TASK 1 Cost-Volume Profit Analysis
Objectives
To be able to identify the relevant and irrelevant costs and benefits associated with each feasible alternative with the greatest overall net benefit to aid decision making.
Golden Sdn. Bhd.'s projected profit for the coming year is as follows:
| |
Total |
|
Per Unit |
|
Sales
|
200,000 |
|
20
|
|
Total variable cost
|
120,000 |
|
12
|
|
Contribution margin
|
80,000 |
|
8
|
|
Total fixed cost
|
64,000 |
|
|
Operating income
|
16,000 |
|
|
Required:
a) Compute the variable cost ratio and the contribution margin ratio.
b) Compute the break-even point in units and sales ringgit.
c) How many units must be sold to earn a profit of $30,000?
d) Using the contribution margin ratio computed in step (a), compute the additional profit that Golden would earn if sales were $25,000 more than expected.
e) For the projected level of sales, compute the margin of safety in units and in sales ringgit.
f) Suppose that Golden revised the forecast to show a 30 percent increase in sales over the original forecast.
i. What is the percent change in operating income expected from the revised forecast?
ii. What is the total operating income expected by Golden after revising the sales forecast?
TASK 2: Master budgeting
How organisations strive to achieve their financial goals by preparing a number of budgets that together form an integrated business plan known as the master budget. This question tests the ability to prepare the cash budget to anticipate identification of shortages or surpluses of cash at specific times in the budget period for decision making.
Jaya Sdn. Bhd. is a wholesaler. The management of Jaya Sdn. Bhd. has been extremely worried about the company's cash position over the last few years. In July 2015, they seek your advice and ask you to prepare a cash budget.
The estimated sales for the six months to December 2015 are as follows:
|
|
July
|
August
|
September
|
October
|
November
|
December
|
|
Credit Sales ($)
|
122,000
|
137,000
|
142,000
|
148,000
|
134,000
|
126,000
|
|
Cash Sales ($)
|
12,900
|
14,500
|
17,700
|
20,100
|
15,000
|
12,600
|
Cash is received immediately on cash sales. The company allows customers one month's credit on sales other than for cash.
Purchase of goods for resale is made on credit. The company receives two months' credit on these purchases. The purchases for the six months to December 2015 are as follows:
July August September October November December
Purchases ($) 62,000 58,000 71,000 80,000 54,000 48,000
An inventory check at the end of the last year has revealed $45,000 of inventory, valued at cost, is considered obsolete. The company is currently negotiating the sale of this inventory for $9,500 and anticipates payment in November 2015.
Jaya Sdn. Bhd's manufacturing overheads are estimated to be $12,000 per month. This includes a charge for depreciation of $2,000 per month. The company takes one month to pay these expenses.
Selling and distribution expenses are estimated to be $50,400 per year and are incurred evenly over the year. One month's credit is taken.
The company is currently negotiating an advertising programme with an agency. The cost will be $6,300 in November and $7,700 in December. Payment will be made in cash.
In December the company anticipates paying $3,880 tax to Lembaga Hasil Dalam Negeri.
The company has agreed to purchase new stock handling equipment. The cost of $105,200 is payable in two equal instalments in October and November 2015.
The company expects in December to be able to take advantage of adjacent property (cost of $150,000) to expand their operation.
It is estimated that the cash balance at 1 October will be $16,000.
Required:
a) Prepare a cash budget for the months of October, November and December 2015.
b) Write a report on the cash position over this period, and in particular on ways in which you think it could be improved.
TASK 3 Capital budgeting - planning investments
To be able to identify how managers plan significant investments in potential projects than can actually be funded which have long-term implications on an organisation.
The management of Popular Stores Sdn. Bhd. are in the process of exploring the company's investment opportunities.
There are six opportunities, the details and relevant information for which is as follows:
Project A would cost $29 000 now, and would generate the following cash flows:
|
Year
|
$
|
|
1
|
8,000
|
|
2
|
12,000
|
|
3
|
10,000
|
|
4
|
6,000
|
The equipment included in the cost of the investment could be resold for $5,000 at the start of year 5.
Project B would involve a current outlay of $44,000 on capital equipment and $20,000 on working capital.
The profits from the project would be as follows:
|
Year
|
Sales |
Variable Costs
|
Contribution |
Fixed cost |
Profit
|
| 1 |
75,000 |
50,000 |
25,000 |
10,000 |
15,000 |
|
2
|
90,000
|
60,000
|
30,000 |
10,000 |
20,000
|
|
3
|
42,000
|
28,000
|
14,000 |
8,000 |
6,000
|
Fixed costs include an annual charge of $4,000 for depreciation; all the other fixed costs are avoidable. At the end of year 3 the working capital investment would be recovered and the equipment would be sold for $5,000.
Project C would involve a current outlay of $50,000 on equipment and $15,000 on working capital. The investment in working capital would be increased to $21,000 at the end of the first year. Annual cash profits would be $18,000 per annum for five years, at the end of which the investment in working capital would be recovered.
Project D would involve an outlay of $20,000 now and a further outlay of$20,000 after one year. Cash profits thereafter would be as follows:
|
Year
|
|
$
|
|
2
|
|
15,000
|
|
3
|
|
12,000
|
|
4 - 8
|
per annum
|
8,000
|
Project E is a long-term project involving an immediate outlay of $32,000 and annual cash profits of $4,500 per annum in perpetuity.
Project F is another long-term project, involving an immediate outlay of $20,000 and annual cash profits as follows:
|
Year
|
|
$
|
|
1 - 5
|
|
5,000
|
|
6 - 10
|
|
4,000
|
|
11
|
in perpetuity
|
3,000
|
The company discounts all projects of ten years' duration or less at a cost of capital of 12%, and all longer projects at a cost of 15%.
You are required to calculate the:
(a) NPV of each project, and determine which should be undertaken by the company.
(b) IRR of projects A, C and E and recommendation with reasons whether each project should be undertaken based on IRR computed.
(c) Discounted and non-discounted payback periods of project A.
(d) Accounting rate of return for project A. Assume that the depreciation charge is on a straight line basis.