ACCO 1116/FINA 1074 Financial and Management Accounting
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EXAMINATION PAPER: ACADEMIC SESSION 2016/2017
ACCO 1116
FINA 1074
Financial and Management Accounting
Financial Management
Answer TWO Questions only.
Question One
Tombstone Ltd produces three types of luxury belts: Business, Premier, and Standard. It is now planning the allocation of its available resources for the next period.
The following information is available concerning each component:
|
Units |
Business |
Premium |
Standard |
Labour cost |
|
250 |
200 |
150 |
Labour hours |
100,000 hours |
25 |
20 |
15 |
Leather |
110 Kg |
2,500 grams |
|
|
Steel |
150 Kg |
|
2,000 grams |
|
Plastic |
100 Kg |
|
|
500 grams |
Iron |
1,100 Kg |
250 grams |
200 grams |
300 grams |
Variable overheads |
|
150 |
50 |
100 |
Total variable overheads per belt |
|
3,150 |
2,450 |
1,050 |
Fixed overheads |
|
50 |
40 |
30 |
Total cost per unit |
|
3,200 |
2,490 |
1,080 |
Selling price |
|
5,000 |
4,000 |
2,500 |
Sales demand |
|
1,000 |
2,000 |
2,000 |
You are required to:
1) Explain if leather, steel and plastic are potential limiting factors? (5 marks)
2) Explain if iron and labour are limiting factors? Use calculation to support your answer. (10 marks)
3) Calculate the contribution per unit and the contribution per limiting factor of each product. Determine, which product should have priority in the production (9 marks)
4) Calculate the quantities to be produced according to the limiting factor. (6 marks)
5) If Tombstone Ltd has 1,500 Kg of iron available and the company would like to produce new product “Trendy” that has the following data: sales per unit 3,000, variable costs 1,400, sales demand 1,500 units and quantity of iron required per unit 300 grams per unit, what is the updated ranking of the products? What is the new level of production? (8 marks)
6) Illustrate advantages of limiting factor analysis and provide at least one example of application. (12 marks)
Total 50 marks
Question Two
Your close friend is the Managing Director of a small business called KK Ltd. The company is in the process of launching a new product and has asked you for advice regarding the options available in obtaining long term finance to support the manufacturing and sales of this new product.
You are required to:
1) Write a report that can be presented at the next board meeting, clearly explaining what financing options are available and highlighting the benefits and risks associated with each option. (30 marks)
2) KK Ltd wants to launch the new product. To launch the new product, the board have been informed that an initial investment is required at a cost of £3.1 m.
The Managing Director feels they should initially approach the bank for these funds, as the company’s short-term borrowings comprise only a bank overdraft, for which they are charged 12% interest per annum. They ask for your advice on whether the bank will grant them the funds.
a) Comment on the bank’s possible views regarding them providing the funds requested (Provide calculations to support your views) (12 Marks)
b) The bank state that to grant the additional loan the interest cover must be at least 1.5. Calculate the interest cover and provide an explanation of your findings to the board including a recommendation that may assist the company. (8 Marks)
KK Ltd has currently agreed to pay 12% per year interest on all borrowings with their bankers. KK Ltd Accounts looks as follow.
KK Ltd Income statement for the year
Sales Revenue
Opening inventories
Purchases
Total
Closing inventories
Cost of goods sold
Gross Profit
Administration expenses
Distribution expenses
Operating profit
Finance costs
Profit before taxation
Tax
Profit for the period
26
10
12
22
-7
15
11
-3
-6.4
1.6
-0.96
0.64
-0.13
0.51
KK Ltd. Statement of financial position as at the end of the year
ASSETS £m
Non - current assets
Property, plant and equipment
Land & buildings 8.0
Equipment 0.6
Motor vehicles 0.6
9.2
Current assets
Inventories 7.0
Trade receivables 3.0
Cash at bank 0.3
10.3
Total assets 19.5
EQUITY AND LIABLITIES
Equity
Share capital 6.0
Retained earnings 2.4
8.4
Non-current liabilities
Loan notes (secured on property) 4.0
Current liabilities
Trade payables 3.1
Short-term borrowings 4.0
7.1
Total equity and liabilities 19.5
Notes:
Land and buildings are shown at their current market value.
Equipment and minor vehicles are shown at their carrying amount (cost less accumulated depreciation).
No dividends have been paid to ordinary shareholders for the past three years
(Total 50 marks)
Question Three
SUN is considering expanding his beach cosmetics business, and will need roughly £500,000 for this. The company needs to pay 3% of the value of the project at the end of December. The Finance Director needs to estimate if the company will have enough resources at the end of the financial period. The following information are available to Finance Director.
Sales period |
Sales units in thousands |
Selling price |
July |
330 |
80 |
August |
350 |
75 |
September |
350 |
80 |
October |
400 |
100 |
November |
400 |
120 |
December |
450 |
130 |
a) 30% of sales are made for cash and the remaining 70% are payable in the month following the sale.
b) Purchases are 60% of the sales from previous month. 20% are paid in cash and the remaining amount is paid the month following the purchase.
c) The business use advertising for its products, advertising cost is set at monthly charge of £2,500 and is paid on monthly basis.
d) Wages are 8,000 and are paid monthly.
e) Commission is 5% of monthly sales and is paid in the first month after the sales is completed.
f) Rental charges are £4,500 monthly from March and this cost is to increase by £1,500 monthly from September; and will stay at this level for some time.
g) Charges for light and heat are £1,500 monthly and are paid every 2 months starting from January.
h) The Company will pay tax charges of £4,000 in October.
i) The monthly depreciation charges are set at £1,500.
j) Dividends of £6,000 will be paid in December.
k) At the end of August Sun has bank balance of £25,550.
You are required to:
1) Prepare a Cash budget statement for SUN Ltd, for the period of 4 months September to December to enable the Finance Director to decide on what steps to engage in when deciding on whether to go ahead with the investment. (25 marks)
2) Comment on the final budget balance at the end of December. (5 marks)
3) The company is considering using one of the two approaches of budgeting, top- down and bottom-up budgets. Critically discuss the uses of each of these budgeting methods, and explain the advantages and disadvantages of each
(20 marks) Total 50 marks
Question Four
Omicron, a Kent based company manufactures laptops. The company uses a batch production method and manufactures batches of computers based on customer preferences. Omicron sells laptops in Great Britain using local independent distributors who have knowledge of the local market as well as experience in delivering and installing computers. Currently Omicron is achieving a profit of £1,000,000.
The Board of directors is considering expansion into the European Market using the same type of distribution channel. They conducted some research and provided you with the following financial information: of Omicron`s expenses and sales price figures for planned sales in Europe:
predicted sales - quantity 5,000
predicted fixed costs - £ 600,000 per year
predicted variable costs 75 % of the sale price
estimated sales price - £1,200 per computer.
The board of directors has asked you to conduct some analysis.
You are required to:
1) Provide a definition of variable, semi-variable and fixed costs. (6 marks)
2) Identify at least three variable costs and three fixed costs for Omicron (12 marks)
3) Calculate:
a. The breakeven point in units (4 marks)
b. The margin of safety in units (2 marks)
c. The net profit if 5,000 laptops are sold (5 marks)
d. The amount of computers that need to be manufactured and sold in Europe for Omicron to make an overall profit of £ 2,500,000 from both Great Britain and European Market. (4 marks)
4) Discuss the usefulness of breakeven analysis for companies such Omicron.
(17 marks) Total 50 marks
2023-05-25