Question 1

The Break Even Point (BEP) is the point at which the Revenue generated or the Total contribution is equal to Expenses incurred in say, Production.

In the case study of Olympus Incentives Ltd, the Turnover necessary to ensure a break even point within the year would be


Break Even Point (Units) = Fixed Cost (FC)

(SP – VC)

Where: SP – is the Selling Price

VC – is the Variable Cost


Break Even point (In Sales) = Fixed cost (FC)


Where: C – is the Cost per Unit

P – is the Price per Unit


= BEP (Units) × P (Price per Unit)


P (Selling price per unit) = Turnover ÷ Number of units

= 850,000 ÷ 850

= £ 1,000

VC (Variable Cost per unit) = 450,000 ÷ 850

=£ 529.41

FC (Fixed Cost) =£ 500,000

P/V Ratio = (1000 – 529.41) ÷ 1,000

= 0.47

BEP (Sales/Turnover) = 500,000 ÷ 0.47

= £ 1,064,000


Question 2

Variable Cost = 450,000

= 95% × 450,000

= £ 427,500

VC (Variable cost per unit) = 427,500 ÷ 850

= £ 502.94

P/V Ratio = (1,000 – 502.94) ÷ 1,000

= 0.5

BEP (Sales/Turnover) = £ 1,000,000

The 5% reduction in variable cost has an effect on the Break Even Point in Turnover. It reduces the BEP point from the previous £ 1,064,000 to £ 1,000,000

Question 3

Turnover = 850,000 × 1.05

= £ 892,500

Ne Profit= 892,500 – 950,000

= (£ 57,500)

Even with the increase in The Company’s Turnover by 5% as the Variable costs remain the same, the Net profit is still a negative. It however reduces from a negative £ 100,000 to a negative £57,500. This means that the increase in turnover, with all other factors remaining constant, the profits increase proportionately.

Question 4

Fixed Cost = 500,000 × 95%

= £ 475,000

Net Profit = Turnover – Direct Cost – Fixed Cost

= 850,000 – 450,00 – 475,000

= (£ 75,000)

A reduction in fixed costs, with everything else remaining constant, the Profit increases. As indicated above the profit increase from a negative £ 100,000 to a negative £ 75,000. This implies that the change in the fixed costs has a proportional effect on the profit realized by the company.



Question 5




Mr. Wei Wong
Mrs. Olive Wong
Mr. Thai Pham
Olympus Incentives Ltd is a manufacturing company well placed in its market to serving a specific but wide range of clients, both individual and companies ranging from football clubs, cricket clubs and large athletic companies. The fact that there are a lot of competitions going around all year round makes the company especially placed to serve this specific niche in the market.

The company has had a great deal of successes over the years and from the financial records it has been growing quite tremendously. This growth can be attributed to various factors such as the fact that even with the company’s relatively small size; it specializes in the manufacturing, wholesale and retail of its products. This has ensured that the company does not have to deal with middle men who would have been an expense to the company. This also enables the company to be in touch with its customers and at the same time carry out its marketing on a more personalized level. Personalized marketing is of great importance as it enables the company to, among other things; identify prospects and potential clients, and know their clients and their needs better (Bhasin, 2012).

The fact that the company has already identified its highest times in a year is also a point to be desired. The is because the company can now concentrate on maximizing on these peak seasons or periods within the year by concentrating on not only its current clients but also on potential clients who might be ‘taking their business’ to the competitors.

The success of a business can be greatly attributed to its location and Olympus Incentives Ltd is right on the money when it comes to this key factor. Its location, 25 kilometers of the center of London is a major plus as it ensures that the company is located in close vicinity to various infrastructure such as main roads to various locations and airports linking the company to its international customers. This reduces transport cost and delivery time which by extension improves customer satisfaction (Bowes, P. 2008).

The company keeps a small stock of its manufactured items and mostly produces on demand. This is of advantage to the company as it ensures that resources are not wasted by producing items that have not been ordered since more clients prefer customized products. Hiring local and foreign casual workers when need be, has also saved the company the expense of paying the workers during the period when business is on a low.

The decision by Mr. Wei to ‘sweat the assets’ which means to putting the assets to a more efficient use (Workman, 2009), was a good business decision. This could ensure that the assets generate an income for the company even during the low business season. By hiring out some of the machinery or the company vehicles, the company could earn some money off them which can be used to pay off some of the loans and interest amounts attributed to the same assets.

