QUESTION 1 - Best Real Estate Agency has opened an office in Swanston Street. It generates its revenue through charging a commission (agency revenue) of 4.5% of the ultimate sale price achieved on behalf of the customer. The average monthly property sales is $700,000 and the Estate agent generates its revenue via charging a commission (agency revenue) of 4.5% of the gross property sales. Fixed monthly costs are office rent ($3,400), depreciation of office furniture ($390), electricity ($640), a multi-line telephone system ($380), computer cabling connection ($480) and salary of the office manager ($7800). Variable costs include commissions for the sales staff (50% of agency revenue), supplies and printing (10% of agency revenue), and usage costs for phone and computers (7% of agency revenue). The average property sales per month are expected to be $700,000 and the agency takes 4.5% of gross property sales, as agency revenue.
REQUIRED -
(a) Calculate the estate agency's monthly break even commission / agency revenue in dollars.
(b) Calculate the commission / agency revenue needed to earn monthly net profit of $10,000.
(c) From your answer in (b) above what is the gross property sales required to generate commission / agency revenue to make a $10,000 profit above breakeven.
(d) When the managing partner of Best Real Estate Agency is shown your CVP calculations, he is quite dismissive. He says it is largely useless information because the reality of the real estate business is much more complex and dynamic with the model based on unrealistic assumption. Prepare a detailed response to the managing partner, identifying model assumptions and potential use of the model. (100 words limit)
QUESTION 2 - XYZ Packaging Ltd purchased equipment for $310,750 on 1 January 2015 for use in its parcel packaging business. XYZ's management estimates that the equipment will be technologically obsolete in 5 years, at which time it will have a residual value of $26,000. The equipment will produce 60,000 batches of parcels in the first year, with annual production decreasing by 5,000 batches during each of the next 4 years (i.e., in the fifth year the equipment will be down to 40,000 batches of production capability).
REQUIRED -
(a) For each of three depreciation methods (straight-line, units-of-production, and reducing balance), prepare a depreciation schedule from acquisition showing the following balances each year for the 5 years: asset cost, depreciation expense, accumulated depreciation and asset carrying amount. For the reducing balance method, use a depreciation rate based on 45%.
(b) Depreciation is a concept used in accrual accounting. Of the depreciation methods above discuss the reasons for selecting one alternative method of depreciation over another as dictated by accrual accounting and the matching principle. (60 words limit)
(c) Depreciation allocates cash to eventually replace the asset once it has reached the end of its useful life. Discuss, stating whether you agree or disagree with the statement and why? (40 words limit)
QUESTION 3 - Southern Star Company is considering replacing an existing piece of machinery with a more sophisticated machine. The existing machine was purchased 3 years ago at a cost of $50,000 and is being depreciated to a zero residual value over 7 years. This machine has 4 years of usable life remaining and can currently be sold for $55,000 net.
The new machine being considered will cost $76,000 and requires an outlay of $4,000 for installation. It will be depreciated over a 4 year period to a zero value and provide the benefit of reducing cash operating costs by$10,000 per annum. (Note: Ignore Tax Implications)
REQUIRED
(a) Given a required rate of return of 14% per annum on capital expenditure proposals, calculate the Net Present Value (Cost). In your own words interpret the meaning of the net present value calculated, nominating whether to continue with the old machine or replace it with the new machine.(Ignore tax implications. / show all working as part of your answer)
Additional information:
The present value of $1, i.e., (1+r)-n, Where: r = discount rate; n = number of periods until payment.
