Financial Management and Cost Accounting - Essay Example

Question - 4 Current situation Particulars Working s Amount Sales 6000 bottles for 12 months divided by 8 months as the sale is only for 8 months= 9000 bottles per month 1080000 Less: Variable Costs:     Direct materials (9000/6000 = 1.5 per bottle )* 9000 *8 months 108000 Direct Labor (10000/6000 = 1.67 per bottle * 9000*8 120240 Fertilizer 3000/6000 = .50 per bottle * 9000 bottles for 8 months 36000 Reticulation of vines 5000/6000 = .83 per bottle * 9000 bottles for 8 months 59760 Packaging 7000/6000 = 1.17 * 9000*8 84240 Insurance 5000/6000 = .83 *9000*8 59760 Sales Commission 6% of $15 = .9 *9000 *8 64800 Less: Fixed Costs:     Fixed Selling and Admn. Costs 7000*12 84000 Total Profit   463200 Alternative - 1 Particulars Working notes Amount Sales Increase in sale price by 5% equals $15+$15*5%= $15.75 and sales volume 9000+9000*12%*8months = (9000 + 1080) *8 1270080 Less: Variable Costs:     Direct materials (9000/6000 = 1.5 per bottle )* 10800 *8 months 126000 Direct Labor (10000/6000 = 1.67 per bottle * 10800*8 144288 Fertilizer 3000/6000 = .50 per bottle * 10800 bottles for 8 months 40320 Reticulation of vines 5000/6000 = .83 per bottle * 10800 bottles for 8 months 71712 Packaging 7000/6000 = 1.17 * 10800*8 101088 Insurance 5000/6000 = .83 *10800*8 71712 Sales Commission 6% of $15 = .9 *10800 *8+10000 87760       Less: Fixed Costs:     Fixed Selling and Admn. Costs 7000*12 84000 Total Profit   543200 Alternative - 2 Particulars Working notes Amount Sales Increase in sales volume by 30% = 9000+9000*30% = 11700 bottles multiplied by $15 per bottle for 8 months 1404000 Less: Variable Costs:     Direct materials (9000/6000 = 1.5 per bottle )* 11700 *8 months 140400 Direct Labor (10000/6000 = 1.67 per bottle * 9000*8 156312 Fertilizer 3000/6000 = .50 per bottle *11700 bottles for 8 months 46800 Reticulation of vines 5000/6000 = .83 per bottle *11700 bottles for 8 months 77688 Packaging 7000/6000 = (1.17+.90) * 11700*8 193752 Insurance 5000/6000 = .83 *11700*8 77688 Sales Commission 6% of $15 = .9 *11700 *8 84240       Less: Fixed Costs:     Promotional Exercise   25000 Fixed Selling and Admn. Costs 7000*12 84000 Total Profit   518120 Alternative - 3 Particulars Working notes Amount Sales (Increase in sales volume for 2 months = 40%= 9000+40% of 9000 = 12600 for two months = 25200 and 9000+7% of 9000 for 6 months = 57780) = total 82980 bottles 1074591 Less: Variable Costs:     Direct materials (9000/6000 = 1.5 per bottle )* 82980 124470 Direct Labor (10000/6000 = 1.67 per bottle * 82980 138577 Fertilizer 3000/6000 = .50 per bottle * 82980 41490 Reticulation of vines 5000/6000 = .83 per bottle * 82980 68873 Packaging 7000/6000 = 1.17 * 82980 97087 Insurance 5000/6000 = .83 *9000*8 60000 Sales Commission 6% of $15 = .9 *82980 74682 Vine Coolers 82980*3 248940 Less: Fixed Costs:     Fixed Selling and Admn. Costs 7000*12 84000 Total Profit   136472 Analysis: In the alternative 1, the selling price is increased to 5% which makes up $15.75 and even the sales volume is increased by 12% which adds up to 10080 bottles per month. Commensurately, the variable costs have been calculated depending on per unit cost of the concerned overhead. The calculations and working are given above. The fixed costs are fixed irrespective of the volume of sales. In the alternative – 2, the sales volume is increased by 30% with no increase in sale price. The costs have again been calculated according to the volume of 11700 bottles per month and the fixed costs are the same. There is an additional expenditure of packaging cost of $.9 per bottle and promotional expenditure amounting to $25,000. After taking into consideration all the inflows accordingly and deducting the outflows, the total profit amounts to $518,120. In alternative – 3, the approach is quite dynamic of giving a $3 worth of cooler free for every Shiraz bottle. Also, the selling price would be reduced to $12.95. This would increase the sales volume by 40% for 2 months and 7% for the later six months. On the whole, the sales would be 82980 bottles per year. However, as per unit profit is quite