Maddox Smith Staff asked 5 years ago

Accounting For Management Decisions

Q

Question 1:  (10 marks)   JB Ltd’s projected profit for 2015 is $550,000, based on a sales volume of 200,000 units.  JB Ltd sells USB flash drive for $15 each.  Variable costs consist of the $9 purchase price and a $1 shipping and handling cost.  JB’s annual fixed costs are $450,000.     REQUIRED:   a)    Calculate JB Ltd’s break-even point in unit sales and dollars. (3 marks)   b)    Calculate JB Ltd’s margin of safety in units. (1 mark)   c)    Calculate JB Ltd’s profit for 2015 if there is a 15% increase in projected unit sales. (3 marks)   d)    For 2015, management expects that the unit purchase price of the USB flash drive will increase by 10%.  Calculate the sales revenue JB Ltd must generate for 2015 to maintain the current year’s profit ($550,000) if the selling price and fixed cost remain unchanged. (3 marks)         Question 2 Capital Investment Decisions (16 marks)   Chima construction Ltd is deciding whether to purchase certain equipment in the coming year.  The capital budget has a cap of $6,800,000 for the year.  Stephen, project analyst at Chima construction Ltd, is preparing an analysis of the three projects under consideration by Rod, the company’s owner.     Project A Project B Project C Projected cash outflow       Net initial investment $5,000,000 $1,500,000 $4,000,000 Projected cash inflows       Year 1 $1,000,000 $400,000 $1,000,000 Year 2 $1,000,000 $1,000,000 $1,000,000 Year 3 $1,500,000 $1,000,000 $2,100,000 Year 4 $1,500,000 $500,000 $1,000,000 Year 5 $3,000,000 $300,000 $300,000 Required rate of return 12% 12% 12%   REQUIRED   a) Calculate the payback period for each of the three projects.  Ignore income taxes.  Using the payback method, which project should Chima construction Ltd choose? (4 marks)   b) Stephen thinks that projects should be selected based on their NPVs.  Assume all cash flows occur at the end of the year except for initial investment amounts.  Calculate the NPV for each project.  Provide NPV projects ranking. (10 marks)   c) Which projects would you consider should be funded?  Briefly explain the reasons for your decision. (2 marks)   ADDITIONAL INFORMATION   Present Value of $1.00 Periods 12% 1 0.893 2 0.797 3 0.712 4 0.636 5 0.567       Question 3: (15 marks)   Befitting Fashion Ltd has provided the estimates below for the January – March quarter in 2015:                                                     January                  February        March                                                              $                          $                     $   Sales of inventory                       70,000                   80,000             90,000   Purchases of inventory               25,000                   30,000             40,000   Operating expenses                    20,000                   21,000             23,500   You are also given the following additional information: ·         25% of sales are cash sales, the remaining 75% are credit sales and are collected as follows:   o   30% of credit sales are collected in the month of sale o   70% of credit sales are collected in the following month after sale   ·         Sales in the month of December 2014 were $42,857.   ·         All purchase of inventory is made on credit and are paid for in the same month they are incurred.    ·         Operating expenses include depreciation expense each month of $3,000. All expenses are paid for in the same month they are incurred.   ·         Loan repayments of $10,000 per month are due to start in February.   ·         The firm expects to sell some old machinery for $5,000 in January. New machinery worth $70,000 will be purchased in March (depreciation expense will not change as a result).   ·         The cash balance on 30th December 2014 is $5,000.   REQUIRED:   a) Prepare a Schedule of expected receipts from Debtors (Account receivable) for Befitting Fashion Ltd for the three months January to March 2015. Show all workings. (3 marks)   b) Prepare a cash budget for Befitting Fashion Ltd for the three months January to March 2015. Show all workings. (10 marks)   c) Befitting Fashion Ltd is budgeting for a cash deficit at the end of one of the months included in their cash budget. Briefly explain how Befitting Ltd could prepare for this forecasted deficit.      (2 marks)           Question 4 (12 Marks)   A&L Ltd is a business that prints customised pens for corporate events. It has been decided by the management that the pricing of customer orders will be based upon the plans for the next financial year.  The plans for the 2015 financial year are shown below:                                                                    $ Sales revenue                                     283,000                      Direct materials                                   (38,000) Direct labour                                       (21,000) Variable overheads                              (12,000) Advertising                                            (2,000) Depreciation of equipment                   (3,000) Administration expenses                      (24,000) Licence expenses                                 (1,200) Profit                                                     191,800   A&L Ltd needs to prepare a quote for a customer for an order of pens and has made the following estimates for the direct costs of the job:   Direct materials           $2,500 Direct labour               $1,100     Required:   (a)  Prepare a quote for the customer using direct labour costs to apportion overheads and profits. Show all workings. (10 marks)   (b)  Describe an alternative method that A&L Ltd could have used to apportion overheads and profits. (2 marks