could be
flawed, as the budget could be
subjective rather than objective.
By implementing
strategic planning
procedures to provide
reliable data and basis for
sales estimate means that
3

prices

This means that the sales director
could be influenced by his or her
own personal experiences or
ideas that could affect the budget
and this could lead to an
unrealistic and inaccurate budget.


the information would
not be as subjective.
The sales director should
also report to someone
more senior or a panel of
managers regarding the
budget to ensure that it is
objective and provides
reliable estimates.
Sales Director
Benefits from
bonuses even
though he
develops the
budget

There is bias from the sales
director as he creates sales
targets that are easily achievable
in order to attain the sales bonus.
This leads to soft budgets that, in
turn, provide no incentive to
improve efficiency or sales
performance. Due to the easily
attainable targets, more bonuses
will be paid out and costs are
therefore higher.
Remove the sales
director from the sales
team bonus scheme. The
sales director should be
placed on a bonus
scheme based on overall
company performance
with the other directors
on the board.
There should also be a %
increase in the budget
compared to actual sales
rather than maintaining
the same budgeted
figures year on year. The
budget should be
reviewed annually by the
board and effective
strategic planning
procedures put in place.

System lacks
real-time
information

The time lag leads to inadequate
analysis of variances. When the
variances are calculated the
information has become out
dated.
Cost centre managers miss
opportunities for efficiency gains
because the variance analysis is
not utilised due to out-dated
information.
Implement a system that
provides real-time data.
The efficiency gains
derived from this new
system will outweigh the
initial investment
Ensure that the system is
accessible to relevant
personnel. This allows all
managers to utilise the
same information, which
improves coordination
and creates opportunities
for efficiency gains.
Non-
production
overheads have
not received
much attention
An inaccurate budget could be
obtained for the non-production
overheads since they are planned
and increased in line with the
sales budget and not developed
Non-production
overheads should not be
increased in line with the
sales budget as they may
not be subject to the
4

in the
budgeting
process

individually. There is the
potential for an escalation of
costs due to lack of attention to
the individual budgets as
incrementally increasing each
budget every year will not
highlight any possible
inefficiencies. This may lead to
future cash flow issues.
same fluctuations or
variances, and therefore
must be independently
calculated to prevent the
magnification of any
possible bias from the
sales budget.
Old standard
costing system

This is inconsistent with current
operations. Many of the costs and
quantities were set three years
ago and have not been changed
despite the fact that the
production processes have been
modified slightly. This could lead
to an inaccurate cost per unit
since old information is being
relied upon.
Also, the prices for the materials
and labour rates were set three
years ago and increased in line
with the retail price index. This
may not accurately reflect actual
price increases.
A possible remedy to
these problems would be
to introduce a zero-based
budget. This could help
identify any inefficiencies
and would force
managers to obtain
materials for the best
price possible to give
maximum margins. A
zero-based budget will
also give more accurate
cost per unit information
compared with using the
three year old data.
These budgets should
then be put forward for
approval by the Board of
Directors.
Absence of
strategic
planning
procedures

Due to issues in predicting the
external environment, the
company terminated its use of
Rolling Strategic Planning and
now has difficulty in establishing
a focus on its product portfolio
and pricing strategies. Costs of
production for its vans and
trailers may therefore not be
properly budgeted for, which can
also lead to inappropriate
pricing- reduced profits or even
losses may result due to over or
underpricing causing a decrease
in demand and margins
respectively.
The firm should
implement strategic
planning procedures
such as developing a
zero-based budget for the
upcoming period which
allows the firm to plan its
future activities whilst
alleviating the pressures
that they faced when
using a rolling budget,
which constantly
required new market
information. As the firm
operates in a market that
is susceptible to changes
in technology, they may
consider shortening the
time period covered by
the budget.

