Fluent Essays

Require 3 hours to do all the questions.Require at lease some narrative for each each questions. accounting.pdf Unformatted Attachment Preview N1549 Accounting for Managers Question 1 Extech Ltds sales revenue budget for 2018 is £350,000. Extech Ltd manufactures tables and its production costs as a percentage of sales revenue are: Raw materials Direct Labour Overheads 25\% 25\% 10\% Raw materials, which are added at the start of production, are carried in inventory for ten days and finished goods are held in inventory before sale for twenty days. Work in progress is held at levels where products are assumed to be 50\% complete in terms of labour and overheads. The production cycle is five days and production takes place evenly through the year. Extech Ltd receives 60 days credit from suppliers and grants 30 days credit to its customers. Overheads are incurred evenly throughout the year. Requirements (a) Determine Extech Ltd’s total working capital requirement [63\% of marks] (b) Extech Ltd are owed £10,000 by a supplier who has just been declared bankrupt. The owner of Extech wants to sue the supplier’s auditors for the £10,000 as she had reviewed their audited accounts and understood that the business would continue for the foreseeable future. Discuss, with reference to the “performance gap” and the “expectations gap” what an auditor does and does not do, and whether the owner of Extech is correct in their understanding. [37\% of marks] 2 N1549 Accounting for Managers Question 2 Sarah Bloom runs a flower stall at a local market. Each morning on her way to the market she visits a wholesaler to buy inventory for the day. Any flowers not sold by the end of the day are given away for free. Sarah has been trading for one month, and has noticed the following possible outcomes: Good day OK day Bad day 75 bunches of flowers sold 30 bunches of flowers sold 10 bunches of flowers sold Sarah has no way of knowing when she starts each day whether it will be a Good, OK, or Bad day. Sarah pays the wholesaler £10 for each bunch of flowers, and she sells them for £25. Required: 1. Determine how many bunches of flowers Sarah should buy in each of the following three circumstances. Briefly explain your answer and show all workings. i) ii) iii) Sarah is risk averse Sarah is a risk seeker Sarah is indifferent to risk [48\% of marks] 2. After another month’s trading, Sarah still has no way of knowing if it will be a Good, OK, or Bad day, but she has noticed the probability of each outcome. Using these probabilities, determine how many bunches of flowers Sarah should buy using expected values. Good day OK day Bad day 10\% 60\% 30\% [25\% of marks] 3. An individual who works at the market claims to know with 100\% certainty whether a day will be Good, OK, or Bad. They have offered to call Sarah and tell her before she buys her inventory each day. They want to be paid £100 per day for this perfect information. i) ii) Should Sarah accept the offer and pay the £100? What is the maximum that Sarah should pay for perfect information and why? [27\% of marks] 3 /Turn Over N1549 Accounting for Managers Question 3 Bustech’s standard terms on sales invoices are 30 days, but analysis has shown that on average customers pay on 60 days. Total sales revenue is £9,000,000 and the company expects irrecoverable receivables of £90,000. A suggestion has been made to offer a 10\% discount to customers paying when ordering (ie 0 days). It is expected that 50\% of customers will take advantage of this. Irrecoverable receivables would be expected to fall by £45,000 and administrative savings on credit control would amount to £35,000. Bustech finances its working capital with a bank overdraft that costs 10\% per annum. Required i) Calculate the total savings and the total costs, and recommend whether or not the proposal should be considered. [42\% of marks] ii) Calculate the maximum discount that could be offered to be viable. [18\% of marks] iii) Describe what we mean by “relevant costs” and give examples that should be included when making decisions. [40\% of marks] 4 N1549 Accounting for Managers Question 4 May Times Ltd is evaluating two projects: Project A: Purchase a new machine for £800, generating increased cashflow of £250 for the next 5 years. Estimated residual value is £450. Project B: Purchase a new machine for £1,300, generating increased cashflow of £450 for 1 year, then £200 for the next 5 years. Estimated residual value is £450. Required: a) Calculate the payback period for each project [15\% Marks] b) Calculate the Accounting Rate of Return for each project, (assume that cashflow equals profit before depreciation.) [15\% Marks] c) Calculate the Net Present Value for each project. Assume that a discount rate of 10\% is appropriate. [25\% Marks] d) Calculate the Internal Rate of Return for each project [25\% Marks] e) Using your results, discuss which of the projects you would recommend. [20\% Marks] 5 /Turn Over N1549 Accounting for Managers Question 5 Raisin-Kash Plc is planning to launch a new product which will be sold to customers who will expect to receive 60 days credit. All costs involved in the new product will need to be paid either in the month of purchase, or the month after. The project has been appraised by discounting future cash flows at a rate equal to the weighted average cost of capital (WACC). Budgets for the new product have determined that they need to raise long term finance of £10m, and short term finance of £2m. Short term finance needs will be met using existing bank overdraft facilities. The long term finance will be raised entirely by the issue of new long-term debt. Raisin-Kash Plc has historically raised finance on a 50\% debt, 50\% equity basis. Current market data suggest that these sources of finance have the following costs: Cost of equity Cost of debt 15\% 10\% Required: (a) Calculate the (WACC) and discuss the appropriateness of using this as a discount rate to appraise the project. (Include a comparison with using the cost of equity or the cost of debt as a discount rate.) [30\% of marks] (b) If this new debt significantly altered the long term gearing to 75\% debt to 25\% equity, and the costs rose to: Cost of equity Cost of debt 20\% 12\% What would be the new WACC? [10\% of marks] (c) Discuss the reasons why a change in gearing might be expected to result in an increase in costs. [30\% of marks] (d) Some of the managers were surprised that the project would require so much financing given the budget has shown it to be very profitable from the first month. Discuss the reasons why the new product will require so much investment, and the steps that were needed to identify the finance required. [30\% of marks] END OF PAPER 6 ... Purchase answer to see full attachment