Business Decision Making Assignment
In January 2019 Lee and Kelly set up a small limited liability company called Fambis Builders (FB). This business builds kit homes in New South Wales, around Canberra. (For those of you who do not know what kit homes are, see the appendix at the end of this document.) FB is slightly different to some kit home manufacturers, as this company manages the building process. The staff at FB will complete some of the work themselves and outsource other work to qualified professionals, who have an ongoing long-term professional relationship with Lee and Kelly.
Lee and Kelly contributed $1,000,000 cash to capitalize this business, using the proceeds from the sale of a previous business. In early January 2019 the company bought a factory in a rural area outside Canberra. The factory is built on land owned by the company. The land cost $100,000, the cost of constructing the factory was $500,000
They also bought equipment for $200,000. The factory and equipment will be used to fabricate metal frames for houses, before being transferred to the relevant building sites, where they will be erected.
Lee and Kelly estimated that factory will have a useful expected life of 40 years with a residual value of $0. On average, the equipment will have a useful expected life of 10 years, with a residual value of $0. All assets are depreciated using the straight-line depreciation method.
Lee and Kelly estimate that the cost of materials and constructing (fabricating) each metal frame in the factory will be $20,000 for Model 1, $30,000 for Model 2, and $85,000 for Model 3. After the frames have been constructed, they will be taken to the building site and assembled.
Table 1 below shows their estimates of the dimensions of, and inputs required for, the different models. Please note there are variations in the units of measurement, you will see meters, square meters, square feet, lineal meters. You will need to deal with these differences in the models that you build.
|Model 1||Model 2||Model 3|
|Living space (square meters)||100||150||350|
|Roofing (square meters)||140||230||430|
|Metal frame (square feet)||1,076||1,615||3,767|
|Guttering (lineal meters)||47||56||81|
|Insulation (square meters)||166||230||470|
|No of hours to install insulation||8||12||31|
|Cladding (square meters)||65.6||80.0||120.0|
|Cost of cladding ($ per square meter)||$22||$80||$150|
|No of hours to install cladding||20||30||90|
|No of hours to install roofing||25||35||112|
|No of hours to install guttering||15||23||46|
|No of hours to prepare formwork for concrete slab||30||40||92|
|Internal walls and ceiling (square meters)||163||240||543|
|No of hours to install Gyprock (for internal walls)||64||96||275.2|
|No of hours to prepare Gyprock for painting||24||36||97.2|
|No of hours to assemble the metal frames on site||25||37||77.7|
|No of hours to finish and paint internal walls and ceilings||30||45||114|
|Cost of wardrobes (purchased and installed)||$3,000||$10,000||$45,000|
|Cost of doors and windows (purchased and installed)||$450||$675||$1,451|
|Cost of kitchen benches and pantry (purchased and installed)||$11,000||$23,500||$46,000|
|Cost of plumbing (purchased and installed)||$13,000||$18,000||$31,000|
|Cost of electrical connections (purchased and installed)||$9,000||$13,500||$39,150|
|Inputs – materials|
|Insulation – number of rolls||13.80||19.17||39.17|
|Paint – number of litres – ceilings (2 coats)||12.50||18.75||43.75|
|Paint – number of litres – walls – (2 coats)||7.88||11.25||24.17|
|Gyprock – ceiling – number of sheets||34.72||52.08||121.53|
|Gyprock – internal walls – number of sheets||21.90||31.25||67.13|
The following text is designed to help you interpret some of the data in Table 1. Model 1 will use 65.5 square meters of cladding; Model 2 will use 80 square meters and Model 3 will use 120 square meters. The three different models will use different types of cladding. The cost per square meter for Model 1 is $22, for Model 2 is $80, and for Model 3 is $150. It is expected that Model 1 will require 20 hours of labour time to install the cladding. For Model 2, the installation time is expected to be 30 hours.
Insulation will be placed in the ceiling cavity and external walls. The insulation will be sheep wool batts, which are expected to cost $90 per 12 square meters. It is expected that it will take 8 hours to install insulation in Model 1 houses, 12 hours in Model 2, and 31 hours in Model 3 houses. You estimate Model 1 will require 165.5 square meters of insulation, Model 2 will require 230 square meters, and Model 3 will require 470 square meters.