5

Forecasting
based on
previous sales
trends

The use of previous sales trends
and outdated information on the
competitive environment in
forecasting sales would create a
sales budget that is meaningless,
as it would be inappropriate to
compare the actual sales
generated within a market that is
entirely different to that upon
which the budgeted sales were
based.
The firm should use a
more holistic approach
when finding a basis for
forecasting. Rather than
relying solely on past
sales trends, the option of
outsourcing may be
considered so the firm
can be confident in using
information on the
current market that has
been gathered by
specialists.

Acquisition Analysis
With regards to the possible acquisition of a forklift truck manufacturer, two
potential candidates have been identified: Boucher Forklifts based in Canada, and Jackson
Engineering based in the United States. The following calculations have been carried to out
determine the suitability of both options and a recommendation can be found in the
conclusion of this report.
Profitability
The expected profitability of the two investment options and the range of profit
outcomes provide an insight into the performance of both companies. The first stage of this
profitability analysis is to calculate the expected sales for the two investments. This is
calculated by multiplying the possible sales volumes by the probability that that they will
occur and adding together each of the probability-weighted sales volumes. The total of the
probability-weighted sales volumes is the expected sales volume for the period. The
expected sales volume for Boucher Forklifts and Jackson Engineering are shown in Appendix
1.
As shown in the table, Boucher Forklifts has a higher expected sales volume of
15,400 compared to Jackson Engineering with 14,600. There is also only a 5% chance that
Jackson will sell 18,000 units compared to 35% for Boucher. There is an 80% chance that
Jackson will sell between 14,000 and 16,000 units and only a 15% chance that they will sell
any less than that. For Boucher there is more of a spread, with an 80% chance of selling
between 14,000 and 18,000 units which provides a greater opportunity for larger sales but
also makes it more difficult to plan output.

With the expected sales volumes for both options, it is now possible to calculate the
expected profitability for the expected sales. This is calculated by subtracting the variable
costs (Production and Selling) and the fixed costs (Production, Selling and Administration)
from the sales revenue. The expected profitability for both options is shown in Appendix 3.
6

The variable costs for Boucher include CA$8500 p/u for production and CA$1260 p/u for
selling and the total fixed costs are CA$45,400,000. The selling price for Boucher is
CA$14,000 and the expected sales are 15,400, generating sales revenue of CA$215,600,000.
The expected profitability is then CA$19,896,000. The variable costs for Jackson include
US$7,000 p/u for production and UD$625 p/u for selling and the total fixed costs are
US$35,900,000. The selling price for Jackson is US$11,250 with expected sales of 14,600,
generating revenue of US$17,025,000. These figures alone do not mean much to the
analysis as they are in two separate currencies. Boucher is dealing in Canadian dollars and
Jackson is US dollars. The expected profitability, in euros, is shown in Appendix 4. Bouchers
profitability in Euros is 14,211,429 and Jacksons profitability is 13,620,000. Based on this
calculation it seems that Boucher is more attractive however this calculation does not take
into account the range of possible profits.

Appendix 2 shows the possible profit outcomes as well as the costs associated with
each possible sales volume. Boucher has a higher selling price compared to Jackson;
however this is accompanied with higher fixed and variable costs as shown in Appendix 2.
For comparability purposes we will use the range of profit outcomes in euros as calculated
in Appendix 4. As stated before, Boucher has a higher expected profitability than Jackson,
based on the most likely sales volume. However Boucher does have a chance of making a
loss of 2,142,857 if they only sell 10,000 units. Although there is only a 5% chance of this
occurring, it is still a possibility and makes this particular option more risky. There is a 35%
chance of Boucher selling 18,000 units, which means that there is a good opportunity to
exceed the expected profitability. There is an 80% chance that they will make between
9,971,428 and 22,085,714. This allows for an increase on the expected profitability.
Jackson, on the other hand, have a 5% chance of making 23,480,000, which is a huge
increase on the expected profitability, however, the likelihood of this occurring is slim.
There is an 80% chance of making profits between 11,880,000 and 17,680,000 which
means that there is less risk involved with Jackson as the profitability gap is smaller. Jackson
are also not going to make a loss as their lowest profitability figure is 280,000 compared to
the loss making situation with Boucher. Boucher does have the opportunity for very high
profits but they do also have the chance of making a loss. Jackson is less risky as they have
no chance of making a loss and the profitability gap is smaller which gives a more reliable
estimate of profitability.
Return on Investment
After expected profitability has been calculated, further calculations are necessary to
fully examine the suitability of the acquisition opportunities. A key calculation is the return
on investment which is determined by dividing average annual profit by the investment cost
to obtain the expected return. This formula is useful when the options under consideration
incur a differing initial outlay which is the case with Boucher and Jackson. An assumption
7

