All Cases For Management Accounting for Business, 8th Edition Colin Drury, Mike Tayles

Case Study: Edit 4U Smith and Jones (updated by Martin Quinn) Introduction Sean O’Sullivan is a sports journalist. He worked in London, but in 2015 he left his job and decided to return to Ireland, from where his parents originated. He hoped to take advantage of Ireland’s booming economy, which at the time was experiencing an annual growth rate of 5-8 per cent. Sean intended to set up his own business to take advantage of Ireland’s rapidly growing service sector. Sean found work as a freelance editor for a company, Technosports Ltd. The company produced several sports magazines. He worked on the design and layout of two of the company’s sports magazines. Work on the magazines accounted for the majority of Sean’s time, but for the remainder of his time he was free to work for other clients, which he did. Working for Technosports had a number of advantages for Sean; he had a regular income, and he did not have to provide any working capital, even when working for his own clients. Over a period of time, relations deteriorated between Sean and the owners of Technosports Ltd. The two brothers who owned Technosports Ltd were not happy about Sean working for other clients; they thought that he should spend more time producing their magazines. For his part, Sean wanted more control over the affairs of Technosports Ltd. Sean thought that the full potential of the company was not being realized. In his opinion the owners of the company were very conservative and did not take full advantage of the opportunities that the growing economy provided. The brothers were happy with the size of their business, they provided all its funding needs, and they were not interested in borrowing money to fund growth. Sean did not have funds to invest in the business. Therefore, the two brothers were reluctant to give him any major say in the running of the business. Over time relations deteriorated to such an extent that the two brothers and Sean parted company, less than a year after Sean took up employment with them. Sean decided to realize his original intention and set up his own business, Edit 4U (E4U). Sean expected the business to be successful as the economy was experiencing a very rapid period of growth, with many small businesses successfully starting up. Sean provided a magazine editing and layout service. Several competitors existed in this field, but demand was growing at a faster rate than supply. Sean thought that he would have a significant competitive advantage as he had relatively low overhead costs and could offer competitive prices. Also, to prevent over-reliance on the magazine market, he was happy to take on any other suitable jobs, e.g. the production of promotional literature. Founding the Business Sean is delighted to have his own business and has a regular stream of work, but problems began to emerge. He is a very experienced journalist, but a poor financial manager. He has great difficulty pricing jobs. He makes up prices as he goes along, basing prices on what he thinks other companies are charging, but he does not know how other companies arrive at their charges for similar jobs. Most of the business’s costs are fixed overheads and it is difficult to arrive at a reasonable overhead absorption rate when predicting future demand is challenging. He also has problems in supporting the business’s working capital needs. Sean had difficulties in raising enough money to start the business. To set up E4U, Sean borrowed €16,452, to be repaid over 10 years. The loan was part of a mortgage raised on the family property. Sean wanted to For use with Management Accounting for Business 8e by Colin Drury and Mike Tayles (ISBN 9781473778801) © 2022 Cengage EMEA