The company will use Colourbond roofing material for all models. This is expected to cost $20 per square meter.
All three models will be built on concrete slab foundations. Concrete is expected to cost $90 per square meter. All models will use the same type of guttering, which is expected to cost $25 per lineal meter. Gyprock (drywall) for the internal walls and ceiling is expected to cost $15 for boards that cover 2.88 square meters (1.2 meters by 2.4 meters). Paint for internal walls and the ceiling is expected to cost $170 per 10 litre can and this is expected to provide 160 square meters of coverage (16 square meters per litre). Lee wants to buy paint in 10-litre tins, as the cost per litre is cheaper, compared to buying paint in smaller cans. For example, it is expected to cost $80 to buy a 4 litre can of the same paint, which works out at $20 per litre.
Please note, the internal walls and ceilings will take 2 coats. The measures above are for two coats of paint. The ceilings will be painted white. The owners will be able to select other colours for the internal walls.
Kelly and Lee are comfortable their workers can complete many of the tasks, such as erecting the metal frames, installing guttering, cladding, roofing, insulation, internal walls made of Gyprock (also known as drywall), finishing and painting internal walls and ceilings. However, Lee and Kelly have decided they will buy a number of components and have them installed by specialists. In Table 1, these are all shown in brackets as (purchased and installed). This includes wardrobes, doors, windows, kitchens, plumbing and electrical work.
Kelly is concerned that they do not accidentally underpay their employees, so you need to check they are being paid at least the minimum wage. To make it easier, Kelly advises you to follow the link and guidance below.
Click on the button ‘I’m an employee looking for pay rates. Then click on next. Then click on next again, when you see the radio button “No, help me find my award” has been selected.
In the dialogue box, type building and construction tradesperson. Press the radio button that shows the same term under the text you just entered. Click Next. Select no for the following.
Are you a trainee? Are you eligible for a supported wage? Are you an apprentice? Click Next.
Select Level 5 (CW/ECW 5). Click next.
Select weekly hire – full time. Click next.
Select General building and construction or metal and engineering construction. Click next.
Select roof tiler, roof fixer, slate-ridger or tradesperson in the metals and engineering construction sector. Click next.
Staff do not operate mobile cranes. Staff will work in the residential building and construction industry. Staff are not required to work underground. Staff are not in charge of plant. None of them are leading hands.
This will tell you the hourly pay rate. You can assume no penalty rates will apply, as no work will be done on weekends, public holidays, Saturdays after Easter Friday, etc.
Use the hourly rate in your calculation of labour costs for the different jobs in building each house type. Each worker will be paid for 38 hours per week.
Kelly remembered that you should also include superannuation in the cost of labour, as the company has to put aside some money, based on the workers’ ordinary time earnings. You can assume the ordinary time earnings is based on 38 hours per week. You can assume all workers qualify for superannuation contributions by the company. Research the appropriate rate that the company has to use.
Table 2 below presents data relating to other costs. Please note that this is incomplete. Certain costs have not been included here. However, you have been provided with specific information which will let you identify those costs and calculate the relevant amounts.
|Office staff (per year)||$420,000|
|ICT costs – cloud (per year)||$3,500|
|Software licenses (per year)||$1,500|
|Compliance costs (tax, superannuation, local government approvals)||$7,800|
|Architect fees for initial drawings (one off)||$8,000|
Prepare responses to the issues below. Some responses will require you to use Microsoft Excel, others will be completed using Microsoft Word. These are indicated below.
Please note, heavy penalties will apply for inappropriate spreadsheet design. You will need to use named cells, linking, and formulas. Minimize the use of hard coded data in your models.