Despite all the things that the company has going for itself, there are various shortcoming that it needs to change or at least keep a keen eye one. These are various issues that could very well spell doom for the company. The fluctuation of activity within a year is normal to any company, but when this means the total halt of business activity for the whole organization during certain months, it becomes a cause for concern. The effects of this are quite evident in the turnover and production level in various months as is evident in the months of March, August, October and November.

Graph One: Monthly Fluctuations in Sales


In this day and age, the use of automated systems to carry out activities such as record keeping, making orders, making quotations and generation of various other necessary sale and purchase documents, is key. The fact that Olympus Incentives is still relying on hand written records is terrifying if not down right terrible. The problem seems to stem from the fact that the person tasked with this duty, Mr. Berlusconi, has rejected the use of computer based accounting and comes to work when he feels up to it. This is why the company seems not to be up to date in its record keeping and is slacking off during the peak season. The lack of proper record keeping in itself has given rise to various problems within the company, and with regard to various other stakeholders. Some clients have even refused to settle their bills due to the fact that they have received mismatching bills and quotation amounts.

Corruption within the company due to the lack of proper record keeping has crept into the company. The employees seem to have free will in the pricing of various products since there are no checks within the organization or departments charged with handling various activities. This has in turn lead to the clients themselves having a free reign on when the payment dates for goods delivered should be. This has had a negative effect on the company’s cash flow since payments are not received when they fall due. The company is therefore at risk of bankruptcy as a result of this poor credit management system, and in turn poor credit rating by the various financial institutions. The lack of sufficient funds resulting to bouncing cheques is also a result of this poor or rather non-existent credit management practice in the company.

The constant disagreement between Mr. Wei and Mr. Scrooge, the bank manager, are also retrogressive to the company. The effect of this is that, besides being in the company’s ‘black book’ future requests for assistance from the bank with regard to financing, extension of loan repayment period or even request for an overdraft facility with the bank, could be denied.

The company has rented a considerable piece of property for its operations. It is however only using half of it and letting the other half go to waste. This is a waste of space and money considering that it still has to pay for the property in full which according to the records, is a considerable amount of money. This in turn has a negative effect on the profit generated by the company.

The negative publicity that the company has also been receiving due to the law suit and Mr. Wei’s attitude towards the matter could also be retrogressive. The saying that all publicity is good publicity could be true in some quarters, but it could also lead to the company’s downfall, especially where there are competitors involved. The suit is attributable to poor workmanship on the medal that ended up hurting one of OIL’s clients.

Lastly, the company being a limited liability company should not have its liabilities guaranteed by one of the directors. The fact that the loans and company’s overdraft facility is guaranteed by a charge on Mr. Thai Pham’s house and other assets, is bad business practice according to international business standards and laws. The company is a separate business entity from its members and as such its liabilities are its own and separate from the members (Companies Act 2006). However the Directors can be held liable for the debts of the company if they allow the company to carry out business while insolvent without any foreseeable future in the company’s activities.

The company therefore has a lot to improve on so as to at least maintain the growth it has been experiencing over the past periods and improve its financial footing. There is a great demand for growth opportunities among organizations and this has encouraged companies to pursue diversification even though its effectiveness is mixed. One could find success in diversifying while another could fail to compensate for the loss incurred even after diversifying his or her business activities (Gassenheimer and Keep, 2012). Since the company is already making medals, trophies, plaques and cups, it could also look into manufacturing household items such as mugs with customized engraving, decorative wares for houses such as chandeliers and vases, or any products that could be made out of the type of materials they already use. Venturing into such diverse production could ensure that the time spent ticking over could be put to better use and ensure that the company is earning revenue from these items.

Depending on how well this diversification goes, the company could also start keeping stock of the products being sold quickly of the market and which require minimal or no customization. This would ensure that more time is spent thinking up ways of diversifying production and go a long way in catering for the months when business activity forth company is low. During these months, more of these other products could be produced and kept in stock with the production volume determined by market studies into their demand in the market.

Diversification should also involve targeted marketing to specific clients which would ensure that a great deal of the company’s business assured of du to its clientele and is not dependent on in a large part, on an unsure general market. This means that the company should make a deliberate effort in establishing relationships with other players in their target markets as it has done with the firm of sports management agents and the English County Cricket Board. This creates a wider pool of clients for the company that it can bank on and budget for in its monthly or yearly projections (eHow, 2012)

Proper record keeping is vital to the success of any business. As the business seeks to maximize on its returns, good record keeping should be among the key ingredients to realizing this objective. In light of this, it is clear that it would be necessary for the good of the company to re-evaluate Mr. Berlusconi’s services towards the company. This does not necessarily mean termination of his services completely, but at least the company should look into getting someone else who is more conversant with a relevant accounting system that can carry out all the necessary requirements and replace the current hand-written books of accounts (Horne and Wachowicz, 2004).

