Solved Management Accounting Exam

Question 1

Five ways Ltd makes a single product, that measures blood pressure and cholesterol. Their market is to the wholesale pharmacy businesses. The current price is £100 per unit. In recent years the sales volume has ranged between 20,000 to 25,000 units per year. Variable costs are £70 and fixed costs are £660,000. You are required:

(a) To determine the breakeven point in units based on the current sales price and costs. Commenting on the viability and profitability of the business, suggest strategies to improve the company’s position if you think is necessary in light of your calculations. (30% of the marks)

Expert Solution

Break Even Point in Units = FIXED COSTS ÷ (SALES PRICE PER UNIT – VARIABLE COSTS PER UNIT)

Fixed costs = £660,000

Variable costs = £70

Sales price per unit = £100

Therefore,

Break-even point = £660,000/ (£100 – £70)

Break even point = 22,000 units

This means Five Ways needs to sell just over 22,000 units to reach the break-even point.

The management are also looking at alternative pricing strategies. In particular they are considering reducing the price to £90 which they have been told by marketing consultants would enhance the levels of sales to 30,000 units. Whilst variable costs would decrease to £65 per unit due to discounts from suppliers of materials. Fixed overheads would increase by £40,000 required for additional advertising. Calculate the breakeven point, the margin of safety and comment on whether this strategy should be taken up by the company. (50% of the marks)

Expert Solution

Break-Even point (units)= fixed costs/(sales price per unit – Variable costs per unit)

=£660,000+£40,000/（£90-£65)=28,000units

Margin of safety = Actual sales – Break even point

= 30,000-28000=2000units

As a percentage (%) Margin of Safety = 2000/28000*100%=7.1%

(c) With reference to your answer in parts (a) and (b) above for Five Ways Ltd describe the benefits of cost volume profit analysis for decision making. What are the limitations of this tool? (20% of the marks)

Question 2

Goodies Limited is assessing an investment into software that would generate cash savings in their production process. Two options are under consideration. Option 1 will cost £200,000 and will generate savings over a five year period. Option 2 will cost £245,000 and generate savings over 7 years. Due to implementation issues Option 2 will not generate savings until year 2. Both investments will not generate any resale value at the end of their lives. The investments are mutually exclusive. The cost of capital for these projects is 15%. The following details the cash flows for the two options:

Required: a) Calculate the Net present Value NPV, Internal Rate of Return and the Pay back for both Options. (60% of marks)

Expert Solution

NPV = (Cash flows)/( 1+r)i

i- Initial Investment

r  = Discount rate

i = time period

1. b) On the basis of your computations, advise the directors of Goodies which of the two Options they should choose assuming the objective of the business is to maximise shareholder value making any comments you think necessary to justify your selection. (40% of the marks)

 Question 3

Albert is proposing to set up a wholesale business on the 1st July 2020. He has savings of £60,000 in cash in a bank account which will fund the enterprise. The premises where the business will operate will cost £1,400 a month paid on the first day of the month. Shop Fittings worth £10,000 will be purchased and to be paid in two equal instalments of £5,000 in the last day of August and September, respectively. From July, Albert intends to withdraw £2,000 per month in respect of his salary. Initially, it will only be Albert working in the business but later he intends to employ an assistant. The sales forecast is as follows:

Sales are on a month’s credit; however, it is anticipated that 40% of the debtors will delay payment for one month beyond the due date.

Forecast purchases are:

All purchases are paid in the month after the purchase.

Expenses are £1,000 for July and thereafter 12%

Required:

• Describe the usefulness of budgets with reference to Albert’s start up. (20% of the marks)
• Prepare a cash flow budget for the half-year commencing July to December 2020. (60% of the marks)

(c) Discuss Albert’s business finances and any actions he needs to take with reference to his cash flow budget. (20% of the marks)

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Solved Management Accounting Exam