Daisy Limited Case Study
Current Ratio shows the liquidity of a business.
Current Ratio = Current Assets/ Current Liabilities
If the current ration is too low,the business may have difficulty in meeting its short-term obligations. However, the ratio should not be too high, there may be too many current assets lying idle. This means that these current assets are not efficiently used to generate revenues and profits for the business. Therefore, Daisy Limited should have funding. The followings is the sources of funding.
Task 1 (a) Review sources of funding available to business industries.
Sources can be divide as short-term and long-term funding.
Short-term Funding
Short-term loan provide an …show more content…
instant solution to short-term cash-flow problems. Lenders approve or deny loan applications in less than two hours, and funds are available within 24 hours. But it feature high finance fees. Extension of loan term will have to pay additional interest.
Factoring
It is organizations that offer their clients a financing service to overcome difficulties in financing that own by customers. They are prepared to advance cash to the clients against the security of the clients 's debtors . The business will assign its debtors which the factor has purchased, usually up to 80% of the value. In Addition, the factor may provide a debtor management service, whereby it take over the control and collection of debts from the clients.
Company like Daisy Ltd that sales rapidly increase, its total debtors will rise quickly too. So selling more on credit will put a strain on the company 's cash flow. Also, if Daisy Ltd credit to customers, it might run into cash flow difficulties for same reason.
Short- term Bank Loan
Bank Loan is offered by a bank for a specific amount that has a specific payment schedule and a floating or fixed interest rate. Short- term loan may be unsecured or secured by the company 's property.
For a SME like Daisy Ltd, It is more difficult to look for external investor to raise funds. Good credit management would help a lot to get short-term bank loan.
Trade Credit
For trade suppliers, the company are required to have good internal control and good credit management. It is the supplier will allow the company a grace period before having to pay for the goods. A common phase is 15 days or 60 days after purchase to pay for the goods. Essentially, trade credit serves as a short-term, interest-free loan. Since Daisy Limited have good internal control and good credit management.
Some business might have difficulties in financing the amounts owed by customers, it is a organization that offer their clients a financing service to overcome these problems, they are prepared to advance cash to the client against the security of the client’s debtors. The business will assign its debtors to the factor and will typically ask for an advance of fund against the debts which the factor has purchased, usually up to 80% of the value of the debts.
Daisy Limited 's sales are rising rapidly, its total debtors will rise quickly too. Selling more on credit will put a strain on the company 's cash flow, the business although making profits, might find itself in difficulties because it has so many debtors and not enough cash.
Long-term Funding
Leasing ( Operating Leases) it is an agreement between the lessor and lessee. It is therefore a form a rental. And there is two kinds of leasing. Operating leasing are agreement is fairly short, less than the useful life of the assets. Finance leasing , it lease for the main part of the asset 's expected useful life or its entire useful life.
For two kinds of leasing, the lessor never has physical possession of the asset, even though he owes it. The lessee id responsible for the upkeep,servicing and maintenance of the asset. The lessor is not involved in this at all. Since Daisy Ltd is a rapidly growth company. Product are made to ingratiate the customer needs. Most product are customized, so some of the equipment may only used for a short period of time. So operating leases are suitable for Daisy Ltd.
Hire Purchase
Firms enter into long-term rental agreement bu installment that generally cover most of the economic life of the assets. The buyer can use the goods but does not own them until the full repayment is made. The role of lessor is to provide finance rather than to rent assets and they perfer that the lessor shoukd purchase the asset at the end of the lease them.
Long Term Bond Funds
Long-term bond funds has potential return rate that can provide the types of returns that are usually linked to high-risk assets types like small-cap stocks. But they are not always a wise investment and are often better utilized as a trading vehicle than a long-term investment plan or solution. In general , bond investor are often aiming to accrue income with minimal volatility and maximum security. However, they are extremely mercurial and can experience dramatic swings in value, often making them a poor fit for traditional minimum-risk-seeking bond investors.
Daisy Ltd is suitable for long-term bond fund, which dependent on the holdings from thay it is comprised. A company that have good liquidity and profitability are take higher-risk like high yield bonds or corporate bonds, asset classes which carry a much higher credit risk
Task 1 (b) Evaluate the contribution made by a range of methods of generating income
Daisy Ltd 's main income are supply the product to travellers, selling and producing souvenirs, and other hospitality service. For non-current asset, It may have a lot of vacant store room and non-using machine and equipment..
Sublet
Daisy Ltd may sublet equipment to others company. Fully use of equipment can bring the maximum profit , In other words, it can minimize the fixed cost when subletting to other company. In non-peak season of producing product, Daisy Ltd can consider to lend the factory and also vacant store rooms to other company.
Sponsorship
It can find sponsorship to develop and extend sales methods. For example. Online shop are very common. Daisy may find hot online shop as eBay, Yahoo. There are many popular online shop from Facebook or Instagram. Since the target market are young and energetic, most of them are Facebook and Instagram frequent user.
For sales booths, secondary school may willing to provide human resource, student are asking for learning opportunities. Also it can find sponsorship to provide venue, stationary or bags. Win- win situation for Daisy Ltd and sponsorship. The exposure of company will increase, company share the cost. Reminder for finding sponsorship. Sponsorship should suit the company image.
Grant
Government grants can be taken designed to give employee financial support towards salary and training cost of disabled and younger, then the government will offer training cost for employee.
SME
The SME Development Fund aims at providing financial support to project carried by non-profit distrubuting organization operating as support organization trade and industries organization. It is to enhance the competitiveness of Hong Kong SME in general or SME in specifics sectors. Daisy Ltd is qualified to have SME Development Fund. Applicants are only required to be statutory organization or an organization registered under the laws of the Hong Kong Special Administrative Region.
Task 2 (a) Discuss of cost involve from Daisy Ltd
Direct Material
The raw material used in the creation of the final product. This includes any raw material that ends up as a part of the final product. From information of Daisy Ltd given that the direct material is “ the company 's product required material” and “ cost of sales” . Such as plastic, zipper and other parts of product.
Direct labour cost
It is a part of wage or payroll that can be specifically and consistently assigned to or associated with the manufacture of a product, a particular work order. It is a cost of work done by those workers who actually make the product. Production supervisor and production line worker are direct labour cost.
Indirect cost
It is a cost incurred in the course of making a product, providing a service or running a department, but which cannot be traced directly and in full to the product, service or department, such as administration and transportation of labour to the working site. In Daisy Ltd case, rental cost of equipment and shipping cost for product is indirect cost.
Fixed cost
The costs are not dependent on the level of goods or service produced by the service. They tend to be time- related, such as salaries, or rents being paid by month and often referred to as overhead costs.
Figure 2.1
Variable cost
The costs that change in proportion to the goods. It likes the sum of the marginal cost over all units produced. For Daisy Ltd. Product materials, production line workers wages and shipping cost are variable cost.
Opportunities cost
The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action. The difference in return between a chosen investment and one that is necessarily passed up. For Daisy Ltd. The rental of building is an opportunity cost. The space can be expend operation and meet demand, or share the building cost with other companies.
Here is a box identifies The cost involved in Daisy Ltd.
