Solar Systems Company

Introduction

Solar Systems Company has been chosen for this analysis. The company focuses on clean, energy products assembles and sells two types of Solar Panels, Panel A and Panel B. The company’s sales occur in two regions. The Northern region incorporates Germany, the Netherlands, the United Kingdom and France, while the Southern region includes Malaysia, Singapore, Indonesia, the Philippines and Australia (DeGeorge 2006, p.52). The company uses costs and performance measurement systems based on monthly profit reports for each product and for each region.

Analysis of a per Unit Cost for each Product

Solar Systems Company has been chosen for this analysis. The company focuses on clean, energy products assembles and sells two types of Solar Panels, Panel A and Panel B. The company’s sales occur in two regions. The Northern region incorporates Germany, the Netherlands, the United Kingdom and France, while the Southern region includes Malaysia, Singapore, Indonesia, the Philippines and Australia (Babad & Balachandran 2003, p. 567). The company uses costs and performance measurement systems based on monthly profit reports for each product and for each region.

Solar Systems Company uses a traditional costing method that allocates overheads arbitrary to the elements of costs. In this case the factory overheads are allocated arbitrarily to the panels on the basis of the factory direct labour hours (Hicks 2010, p.1). In addition, the management accountant classifies period costs/expenses in terms of warehousing and handling costs, distribution and transportation costs, administrative expenses, and marketing expenses and then allocates these expenses to each region on the basis of total sales dollars per region in order to come up with the net profit for the region. This will help the management to establish the individual performance of each of the distribution regions and to initiate appropriate decisions aimed at improving the profitability of the company (Emblemsvag 2010, p. 1).

Analysis

From the data that the management accountant established as the results of operations of Solar Systems in the recent month and by employing the first report framework that generates reports showing sales by panel, the following data is evident as shown in the working figures above the profit statement above. In order for the system to calculate the sales of both panels, it was important that the total cost of each group of the indirect overheads be established. In this regard, warehousing and handling consisted of receiving shipments of 20A410,440.00 pounds, pricing and tagging of the panels totalling to 20A44,200.00 pounds (Kaplan & Bruns 2007, p.76). Packing costs of 20A4800.00 pounds and fixed depreciation costs of shipments equipment of 20A4900.00 pounds. This ensures that the total cost of the warehousing and handling overhead costs cumulated to 20A4 16,340.00 pounds. The distribution and transportation overhead, which consisted of a fixed amount of rent of 20A4600 pounds, a fixed transportation cost of 20A4250 pounds and an indirectly variable transportation cost totalling to 20A41999.80 pounds, thereby ensuring a total distribution and transportation cost of 20A42449.80 pounds. The administrative expenses consisted of accounts receivable costs totalling to 20A4900 pounds and supplier order processing cost of 20A4300 pounds (Cokins, Blocher & Chen 2008, p.67). Therefore, this ensured that the administrative expenses overhead cumulated to a total of 20A41,200 pounds. Moreover, the marketing expenses, which involves general marketing totalling to 20A4320 pounds, and a fixed marketing costs of %u20A4800, thereby ensuring that the total costs of marketing expenses amounts to 20A41120 pounds.

The manufacturing overhead costs included assembly costs of 20A44,500 pounds, set-up costs of 20A46,000 pounds  and inspection costs of 20A43,000 pounds. This ensured that the total manufacturing overhead is 20A413,500 pounds. Consequently, following the fact that factory overheads are allocated to the panels on the basis of direct labour hours, the total direct labour hours is 1000, the overhead absorption rate is 20A413.50 pounds per labour hour (Hicks 2005, p.36). From the aforementioned information together with the findings of the management accountants concerning the unit sales price, the unit prime cost and the number of units that each panel manufactured, it is evident that the sales of panel A and panel B are 20A419,032 and 20A445,000 pounds respectively. The resulting prime costs for each panel were 20A43,200 and 20A47,200 pounds for panel A and panel B respectively. Overhead costs for each panel amounted to 20A45,400 and 20A48,100 poundsfor panels A and B respectively. This ensured that the resulting profits are 20A410,432 and 20A429,700 pounds for panel A and panel B respectively.

Additionally, and in regards to the periodic expenses, which the management accountant deducted from the panel gross profit on the basis of the total dollars per panel to determine the net profit of the panel, the deduction rate were 29.72% and 70.28% for panels A and B respectively. In this regard, the warehousing and handling overhead costs for panel A and panel B are 20A44856.68 pounds and 11,483.32 respectively. The resulting distribution and transportation overhead costs for each panel were 20A4847.04, 20A42,002.76 pounds for panels A and B respectively. The administrative expenses and marketing expenses for panels A and B were 20A4356.67, 332.89 and 843.33, 787.11 pounds, respectively. As such, the total period expenses for Solar Panels A and B were %u20A46393.28 and 15,116.52 respectively, which ensures that each panels attained net profits of 20A44038.72 and 20A414583.48 pounds for panel A and panel B respectively. Consequently, the resulting costs of each panel per unit are 20A437.48 and 20A450.69 pounds for panel A and panel B respectively.      

A Five Year net present value (NPV) Appraisal of your new business

The initial investment cost of the new business is %u20A425. Therefore, the Net Present Value (NPV) for this new business can be calculated as shown below.

NPV= 20A4{[5/(1+0.1)^2] + [10/(1+0.10)^3] + [15/(1+0.10)^4] + [12/(1+0.10)^5]} – 25

NPV =20A4 (4.132 + 7.513 + 10.245 + 7.451) -25

NPV = 20A429.341 -25

NPV = 20A44.341 million

Internal Rate of Return (IRR) Calculation

NPV = 0

-25 + {[5/(1+IRR)^2] + [10/(1+IRR)^3] + [15/(1+IRR)^4] + [12/(1+IRR)^5]}= 0

Therefore, IRR = 14.87%

 Recommendations for the business and a conclusion

It is evident from the analysis above that NPV gives the accurate and appropriate measure of the project capabilities. Therefore, the new business should use the NPV method to evaluate its project and in this case, it would choose to finance the proposed project of manufacturing the two complementary solar panels, because they could provide the highest positive NPV (Clinton & Van Der Merwe 2006, p. 15). The two products could perform better since the net present values would be more realistic as they put into consideration the time value of money as well as all the cash inflows that the project would bring to the new company. Therefore, the bank should provide loan to the new business investment.

The new business can propose for clean and sustainable source of energy, which would reduce reliance of oil and gas energy, as a measure of reducing environmental sustainability. In this regard, technology of manufacturing components for converting transport vehicles to use natural gas can be implemented. Other sources of fuel such as clean coal and nuclear power can be exploited. Failure to adopt alternative and clean sources of energy would adversely affect the world energy market. For example, China started experiencing dwindling economic performance, because of increasingly high demand for energy. Regarding this, China encouraged the UK and the US to set up fuelling stations for natural gas. Such policy on independent sources of energy also aims at ensuring a continuous and self sufficient energy supply in the United Kingdom. The guidelines of the policy are aimed at protecting the quality of the UK (London) environment and population from the possible hazards of energy utilization and exploitation. The policies are also aimed at improving the technical capabilities of the UK energy sector for their security of the state, energy self reliance and their economic competitiveness.