Reference no: EM132315483

QUESTION ONE

Kitchen Electrical Company is planning to introduce a food blender - Project A - to its line of small home appliances. Annual sales of the blender are estimated at 7,000 units at a price of $75 per unit. Variable manufacturing costs are estimated at $46 per unit, incremental fixed manufacturing costs (other than depreciation) at $35,000 annually, and incremental administration and selling expenses relating to the blenders at $37,000 annually. To build the food blender the company must invest $250,000 in moulds, patterns and special equipment. Since the company expects to change the design of the blender every four years, this equipment will have a four-year service life with $10,000 salvage value. Depreciation will be calculated on a straight-line basis. (Note - Initial Investment is made at the start of the year when the project commences). Ignore taxation for the purposes of this question.

REQUIRED:

(a) Provide a projected accrual income statement calculating average per annum accounting profit for Kitchen Electrical based on the above information.

(b) Produce a table showing projected cash inflows / outflows and net cash flows each year over the project life.

(c) Calculate (show full workings to your answer) and interpret the meaning of
(I) accounting rate of return on the project
(ii) payback on the project
(iii) net present value assuming a 18% discount rate on the project.
(iii) internal rate of return on the project

(d) The company is also considering an alternate superior blender - Project B - to manufacture and sell. The upfront capital cost to manufacture this blender is costlier at $500,000 initially. The projected life is again 4 years generating a NPV of $145,600 and an Internal Rate of Return of 32.36 percent based on a yearly year end cash inflow of $240,000.

Required:
(i) Determine which alternative proposal the company should choose based on increasing the net wealth of the business. (Full justify your answer - (limit 40 words))

(ii) Now assume the company has the opportunity of replicating each proposal several times (projects are no longer mutually exclusive) but also has an imposed capital constraint, limiting initial investment to $1,000,000. Does your recommendation change - Fully justifying your answer comparing total returns when utilising the $1 million in capital - (limit 80 words). (HINT: The company can do multiple projects - A and/or B up to an initial capital spend of 1,000,000)

QUESTION TWO
Fabulous Fashion Ltd operates a chain of high end ladies' fashion stores with locations in all major capital cities throughout Australia. It's been established since 2010 and has seen tremendous growth but more recently has seen several fashion labels from overseas enter the Australian market resulting in an increase in competition. This increased competition has placed significant pressure on containing costs and drawn management's attention to a review of working capital practices. Detailed below are relevant figures and ratios to assist you in evaluating Fabulous Fashion's working capital management.

Working Capital Ratios          2016                  2017                  2018                  2019

Accounts Receivable Days            14.0 days        18.1

days          23.1 days      31.9 days

Inventory Days                      16.0 days        19.1

days          21.9 days         25.0 days

Accounts Payable Days                     14.1 days        21.

days          29.0 days      37.0 days

Note: Ratios are based on assuming end year figures are the average throughout the majority of the year

Extracts from Financial Statements

Cash on hand                       0.20 mill          0.15 mill     .01

mill               (.003 mill)

Sales - all on credit                     8.1 mill                  6.9

mill                  8.0 mill                    9.0 mill

Accounts Receivable Balance              0.3069 mill         0.3453

mill           0.5044 mill         0.7894 mill

Inventory                           0.1754 mill          0.2186

mill           0.2712 mill         0.3219 mill

REQUIRED:
(a) Calculate (show full workings to your answer):
(i) the dollar value of actual net working capital each year from 2016 to 2019 for Fabulous Fashion.
(ii) the duration of the operating cash cycle each year from 2016 to 2019 for Fabulous Fashion.
(iii) interpret the meaning of each of the figures calculated above (40-word limit)

(b) Review Fabulous Fashion's working capital management performance utilizing calculations in (a) above and information provided such as trends / benchmark figures / industry averages and budgets (300-word limit).

(c) Once you have analyzed their performance, provide some strategies and recommendations to assist in improving any weaknesses in working capital management referring to the management of components of working capital including cash, inventory, accounts receivable and accounts payable. As part of your recommendations identify the associated potential benefits and costs of each recommendation.

(400-word limit)

QUESTION THREE

Cartlidge Ltd manufactures and sells plastic kitchen containers through associated retail outlets throughout Australia. To compete more effectively it has recently introduced a budgetary control system to assist with planning and control of operations. Detailed below are the budgeted and actual performance figures for their most popular plastic container sold for the month of December 2018,BUDGET (static) ACTUAL
Output (production and sales) 3000
Units 3,300 Units
$ $
Sales $45,000 $47,850
(3,000 unit @ $15) (3,300 units
@ $14.50)
Raw Materials
Labour ($18,000) ($20,140)
(36,000 units (38000 units
@ 50 cents per
unit) @ 53 cents per unit)
($6,000) ($7,040)

(300 hours (320 hours
@$20 per hour) @22 per
hour)
Fixed Overheads ($5,000) ($4,700)
Operating
Profit $16,000 $15,970

REQUIRED:
(a) Based on the information above calculate a flexed budget based on actual output / sales levels for the month of December 2018

(b) Describe the purpose of the flexed budget in identifying deviations from planned performance. (limit 60 words)

(c) Based on information above reconcile the operating profit under a static budget to the actual operating profit breaking down the reconciliation and identifying specific variances in as much detail as possible.

(d) Assuming that the standards were all well set in terms of labor times and rates and material usage and price, suggest one feasible reason for each variance you have identified in (c), from what you know about the company's performance in December 2018. (HINT: As part of your answer attempt to explain why a favorable variance in one area might explain an unfavorable variance in another area).

QUESTION FOUR

(a) Comment on the validity of the following statement: "As an asset loses its ability to provide services, cash needs to be set aside to replace it. Depreciation accomplishes this goal." (limit 120 words)

(b) How is it possible for a company to suffer a net loss for a given year, yet produce a positive net cash flow from operating activities? (limit 120 words)

(c) Describe the major purpose of a fully classified balance sheet and significant information that can be obtained from it. (limit 120 words)

(d) Cost, volume, profit analysis identifies a transaction's "contribution' to fixed costs. Explain the meaning of `contribution' and discuss the usefulness of such analysis in making business decisions. (limit 120 words)

(e) All else being equal, two companies in similar businesses can have the same current ratio yet due to the composition of assets and liabilities have significantly different liquidity positions. Discuss, referring to
a. Composition of assets and liabilities
b. the turnover of inventory and accounts receivable