Direct Materials
Direct Labour
Indirect Costs
Fixed Costs
Variable Costs
Opportunity Costs
Rental Revenue
✔
✔
Product Materials
✔
✔
Production Supervisor Salary
✔
✔
Production Line Worker Wages
✔
✔
Rental Costs Of Equipments
✔
✔
Marketing Costs
✔
✔
Shipping Costs
✔
Figure 2.2
Rental Revenue is a fixed cost and an opportunity cost. It is because the rent cost of $300,000 per year is regular for each month. And if the company decided to lease the place to other company, it will get a revenue. So it is a opportunity cost.
Product material cost is a variable cost and direct material cost. Since the cost of product material will raise as more units of peoduct are manufactured, ans so they are variable costs that vary with the volume of production. Product material is a prime cost, it likes the basic costs of goods, and raw material of the product, so it is direct material cost.
Production supervisor salary is direct labour cost and a fixed cost. A regular salary is paid to the supervisor per month. And it is related to the labour of manufaturing the product.
Production Line Worker Wages is direct labour cost and variable cost. The worker are directly related to the production. And the production of product are based the work of prpduction line worker.
The rental cost of equipment is a fixed cost and indirect costs. No matter how many goods are produced, it is a regular cost the compant have to pay. And the cost is not directly related to the production because it only to assist the production. No changes of production when the company rent more equipment.
The marketing cost is a fixed cost and indirect cost. It is a regular cost $160,000 per year. And this is an extra cost that it is not related to the production.
Shipping cost is a variable cost. It based on the volume the production. More volume of goods needs more shipping cost.
Task 2 (b) Evaluate methods of controlling stock and cash handling for Daisy
Controlling stock and cash
Managing cash and controlling costs are crucial to any business. Inventory manganese is responsible for planning and controlling inventory from raw material stage to customer. They attempt to control stocks on a scientific basis by balancing the costs of stock shortages against those of stock holding. The ability to meet effectively internal organization or external customer demand to a timely, efficient manner is referred to as the customer service level. The followings is methods for controlling stock and cash.
It is very important to manage the stock level. There are disadvantages both in low stocks level and high stock level.
For low stock level, customer demand for product cannot be satisfied often. This can lead to an immediate loss of business through customer dissatisfaction. As the demand cannot be met, costly emergency procedures such as special production runs and upset schedules can often resorted to in an attempt to maintain customer goodwill. Also, to maintain a reasonable service it will be necessary to replace replenishment higher stock level. Thus higher replenishment ordering costs are incurred.
For high stock level, Storage costs incurred are very high. These costs not only cover buildings, labour, heating, air-con, but must allow for deterioration and spoilage. The increase loss on capital invested in stocks can be prohibitive. Where the stored product becomes obsolete, a large stock- holding of that item could represent a large capital investment in an unsaleable product whose cash value is only that of scrap. A high capital investment in stocks could mean that less money available with the business for other uses.
Storage and purchasing
The Economic Order Quantity (EOQ) is the optimal quantity foe any item of stock which will minimize costs. The formula of calculation is mathematical. There are assumption for the stock. The demand, purchase cost per unit and lead time is constant. In other words. No special discount given from supplier when purchasing more. And 1 EOQ for each product.
Figure 2.3 Ordering costs include the activities required in issuing a purchase or production order. They includes the costs of writing and recording the order, preparation of specification, processing of invoices and preparation of payment.
Carrying costs as known as holding costs. It includes costs of capital invested, insurance and tax, security, space, and record- keeping requirement.
Example for EOQ
Daisy Ltd product materials
Annual demand= 1000
Ordering cost= $20 per order
Carrying costs= $12 per order
EOQ= √(2 * 1000 * 20 / 12) = √3333. 33 = 57.73
As a matter of practice, the EOQ would be rounded up to order 58 units.
Figure 2.4
Security
ABC Analysis apply to inventory management would involve classifying inventory items on the basis of the relative importance, and establishing different management controls for different classifications with the degree of control being commensurate with the ranked importance of each classification. The A, B, C represent different classification of descending importance. Criteria of classification reflect the difficulty of controlling an item and the impact on cost and profitability.
A, It is high priority, product or good that frequent with tight tolerance on accuracy. It need close follw up such as daily updating records and expediting to reduce lead time.
B, It is medium priority, It is similar to A with most control activities taking place less frequently.
C, It is lowest priority. Some products that are large order quantities and safety stock. Simple records for preview only. ABC Analysis help to divide the stock, it is more easy to secure the stock. Than filling record of each stock taking can increase the security.
Reconciliations
Reconciliations involve comparison of a specific balance in the accounting record with what another source says that balance should be. Difference between the two figures should only be due to valid reconciling items. A good example is bank reconciliation
Stock Taking
The management of stocks in every business requires a sound system of recording stock movements. There must be proper procedures for recording stock stock purchases and sales. Periodic stock check ensure the amount of physical stocks held is consistent with the stock records.
Record Accuracy is a critical ingredient in production and inventory systems. It allows Daisy to focus on those otems that are needed, rather than settle for being sure that 's 'something of everything ' is in the inventory. To ensure accuracy, incoming and outgoing record keeping is good as stockroom security.
Task 3 (a) Assess the source and structure of the trial balance
Trial Balance is a schedule which lists all the accounts of the ledger along ensure that the equality of debits and credits has been maintained in preparing the ledger accounts. It shown that each transaction is entered at least twice in the ledge, once as debit and once as credit. And the amount of two side are equal.
Fig3.1
Task 3 (b) Evaluate the finical statement in balance sheet and profit and loss account and the importance of adjustment and notes to accounts
Balance sheet is a statement of the assets, liabilities and capital of a business at a given moment in time. By comparing current assets and current liabilities, the ability of pay off the debt can moe easily to assessed. It identifies the overall book value of a company
Profit and Loss account is called income statement.
It is to give an indication of the success or otherwise of management policies to generate profit.. it can see where profits are before interest and tax have been allocated and to indicate the profit philosophy of the company.
Fig 3.3
Adjustment
The trial balance lists the balances on the ledger accounts at the period end date. It doesn 't take into account various items which can only be calculated right at the period once the final position is known. These adjustment include the cost of good sold, accrual and prepayment , bad debt.
Accrual and prepayment are expenses have been incurred but have not yet been paid, and some that have been made in advance. A bad debt is the business find it impossible to collect from the customer.
Importance of adjustment is to helps department heads create meaningful operating dynamics between top leadership and the record keeping team, paving the way for sound and complete financial statement preparation down the road. For example, senior personnel may review internal accounting policies to figure out how bookkeepers record transactions, make periodic adjustments, follow regulatory guidelines and periodically attend training sessions to expand or jump-start their accounting …show more content…
creativity.
Task3 (c) Discuss the process and purpose of the budgetary control
The establishment of budgets relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results,either to secure by individual action the objective of that policy, or to provide a basis for its revision
Here is the process of the budgetary control.
Steps in preparing a cash budget
Step 1: set out a form of cash budget month by month. Below is a suggested layout.
Step 2: sort out cash receipts from debtors
Step 3: other income
Step 4: sort out cash payments to suppliers
Step 5: establish other cash payments in the month
Here is the purpose of budgetary control.
Ensure the achievement 's objectives
The company 's objectives are quantified and drawn up as targets to be achieved within the timescale of the budget plan.