has been made that the additional investment in technology was part of the initial
investment in both companies, as shown in the following calculations:
Boucher Forklifts

Jackson Engineering

From these calculations, it would appear that Jackson Engineering is the more attractive
investment opportunity as it yields the highest rate of return. The main reason for this is
that Boucher Forklifts would cost 55,000,000 more than Jackson, but only generate an
extra 2,000,000 in profit. This would suggest that Boucher Engineering is either over-
valued, or more worryingly, suffers from inefficiencies that reduces their ability to maximise
profits.
Payback Period
Considering there has been recent upward pressure on international interest rates
and an accepted view that belt-tightening is required, another calculation may be necessary
to ascertain the period of time that is required for the incomes from an investment to
recover the initial cash outlay in order to minimise the possibility for future cash flow
problems. This calculation is called the payback method and is found by dividing the initial
investment by the annual net cash flow. Once again, it is assumed that the additional
investment in technology is included in the initial investment, along with the assumption
that there is a uniform annual net cash flow and 365 days per year. The payback periods for
the acquisition opportunities are presented below:
Boucher Forklifts

Jackson Engineering

Once again, from this result, it would appear that Jackson Engineering is the most suitable
acquisition opportunity as it recoups the initial investment in a shorter period of time.
However, the payback method compares future cash flows with the initial outlay without
discounting them to their present values and so this method is subject to an inaccuracy in
this regard. Nevertheless, it can still be used to give an approximate measure of when an
investment will recover its original cost and so, based upon the return on investment and
payback figures, it would appear that the Jackson Engineering option should be pursued.
Breakeven Analysis
Breakeven analysis allows us to determine which acquisition would be suitable and
worthwhile to invest in. Calculating the Breakeven units allows us to determine how many
units must be sold in order to make a profit, anything greater than this amount would yield
a profit.
8





Contribution margin per unit is calculated as Price Variable Cost per unit. In order
to determine which acquisition is the most suitable the breakeven units must be calculated,
using the figures gathered.









By looking at the figures above we can see that Jackson Engineering only requires
9,904 units to be produced to breakeven, any units produced after this amount are profit.
Jackson Engineering require less units to be produced than Boucher Forklifts, as they have
less total fixed costs and the variable cost per unit is also lower. Jackson Engineering forklifts
are cheaper as they are lighter trucks with fewer standard features, but despite the price
difference, fewer units of Jackson Engineering forklifts must be sold to make a profit.
A further calculation associated with breakeven analysis is breakeven sales.

This formula uses the breakeven units that we had previously calculated which already takes
into account the fixed and variable costs associated with production.
Using the figures given and those previously calculated the breakeven sales value can be
calculated.



Jackson Engineering has a lower breakeven sales value than Boucher Forklifts. If we convert
both Canadian dollars and American dollars into Euros we can see that the breakeven sales
value for Boucher forklifts is 107,080,000 and for Jackson Engineering it is 89,136,000. By
comparing both values we can see that the breakeven sales value for Jackson engineering is
almost 20,000,000 lower than Boucher Forklifts.



