Case Study: WINDCATCHER LTD
John Jeffries recently left the army after more than 20 years in the service. He had decided that at 45 years of age it was time to start a second career. Throughout most of his life John had a passion for sailing and had competed successfully in many offshore yacht races. He felt that because of his expertise and interest in sailing and the fact that over the years he had cultivated many friends and contacts in the sailing world, he would be wise to invest his money and energies in this area of business.
After many months of searching for a suitable business, last October John and his wife agreed to purchase all of the shares of Windcatcher Ltd for £500,000 at the 31
December. The business was involved in the manufacture of sails on an individual
‘made to measure’ basis for boats ranging in size from one-man dinghies to ocean-going yachts. Most of the customers were private individuals, though about
10% of orders each year were placed by small boat-builders. Windcatcher also undertook some repair work to damaged sails. The business was established in 1970 by Arthur Davies and was managed by him until his sudden death in August. Over that period he had shown a strong interest in the technical side of the business and
Windcatcher enjoyed a good reputation for the quality of the products. However, he had had little interest in financial matters and maintained only rudimentary management accounting records.
Demand for Windcatcher’s work had been very buoyant over recent years, the output being restricted only by the shortage of space at the business’s premises and by the lack of appropriately skilled labour. John Jeffries could see no reason for the level of demand to fall in the future, but he could see no immediate prospects for expanding the workforce or finding larger premises.
In the three-year period preceding Arthur Davies’s death the results of the business were as follows:
First year

Year before last

£000 £000

£000 £000

Sales revenue

980

Last year
£000

1,002

£000
1,032

Materials consumed

(526)

(554)

(552)

Production expenses

(354)

(350)

(370)

(22)

(24)

(24)

(52)

(56)

(58)

Admin expenses
Sales and distribution expenses (954)

(984)

(1,004)

26

18

28

Net profit before directors’ salaries and Corporation tax

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Though John was not impressed by the business’s profits in the past, he felt sure that
Windcatcher had tremendous potential. He was confident that under his direction profits could improve dramatically.
During the last couple of months of last year John obtained the agreement of Arthur
Davies’s family, who were running the business temporarily, to gain access to the premises and to the business’s accounting records. John discovered that the manufacturing process was divided for supervisory purposes into three departments and he intended to retain this structure. The departments were:
1. The cutting shop, where the sailcloth was marked out and cut according to the required size.
2. The machine shop, where workers sewed the sails using sewing machines.
3. The inspection department, where the sails were inspected for quality and, if satisfactory, packed in sacks for dispatch to the customer.
The range of sails was so vast as to mean that the proportion of time spent by each sail being worked on in each department varied greatly.
The whole business occupied a building of 610 square meters of floor area. The building was leased at a fixed annual rent of £44,000 for a further six years.
The space was divided as follows:
Cutting shop

180 sq m

Machine shop

250 sq m

Inspection department 120 sq m
Offices

60 sq m

During the forthcoming year it was expected that each production worker would work for 1,800 hours, after allowing for holidays and so on. The annual salaries had been agreed at £19,800 each for the three people in the cutting shop, £18,000 each for the five people in the machine shop and £21,600 for the one person who works in the inspection department. The offices where the secretarial and the accounting functions took place employed two part-time workers at annual salaries of £10,000 each.
John undertook some analysis of past costs and after making allowances for some minor changes that he intended to make and for inflation, expected that other costs for the forthcoming year would be:

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£
Rent

44,000

Local authority rates

10,000

Selling and administrative costs

60,000

Depreciation of cutting shop equipment

16,000

Depreciation of machining shop equipment

40,000

Depreciation of inspection department equipment
Packing material and dispatch costs

6,000
18,000

Heating and lighting

10,000

Electric power

16,000

Cleaning premises

10,000

Thread and so on used by sewing machines

2,000

Sailcloth costs the business a range of prices, dependent on quality, up to £30.00 a square metre; it is expected that about 30,000 square metres of it will be used in the forthcoming year.
A matter of particular concern to John was the way in which prices for jobs were determined. In the past it seemed that pricing was left to Arthur Davies who operated a rather intuitive approach to the question. John felt that this was unsatisfactory.
John finally took up his management of Windcatcher on the first working day after the new year holiday, pleased to be in the ‘driving seat’ of his newly acquired business. He was also very pleased that Arthur Davies’s family had kept Windcatcher going so well since his death; the business was operating at full capacity and there were no signs that its reputation had died with the previous owner.
During John’s first morning a letter arrived from FG Marine, a manufacturer of sailing dinghies, with whom Windcatcher had done business before. The letter invited
Windcatcher to tender for a batch of 20 sails for a new model of dinghy that FG
Marine had developed and intended to test in the market. From the specifications supplied by FG Marine and with the advice of his own staff, John was able to estimate that each sail would require about 5 square metres of sailcloth, costing £16.00 a square metre, would take 2 hours to mark out and cut in the cutting shop, 3 hours to machine in the machine shop and 1 hour to inspect and to pack in the inspection department. Required:
(a) Establish the essential cost of the order and state any assumptions that you have made in calculating this figure.
(b) Derive a tender price for the order and justify your reasoning.

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