Compel planning
Planning forces management to look ahead, to set out detailed plans for achieving the target for each department, operation and each manager and to anticipate problems.
Communicate ideas and plans a formal system is necessary to ensure that each person affected by the plans is aware of what he or she is supposed to be doing. Communication might be one-way,with manager giving orders to subordinates, or there might be a two-way dialogue.
Co-ordinate activities
The activities of the different department need to be coordinated to ensure maximum integration of effort towards common goals. This implies that the purchasing department should based its budget on production requirement and that the production budget should in turn be based on sales expectations.
Task 3 (d) Analysis varies from budgeted and actual figures
$
Direct Material
0.5 kg at $16 per kg
8
Direct Wages
2 hours at $33 per hours
66
Variable Overheads
2 hours at $12 per hours
24
Fixed Overhead
2 hours at $50 per hours
100
Standard Cost
198
Standard Profit
66
Standard Selling Price
264
Table 1.1 ( Given)
i) Material price variance:
2000 kg of materials should cost (x16) 32,000 but did cost 37,000
Material price variance 5,000 (A)
The variance $5000( Adverse) , it is adverse because the actual materials cost was higher than budgeted, which the adverse effect on profit. The differences from excess usage of the raw material, in which related to non- efficient management, may be is the budgeted are set too low. Both can be the reason that why there is a material variance.
ii) Labour rate variance:
900o hours of labour rate should cost (x33) 297,000 but did cost 270,000
Labour rate variance 27,000 (F)
Labour rate variance are similar in form to those for raw materials. The variance$ 27,000 (Favourable) means there is a less spent on labour than was budgeted for the actual level of output achieved. One of the reasons is fewer hours were used than would have been allowed for the actual level of output. Working more quickly would tend to kead to higher profit
iii) Variable overhead expenditure variance:
8500 hours operating should cost (x12) 102,000 but did cost 120,000
Variable overhead expenditure variance 18,000 (F)
Variable overhead expenditure variance $18,000 ( Adverse) means there are increase in cost of services, excessive use of services or change in type of service used. There may be poor supervision of the overheads.
iv) Fixed overhead expenditure variance:
Fixed budget of 5000 should cost (x100) 500,000 but actual fixed overhead 496,000
Fixed overhead expenditure variance 4,000 (F)
Fixed overhead expenditure variance $4,000( Favourable) means some saving in cost incurred, or more economical use of service.
v) Selling price variance:
Revenue from selling 4700 units (x264) 1,240,800 but was 1,070,000
Selling price variance 170,800(A)
The selling price variance$170,800 ( Adverse) is common. It means there is poor performance by sales personnel , or deterioration in market conditions between the setting of the budget and the actual event
vi) Sales volume profit variance:
Budgeted sales volume 5,000
Actual sales volume 4,700
Sales volume variance 300 x Standard profit per unit x 66 Sales volume profit variance 19,800(A)
A Sales volume profit variance $ 19,800 ( Adverse). It is related to the selling price, and also, maybe lack of stock or services to sell as a result of some product problem.
Task 3 (e) Suggest three ways for appropriate future management action on Task 3 (d)
Making budgetary control effective is obvious what a company need to maintain. Here is some future management suggestion.
Serious attitude all level should take a serious right from the very top. Senior manager need to make clear to junior manager that they should take notice of the monthly variance report and base some of their action on them. Every adverse variance should be investigated because the continuation of the fault that they represent could be very costly. Management must design what significant means. For example, variance of 5 % from the budgets figure would deemed to be significant.
Reasonable budget target
It represent a rigorous yet achievable target. This may be promoted be manager being involved in setting their own targets. It is argued that this can increase the management 's commitment and motivation. Significant favourable variances should probably be investigated. They still represent things not going according to plan. It actual performance is significantly better than target, it may well mean that the target is unrealistically low.
Established the data
Including collection, analysis and dissemination routines, which take the actual results and the budget figures , and calculate and report the variances. This should be part of the business ' s regular accounting information system, so the required report are automatically produced each month. Established each month can prevent large variance appear in the production. Since fairly short reporting periods, things cannot go too far wrong before the company picked up.
Task 3 (f) Dicsuss the marginal cost-plus pricing and full cost- plusing . And the mark up on marginal cost for the selling priceis $264.
The marginal cost- plusing means how much of a good should be produced and what its price should be can be examined by considering the benefits and costs of various levels of production as shown. It is a method of determining the sales price by adding a profit margin cost of production or marginal cost of sales.
Selling price : $264
Marginal cost : Direct material + Direct wages + Variable overhead =$(8+66+24) = $98
Profit per unit: $(264-98) = 166
Mark up : (Profit/ Marginal cost ) x 100% = (166/ 98) x100% = 169. 39%
The mark up on marginal cost is 169. 39%.
Full cost- plus pricing is to set a price that takes into account costs all relevant costs of production and adding a percentage mark-up for percantage.
Selling price: $264
Full Cost : Direct material + Direct wages + Variable overhead + Fixed Cost =$(8+66+24+100) = $198
Profit per unit: $(264-198) = 66
Mark up : (Profit/ Marginal cost ) x 100% = (66/ 198) x100% = 33.33%
The mark up on full cost is 33.33%.
Task 4 (a) Analysis and make a consistent interpretation of Daisy Ltd
i) Sales profitability ratios:
Gross profit [(Sales Revenue – Costs of Good Sold) / Sale Revenue ] x 100%
=[(1,990,000 – 900,000) / 1,990,000] x100%
=54.77%
=54.8%
Net Profit [(Sales Revenue – All Expenses) / Sales Revenue] x 100%
=[(1,990,000 – 1,608,950) / 1,990,000 ] x 100 %
=(381,050 / 1,990,000 0 x 100 %
=19.14%
=19.1%
Return on Capital Employed (Net Profit / Capital Employed ) x 100%
= [ Net Profit / ( Total Assets – Current Liabilities) ] x 100%
= 381,050 / (4,076,000 – 1,269,000 )x 100%
= 13.57 %
=13.6%
ii) Liquidity ratios:
Current ratios Current Assets / Current Liabilities
= ( Cash + Inventory + Account Receivable) / (Account Payable + Salaries Payable + Notes Payable )
=( 743,000 + 63,000 + 554,000) / (654,000 + 230,000 + 385,000)
=1,360,000 / 1,269,000
=1.071
=1.07
Acid test Quick Assets / Current Liabilities
= (Cash + Markable Securities + Current Receivable) / Current Liabilities
= ( 743,000 + 554,000) / 1,269,000
= 1.022
= 1.02
iii) Efficiency ratios:
Debtor Payment Periods (Account Receivable / Sales Revenue ) x 365 Days
= ( 554,000 /1,990,000 ) x 365Days
= 101.61 Days
= 102 Days
iv) Creditor payment Periods ( Account Payable / Cost of Good Sold ) x 365 Days
= ( 653,000 / 900,000) x 365 Days
= 264.82 Days
= 265 Days
Stock Turnover Cost of Good Sold / Inventory
= 900,000 / 63,000
= 14.285 Days
= 14 Days
v) Financial Ratios :
Gearing
[ Long Term Loan / ( Total Assets – Current Liabilities)] x 100%
= [ 740,000 / ( 4,076,000 – 1,269,000)] x 100%
= 26.36 %
= 26.4%
Task 4 ( b) Recommend appropriate future strategies for Daisy Ltd
Sales
Gross profit: Gross profit margin is a metric that defines the percent profit that a company makes for every dollar of goods produced.