- (Excel) name a sheet Data and place relevant inputs there. Name these inputs. You will use these named cells in formulas and models below. (5 marks)
- Name a sheet Budget 2018. Build a model which will show the contribution margin of each model of kit home, assuming the frames are fabricated by FB at their factory. The column headings will be Model 1, Model 2, Model 3. (30 marks)
- On the same sheet and under the contribution margin, list the annual budgeted fixed costs of the business. (5 marks)
- Under the fixed costs, calculate the budgeted profit or loss the entity expects to make for 2018. You can assume that the company expects to sell 7 units of Model 1, 10 units of Model 2, and 3 units of Model 3 in 2019. (5 marks)
- (Word document) identify limitations and weaknesses of the model you have created. (15 marks)
- (Word document) advise Kelly whether Lee is correct to focus on the cost per litre of paint, or whether the company should buy paint in smaller tins. State any assumptions you make. (5 marks)
- At the end of 2019, Kelly discovered the business could purchase the fabricated metal frames for $12 per square foot from an overseas supplier. Kelly wants to get some idea of the impact this would have on the budgeted profit, if the company purchased the frames, rather than made them. None of the other costs will change if the company buys the frames or builds them.
- (Spreadsheet) Quantify the impact on the company’s profit, if it bought the frames, rather than fabricated them. (5 marks)
Kelly stated that if the frames were bought, the company could sell the factory, land and equipment. (Kelly explained that the wages of the fabricators do not appear as a separate line in the budget, as these wages are included in the cost of fabricating the metal frames.) Lee is not comfortable with Kelly’s suggestion, as real estate agents have advised that the land is likely to be sold for no more than $110,000 and the fair value of the factory is estimated to be $110,000. (In other words, this is the best offer the company can expect to receive if the factory is offered for sale.) The company would be lucky to receive $70,000 for the equipment. Lee said that even after depreciating some of these assets for 2 years, the sale was likely to produce a major negative impact on the company’s expected profits.
Open a new tab, called Sale of land, factory and equip.
Use appropriate formulas and linking to relevant material in the workbook to calculate the following figures. You must show your workings.
- Calculate the loss or gain the company would report if it sold the land. (5 marks)
- Calculate the loss or gain the company would make if it sold the factory for $110,000. (5 marks)
- Calculate the loss or gain the company would record, if it sold the equipment for $70,000. (5 marks)
(Hint for parts b and c. Ensure you calculate the carrying amount of these assets at the end of 2019. Remember, at this point the assets have not been sold. You want to work out the gain or loss if they were sold at the end of 2019.
- (Word document)
- Should the company be swayed by Lee’s argument? (5 mark)
- Justify your response. (15 marks)
- (Word document) assume it is now July 2020 and Lee won the argument. That is, the company did not sell the factory and other assets mentioned above. Coronavirus has brought massive disruptions to the supply chain. Lee and Kelly are aware of a number of competitors who have had to close down, as they have not been able to obtain metal frames from their overseas supplier. Lee has been annoying Kelly by stating that the decision to keep the factory running was good, as this protected the company. Therefore, Lee’s decision-making processes are good, as Lee’s decision was good for the company.
- What behavioural bias is Lee displaying? (5 marks)
- What factor is Lee neglecting to acknowledge? If Lee does not acknowledge this factor, what impact is this likely to have on Lee’s decision-making processes? What impact could this have on future decisions and the viability of the company? (10 marks)
Appendix – Kit homes – business model
Assume you bought some land and want to build a house. You could find an architect, pay that person to develop bespoke architectural drawings, which would need to be approved by the local council. You would then engage a builder to build the house, based on those drawings. Alternatively, you could go to the website of a kit home business and look at images of houses plus plans that have already been created. If you find one that suits your taste, you will buy that product.
Here are some examples of kit home businesses.
The kit home business model provides cost savings to the businesses and customers. The architectural drawings only need to be drawn once and can be used multiple times. This saves a lot of money, as these drawings are not cheap. In addition, ordering materials for each customer is standardized, as the purchasing teams knows how much timber, metal, concrete etc., to order for each job. Further, long-term suppliers to the business can generate efficiencies, as they set up systems to make standardized products.
As you look through the links above, and those relating to other kit home businesses, you will notice these businesses offer many products (many different types of kit homes). This assignment has greatly reduced the number of products and reduced the complexity of construction issues, to make the assignment appropriate for a first year, first semester unit. For example, the assignment does not include the cost of fencing off building sites or detailed requirements relating to license approvals, safety equipment costs for working on roof tops, subsequent site visits and approvals etc.
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