Assignment 1 - Questions
Question 1 - Foods 'R Us Ltd. manufactures several kitchen items, among them a popular food processor suitable for home use or small restaurant. Some financial data for this line of product for the last year are following:
Sales - 30,000 units
Selling price - $200 per unit
Variable manufacturing cost - $75 per unit
Fixed manufacturing costs - $600,000
Variable selling and administrative costs - $45 per unit
Fixed selling and administrative costs - $450,000.
The management is under pressure from the board of directors to increase the profitability of the food processor and asked executives from different departments for suggestions. Three managers have responded with the following ideas:
1. The production manager, Dick Solomon, suggests making improvements to quality of the product to boost sales which accompanied by $75,000 national advertising campaign would increase by 25%. The quality improvements would add $8 of variable costs. The increased sales volume wouldn't necessitate any price increases.
2. The accountant, Mary Albright, would increase spending on advertising by $185,000 and increase the price by $15. She believes that those two changes wouldn't affect the sales volume.
3. The marketing director, Nina Campbell, wants to undertake a promotion campaign where a $10 rebate is offered on all food processors sold in the second quarter of the year.
Normally 9,000 units are sold during that period, but the rebate program would boost the sales to 15,000 if spending on advertising was increased by $60,000 in the first quarter.
You have been asked by Harry Dubcek, the CEO, to comment on each of these three proposals before she presents them to the board of directors. Draft a report in response to this request. You are not asked to make one particular choice, but rather to explore the potential strengths and weaknesses. Keep in mind that the sales volumes should be treated as estimates only and your report should consider variations in actual sales and their effects. Give both qualitative and quantitative support to your comments.
Question 2 - OzziComp Ltd produces hard disk drives of various sizes for use in computers. The estimated sales volume of one product, DX-9, is 5,000 units per month. The company has budgeted the following costs and prices per unit:
Direct Material Cost - $30.00
Direct Labour Cost - 5.00
Variable Factory Overhead - 5.00
Fixed Factory Overhead - 50.00
Manufacturing Cost - 90.00
Variable Selling and Administrative Cost - 10.00
Fixed Selling and Administrative Cost - 20.00
Total Cost - 120.00
Selling Price - $150.00
A computer part supplier wants to outsource the production of the hard drives which gives the company has an opportunity to bid for the supply of an additional 30,000 units its product without incurring additional variable selling or administrative costs or any additional fixed costs. What amount should OzziComp, Ltd. bid for this contract in each of the following circumstances:
1. The OzziComp's annual factory capacity is 100,000 units.
2. The OzziComp's annual factory capacity is 70,000 units.
Question 3 - Greengo Ltd makes various farming equipment. It receives a special order to produce 80 plows for an international farming equipment supplier. This order will incur the following costs:
Direct materials: 3,150 kg
Material cost: $24.15 per kg
Direct labour hours: 2,100
Machine hours: 750
The company's annual expected costs are following:
Direct labour - $490,000
Direct labour hours - 39,200
Direct materials - $289,800
Indirect costs - $148,600
Machine hours - 14,000
Required:
1. Calculate the overhead allocation rate based on labour.
2. Calculate the overhead allocation rate based on machine hours.
3. Calculate the cost of the special order if Greengo Ltd uses labour hours as the basis for allocating overheads.
4. Calculate the cost of the special order if Greengo Ltd uses machine time as the basis for allocating overheads.
5. Calculate the minimum price per plow that Greengo Ltd could accept.
Assignment 2 - Questions
Question 1 - a) Compare and contrast financial accounting reports from management accounting reports, providing two examples of each one's different characteristics.
b) For each of the following items, classify them as either: asset, liability or equity.
- Paid up capital
- Bank loan
- Provision for annual leave
- Brand names and intellectual property
- Accounts receivable
- Prepaid insurance premiums
- Deposit paid by a customer for work yet to be done
- Retained profit
c) For a public company whose shares are listed on the stock exchange, answer the following questions.
- Who owns the company? In what ways do they gain ownership?
- Apart from shareholders, who else might be interested in the contents of financial accounting reports?
d) What is the difference between a cash flow budget and a statement of cash flows?
e) What is depreciation? Explain why businesses recognise depreciation expenses and provide a practical example.
f) For the following pairs of items, state which one of each pair you would expect to be larger and why you think it should be larger?
- Gross profit and net profit
- Paid up capital and owners' equity
- Earnings per share and dividends per share
- Current assets and current liabilities
- Operating profit and net profit
Question 2 - a) When preparing the financial statements, how would financial performance and position be affected by not taking into account the fact that a debt was bad? Discuss using some examples.
b) Assume that last year's statement of cash flows for a company showed a "negative" cash flow from operating activities. What could be the reasons for this? Should the company's management be alarmed by it? Explain using some examples.
c) Discuss the major changes that would give rise to increase or decrease in owners' equity during the year. Use some examples to support your discussion.
d) Explain the reasons why business owners would leave profits in the business rather than withdrawing them for personal use? Use some examples to support your explanation.
