PGD 2021 8200
Assignment 2: Individual Business Analysis
Learning Outcomes
Learning Outcome 3:
Analyze business internal accounting information to evaluate working capital management performances of a business
Learning Outcome 4:
From cost and revenue data, apply techniques in deciding upon alternative courses of action and implements budgets in decision making for an organization
Assignment Instructions
Make sure to read the marking rubric provided on Canvas to ensure that you have answered the questions according to the requirements of each task. Your mark will reflect how well you answered the questions.
You are expected to research a range of sources and reference these correctly. You must use your own words to report your findings.
Your report completed using professional business English report format and must answer all the questions listed below.
The length of your report should be a MINIMUM of 2400 words
LO 3 Analyze business internal accounting information to evaluate working capital management performance of a business
Task 1 50 marks
Jason Co is an online computer trader which made annual sales of $15,000,000 last year. The most recent financial statement indicates the company owns $2,466,000 trade receivables, $2,220,000 trade payables and $3,000,000 of overdraft. The customers pay within 60 days on average.
To encourage customers to pay earlier the company decided that for a payment within 30 days, the customer will receive an early settlement discount of 1%. The finance department suggests that, under the new policy, only 20% of customers will carry on paying in 60 days, 30% of customers will pay after 45 days, and 50% of consumers will take the early discount and pay in 30 days. The finance provider charges Jason Co 6% annually for overdraft facility and the new policy is also expected to reduce the cost of finance when the interest rate remains constant.
In terms of inventories, Jason Co places an order of 15,000 units with its supplier every month, which costs $150 per order. Last year, the annual cost of materials was $540,000 and the holding cost is $1.2 per unit per year. The supplier could now offer a 2% bulk discount for orders over 45,000 units and the finance department of Jason Co is required to investigate the proposal.
Required:
[i] Should Jason adopt the new credit period and early settlement policy? Calculate the net benefit and comment on your findings. Hint: provide your recommendation and evaluate its validity. [20 marks]
[ii] Should Jason accept the bulk purchase discount offered by the supplier? Calculate the different costs of inventory (including cost of material, annual ordering cost and annual holding cost before and after taking the discount) and comment on your findings.
Hint: provide your recommendation and evaluate its validity. [15 marks]
[iii] Provide Jason with any three policies aimed at efficiently managing amounts owed from credit sales. [15 marks]
Please note: The lecturer may have an interview with you to ascertain your knowledge.
Task 2 LO 4 25 marks
The summarised statement of financial position of Leila Ltd as at 31 May 2023 is as follows:
100071
Current assets
Bank 20,000
AR 200,000
Inventory 86,000
306,000
NCA [net of depreciation] 154,000
Total assets 460,000
Current liabilities
AP 72,000
Accruals [wages] 3,800
Accruals [expenses] 2,500
78,300
Capital and reserves 381,700
460,000
Accounts payable represent purchases for May, and accounts receivable the sales for April and May at $100,000 per month.
The directors are seeking finance from a bank and have produced the following profit forecast, but the bank, before deciding, has asked for a cash budget for the period showing the maximum anticipated finance needed from month to month. The profit forecast for the next six months is:
100071 Jun Jul Aug Sep Oct Nov
Sales 180,000.0 220,000.0 240,000.0 262,000.0 262,000.0 260,000.0
Gross profit 45,000.0 55,000.0 60,000.0 65,500.0 65,500.0 65,000.0
Wages and salaries 20,000.0 18,000.0 24,000.0 27,000.0 32,000.0 24,000.0
Rent 1,670.0 1,670.0 1,660.0 1,670.0 1,670.0 1,660.0
Other expenses 8,000.0 10,000.0 12,000.0 12,000.0 10,000.0 15,000.0
Profit 15,330.0 25,330.0 22,340.0 24,830.0 21,830.0 24,340.0
Stock requirement at month end 90,000.0 80,000.0 120,000.0 100,000.0 112,000.0 170,000.0
Further information is given below:
1. At each month-end, one-eighth of a month’s wages and salaries, and a quarter of other expenses, would be outstanding.
2. Rent at the rate of $20,000 per annum is payable quarterly in arrears on 31 August, 30 November, etc.
3. Assume that one month’s credit will be taken on purchases as previously, and that accounts receivable will continue to take two months’ credit.
4. New fixed assets (additional) will be delivered in June and must be paid for on 31 August; cost $200,000.
5. If the bank grants finance, it will continue an existing $50,000 overdraft facility, and give a five-year loan of a fixed amount as soon as necessary to maintain the overdraft within its limit for the whole period under review.
You are required to:
[a] prepare the cash budget for the period of June – November 2023. [15 marks]
[b] prepare a summary statement of financial position as at 30 November 2023. [5 marks]
[c] Calculate current ratios at the beginning and at the end of the period.
Discuss if the change in these ratios could affect the firm’s ability to obtain short-term loans from the bank. [5 marks]
Please note: The lecturer may have an interview with you to ascertain your knowledge.
Task 3 LO 4 25 Marks
Diogo Ltd makes a standard product, which is budgeted to sell at $17 a unit. It is made from a budgeted 0.5 kilograms of material, budgeted to cost $7 per kilogram, and worked on by an employee paid a budgeted $13 per hour, for a budgeted 15 minutes. Monthly fixed overheads are budgeted at $18,000. The output for March was budgeted at 5,100 units.
The actual results for March were as follows:
$
Sales revenue (5,380 units) 79,500
Materials (2,840 kilograms) (26,400)
Labour (1,300 hours) (20,700)
Fixed overheads (19,100)
Actual operating profit 13,300
No inventories existed at the start or end of March.
[i] Deduce the budgeted profit for March. [5 marks]
[ii] Reconcile it with the actual profit. [12 marks]
[iii] Analyse negative variances and explain an impact of your findings on Diogo’s decision making. [8 marks]
Please note: The lecturer may have an interview with you to ascertain your knowledge.