Part 1

You are required to conduct a vertical analysis of the Balance Sheet of a public listed company over 2018 and 2019 financial years.

  • You can use the public listed company that used in your assignment one.
  • You have to attach the Balance Sheets under the section: Appendix One.

Part 2

Discuss vertical analysis results and provide possible reasons for the significant changes.

The explanation should identify the effect on liquidity and how non-current assets are funded.

 

 

Task Two: Internal Accounting Information and Working Capital Management (LO 3)

Boswell Limited is a wholesale business. Extracts from the business’s recent financial statements are as follows:

Boswell Ltd Income Statement for the year ended 31 May 2020 $000’s
Sales 903
Cost of sales  (652)
Gross Profit 251
Other operating expenses (109)
Operating Profit 142
Interest (11)
Profit before taxation 131
Income tax (38)
Profit for the year 93

 

Boswell Ltd Statement of Financial Position as at 31 May 2020 $000’s
Assets  
Current Assets  
Inventories 192
Accounts receivable 202
  394
Non-current assets at cost 714
Accumulated depreciation (295)
Book value 419
Total Assets 813
Current liabilities  
Accounts Payable 260
Borrowings (all bank overdraft) 107
Total current liabilities 367
Equity  
Ordinary Share Capital issued at $1.00 200
Retained earnings 246
Total Equity 446
Total liabilities and Equity 813

 

Opening inventory was 160.

Part Three:

[i] Calculate cash operating cycle

[ii] Evaluate liquidity of Boswell Ltd

Part Four:

[i] The Operations Manager believes that the current level of inventory should be reduced.

Do you agree with the OM? Explain two factors for and two factors against this decision.

[ii] Discuss three policies to efficiently manage Accounts Receivable.

 

Task Three: Financing strategy for a business (LO 5) 

Use the Boswell financial information and consider the following assumptions to answer the questions:

  • Suppliers have been pressing for payment, so the financing director has decided to reduce the level of accounts payable to an average of 60 days outstanding.
  • To achieve this, he has decided to ask the bank to increase the overdraft to finance the necessary payments.
  • The bank currently charges 12% interest on the overdraft.

Part Five:

Calculate the amount of finance required to reduce accounts payable, as shown on the statement of financial position, to an average of 60 days outstanding.

Discuss two factors that the bank would consider when making a decision about raising overdraft amount.

Evaluate three short term financing options that Boswell can use to manage working capital.

Recommend an option to Boswell and justify your recommendation.

 

Task Four: Cost-Volume-Profit analysis (LO 4)

Western Appliance Co Ltd manufactures one model of dishwashing for distribution and sale to retailers. This Economy model sells for $700.

Cost information is set out below.

Fixed Costs (per annum)  
Manufacturing overheads $160 000
Selling and Distribution 70 000
Administration 40 000
  270 000
Variable costs (per unit)  
Direct materials $210
Direct Labour $80
Manufacturing Overheads $110
Selling and Distribution 10% of the selling price
Administration $30

 

During 2020 the company sold 2000 “Economy” dishwashing machines.

Western Appliance Co Ltd is considering the manufacture of a second model in 2021.

The “Deluxe” model would sell for $1000. Budgeted variable costs per unit of the “Deluxe” model are $700. Fixed costs are expected to increase by $100000 per annum if the new model is produced.

If the change is made, the company estimates sales for 2021 would total 2400 dishwashing machines.

As some existing customers would now purchase “Deluxe” models, the sales mix is expected to be 1800 “Economy” models and 600 “Deluxe” models. If the proposed change is not implemented, 2021 sales of “Economy” models are expected to remain the same as in 2020.

Part Six:

Use the above information and calculate the yearly break-even sales in units and dollars for 2020 (before the proposed change).

Calculate the 2021 break-even sales in units (of each product) if the proposed change is implemented, assuring a constant sales mix. Use a weighted average contribution margin.

Given the anticipated level of sales in 2021, should Western Appliance Co Ltd begin production of “Deluxe” model dishwashing machines? Show calculations to support your answer.

 

Task Five: Activity-based costing (LO 4)

Siegel Company manufactures a product that is available in both a deluxe model and a regular model.

Manufacturing overhead is assigned to products on the basis of direct labour hours.

For the current year, the company has estimated that it will incur $900000 in manufacturing overhead cost and produce 5000 units of Deluxe model and 40000 units of the regular model. The deluxe model requires two hours of direct labour hour time per unit, and the regular model requires one hour.

Materials and labour costs per unit are as follows:

  Deluxe Regular
Direct Materials $40 $25
Direct Labour $14 $7

 

Management considering using activity-based costing to apply manufacturing overhead cost to both products.

The activity-based costing system would have the following four activity cost pools:

Activity cost pool Activity Measure Estimated overhead cost
Purchasing Purchase orders issues $204000
Processing Machine hours $182000
Scrap/rework Scrap/rework orders issued $379000
Shipping Number of shipments $135000
    $900000

 

Expected Activity      
  Deluxe Regular Total
Purchase orders issues 200 400 600
Machine hours 20000 15000 35000
Scrap/rework orders issued 1000 1000 2000
Number of shipments 250 650 900

Part Seven: 

Using direct labour hours as the base for assigning overhead cost to products, compute the predetermined overhead rate. Using overhead rate and other data which is given above, determine the unit product cost of each model.

Part Eight: 

Using the above information and compute the activity rates for each activity cost pool and determine the unit product cost of each product according to the activity-based costing system, including direct materials and direct labour.

Part Nine:

“Activity-based cost systems yield more accurate product costs than traditional costing systems because they use more cost drivers to assign overheads”. Indicate whether you agree or disagree with this statement and explain at least three reasons supporting your decision