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Discount rate (r) 14%
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Periods (n)
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1
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2
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3
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4
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Present value of $1
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0.877
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0.769
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0.675
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0.592
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(b) In your own words, provide three non-financial factors that should be considered in making the final investment decision, besides the NPV calculation in part (a).(100 words limit)
(c) The factory manager at SouthernStar says she has heard that the data used in NPV calculations can be unreliable, especially estimates of future cash flows, and that alternative methods of assessing a capital investment would be more reliable. Discuss in your own words the limitations and advantages of NPV analysis over other capital evaluation techniques reviewed throughout the semester. (180 words limit)
QUESTION 4 - The management of Trucks Ltd, a transport business, wants to get a report from the accountant on the cash provided from various activities. The accountant has provide you the following information for the financial year ended 30 June 2016
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Item
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$
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Interest paid
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3,000
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Dividends paid to Shareholders
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20,000
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Profit after tax for year ended 30/6/2016
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100,000
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Cash at bank at July 1, 2015
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1,000,000
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Depreciation for the year
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50,000
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Payment for Motor vehicle purchased on 28th April 2016
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40,000
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Loan repayments made
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60,000
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Taxes paid to the Tax Office
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76,000
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Payments to employees
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100,000
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Cash received from the sale of machinery
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100,000
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Cash sales
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650,000
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Dividend received
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240,000
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Investments in companies listed on the ASX (Australia Security Exchange)
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56,000
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Cash received from accounts receivable
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550,000
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Bad Debts expense
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10,000
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Payments to suppliers
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500,000
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Credit sales for the year
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750,000
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Money borrowed from Net bank
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250,000
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Purchase of property and land for cash
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800,000
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REQUIRED
(a) Prepare a fully classified cash flow statement for the year ended 30th June 2016 for Trucks Ltd.
(b) Trucks Ltd management is confused in that their Income Statement is indicating they made a net loss (negative profit) over the same period whilst reporting a positive cash inflow from operations. Assuming both reports are accurate explain to Truck management providing two possible reasons why this discrepancy could occur when comparing cash flow from operations (cash profit) with accrual accounting profit / loss. For each cause identified highlight the impact on Assets = Liabilities + Owners Equity and profit versus cash flow (80 word limit)
(c) Given the above differences discuss which statement (Income Statement or Cash Flow from Operations) better reflects the financial performance / wealth creation for the period ending 31 December 2016. (Justify your answer with reference to accrual accounting) (80 word limit)
QUESTION 5 - The Good Men Ltd competes in the home electrical markets alongside Harvey Norman and The Good Guys. The business is in its growth phase of its business life cycle and has decided to review its performance as regard the management of its working capital. You have been asked to review their performance utilizing figures and ratios calculated over the past four years and comment on their performance taking into account benchmark figures / industry averages / budgets also detailed below. Once you have analyzed their performance provide some strategies and recommendations to assist in improving any weaknesses in working capital management identified. As part of your recommendations identify the associated potential benefits and costs of each recommendation. (250+250 = 500 word limit)
Working Capital Ratios 2014 2015 2016 2017
Accounts Receivable Days 29.2 days 39.1 days 43.8 days 50.2 days
Inventory Days 32.0 days 33.5 days 36.9 days 45.6 days
Accounts Payable Days 29.6 days 30.2 days 38.2 days 53.0 days
Note: Ratios are based on assuming end year figures are the average throughout the majority of the year
Extracts from Financial Statements
Cash on hand 0.35mill 0.3mill .01mill .005mill
Sales - all on credit 15 mill 14 mill 15mill 16mill
Accounts Receivable Balance 1.2 mill 1.5 mill 1.8 mill 2.2 mill
Inventory 0.7 mill 0.78 mill 0.9 mill 1.15mill
Cost of Goods Sold 8.0 mill 8.5 mill 8.9 mill 9.3 mill
Accounts Payable 0.65mill 0.7 mill 0.95 mill 1.35 mill
Budgeted Figures
Cash on hand 0.3 mill 0.3 mill 0.31 mill 0.32 mill
Accounts Receivable Balance 1.2 mill 1.22 mill 1.28 mill 1.35 mill
Inventory Balance 0.7 mill 0.72 mill 0.78 mill 0.80 mill
Accounts Payable 0.64 mill 0.65 mill .07 mill 0.71 mill
Accounts Receivable Terms 30 days 30 days 30 days 30 days
Accounts Payable Terms 45 days 45 days 45 days 45 days
Industry Averages
Accounts Receivable Days 30.1 days 29.6 days 30.4 days 33.1 days
Inventory Days 30 days 31 days 33 days 32.2 days
Accounts Payable Days 30 days 28.5days 17 days 15 days