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1102AFE Accounting for Decision Making
Questions:
Question 1 (16 Marks)
Green Friends Ltd is a garden design and landscaping business that started operations on 1 September 2020. The following information has been provided by the firm. In September, cash sales were $15,000 and credit sales $35,000. Total expected sales in the following three months are: $64,000 in October; $82,000 in November; and $96,000 in December.
The company expects 25% of the sales of each month to be cash sales and the remainder credit sales. Credit sales are expected to be collected 60% in the month of the sale, 30% in the next month, and 10% in the following month.
All purchases of inventory are on credit. Purchases of inventory in September were $35,000. The company estimates purchases in the following three months to be: $30,000 in October, $35,000 in November and $40,000 in December.
Purchases are paid 40% in the month of purchase, and 60% in the following month. Wages expense is estimated to be $12,000 in October, $16,000 in November and $20,000 in December, paid in cash.
Other operating expenses are budgeted to be $18,000 in October, $22,000 in November and $24,000 in December, paid in cash. Depreciation expenses of $1,400 per month are expected.
The cost of sales is estimated as 40% of sales revenue each month. Dividends of $10,000 are budgeted to be paid in December. Proceeds from a bank loan to be received in October: $40,000 The cash balance at 1st October 2020 was $6,000
Required:
- Prepare a Budgeted Income Statement for the period October – December 2020.
|
Budgeted Income Statement For the period October – December 2020 |
|
|
October – December ($) |
|
- Prepare a schedule of estimated receipts from debtors (accounts receivable) for the months of October, November and December 2020.
|
Month of cash collection |
||||
|
Month |
Credit Sales |
Oct |
Nov |
Dec |
- What is the amount of accounts receivable at 31stDecember 2020?
- Prepare a cash budget for October, November and December 2020
- What is the amount of accounts payable at 31stDecember 2020?
- Is there anything you would do to improve the cash budget?
Question 2 (15 Marks)
B&B produces and sells one single product: BT5. The production capacity of B&B is 60,000 units. Annual sales volume expected in 2021 is 54,000 units.
The following information is estimated for 2021: selling price per unit: $30, variable cost per unit: $20, and annual fixed costs: $298,000.
Required:
Answer the following questions in the spaces provided:
- What is the available production capacity?
- What is the contribution margin per unit?
- What is the contribution margin ratio?
- What is the break-even-point (BEP) in units?
- What is the BEP in sales dollars?
- Prepare a contribution margin income statement for the expected sales in 2021.
- What would be the firm’s profit if 38,000 units are sold in 2021?
- What would be the BEP in units if selling price increases by $2.50 and the expected sales in 2021 is 54,000 units?
- What would be the BEP in units if variable costs increase by $2 per unit and annual fixed costs decrease by $100,000 (assume original selling price and expected sales do not change).
- Using the original data provided, if B&B receives an offer from BigZ Ltd, which is not a current customer of B&B, to purchase additional 6,000 units at $22 per unit, and B&B would incur additional fixed costs of $18,000 but no other fixed costs to produce the 6,000 units required,
a. What would be the incremental revenue if the offer is accepted?
b. What would be the incremental cost if the offer is accepted?
c. Would you accept the offer? Why?
d.What qualitative factor would make you to change your decision (identify only one qualitative factor)?
Question 3 (9 Marks)
The manager of K&K Ltd is considering a new investment opportunity at the end of December 2020. The company has two independent divisions: Division A and Division B. Any of these divisions can take responsibility for this investment opportunity. The company’s cost of capital is 15%, which is the required rate of return for the company. The company has a required pay-back period of maximum 3.6 years.
The total investment of Division A is $1,020,000 and Division B is $850,000. The estimated divisional margin for 2021 (without considering the investment opportunity) of Division A is $250,000 and for Division B is $280,000.
The required investment to take this opportunity is $200,000, useful life is 4 years and residual value at the end of the useful life is $40,000. The net cash flows estimated from this investment are as follows (assume depreciation is the only non-cash expense):
Net cash flows year 2021 80,000
Net cash flows year 2022 60,000
Net cash flows year 2023 50,000
Net cash flows year 2024 20,000
Required:
- Based on the Accounting Rate of Return (ARR) method, what would be the decision of the company regarding the investment (round to two decimal places)?
Average Profit =
Average investment =
ARR =
Recommendation? Why?
- Based on the Payback Period method, what would be the decision of the company regarding this opportunity of investment (calculate the Pay Back Period in years rounding to two decimal places)?
- If the performance of the divisional managers is based on the Return on Investment (ROI) of their divisions based on their divisional margin, and, therefore, their main objective is to maximise their performance in 2021, will they accept this investment (justify your answer calculating the difference in their ROI)?
Assume depreciation is calculated using the straight-line method.
|
ROI Division A 2021 (without additional investment) = |
|
ROI Division B 2021 (without additional investment) = |
|
ROI additional investment 2021 = |
|
Decision of each Division? Why? |
- If the performance of the divisional managers is based on the Residual Income (RI) of their divisions, based on a charge of capital of 22%, and, therefore the main objective of the managers is to maximise their residual income in 2021, will they accept this investment (justify your answer calculating the RI of the additional investment)?
|
RI additional investment 2021 = |
|
Decision of each Division? Why? |
1102AFE Accounting for Decision Making
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