Reference no: EM13341165
Question 1 Full Costing
Asterixis 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 163,000
Direct materials (28,000)
Direct labour (21,000)
Variable overheads (12,000)
Advertising and marketing (2,000)
Depreciation of equipment (3,000)
Administration expenses (24,000)
Interest on loan (1,200)
Profit 71,800
Asterix 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 $1,500
Direct labour $1,100
Required:
(a) Prepare a quote for the customer using direct labour costs to apportion overheads and profits. Show all workings.
(b) What assumption does the customer quote in part (a) make regarding the variable overheads of the business?
(c) Describe an alternative method that Asterix could have used to apportion overheads and profits.
Question 2 CVP Analysis
Nymph Ltd manufactures and sells artificial Christmas trees. Nymph Ltd sold 75,000 Christmas treesin 2013 with the following results:
Sales revenue $1,125,000
Variable labour costs 187,500
Variable machine costs 37,500
Variable material costs 600,000
Fixed Costs 190,000
Operating Profit $110,000
Nymph expects the variable labour costs to increase by $1 per unit and the variable material costs to increase by $1 per unit in 2014.
Required:
(a) Assuming the sale price for each Christmas tree stays the same in 2014; calculate the contribution margin per Christmas tree for 2014. Show all workings.
(b) Nymph Ltd wants to increase its operating profit by 20% in 2014. How many Christmas trees will Nymph Ltd need to sell to reach its desired operating profit? Show all workings.
(c) Nymph Ltd is also considering purchasing a new piece of machinery that will eliminate the variable labour costs but increase the fixed costs by $50,000. If Nymph purchases this machinery for 2014 how many Christmas trees would Nymph need to sell to reach the desired operating profit calculated in part (b)? Show all workings
(d) Discuss the effect that the purchase of the new machine by Nymph Ltd will have on the business' operational gearing.
Question 3 Capital Investment Decisions
Starbuck Construction is analysing its capital expenditure proposals for the purchase of equipment in the coming year.
The capital budget is limited to $6,000,000 for the year.
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Project A
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Project B
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Project C
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Projected cash outflow
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Net initial investment
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$3,000,000
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$1,500,000
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$4,000,000
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Projected cash inflows
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Year 1
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$1,000,000
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$400,000
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$2,000,000
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Year 2
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$1,000,000
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$900,000
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$2,000,000
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Year 3
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$1,000,000
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$800,000
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$200,000
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Year 4
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$1,000,000
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$100,000
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Required rate of return
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11%
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11%
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11%
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REQUIRED:
(a) Payback period method.
i. Discuss the benefits and limitations of the payback period method.
ii. Calculate the payback period for each of the three projects. Show all workings
iii. Using these payback period calculations, discuss which of the three projects, if any, should be undertaken.
(b) NPV method.
i. Discuss the benefits and limitations of the NPV method.
ii. Calculate the NPV for each of the three projects. (assume all cash flows occur at the end of the year except for initial investment amounts)
iii. Using these NPVcalculations, discuss which of the three projects, if any, should be undertaken.
Question 4: Budgeting
Pandorica Ltd has provided the estimates below for the October-December quarter in 2014:
October November December
$ $ $
Sales 55,000 63,000 57,000
Purchases 31,000 36,000 29,000
Operating expenses 20,000 21,000 23,500
You are also given the following additional information:
- 50% of sales are cash sales, the remaining 50% are credit sales and are collected as follows:
- 25% in the month of sale
- 40% in the month after sale
- 30% 2 months after sale
- 5% lost in bad debts
· Sales in the months of August and September were $53,000 and $51,500 respectively.
· Operating expenses include depreciation each month of $1,350. All expenses and purchases are paid for in the same month they are incurred.
· The firm expects to sell some old machinery for $11,000 in October. New machinery worth $38,000 will be purchased in November (depreciation expense will not change as a result).
· The cash balance on 30th September 2014 is $2,500.
REQUIRED:
a) Prepare a cash budget for PandoricaLtd for the three months October to December 2014. Show all workings.
b) Pandorica Ltd is budgeting for a cash deficit at the end of one of the months included in their cash budget. Explain how PandoricaLtd could prepare for this forecasted deficit. (maximum 150 words)
Question 5 Management of working capital and business structures
Hawkeye Ltd is concerned about its management of working capital and has provided you with the following ratios calculated by its accountant:
2010 2011 2012 2013
Receivables turnover 8.7 8.1 8.0 7.5
Inventory turnover 6.5 6.3 6.0 5.9
Payables turnover 7.6 8 8.1 8.5
Also, you have a friend who has bought $500,000 of shares in Xander Ltd.
For this purchase, your friend was only required to pay 20% of the full purchaseof $500,000. The remaining 80% is to be paid at a later date, yet to be settled by Xander Ltd.
Sadly, one week after your friend makes the first payment, Xander Ltd is sued. The case goes to trial immediately due to the serious nature of the circumstances. The legal matter is clear, and within a week the case is finished.
Xander Ltd loses the case and is fined $20 million dollars, which it must pay within the next 28 days.
This fine causes Xander Ltd to declare that it is bankrupt.
Your friend has been following this case in the news media, and has become very worried, and seeks your advice.
(a) Calculate the cash cycle period for each of the four years for Hawkeye Ltd
(b) Comment on the management of working capital by Hawkeye Ltd over the past four years. (maximum 150 words)
(c) Explain how much money (if any at all), Xander Ltd can demand from your friend.