That is, the profit to the company after all material and labor production costs.
Gross profit margins vary significantly by industry and type of business. Gross profits margins in the pharmaceutical industry typically range from 50 to 100 percent, and in the textile manufacturing industry margins average around 40 to 45 percent. 54.8% is a high value. It means the cost put product production is fewer than others.
Liquidity
Current ratios: The current ratio measures the business whether has enough resources to pay its bills over the next 12 months. A current ratio of over 1 is good news. Daisy (1.07) is in the range. If the ratios is high, there may be problems with collecting account receivable or be carrying too much inventory.
Efficiency
Stock Turnover: it known as The Inventory turnover. It is a measure of the number of times inventory is sold or used in a time period such as a year. The equation for inventory turnover equals the cost of good sold divided by the average
inventory.
A low turnover rate may point to overstocking, it will cost most stocking cost and deficiencies in the product line or marketing effort. However, in some instances a low rate may be appropriate, such as where higher inventory levels occur in anticipation of rapidly rising prices or expected market shortages.
Management
Gearing Ratios:
The gearing ratio is a financial metric used to analyze the capital structure of a company. Many professional financial analysts use this number to determine the health of a company.
The gearing ratio can be used by analysts to determine how healthy a corporation is. A gearing ratio above 1.0 is considered healthy, while less than 1 is less robust. Daisy 's gearing ratios is 26.4%. it is much lower than other company and competitors. So manufacturing firms like Daisy Ltd can use less capital expenditures and loans to less generate new businesses have much higher gearing ratios.
Task 5 (a) Categorise the cost and sales
Year 2012
Year 2011
Unit Sold
17,500
14,000
Sales Revenue
2,626,000
2,100,000
Less Cost of Good Sold
(1,697,500)
(1,358,000)
Gross Margin
927,500
742,000
Less Operating Expenses
(525,000)
(462,000)
Net Profit Income
402,500
280,000
Table 1.3 (Given)
Before the calculation, the selling price of Year 2012 should be proved to be same as Year 2011. Sales Revenue / Unit sold
Year 2012: 2,625,000 / 17,500 = $150
Year 2011: 2,100,000 / 14,000 = $150
For Cost of Good Sold
Quick check to define it is a variable cost or semi- variable cost. Cost of Good Sold / Units sold
Year 2012: $1,697,500 / 17,500 = $97
Year 2011: $1,358,000 / 14,000 = $97
Under Cost of Good Sold, Since the portion is same, it means Cost of Good Sold is $97 variable cost.
For Operating costs
Quick check to define it is a variable cost or semi- variable cost. Operating cost / Units sold
Year 2012: 525,000 / 17,500 = 30
Year 2011: 462,000 / 14,000 = 33
Since the portion is not the same, it means the Operating cost contain fixed cost and a variable cost. It is a semi- variable cost.
Cost
Activity
Year 2012
525,000
175,000
Year 2011
462,000
160,000
Change observed
$63,000
3,500
$6,300 / 3500 units = $18 per units
For Operating cost, it contains $18 variable cost.
Year 2012
Year 2011
Operating Cost
525,000
462,000
Less Variable cost element
(17,500 units x $18)
=(315,000)
(14,000 units x $18)
= (252,000)
Fixed element
210,000
210,000
Under Operating expenses, it contains $210,000 fixed costs and $18 variable costs.
Total Variable cost : $ 97 + $ 18 = $ 115 per units
Fixed Cost means total the cost remains the same even the activity level changes. From the Table1.3. There is no total cost are same in Year 2011 and Year 2012. Therefore, none of above is fixed costs.
Variable Cost means the costs change as activity level changes. In the other words, the cost are change by proportion. So the Cost of Good Sold is a $18 variable cost
Semi- variable Cost contains fixed cost and variable cost, so the costs are not proportion to the activity level changes. So the Operating Cost is a semi- variable cost with $210,000 fixed costs and $18 variable cost.
Task 5 (b) Calculate contribution per product and explain the cost/ profit/ volume relationship
Year 2012
Year 2011
Sales Revenue
$2,625,000
$2,100,000
Less Variable expenses
Cost of Good Sold
$(1,697,500)
$(1,358,000)
Operating cost
$18 x 17,500 units
=( $315,000)
$18 x14,000
=( $252,000)
Contribution Margin
$612,500
$490,000
When goods sold = Q
Fixed Cost: 210,000
Variable Costs: $115 per units
Total Cost: $210,000 +115Q
Total Revenue : 150Q
Break even:
150 Q = 115 Q + 210,000 Q = 6000
When Q = 6000, the Sales Revenue will be $900,000
Fig 5.1
For Daisy Ltd, the break even for profit ans loss is at $900,000 and sells 6000 units. In the other words, at least 6000 units have to be sold, otherwise, she will get a loss.
For the 6001st unit, the net profit she earn is: $150 x 61 - ($115x61+ 210,000)
=$35
After reaching the break even point at Q= 6000, she will earn $35 per units.
Task 5 (c) Justify short-term management decisions based on profit / lost potential and risk ( break even ) calculation.
Here is three cases for short-term management decisions.
i) If management team are planning to have special discount for customer. If the discount id 10% off.
When Q remains same as the break even unit = 6000
150 x (0.9) x 6000 – (115 x 6000 + 210,000)
= -$90,000
She will get a loss of $90,000
ii) If the fixed cost are raised from $210,000 to $250,000
When Q remains same as the break even unit = 6000
150 x 6000 – (115 x 6000 + 250,000)
= - $ 40,000
She will get a loss of 40,000
iii) If the fixed cost are raised from $210,000 to $250,000, the management team should increase the selling price with giving out a discount to attract customer. The marking price should raise up 35%, and give a discount 20% off.
When Q remains same as the break even unit = 6000
150 x (1.35) x (0.8) x6000 - ( 115 x 6000 + 250,000)
=$ 32,000
She will get a profit of $32,000
Task5 (d) Discuss the gross profit percentage
Gross Profit margin = [(Sales Revenue – Costs of Good Sold) / Sale Revenue ] x 100% =[(1,990,000 – 900,000) / 1,990,000] x100% =54.77% =54.8% this measure indicates how much at each sales dollar is left after deducing and cost of good sold to cover expenses and provide a profit.
References
http://www.ehow.com/info_8320483_gearing-ratio.html#ixzz2qr9MG28E
http://isearch.avg.com/search?q=Controlling%20stock%20and%20cash&cid={57B62CDC-DEEE-4C65-8035-A4CD43BFEE94}&mid=20ece7093d2147d0b6856f6fdde14bb8-284cdf64da9577f322eab45ce76ccbf63bba6fbc&lang=zh-cn&ds=gm011&pr=sa&d=2012-10-01%2001:19:40&v=15.2.0.5&pid=avg&sg=0&sap=hp&snd=hp&sap_acp=0
http://www.ehow.com/info_8613609_accounting-adjustment-concept-notes.html#ixzz2qrHlNRuC
Current Ratio = Current Assets/ Current Liabilities
If the current ration is too low,the business may have difficulty in meeting its short-term obligations. However, the ratio should not be too high, there may be too many current assets lying idle. This means that these current assets are not efficiently used to generate revenues and profits for the business. Therefore, Daisy Limited should have funding. The followings is the sources of funding.