low, the profit receivable would also be very low at $136,472. Thus, the alternative - 1 i.e. increasing the sale price by 5% and spending additional 10000 for promotional charges to increase the demand by 12% is the best alternative as it gives the highest profit of $543200. Question - 5 Projected cash flows:                   Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 cost of gazebo, landscaping and garden -41000                   Cost of reception centre   -250000                 Total Cash Outflows -41000 -250000                                       Revenue:                     Net Cash Inflow: 6000 24000 33000 38000 43000 45000 54000 59000 66000 68000                       Net Cash Flow -35000 -226000 33000 38000 43000 45000 54000 59000 66000 68000 Cost of Capital is 12% NPV for the proposition: ($4,013) IRR for the proposition: Cash outflows at 10% 243769 NPV of Cash inflows at 10% 237585 NPV of Cash inflows at 9% 251072 This implies that the actual rate of return is between 9% and 10% By interpolation, we get the actual rate of return as follows: NPV at 10%+ 9% 488657 IRR = NPV at 9% + (NPV at 9%/NPV at 10% +9%) 9.51% Since the IRR arrived is quite less than the cost of capital, it is better to avoid this proposal. (Chandra, Prasanna. 2006) Analysis: In the first year, there is a cash outflow of $8000+$18000+$15000 for Gazebo. In the second year, the payment for reception center of $250,000 has to be paid. The resulting inflows have been recorded accordingly. After estimating the cash flows thus for the ten years, we need to calculate the two normal methods of project evaluation, namely: NPVand IRR. The NPV for cash flow is a negative value of ($4013). The IRR is arrived at by matching the total outflows and inflows to a particular rate of return. By trial and error basis, we understand that the interest rate is between 9 and 10%. By interpolation, we arrive at the 9.51% rate of interest. However, the cost of capital is 12% and the expected rate of return is less in both the evaluations. Hence, this project should be avoided. But, as the land would be vacant for 10 years, more profitable avenues should be dwelled upon. Question – 6 Particulars Chenin Dessert wine Selling Price (S) 24.0 20.0 Less Variable Overheads (V): Direct Materials 6.0 4.0 Direct Labor 5.0 3.0 Factory Overheads 3.2 2.4 Selling Expenses 0.8 0.6 Total Variable Overheads (V) 15.0 10.0 Contribution = (S-V) 9.0 10.0 Total Sales 8000 6000 Contribution for sales 72000 60000 Less Fixed Overheads: Factory Overheads 25600 14400 Selling and Administration costs 16000 12000 30400 33600 Offer made in February Selling Price 15.0 Less Variable Overheads 15.0 Contribution 0.0 Offer made in May: Chenin Dessert Wine Selling Price 21.5 20.0 Less Variable Overheads 15.0 10.0 Contribution = (S-V) 6.5 10.0 Sales volume 800 600 Contribution of sales 5200 6000 (Jain, S.P. & Narang, K.L. 2006) Analysis: In the current situation, Chenin and Dessert Wine are quite profitable with $9 and $10 contribution per unit respectively. Here, the point to be noted is that the contribution per unit for Dessert Wine is more than that of Chenin. After deducting the fixed expenses from contribution of sales, we arrive at profit figures of $30,400 and $33,600. In the February offer, the contribution is nil. Hence, there is no point in considering that proposal unless; it can lead to further sales. In the May offer, even though, the volume is more, the total profit earned is less in the case of Chenin because of its low contribution per unit. Hence, the company should not look into the proposal of halting dessert wine bottles by 600 and taking up 800 bottles order for Chenin. Book References: Chandra, Prasanna. Financial Management – Theory and Practice. Ed. 6. Ch.11&12. New Delhi. Mc. Graw Hill. 2006. Jain, S.P. & Narang, K.L. Cost Accounting – Principles and Practice. Part – 5. Ch. 3. New Delhi. Kalyani Publishers. 2006. Book Bibliography: Kendrick, Tom. The Project Management Tool Kit: 100 Tips and Techniques for Getting the Job Done Right. Ed.2. Ch.20. U.K. Amacom. 2010. Anonymous. 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