Analysis of Cash Budget - Assignment Example

Question 1 Part A Credit sales - $140000 Part B Purchase inventory on credit – $70000 Accounts payable paid – $56000 Interest on loan – $20000 Salaries paid – $180000 Salary Outstanding – $40000 Electricity Consumed - $22000 Insurance - $18000 Part C   in $ Sales 140000 Less: Accounts payable paid 56000 Less: Interest on loan 15000 Less: Salaries paid 180000 Less: Insurance policy 24000 Cash flow from operations -135000 Part D   in $ Creditors 70000 Outstanding interest on loan 5000 Advance from customer 80000 Salaries outstanding 40000 Outstanding electricity bill 22000 Question 2 Transactions Net Profit Assets Liabilities A O-200000 O-200000 NE B O-10000 O-10000 NE C NE O-20000 U-20000 D U-18000 U-18000 NE Question 3 1. D 2. B 3. B 4. A 5. B 6. E 7. C 8. C 9. A 10. A 11. D 12. B 13. B 14. D 15. A 16. B 17. B 18. C Question 4 Transaction Current Ratio Debt to Equity 1 No effect Increase 2 No effect Decrease 3 Increase Increase 4 Increase Increase 5 No effect No effect 6 Increase Decrease Question 5 Part A Revenues for all year = 210000 + 70000 = 280000 Cost all the year = 80000 + 40000 + 25000 = 145000 Total Profit = 280000 – 145000 = 135000 Value of plant = 400000 Estimated residual value = 90000 Cost = 310000 Rate of return = 10% NPV = 135000 / (1 +.1)1 + 135000 / (1 +.1)2 + 135000 / (1 +.1)3 = 122727.27 + 111570.25 + 101427.50 = 335725.02 Gain from the deal = 335725.02 – 310000 = $25725.02 Part B Tax rate is 30% So NPV is NPV = 135000 / (1 +.1 – 0.3)1 + 135000 / (1 +.1 – 0.3)2 + 135000 / (1 +.1 – 0.3)3 = 16875 + 210937.5 + 263671.875 = 491484.375 This will make the actual returns to be negative in the third year as the net present value increases considerably and the business is not able to generate the same from the use of the asset which will thereby reduce the usage of the asset. Question 6 Part A Cost Drivers = Direct Labor hours for product A: Direct Labor hour for product B = 1:2 Total Manufacturing support cost = $2,000,000 Cost allocated on the basis of direct labor hour So, manufacturing support cost for product A= 2,000,000 * 1/3 = 666666.67 Manufacturing support cost for product B = 2,000,000 * 2/3 = 1333333.33 Total products produced is 40,000 product A and 5,000 Product B Manufacturing support cost for 1 unit of product A = 666666.67 / 40000 = $16.67 Manufacturing support cost for 1 unit of product B = 1333333/5000 = $266.67 Total Cost to manufacture 1 unit of product A = Direct Material Cost per unit + Direct Labor cost per unit + Manufacturing support cost per unit = 60 + 20 + 16.67 = $96.67 Total Cost to manufacture 1 unit of product B = Direct Material Cost per unit + Direct Labor cost per unit + Manufacturing support cost per unit = 90 + 40 + 266.67 = $396.67 Part B Cost is allocated on the basis of different drivers which have been identified Purchase order cost = 360,000 Purchase order cost for product A = 360000 * 400 / 600 = 240000 Purchase order cost for product B = 360000 * 200 / 600 = 120000 Quality Control Cost = 500000 Quality Control cost for product A = 500000 * 1000 / 2000 = 250000 Quality Control cost for product B = 500000 * 1000 / 2000 = 250000 Product Set up cost = 440000 Product Set up cost for product A = 440000 * 100 / 200 = 220000 Product Set up cost for product B = 440000 * 100 / 200 = 220000 Machine Maintenance Cost = 700000 Machine Maintenance cost for product A = 700000 * 15000 / 35000 = 300000 Machine Maintenance cost for product B = 700000 * 20000 / 35000 = 400000 Total Manufacturing Support Cost for product A = Purchase order cost + Quality Control cost + Product Set up cost + Machine Maintenance cost = 2400000 + 2500000 + 2200000 + 3000000 = 1010000 Total Manufacturing Support Cost for product B = Purchase order cost + Quality Control cost + Product Set up cost + Machine Maintenance cost = 1200000 + 2500000 + 2200000 + 4000000 = 9900000 Manufacturing support cost for 1 unit of product A = 1010000 / 40000 = $25.25 Manufacturing support cost for 1 unit of product B = 990000/5000 = $198 Total Cost to manufacture 1 unit of product