Reference no: EM132351879
Accounting for Decision Makers
Learning Outcomes Assessed:
1. Demonstrate a critical understanding of, and evaluate, balance sheets and income statements
2. Interpret the financial data commonly provided by accountants to managers
Question 1
"A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the non-distribution of profits among stockholders in order to devote them to other purposes."
Dodge v. Ford Motor Co. (1919).
The Michigan State Supreme Court made the above ruling in Dodge vs. Ford Motor Company in 1919. The decision provides us with a historical perspective on the primacy of the stockholders (or shareholders) interest over the interest of the other stakeholders such as the employees, customers, suppliers etc. in the early 20th century.
Required: -
In the context of a modern public limited company, critically evaluate the implications of solely prioritising the shareholder's interests over other stakeholders.
Within your discussion, please state the
- advantages and disadvantages of solely focusing on the shareholders
- likely effect of this policy over the other stakeholders and
- the likely effect on the long-term viability of the organisation.
Question 2
The financial results of Epsilon Ltd., a small retailing company, are as follows:
Income Statement for the year ended 31/12/XX
|
|
31/12/17 £
|
31/12/18 £
|
|
Sales
|
50,000
|
54,000
|
|
Cost of Goods Sold
|
-40,000
|
-42,000
|
|
Gross Profit
|
10,000
|
12,000
|
|
Operating expenses
|
-1,500
|
-1,600
|
|
Profit before interest and tax
|
8,500
|
10,400
|
|
Interest payable
|
-2,500
|
-2,550
|
|
Profit before taxation
|
6,000
|
7,850
|
|
Taxation
|
-1,800
|
-2,355
|
|
Profit after taxation
|
4,200
|
5,495
|
Statement of Financial Position as at 31/12/XX
|
|
31/12/17 £
|
31/12/18 £
|
|
ASSETS
|
|
|
|
Non-current assets
|
13,200
|
14,600
|
|
Current assets:
|
|
|
|
Inventories
|
5,000
|
5,500
|
|
Trade receivables
|
14,000
|
14,500
|
|
Cash
|
14,000
|
6,595
|
|
TOTAL ASSETS
|
46,200
|
41,195
|
|
EQUITY CAPITAL
|
|
|
|
Share capital
|
15,000
|
15,000
|
|
Retained profits
|
4,200
|
9,695
|
|
|
19,200
|
24,695
|
|
LIABILITIES
|
|
|
|
Long-term loans
|
8,000
|
8,500
|
|
Creditors -liabilities:
|
|
|
|
Bank overdraft
|
7,000
|
5,000
|
|
Trade payables
|
12,000
|
3,000
|
|
TOTAL EQUITY and LIABILITIES
|
46,200
|
41,195
|
Required: -
A. Calculate any ten categories financial ratios of your choice for both 2017 and 2018.
Please note: - you should calculate the ratios for both years. Therefore, if you calculate ten categories ratios, you will have a total of twenty ratios.
B. Based on your calculations above, summarise the changes in the financial health of the organisation over the year. Please also make recommendations, where appropriate, to the managers of Epsilon Ltd. to improve its financial viability.
Question 3
Pineapple limited produces three products. Details of its products are as follows: -
|
CC
|
DD
|
EE
|
|
£ per unit
|
£ per unit
|
£ per unit
|
|
Selling Price
|
3.00
|
3.85
|
3.50
|
|
Direct Material
|
1.95
|
1.00
|
2.55
|
|
Direct Material 2
|
0.60
|
0.90
|
0.15
|
|
Variable Overheads
|
0.50
|
0.15
|
0.45
|
|
Allocation of Shared Fixed Costs
|
0.55
|
0.60
|
0.40
|
|
Profit
|
-0.60
|
1.20
|
-0.05
|
|
|
|
|
|
Estimated Sales Volume in Units (Demand)
|
150000
|
100000
|
200000
|
Required: -
a. Based on the above-given information, advice the managers on the products that should be manufactured or discontinued. Briefly explain the reason(s) for your recommendation.
b. You have now learnt that £0.40 of ‘EE' fixed cost is a separable fixed cost, will this alter your recommendation?
c. Assume the business's fixed costs are all shared, not separable, and Direct Material 2, costs £0.15 per ml. You have been advised that due to a shortage of Direct Material 2, the business can only secure 440,000 ml of this raw material in the current year. Advise the company on a sales mix that will maximise its profits and calculate this profit. Numerically justify your recommended sales mix.
d. Assume of the fixed costs that are stated above are separable.
The business plans to hire a new marketing intern and offer them a fixed salary of £15,000. Calculate the business's expected profit, break-even volume and the margin of safety for the upcoming year if they hire the intern.
e. Assume that the intern offers the business the option to pay him a commission of £0.05 for each unit of sales, as opposed to a fixed salary of £15000. If the business accepts this offer, what will be its expected profit, break-even volume and margin of safety for the upcoming period?
f. Based on your calculations above, would you recommend the business to offer a fixed salary, as mentioned in point d., or the variable, as mentioned in e.?
Attachment:- Accounting for Decision Makers.rar