Task 1 (a) Review sources of funding available to business industries.
Sources can be divide as short-term and long-term funding.
Short-term Funding
Short-term loan provide an …show more content…
instant solution to short-term cash-flow problems. Lenders approve or deny loan applications in less than two hours, and funds are available within 24 hours. But it feature high finance fees. Extension of loan term will have to pay additional interest.
Factoring
It is organizations that offer their clients a financing service to overcome difficulties in financing that own by customers. They are prepared to advance cash to the clients against the security of the clients 's debtors . The business will assign its debtors which the factor has purchased, usually up to 80% of the value. In Addition, the factor may provide a debtor management service, whereby it take over the control and collection of debts from the clients.
Company like Daisy Ltd that sales rapidly increase, its total debtors will rise quickly too. So selling more on credit will put a strain on the company 's cash flow. Also, if Daisy Ltd credit to customers, it might run into cash flow difficulties for same reason.
Short- term Bank Loan
Bank Loan is offered by a bank for a specific amount that has a specific payment schedule and a floating or fixed interest rate. Short- term loan may be unsecured or secured by the company 's property.
For a SME like Daisy Ltd, It is more difficult to look for external investor to raise funds. Good credit management would help a lot to get short-term bank loan.
Trade Credit
For trade suppliers, the company are required to have good internal control and good credit management. It is the supplier will allow the company a grace period before having to pay for the goods. A common phase is 15 days or 60 days after purchase to pay for the goods. Essentially, trade credit serves as a short-term, interest-free loan. Since Daisy Limited have good internal control and good credit management.
Some business might have difficulties in financing the amounts owed by customers, it is a organization that offer their clients a financing service to overcome these problems, they are prepared to advance cash to the client against the security of the client’s debtors. The business will assign its debtors to the factor and will typically ask for an advance of fund against the debts which the factor has purchased, usually up to 80% of the value of the debts.
Daisy Limited 's sales are rising rapidly, its total debtors will rise quickly too. Selling more on credit will put a strain on the company 's cash flow, the business although making profits, might find itself in difficulties because it has so many debtors and not enough cash.
Long-term Funding
Leasing ( Operating Leases) it is an agreement between the lessor and lessee. It is therefore a form a rental. And there is two kinds of leasing. Operating leasing are agreement is fairly short, less than the useful life of the assets. Finance leasing , it lease for the main part of the asset 's expected useful life or its entire useful life.
For two kinds of leasing, the lessor never has physical possession of the asset, even though he owes it. The lessee id responsible for the upkeep,servicing and maintenance of the asset. The lessor is not involved in this at all. Since Daisy Ltd is a rapidly growth company. Product are made to ingratiate the customer needs. Most product are customized, so some of the equipment may only used for a short period of time. So operating leases are suitable for Daisy Ltd.
Hire Purchase
Firms enter into long-term rental agreement bu installment that generally cover most of the economic life of the assets. The buyer can use the goods but does not own them until the full repayment is made. The role of lessor is to provide finance rather than to rent assets and they perfer that the lessor shoukd purchase the asset at the end of the lease them.
Long Term Bond Funds
Long-term bond funds has potential return rate that can provide the types of returns that are usually linked to high-risk assets types like small-cap stocks. But they are not always a wise investment and are often better utilized as a trading vehicle than a long-term investment plan or solution. In general , bond investor are often aiming to accrue income with minimal volatility and maximum security. However, they are extremely mercurial and can experience dramatic swings in value, often making them a poor fit for traditional minimum-risk-seeking bond investors.
Daisy Ltd is suitable for long-term bond fund, which dependent on the holdings from thay it is comprised. A company that have good liquidity and profitability are take higher-risk like high yield bonds or corporate bonds, asset classes which carry a much higher credit risk
Task 1 (b) Evaluate the contribution made by a range of methods of generating income
Daisy Ltd 's main income are supply the product to travellers, selling and producing souvenirs, and other hospitality service. For non-current asset, It may have a lot of vacant store room and non-using machine and equipment..
Sublet
Daisy Ltd may sublet equipment to others company. Fully use of equipment can bring the maximum profit , In other words, it can minimize the fixed cost when subletting to other company. In non-peak season of producing product, Daisy Ltd can consider to lend the factory and also vacant store rooms to other company.
Sponsorship
It can find sponsorship to develop and extend sales methods. For example. Online shop are very common. Daisy may find hot online shop as eBay, Yahoo. There are many popular online shop from Facebook or Instagram. Since the target market are young and energetic, most of them are Facebook and Instagram frequent user.
For sales booths, secondary school may willing to provide human resource, student are asking for learning opportunities. Also it can find sponsorship to provide venue, stationary or bags. Win- win situation for Daisy Ltd and sponsorship. The exposure of company will increase, company share the cost. Reminder for finding sponsorship. Sponsorship should suit the company image.
Grant
Government grants can be taken designed to give employee financial support towards salary and training cost of disabled and younger, then the government will offer training cost for employee.
SME
The SME Development Fund aims at providing financial support to project carried by non-profit distrubuting organization operating as support organization trade and industries organization. It is to enhance the competitiveness of Hong Kong SME in general or SME in specifics sectors. Daisy Ltd is qualified to have SME Development Fund. Applicants are only required to be statutory organization or an organization registered under the laws of the Hong Kong Special Administrative Region.
Task 2 (a) Discuss of cost involve from Daisy Ltd
Direct Material
The raw material used in the creation of the final product. This includes any raw material that ends up as a part of the final product. From information of Daisy Ltd given that the direct material is “ the company 's product required material” and “ cost of sales” . Such as plastic, zipper and other parts of product.
Direct labour cost
It is a part of wage or payroll that can be specifically and consistently assigned to or associated with the manufacture of a product, a particular work order. It is a cost of work done by those workers who actually make the product. Production supervisor and production line worker are direct labour cost.
Indirect cost
It is a cost incurred in the course of making a product, providing a service or running a department, but which cannot be traced directly and in full to the product, service or department, such as administration and transportation of labour to the working site. In Daisy Ltd case, rental cost of equipment and shipping cost for product is indirect cost.
Fixed cost
The costs are not dependent on the level of goods or service produced by the service. They tend to be time- related, such as salaries, or rents being paid by month and often referred to as overhead costs.
Figure 2.1
Variable cost
The costs that change in proportion to the goods. It likes the sum of the marginal cost over all units produced. For Daisy Ltd. Product materials, production line workers wages and shipping cost are variable cost.
Opportunities cost
The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action. The difference in return between a chosen investment and one that is necessarily passed up. For Daisy Ltd. The rental of building is an opportunity cost. The space can be expend operation and meet demand, or share the building cost with other companies.
Here is a box identifies The cost involved in Daisy Ltd.