Question 3 - Helen Magnus runs a small business. She is worried about the profitability and the financial situation of her business since the bank is requiring repayment of its overdraft. The following information pertains to her business:
|
|
31-Jan-17
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31-Jan-18
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|
Sales (credit)
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$90,000
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$135,000
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|
Cost of sales
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58,500
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94,500
|
|
All other expenses
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18,000
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31,500
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|
Cash at Bank
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18,000
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(27,000)
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|
Inventory
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27,000
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49,500
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|
Accounts Receivable (net)
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18,000
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45,000
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|
Non-current assets (net)
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36,000
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72,000
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Accounts Payable
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9,000
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13,500
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Non-current liabilities
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0
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18,000
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Helen Magnus, Capital
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90,000
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108,000
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Other information:
- Inventory at 1 February 2016 was $22,500
- Accounts receivable at 1 February 2016 was $15,000
- Helen Magnus, Capital as at 31 January 2016 was $84,000
a) Calculate the following ratios for 2017 and 2018
- Net profit margin
- Rate of return on owners' equity
- Current ratio
- Acid test ratio
- Debt ratio
- Inventory turnover period
b) Write a short report about profitability, short-term liquidity and long-term solvency of the business.
Question 4 - Glassy Ltd is a mall manufacturing company that makes wine and champagne glasses. The normal price for simple wine glass is $3.50. Champagne glasses have etched designs and are priced at $5.00 per glass. Both types of glasses use the same material, but the champagne glasses take longer to make due to the design. The business has machines with ovens that heat the sand to make glass, then pour hot glass into moulds, cool them, and etch the design if one is programmed. Machine operating staff are employed on a casual basis at an hourly rate. The operator works the machine and packs the glasses into boxes. Then the transport company picks them up and sends them to buyers. The manager takes care of all other aspects of the business including marketing, administration, and maintenance.
The following future costs have been estimated.
Liquid glass raw material - $1.50 per kilo
Electricity - $2.30 per moulding machine hour
Machine operator labour - $15.00 per hour
Rent on premises - $2,000.00 per month
Manager's salary - $2,500.00 per month
Transport and distribution - $1.00 per glass
Champagne glasses require 0.5 kilo of raw material each.
Wine glasses require 0.4 kilo of raw material each.
Champagne glasses can be produced at the rate of 18 per moulding machine hour.
Wine glasses can be produced at the rate of 40 per moulding machine hour.
a) Calculate the variable costs per glass for champagne glasses.
b) What is the contribution margin per glass for champagne glasses?
c) The variable cost for wine glasses is $2.03 per glass. Calculate the break-even output per month if only wine glasses are made.
d) If a special request is received for a large order of 1,000 wine glasses at a price of $1.80 per glass, and the buyer would pick up the pots thus avoiding any transport and distribution costs, should this order be accepted? Explain.
e) What circumstances might make you change your conclusion in part d)?
f) If, for the month of December 600 champagne glasses and 2000 wine glasses were made and sold at normal prices; calculate the profit or loss for the month of December.
Question 5 - Southern Cross Sails Pty Ltd builds sailing boats to order for customers. When quoting prices on jobs they allocate manufacturing overheads on the basis of estimated machine hours to complete the job and they allocate administrative overhead costs on the basis of direct labour hours estimated for the job. Budgeted profit margin is then added to arrive at the final price quotation.
Below is a budget for the current year showing budget total figures.
Budget for the year
Sales revenue on all jobs - 686,000
Direct labour costs - 112,000
Direct materials - 133,000
Manufacturing overheads - 124,600
Administrative overheads - 144,900
Total costs - 514,500
Profit before tax - 171,500
Direct labour hours - 5,600
Total machine hours - 2,800
Using the information above, and the specific estimates for Job No. 43 below, prepare a price quotation for Job No. 43.
Job No. 43 Estimate
Direct labour hours required - 630
Machine hours required - 315
Direct materials estimate - $ 14,000
Question 6 - a) What do you think are the main factors that influence how much cash a business will hold? (discuss five possible factors).
b) What costs might a business incur by holding too low a level of inventory? (list at least three types of costs).
c) Are retained profits/earnings a free source of finance to the business? Explain the pros and cons of this source of finance.
d) When examining prospective investment opportunities, what kind of non-financial information do you think a venture capitalist would be concerned with? Explain.