9

Evaluation
Analysing these figures, we can see that Jackson Engineering seems like the more
suitable acquisition, because it has lower breakeven units value and a lower breakeven sales
value. This means that Jackson Engineering does not need to sell as many units to make a
profit, meaning that even though the forklifts that Jackson Engineering sells are cheaper,
they seem like a more profitable option than Boucher Forklifts.
Based on the information calculated earlier in the report, an evaluation of both
proposals may now be carried out, whilst taking into account any qualitative and strategic
issues that are relevant to Bolt Industries.
Firstly, Jackson has an acquisition cost of 64million (US$80million) whilst the
purchase price for Boucher is over 50% higher at 100million (CA$140million). Acquiring
Jackson Engineering would therefore require a lower initial outlay and, as a result, less
borrowing. Given that Bolt is currently considering financing the acquisition through
borrowing due to insufficient reserves and Crawfords reluctance to offer share capital
which would result in a dilution of control, the lower acquisition price of Jackson makes it
more appealing from a funding point of view.
Another factor to consider is the amount of technological investment associated
with the proposals. The acquisition of Jackson would require an immediate investment
of 20 million (US$25 million) whilst Boucher would only need 14,285,714.29
(CA$20 million). However, despite the higher investment in technology required by Jackson,
its lower purchase price of 64 million (US$80 million) means the total initial outlay at 84
million (US$105 million) is still significantly lower than the outlay of 114,285,714.30
(CA$160 million) necessary for Boucher.
With regards to return on investment and payback, the superior figures of 16.21%
and 6 years, 61 days respectively for Jackson compared to 12.44% and 8 years, 15 days for
Boucher make Jackson appear the more attractive candidate for acquisition.
This is further supported by Jacksons breakeven sales volume and value of 9904
units and 89,136,000 respectively, in comparison with 10,708 units and 107,080,000 for
Boucher. However, it is important to note that the calculation of these figures was based
upon an estimated range of sales volumes and related probabilities.
In terms of the future prospects for both companies, orders for the following year
have already been secured by Jackson, and location of the company itself is in close
proximity to other potential customers situated in Florida, which indicates that Jackson is in
a good position to negotiate further orders for the future. Given that Boucher has no
confirmed orders and that there is a degree of uncertainty surrounding the firms future, it
would appear that acquiring Jackson is the safer option.
10

As for the product portfolios of the two companies, the Wakulla forklift produced by
Jackson is a lighter model compared to the Carleton forklift manufactured by Boucher.
Research carried out by the production manager at Bolt Industries suggests that an electric
forklift that is relatively lightweight and small in size would be most suited for the
companys current customer base. Therefore, the addition of the Jacksons Wakulla forklift
to Bolts product range would seem the more appropriate choice to satisfy the needs of
their existing customers.
Another element to take into consideration is the compatibility of the management
of Bolt Industries with that of Boucher and Jackson. If either of the two companies is
acquired, it is probable that the management of the acquired company would stay within
the business for a considerable amount of time. It is therefore vital to ensure that the
management teams of both Bolt and the acquired company can effectively work together
without hostility to provide the best chance of success after the acquisition.
Having analysed the above factors influencing the choice between the two
acquisition proposals, taking into consideration both financial and qualitative information, it
would appear that it would be most appropriate for Bolt Industries to acquire Jackson
Engineering. In comparison to Boucher, Jackson seems more financially viable with its lower
initial outlay and superior return on investment, payback and breakeven figures. From a
qualitative point of view, evidence suggests that Jacksons Wakulla forklift would better
complement Bolts current product portfolio and its desirable location means the companys
future appears more certain in terms of securing new customer orders in North America.
However, the success of this acquisition would also to a certain degree be dependent on the
effectiveness of the working relationship between the management teams of the two
companies.
Another potential option for Bolt Industries, assuming that more time and resources
can be made available, is to examine Eastern European companies for potential merger
opportunities given that the companys major competition are lower priced trailers that are
imported from this area. Bolt may focus on finding a competitor who manufactures trailers
of a similar quality standard to their own and if an amalgamation is successful, Bolt can
potentially benefit from reduced costs of production, therefore helping to increase profits.
Conclusion
Overall, from the information provided and calculated, it can be concluded that out
of the two current proposals Jackson Engineering would be the most suitable acquisition
opportunity for Bolt Industries. Although potential opportunities available in Eastern Europe
should be acknowledged, the information available at present on the stability, profitability
and product integration with Bolts existing range and customer base supports the
acquisition of Jackson Engineering.
11

