Accounting For Managers

Question One

A colleague has suggested that your company should invest in The End Game Limited and that all you need to do to decide whether it is a good idea or not is to get a copy of their financial statements. They said that the only type of analysis required will be to use ratio analysis and that should provide you with all the answers.

Required

Looking at the information that is used in ratio analysis, coming from the financial statements and the notes, write a report to your colleague highlighting and discussing three limitations of using ratio analysis as your major analysis method.

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Question Two

Cosimo Rossi runs a small manufacturing business in Winnellie and has asked for help preparing a cash budget for July and August. He estimated that the cash balance at the end of June would be $105,000. He has provided you with a breakdown of the revenue figures for May and June and an estimate for July and August.

  May June July August
Cash $ $ $ $
Sales 110,250 106,750 126,000 105,000
Credit  157,500  192,500  227,500  140,000
Sales        
Total $ $ $ $
   267,750  299,250  353,500  245,000

He has found that his credit customers generally pay their accounts in the three months after the sale. 60 percent is collected in the month of sale, 35 percent in the following month and the balance the month after that.

Cosimo has budgeted for selling and administrative expenses on a monthly basis at

$154,000 a month.

He will be buying and installing new equipment for $175,000. There is an initial outlay of

$35,000 in July with the remainder due after installation in October.

With the need to cover unexpected expenses Cosimo tries to keep a minimum cash balance of $ 105,000.

He anticipates that during the dry season there will be an increase in sales and so he will need to build up his inventory levels to meet the demand. He has ordered new stock at a cost of $105,000 which will be delivered in June with settlement paid in July.

Required

a.Show in a table how much credit customers pay in July and August.

b.Create a cash budget for July and August.

c.Write notes for Cosimo showing his cash position over July and August and provide him with advice about his financing requirements if there is a cash shortfall or investment opportunities if there is a surplus.

Question Three

Blenkinsop Manufacturing produces ChopNSlice, a multifunctional slicing and chopping kitchen tool. The following shows a summary of the manufacturing data for ChopNSlice for 2020.

Selling price per unit $ 64
Variable manufacturing costs 38
Annual fixed manufacturing costs 201 060
Variable selling, distribution and administration costs 10
Annual fixed non-manufacturing costs 102 940
Annual volume 28 000 units

Required

a.Calculate the contribution margin per unit.

b.Calculate the contribution margin ratio.

c.Calculate the break-even in units and sales dollars for 2020

d.Calculate the profit earned in 2020.

e.Blenkinsop Manufacturing has decided to introduce robots in part of the manufacturing production process with the changes taking place in 2021. The new production methods would bring about a decrease in variable costs per unit of $18 but would increase the fixed manufacturing costs by $150 000. How many units would need to be sold to earn the same profit as in 2020? Would you recommend the changes?

f.Prepare the Statement of Profit or Loss for (d) and (e).

Question Four

Gulpit Limited manufactures two popular high energy drinks for dynamic business professionals, GetUpAndGo and INeedALift. Both drinks are produced on the same assembly lines and are sold in packs of 20 easy to go drinks. The sales of both drinks for 2021 are predicted to be 506 000 packs of GetUpAndGo and 644 000 packs of INeedALift. The budgeted costs for the coming year are as follows.

   Variable

cost

 Fixed cost
Materials $650 000 $1 610 000
Other $810 000 $2 756 000

Both drinks incur similar variable material costs on a per pack production basis. The fixed costs are apportioned equally between both drinks. The other variable costs are allocated on a machine time basis with GetUpAndGo requiring 253 000 machine hours and INeedALift 161 000 machine hours. Gulpit directors have indicated that they require a profit of $375 600 from the GetUpAndGo line and $486 800 from INeedALift for 2021.

Required

a.Calculate the total cost for each drink.

b.What price should be charged for each drink?

 
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