Direct Materials
Direct Labour
Indirect Costs
Fixed Costs
Variable Costs
Opportunity Costs
Rental Revenue
✔
✔
Product Materials
✔
✔
Production Supervisor Salary
✔
✔
Production Line Worker Wages
✔
✔
Rental Costs Of Equipments
✔
✔
Marketing Costs
✔
✔
Shipping Costs
✔
Figure 2.2
Rental Revenue is a fixed cost and an opportunity cost. It is because the rent cost of $300,000 per year is regular for each month. And if the company decided to lease the place to other company, it will get a revenue. So it is a opportunity cost.
Product material cost is a variable cost and direct material cost. Since the cost of product material will raise as more units of peoduct are manufactured, ans so they are variable costs that vary with the volume of production. Product material is a prime cost, it likes the basic costs of goods, and raw material of the product, so it is direct material cost.
Production supervisor salary is direct labour cost and a fixed cost. A regular salary is paid to the supervisor per month. And it is related to the labour of manufaturing the product.
Production Line Worker Wages is direct labour cost and variable cost. The worker are directly related to the production. And the production of product are based the work of prpduction line worker.
The rental cost of equipment is a fixed cost and indirect costs. No matter how many goods are produced, it is a regular cost the compant have to pay. And the cost is not directly related to the production because it only to assist the production. No changes of production when the company rent more equipment.
The marketing cost is a fixed cost and indirect cost. It is a regular cost $160,000 per year. And this is an extra cost that it is not related to the production.
Shipping cost is a variable cost. It based on the volume the production. More volume of goods needs more shipping cost.
Task 2 (b) Evaluate methods of controlling stock and cash handling for Daisy
Controlling stock and cash
Managing cash and controlling costs are crucial to any business. Inventory manganese is responsible for planning and controlling inventory from raw material stage to customer. They attempt to control stocks on a scientific basis by balancing the costs of stock shortages against those of stock holding. The ability to meet effectively internal organization or external customer demand to a timely, efficient manner is referred to as the customer service level. The followings is methods for controlling stock and cash.
It is very important to manage the stock level. There are disadvantages both in low stocks level and high stock level.
For low stock level, customer demand for product cannot be satisfied often. This can lead to an immediate loss of business through customer dissatisfaction. As the demand cannot be met, costly emergency procedures such as special production runs and upset schedules can often resorted to in an attempt to maintain customer goodwill. Also, to maintain a reasonable service it will be necessary to replace replenishment higher stock level. Thus higher replenishment ordering costs are incurred.
For high stock level, Storage costs incurred are very high. These costs not only cover buildings, labour, heating, air-con, but must allow for deterioration and spoilage. The increase loss on capital invested in stocks can be prohibitive. Where the stored product becomes obsolete, a large stock- holding of that item could represent a large capital investment in an unsaleable product whose cash value is only that of scrap. A high capital investment in stocks could mean that less money available with the business for other uses.
Storage and purchasing
The Economic Order Quantity (EOQ) is the optimal quantity foe any item of stock which will minimize costs. The formula of calculation is mathematical. There are assumption for the stock. The demand, purchase cost per unit and lead time is constant. In other words. No special discount given from supplier when purchasing more. And 1 EOQ for each product.
Figure 2.3 Ordering costs include the activities required in issuing a purchase or production order. They includes the costs of writing and recording the order, preparation of specification, processing of invoices and preparation of payment.
Carrying costs as known as holding costs. It includes costs of capital invested, insurance and tax, security, space, and record- keeping requirement.
Example for EOQ
Daisy Ltd product materials
Annual demand= 1000
Ordering cost= $20 per order
Carrying costs= $12 per order
EOQ= √(2 * 1000 * 20 / 12) = √3333. 33 = 57.73
As a matter of practice, the EOQ would be rounded up to order 58 units.
Figure 2.4
Security
ABC Analysis apply to inventory management would involve classifying inventory items on the basis of the relative importance, and establishing different management controls for different classifications with the degree of control being commensurate with the ranked importance of each classification. The A, B, C represent different classification of descending importance. Criteria of classification reflect the difficulty of controlling an item and the impact on cost and profitability.
A, It is high priority, product or good that frequent with tight tolerance on accuracy. It need close follw up such as daily updating records and expediting to reduce lead time.
B, It is medium priority, It is similar to A with most control activities taking place less frequently.
C, It is lowest priority. Some products that are large order quantities and safety stock. Simple records for preview only. ABC Analysis help to divide the stock, it is more easy to secure the stock. Than filling record of each stock taking can increase the security.
Reconciliations
Reconciliations involve comparison of a specific balance in the accounting record with what another source says that balance should be. Difference between the two figures should only be due to valid reconciling items. A good example is bank reconciliation
Stock Taking
The management of stocks in every business requires a sound system of recording stock movements. There must be proper procedures for recording stock stock purchases and sales. Periodic stock check ensure the amount of physical stocks held is consistent with the stock records.
Record Accuracy is a critical ingredient in production and inventory systems. It allows Daisy to focus on those otems that are needed, rather than settle for being sure that 's 'something of everything ' is in the inventory. To ensure accuracy, incoming and outgoing record keeping is good as stockroom security.
Task 3 (a) Assess the source and structure of the trial balance
Trial Balance is a schedule which lists all the accounts of the ledger along ensure that the equality of debits and credits has been maintained in preparing the ledger accounts. It shown that each transaction is entered at least twice in the ledge, once as debit and once as credit. And the amount of two side are equal.
Fig3.1
Task 3 (b) Evaluate the finical statement in balance sheet and profit and loss account and the importance of adjustment and notes to accounts
Balance sheet is a statement of the assets, liabilities and capital of a business at a given moment in time. By comparing current assets and current liabilities, the ability of pay off the debt can moe easily to assessed. It identifies the overall book value of a company
Profit and Loss account is called income statement.
It is to give an indication of the success or otherwise of management policies to generate profit.. it can see where profits are before interest and tax have been allocated and to indicate the profit philosophy of the company.
Fig 3.3
Adjustment
The trial balance lists the balances on the ledger accounts at the period end date. It doesn 't take into account various items which can only be calculated right at the period once the final position is known. These adjustment include the cost of good sold, accrual and prepayment , bad debt.
Accrual and prepayment are expenses have been incurred but have not yet been paid, and some that have been made in advance. A bad debt is the business find it impossible to collect from the customer.
Importance of adjustment is to helps department heads create meaningful operating dynamics between top leadership and the record keeping team, paving the way for sound and complete financial statement preparation down the road. For example, senior personnel may review internal accounting policies to figure out how bookkeepers record transactions, make periodic adjustments, follow regulatory guidelines and periodically attend training sessions to expand or jump-start their accounting …show more content…
creativity.
Task3 (c) Discuss the process and purpose of the budgetary control
The establishment of budgets relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results,either to secure by individual action the objective of that policy, or to provide a basis for its revision
Here is the process of the budgetary control.
Steps in preparing a cash budget
Step 1: set out a form of cash budget month by month. Below is a suggested layout.
Step 2: sort out cash receipts from debtors
Step 3: other income
Step 4: sort out cash payments to suppliers
Step 5: establish other cash payments in the month
Here is the purpose of budgetary control.
Ensure the achievement 's objectives
The company 's objectives are quantified and drawn up as targets to be achieved within the timescale of the budget plan.