A = Direct Material Cost per unit + Direct Labor cost per unit + Manufacturing support cost per unit = 60 + 20 + 25.25 = $105.25 Total Cost to manufacture 1 unit of product B = Direct Material Cost per unit + Direct Labor cost per unit + Manufacturing support cost per unit = 90 + 40 + 198 = $328 The old method used in part a in comparison to the new method used in part B shows wide differences as it is identified that the cost price for product A is under valued and not estimated correctly whereas the cost prices for product B is wrongly estimated to be higher that it actually is. Using the different cost drivers helps to ensure that the correct cost is estimated and ensures that better pricing mechanism can be adopted. Question 7 Cash Budget for February 13   In $ Cash Receipts from customer for the sale of February 28000 Cash collected from customers for the sale of previous month 16200 Total Receipts 44200 Cash paid for merchandise purchased in January 37800 Insurance policy purchased 12000 Other monthly expenses 4520 Total Payments 54320 Closing Cash Balance -10120 Calculation of Cash receipts from customer for the sale of February Total sale = 40000 Cash Sale = 70% of total sale = 70% of 40000 = 28000 Calculation of Cash collected from customers for the sale of previous month Total sale for January = 54000 Credit sale in January which was collected in February = 30% of total sale = 30% of 54000 = 16200 Budgeted income for the month of Feb 13  Transactions in $ Sales 40000 Cost of Sales 28000 Gross Profit 12000 Depreciation on Equipment 6000 Insurance Policy Premium 1000 Other Expenses 4520 Net Profit 480 Calculation of Cost of sales Cost of Sales = 70% of total sales = 70% of 40000 = 28000 Calculation of Depreciation on Equipment Purchase Value of equipment = 216000 Estimated life = 3 years Per month depreciation = 216000 / (3 * 12) = 6000 Calculation of Insurance policy premium Policy amount = 12000 Tenure = 12 months Per month premium = 12000 / 12 = 1000 Question 8 Part A Selling Price = $40 Variable Cost per unit = $25 Total Fixed Cost = $135,000 Sales = 10,000 Units Total Revenue = 40 * 10000 = 400000 Total Cost = Total Variable Cost + Total Fixed Cost = 25 * 10000 + 135000 = 385000 Total Profit = Total Revenues – Total Cost = 400000 – 385000 = $15000 Now, Sales = 15000 units Total Revenue = 40 * 15000 = 600000 Total Cost = Total Variable Cost + Total Fixed Cost = 25 * 15000 + 135000 = 510000 Total Profit = Total Revenues – Total Cost = 900000 – 510000 = $90000 Change in volume of sale from 10000 units to 15000 units results in an increase in profit by 90000 – 15000 = $75000. Part B Total Fixed Cost = 800000 Units sold for A = 20000 Units Sold for B = 30000 Apportioning total fixed cost on the basis of units sold Total fixed cost for product A = 800000 * 20000 / 50000 = 320000 Total fixed cost for product B = 800000 * 30000 / 50000 = 480000 Break even point is when sales or revenues equals total cost We assume that n units were sold for product A So, break even point is Reveunes = Cost 130 n = 320000 + 90 n 40 n = 320000 N= 8000 units We assume that n units were sold for product B So, break even point is Revenues = Cost 90 n = 480000 + 60 n 30 n = 480000 N= 16000 units Thus break even is established and 8000 units of product A and 16000 units for product B. Part C Selling Price = 150 Variable Cost = 105 Total Fixed Cost = 720000 Tax Rate = 30% Let us assume than n number of products are sold to earn a profit after tax of 40000 Profit = Sales Revenue – Total Cost 40000 / 70% = 150n – 105n – 720000 40000 * 100 / 70 + 720000 = 45n N= 17269.84 Expected sales to generate a profit of 40000 after tax = 17269.84 * 150 = $2590476.19 Part D Considering a situation where 1000 units have been produced Sales Price per unit = 600000 / 1000 = 600 Variable Cost per unit = 400000 / 1000 = 400 Total Fixed Cost = 120000 To earn a profit of 100000 before tax we assume that n units are sold Profit = Sales Revenue – Total Cost 100000 = 600n – 400n – 120000 200 n = 220000 N= 1100 So sales revenue = 1100 * 600 = $660000 Read More