Learning Goal: I’m working on a finance multi-part question and need an explanation and answer to help me learn.Question 1 NewTown Ltd makes a range of products all of which follow a similar production process and have the same cost structure. The products are made in batches which started at the beginning of the month and are completed and taken into finished goods inventories at the end. There is no work in progress at the end of any month. The business is considering a change in its sales prices, volumes, and credit terms. Current position Sales revenues are RM300,000 a month and produce a contribution of RM0.40 per RM1 of sales revenue. Variable raw material costs account for RM0.20 per RM1 of sales revenue. Fixed costs are RM120,000 a month, of which RM30,000 is depreciation. The business’s only variable costs are production costs. Credit customers take one month to pay, trade payables for raw materials are paid one month after purchase and the other variable costs are paid during the month of production. At the end of each month, the business has sufficient raw material inventories to meet the following month’s production and enough finished inventories to meet the following month’s sales. Possible future position Production and sales volumes would be increased by 50%. To generate the increased demand, selling prices would be reduced by 10% and trade receivables would be allowed to pay two months after the sale. Apart from the increased trade receivables payment period, all working capital policies would remain the same as at present. The changes to sales volume, price, and payment period, if occur, would commence with sales made from 1 December this year, but to meet the business’s working capital policies, there would be effects on cash flows before that time. The business’s balance in bank at 1 October is expected to be RM70,000 Required: (a) Prepare NewTown Ltd’s cash budgets for each of the months of October, November, and December this year and January and February next year, assuming that the proposed sales expansion goes ahead. Show all relevant workings. Provide practical suggestions on the production and purchases. Note: Ignore interest. (b) Critically evaluate the importance of budgeting to strategic planning and why companies fail to do budgeting. Question 2 A business manufactures television for domestic use. There are three models; X, Y, and Z. The models, their quality and their prices are targeted at varying markets. Product costs are computed using a blanket overhead rate. Products absorb overheads on the basis of labour hour. Generally, prices are set according to cost plus 20%. The following information is given: Model X Model Y Model Z Material cost (RM/unit) 25 62.5 105 Direct labour hours (per unit) 0.5 1 1 Budget production/sales (units) 20,000 1,000 10,000 The budgeted overheads for the business for the year are RM4,410,000. Meanwhile, direct labour is RM8 an hour. The business is currently facing rising competition, especially from imported goods. Consequently, the selling price of X is reduced to a level that produces very low profit margin. To address this problem, an activity-based costing (ABC) approach is proposed. The overheads have been analysed and it is found that these are grouped around main business activities of machining (RM2,780,000), logistics (RM590,000), and establishment costs (RM1,040,000). It is maintained that these costs could be allocated based respectively on cost drivers of machine hours, material orders and space, to reflect the use of resources in each of these areas. After analyzing, the following proportionate statistics are produced as shown below: X (%) Y (%) Z (%) Machine hours 40 15 45 Material orders 47 6 47 Space 42 18 40 Required: (a)Calculate the full cost and selling price determined for each product from:
(b)Critically evaluate the benefits of International Accounting Standards (IAS 2 Inventories) from the perspective of relevant stakeholders
(i)The traditional costing method (ii)The activity-based costing method Question 3 The senior management at Hotel Magneta is reviewing the performance of the hotel and making plans for the year. The information is as follow: RM Sales 4,000,000 Variable cost 800,000 Contribution margin 3,200,000 Fixed cost 2,400,000 Net income/(loss) 800,000 The total estimated number of guest nights for the current year is 50,000, with each guest night being charged at the same rate. The results follow a regular pattern; there are no unexpected cost fluctuations beyond the seasonal business pattern shown above. For the year, management anticipates an increase in unit variable cost of 10% and a profit target for the hotel of RM1 million. These will be integrated into the plans. Required: (a)Calculate the target net income per guest. If there is no increase in guests for next year, what will be the required sales revenue rate per hotel guest to meet the profit target?
(b)If the required revenue rate per guest is not raised above this year’s level, how many guests will be required to meet the profit target?
(c)Tourism Industry relies heavily on website and social media. In reference to the IAS 38/ SIC 32 Intangible Assets – Website Costs, critically evaluate practical suggestions on how the company can achieve the target.
Question 4 You are the General Manager of Finance Department in Lexra Ltd, a palm oil company. You are tasked at advising the Board of Directors on considering two mutually exclusive investment projects. These projects concern with the purchase of new plants which will be placed at estates and mills. The details as shown below: Project A Project B Net Present Value (NPV) RM96,000 RM80,000 Internal Rate of Return (IRR) 16% 17% Payback Period 3 years 4 years Required: a)In reference to the information above, critically advice the Directors of Lexra Ltd on which project should the company proceed with. Provide detailed justifications.
b)Suppose one Director is in the opinion that the selection of project should be based on IRR. Advise the rest of the Board members on why IRR is frequently preferred by top management. Then, provide concrete suggestion on the best method to use.
Requirements: 1200-1500 words | .doc file
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