Compel planning
Planning forces management to look ahead, to set out detailed plans for achieving the target for each department, operation and each manager and to anticipate problems.
Communicate ideas and plans a formal system is necessary to ensure that each person affected by the plans is aware of what he or she is supposed to be doing. Communication might be one-way,with manager giving orders to subordinates, or there might be a two-way dialogue.
Co-ordinate activities
The activities of the different department need to be coordinated to ensure maximum integration of effort towards common goals. This implies that the purchasing department should based its budget on production requirement and that the production budget should in turn be based on sales expectations.
Task 3 (d) Analysis varies from budgeted and actual figures
$
Direct Material
0.5 kg at $16 per kg
8
Direct Wages
2 hours at $33 per hours
66
Variable Overheads
2 hours at $12 per hours
24
Fixed Overhead
2 hours at $50 per hours
100
Standard Cost
198
Standard Profit
66
Standard Selling Price
264
Table 1.1 ( Given)
i) Material price variance:
2000 kg of materials should cost (x16) 32,000 but did cost 37,000
Material price variance 5,000 (A)
The variance $5000( Adverse) , it is adverse because the actual materials cost was higher than budgeted, which the adverse effect on profit. The differences from excess usage of the raw material, in which related to non- efficient management, may be is the budgeted are set too low. Both can be the reason that why there is a material variance.
ii) Labour rate variance:
900o hours of labour rate should cost (x33) 297,000 but did cost 270,000
Labour rate variance 27,000 (F)
Labour rate variance are similar in form to those for raw materials. The variance$ 27,000 (Favourable) means there is a less spent on labour than was budgeted for the actual level of output achieved. One of the reasons is fewer hours were used than would have been allowed for the actual level of output. Working more quickly would tend to kead to higher profit
iii) Variable overhead expenditure variance:
8500 hours operating should cost (x12) 102,000 but did cost 120,000
Variable overhead expenditure variance 18,000 (F)
Variable overhead expenditure variance $18,000 ( Adverse) means there are increase in cost of services, excessive use of services or change in type of service used. There may be poor supervision of the overheads.
iv) Fixed overhead expenditure variance:
Fixed budget of 5000 should cost (x100) 500,000 but actual fixed overhead 496,000
Fixed overhead expenditure variance 4,000 (F)
Fixed overhead expenditure variance $4,000( Favourable) means some saving in cost incurred, or more economical use of service.
v) Selling price variance:
Revenue from selling 4700 units (x264) 1,240,800 but was 1,070,000
Selling price variance 170,800(A)
The selling price variance$170,800 ( Adverse) is common. It means there is poor performance by sales personnel , or deterioration in market conditions between the setting of the budget and the actual event
vi) Sales volume profit variance:
Budgeted sales volume 5,000
Actual sales volume 4,700
Sales volume variance 300 x Standard profit per unit x 66 Sales volume profit variance 19,800(A)
A Sales volume profit variance $ 19,800 ( Adverse). It is related to the selling price, and also, maybe lack of stock or services to sell as a result of some product problem.
Task 3 (e) Suggest three ways for appropriate future management action on Task 3 (d)
Making budgetary control effective is obvious what a company need to maintain. Here is some future management suggestion.
Serious attitude all level should take a serious right from the very top. Senior manager need to make clear to junior manager that they should take notice of the monthly variance report and base some of their action on them. Every adverse variance should be investigated because the continuation of the fault that they represent could be very costly. Management must design what significant means. For example, variance of 5 % from the budgets figure would deemed to be significant.
Reasonable budget target
It represent a rigorous yet achievable target. This may be promoted be manager being involved in setting their own targets. It is argued that this can increase the management 's commitment and motivation. Significant favourable variances should probably be investigated. They still represent things not going according to plan. It actual performance is significantly better than target, it may well mean that the target is unrealistically low.
Established the data
Including collection, analysis and dissemination routines, which take the actual results and the budget figures , and calculate and report the variances. This should be part of the business ' s regular accounting information system, so the required report are automatically produced each month. Established each month can prevent large variance appear in the production. Since fairly short reporting periods, things cannot go too far wrong before the company picked up.
Task 3 (f) Dicsuss the marginal cost-plus pricing and full cost- plusing . And the mark up on marginal cost for the selling priceis $264.
The marginal cost- plusing means how much of a good should be produced and what its price should be can be examined by considering the benefits and costs of various levels of production as shown. It is a method of determining the sales price by adding a profit margin cost of production or marginal cost of sales.
Selling price : $264
Marginal cost : Direct material + Direct wages + Variable overhead =$(8+66+24) = $98
Profit per unit: $(264-98) = 166
Mark up : (Profit/ Marginal cost ) x 100% = (166/ 98) x100% = 169. 39%
The mark up on marginal cost is 169. 39%.
Full cost- plus pricing is to set a price that takes into account costs all relevant costs of production and adding a percentage mark-up for percantage.
Selling price: $264
Full Cost : Direct material + Direct wages + Variable overhead + Fixed Cost =$(8+66+24+100) = $198
Profit per unit: $(264-198) = 66
Mark up : (Profit/ Marginal cost ) x 100% = (66/ 198) x100% = 33.33%
The mark up on full cost is 33.33%.
Task 4 (a) Analysis and make a consistent interpretation of Daisy Ltd
i) Sales profitability ratios:
Gross profit [(Sales Revenue – Costs of Good Sold) / Sale Revenue ] x 100%
=[(1,990,000 – 900,000) / 1,990,000] x100%
=54.77%
=54.8%
Net Profit [(Sales Revenue – All Expenses) / Sales Revenue] x 100%
=[(1,990,000 – 1,608,950) / 1,990,000 ] x 100 %
=(381,050 / 1,990,000 0 x 100 %
=19.14%
=19.1%
Return on Capital Employed (Net Profit / Capital Employed ) x 100%
= [ Net Profit / ( Total Assets – Current Liabilities) ] x 100%
= 381,050 / (4,076,000 – 1,269,000 )x 100%
= 13.57 %
=13.6%
ii) Liquidity ratios:
Current ratios Current Assets / Current Liabilities
= ( Cash + Inventory + Account Receivable) / (Account Payable + Salaries Payable + Notes Payable )
=( 743,000 + 63,000 + 554,000) / (654,000 + 230,000 + 385,000)
=1,360,000 / 1,269,000
=1.071
=1.07
Acid test Quick Assets / Current Liabilities
= (Cash + Markable Securities + Current Receivable) / Current Liabilities
= ( 743,000 + 554,000) / 1,269,000
= 1.022
= 1.02
iii) Efficiency ratios:
Debtor Payment Periods (Account Receivable / Sales Revenue ) x 365 Days
= ( 554,000 /1,990,000 ) x 365Days
= 101.61 Days
= 102 Days
iv) Creditor payment Periods ( Account Payable / Cost of Good Sold ) x 365 Days
= ( 653,000 / 900,000) x 365 Days
= 264.82 Days
= 265 Days
Stock Turnover Cost of Good Sold / Inventory
= 900,000 / 63,000
= 14.285 Days
= 14 Days
v) Financial Ratios :
Gearing
[ Long Term Loan / ( Total Assets – Current Liabilities)] x 100%
= [ 740,000 / ( 4,076,000 – 1,269,000)] x 100%
= 26.36 %
= 26.4%
Task 4 ( b) Recommend appropriate future strategies for Daisy Ltd
Sales
Gross profit: Gross profit margin is a metric that defines the percent profit that a company makes for every dollar of goods produced.