The company does not also seem to carry out any budgeting system. As such, a cash budget should be considered among its most important things to introduce (Rachulin, 2000). A cash budget would ensure that the company is prepared for the seasonal cash flow fluctuations and unexpected discounts from its suppliers. It also helps the company know its cash position so as to determine how creditors will be settled, whether or not their bank will approve a loan request as well as influencing the company’s profitability. Variances between the actual and budgeted amounts can also be determined and relevant adjustments made (Bond, 2005).

The cash budget would also ensure help in indicating areas that need improvement on. From the records, the company clearly needs to work on its Accounts Receivable collection. The issue of clients paying when they want should be nonexistent. If need be, the company set up a credit control department to ensure that debts to the company are collected in time by being in constant communication with such clients, and ensuring that these clients are dully reminded of such obligation.

The company should also consider leasing a smaller property or sub-letting the part of the property it does not make use of. This would ensure that the company’s expenses are reduced in the case of leasing out a smaller place, or the money generated from the sub-letting goes into settling the hefty rent bill imposed on the company.

Question 6

Olympus Incentives Ltd. Cash Budget
For the Year Ending 31st December 2011
£ 000
Beginning Cash Balance 15
Expected Cash Receipts
Cash Sales 408
Collection of Accounts Receivable 82
Other Income 52
Total Cash 557
Expected Cash Expense
Raw Materials 30
Payroll 3
Direct Expenses 96
Sales and Marketing Expense 22
Administration Expenses 40
Equipment Expenditures 10
Total Cash Expenses 201
Ending Cash Balance 356

The Cash Budget is as a result of various estimations made in relation to various recommendations made above such as: The introduction of an automated accounting system, diversification of product line, introduction of a cash budgeting system, introduction of a credit control department or person, enhanced target marketing, keeping of stock of goods produced, and leasing a smaller business premise or sub-letting the existing one.

The estimates made were:

A 20% increase in the Turnover of the company.
40% of the sales in the year will be cash sales with only 10% of the sales being receivables. 80% of the receivables are estimated to be collected within the year.
The raw materials are estimated to increase by 50% while the sales and Marketing expense estimated to rise by 10% since this activity was already ongoing.
While the administration expense is estimated to remain the same, equipment expense attributed to repairs and maintenance could amount to £10,000.
The result of the estimated Cash budget is a positive balance of £356,000. This should however be compared with actual results to be realized at the end of the year. The necessary adjustments will then be made. The company should also consider making a more frequent Cash budget, say monthly, which would enable it streamline some of the issues such as pricing of its products and determine its cash position (Laidre, A. 2012)

From the Cash budget, a resulting Income statement and Statement of Financial position can be generated.

Olympus Incentives Ltd.

Income Statement for Year ended 31 December 2011
£000 £000

Turnover 1,020

Direct Labor 350
Direct Materials 20
Direct expenses 96 466

Contribution 554

Fixed Costs-
Rent 94
Rates 40
Bank interest and charges 100
Administration 40
Sales and marketing expenses 22
Insurance 6
Vehicle expenses 24
Sundry expenses 20
Depreciation 40 386

Net Profit (Loss) 168
The resulting Balance sheet would be as follows:

Olympus Incentives Ltd.

Statement of Financial Position as at 31 December 2010
£000 £000

Non-current Assets 230

Current Assets
Inventories 5
Trade Receivables 102
Cash and Bank 326 433


Bank overdraft 120

Bank Loans 100


Bhasin, H. (2012) One on One Marketing.

Bond, E. (2005) How to Prepare a Cash Budget: Amegy Bank Business Resource Center.

Bowes, P. (2008) Transforming Location into Success. Available from: (Accessed 23rd April 2012).

eHow Money. Market Diversification vs. Product Diversification (2012). Available from: (Accessed 23 April 2012).

Gassenheimer, B. and Keep, W. (2012) The Effect of Diversification on Manufacturers, Wholesalers, and Retailers.

Horne, C. and Wachowicz (2001) Fundamentals of Financial Management: Prentice Hall.

Laidre, A. (2012) How to Evaluate Your Company’s Financial Position. Available from: (Accessed: 22nd April 2012).

Queensland Government (2008) The Importance of Record Keeping. Available from: (Accessed: 22nd April 2012).

Rachulin, R. (2000) Hand Book of Budgeting. 4.

The Companies Act (2006). Available from: (Accessed 22nd April 2012).

Workman, B. (2009) EDUCAUSE REVIEW. 44(5), 44-55.

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