Appendix 1- Possible sales Values and Probabilities for both Investment Options

Boucher Forklifts


Jackson Engineering









Units Probability Weighted Units
18,000 0.35 6,300
16,000 0.25 4,000
14,000 0.20 2,800
12,000 0.15 1,800
10,000 0.05 500
15,400
Units Probability Weighted Units
18,000 0.05 900
16,000 0.40 6,400
14,000 0.40 5,600
12,000 0.10 1,200
10,000 0.05 500
14,600
12

Appendix 2- Range of Profitability Outcomes for both Investment Options


Boucher Forklifts
Units Revenues
(CA$)
Variable
Costs (CA$)
Fixed Costs
(CA$)
Profit
(CA$)
Profit ()
18,000 252,000,000 175,680,000 45,400,000 30,920,000 22,085,714
16,000 224,000,000 156,160,000 45,400,000 22,440,000 16,028,571
14,000 196,000,000 136,640,000 45,400,000 13,960,000 9,971,428
12,000 168,000,000 117,120,000 45,400,000 5,480,000 3,914,285
10,000 140,000,000 97,600,000 45,400,000 (3,000,000) (2,142,857)



Jackson Engineering
Units Revenues
(US$)
Variable
Costs (US$)
Fixed Costs
(US$)
Profit (US$) Profit ()
18,000 202,500,000 137,250,000 35,900,000 29,350,000 23,480,000
16,000 180,000,000 122,000,000 35,900,000 22,100,000 17,680,000
14,000 157,500,000 106,750,000 35,900,000 14,850,000 11,880,000
12,000 135,000,000 91,500,000 35,900,000 7,600,000 6,080,000
10,000 112,500,000 76,250,000 35,900,000 350,000 280,000







13

Appendix 3- Expected Profitability of both Investment Options

Boucher Forklifts






(CA$) (CA$)
Sales (15,400 * $14,000) 215,600,000

Variable Costs:
Production ($8,500 p/u) 130,900,000
Selling ($1260 p/u) 19,404,000 (150,304,000)

Fixed Costs:
Production 27,800,000
Selling 7,200,000
Administration 10,400,000 (45,400,000)

Profit 19,896,000

14

Jackson Engineering









(US$) (US$)
Sales (14,600 * $11,250) 164,250,000

Variable Costs:
Production ($7,000 p/u) 102,200,000
Selling ($625 p/u) 9,125,000 (111,325,000)

Fixed Costs:
Production 25,800,000
Selling 3,000,000
Administration 7,100,000 (35,900,000)

Profit 17,025,000

15

Appendix 4- Expected Profitability and Range of Profit Outcomes for both Investment
Options in Euros














Boucher Forklifts Jackson Engineering
Expected Profit
()
14,211,429 13,620,000
Units
Range of Profit: 18,000 22,085,714 23,480,000
16,000 16,028,571 17,680,000
14,000 9,971,428 11,880,000
12,000 3,914,285 6,080,000
10,000 (2,142,857) 280,000

16

Bibliography:

Drury, C. (2012) Management and Cost Accounting, 8th edn., London, UK: Thompson
Business Press.
Hyndman, N. and McKillop, D. (2013), Cases and Solutions in Management Accounting and
Business Finance, 3
rd
edn., Dublin, Chartered Accountants Ireland.