That is, the profit to the company after all material and labor production costs.
Gross profit margins vary significantly by industry and type of business. Gross profits margins in the pharmaceutical industry typically range from 50 to 100 percent, and in the textile manufacturing industry margins average around 40 to 45 percent. 54.8% is a high value. It means the cost put product production is fewer than others.
Liquidity
Current ratios: The current ratio measures the business whether has enough resources to pay its bills over the next 12 months. A current ratio of over 1 is good news. Daisy (1.07) is in the range. If the ratios is high, there may be problems with collecting account receivable or be carrying too much inventory.
Efficiency
Stock Turnover: it known as The Inventory turnover. It is a measure of the number of times inventory is sold or used in a time period such as a year. The equation for inventory turnover equals the cost of good sold divided by the average
inventory.
A low turnover rate may point to overstocking, it will cost most stocking cost and deficiencies in the product line or marketing effort. However, in some instances a low rate may be appropriate, such as where higher inventory levels occur in anticipation of rapidly rising prices or expected market shortages.
Management
Gearing Ratios:
The gearing ratio is a financial metric used to analyze the capital structure of a company. Many professional financial analysts use this number to determine the health of a company.
The gearing ratio can be used by analysts to determine how healthy a corporation is. A gearing ratio above 1.0 is considered healthy, while less than 1 is less robust. Daisy 's gearing ratios is 26.4%. it is much lower than other company and competitors. So manufacturing firms like Daisy Ltd can use less capital expenditures and loans to less generate new businesses have much higher gearing ratios.
Task 5 (a) Categorise the cost and sales
Year 2012
Year 2011
Unit Sold
17,500
14,000
Sales Revenue
2,626,000
2,100,000
Less Cost of Good Sold
(1,697,500)
(1,358,000)
Gross Margin
927,500
742,000
Less Operating Expenses
(525,000)
(462,000)
Net Profit Income
402,500
280,000
Table 1.3 (Given)
Before the calculation, the selling price of Year 2012 should be proved to be same as Year 2011. Sales Revenue / Unit sold
Year 2012: 2,625,000 / 17,500 = $150
Year 2011: 2,100,000 / 14,000 = $150
For Cost of Good Sold
Quick check to define it is a variable cost or semi- variable cost. Cost of Good Sold / Units sold
Year 2012: $1,697,500 / 17,500 = $97
Year 2011: $1,358,000 / 14,000 = $97
Under Cost of Good Sold, Since the portion is same, it means Cost of Good Sold is $97 variable cost.
For Operating costs
Quick check to define it is a variable cost or semi- variable cost. Operating cost / Units sold
Year 2012: 525,000 / 17,500 = 30
Year 2011: 462,000 / 14,000 = 33
Since the portion is not the same, it means the Operating cost contain fixed cost and a variable cost. It is a semi- variable cost.
Cost
Activity
Year 2012
525,000
175,000
Year 2011
462,000
160,000
Change observed
$63,000
3,500
$6,300 / 3500 units = $18 per units
For Operating cost, it contains $18 variable cost.
Year 2012
Year 2011
Operating Cost
525,000
462,000
Less Variable cost element
(17,500 units x $18)
=(315,000)
(14,000 units x $18)
= (252,000)
Fixed element
210,000
210,000
Under Operating expenses, it contains $210,000 fixed costs and $18 variable costs.
Total Variable cost : $ 97 + $ 18 = $ 115 per units
Fixed Cost means total the cost remains the same even the activity level changes. From the Table1.3. There is no total cost are same in Year 2011 and Year 2012. Therefore, none of above is fixed costs.
Variable Cost means the costs change as activity level changes. In the other words, the cost are change by proportion. So the Cost of Good Sold is a $18 variable cost
Semi- variable Cost contains fixed cost and variable cost, so the costs are not proportion to the activity level changes. So the Operating Cost is a semi- variable cost with $210,000 fixed costs and $18 variable cost.
Task 5 (b) Calculate contribution per product and explain the cost/ profit/ volume relationship
Year 2012
Year 2011
Sales Revenue
$2,625,000
$2,100,000
Less Variable expenses
Cost of Good Sold
$(1,697,500)
$(1,358,000)
Operating cost
$18 x 17,500 units
=( $315,000)
$18 x14,000
=( $252,000)
Contribution Margin
$612,500
$490,000
When goods sold = Q
Fixed Cost: 210,000
Variable Costs: $115 per units
Total Cost: $210,000 +115Q
Total Revenue : 150Q
Break even:
150 Q = 115 Q + 210,000 Q = 6000
When Q = 6000, the Sales Revenue will be $900,000
Fig 5.1
For Daisy Ltd, the break even for profit ans loss is at $900,000 and sells 6000 units. In the other words, at least 6000 units have to be sold, otherwise, she will get a loss.
For the 6001st unit, the net profit she earn is: $150 x 61 - ($115x61+ 210,000)
=$35
After reaching the break even point at Q= 6000, she will earn $35 per units.
Task 5 (c) Justify short-term management decisions based on profit / lost potential and risk ( break even ) calculation.
Here is three cases for short-term management decisions.
i) If management team are planning to have special discount for customer. If the discount id 10% off.
When Q remains same as the break even unit = 6000
150 x (0.9) x 6000 – (115 x 6000 + 210,000)
= -$90,000
She will get a loss of $90,000
ii) If the fixed cost are raised from $210,000 to $250,000
When Q remains same as the break even unit = 6000
150 x 6000 – (115 x 6000 + 250,000)
= - $ 40,000
She will get a loss of 40,000
iii) If the fixed cost are raised from $210,000 to $250,000, the management team should increase the selling price with giving out a discount to attract customer. The marking price should raise up 35%, and give a discount 20% off.
When Q remains same as the break even unit = 6000
150 x (1.35) x (0.8) x6000 - ( 115 x 6000 + 250,000)
=$ 32,000
She will get a profit of $32,000
Task5 (d) Discuss the gross profit percentage
Gross Profit margin = [(Sales Revenue – Costs of Good Sold) / Sale Revenue ] x 100% =[(1,990,000 – 900,000) / 1,990,000] x100% =54.77% =54.8% this measure indicates how much at each sales dollar is left after deducing and cost of good sold to cover expenses and provide a profit.
References
http://www.ehow.com/info_8320483_gearing-ratio.html#ixzz2qr9MG28E
http://isearch.avg.com/search?q=Controlling%20stock%20and%20cash&cid={57B62CDC-DEEE-4C65-8035-A4CD43BFEE94}&mid=20ece7093d2147d0b6856f6fdde14bb8-284cdf64da9577f322eab45ce76ccbf63bba6fbc&lang=zh-cn&ds=gm011&pr=sa&d=2012-10-01%2001:19:40&v=15.2.0.5&pid=avg&sg=0&sap=hp&snd=hp&sap_acp=0
http://www.ehow.com/info_8613609_accounting-adjustment-concept-notes.html#ixzz2qrHlNRuC