ACC00724 Accounting For Manager: Liquidity And Financial Stability

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ACC00724 Accounting For Managers

Questions

Question 1 (10 Marks)

Several potential investors have been studying the affairs Grafton Pty Ltd to decide whether to invest in the company by purchasing unsecured notes with the company was proposing to issue. The statements of financial position at 30 June 2018 and 2019 follow:

Grafton Pty Ltd Statement of Financial Position As at 30 June

                                            2019       2018

Current Assets                       $               $

Cash at bank                      3,264        2,832

Marketable securities         1,519        1,775

Accounts receivable           1,178        930

Inventories                         2,619       1,848

Other current assets           3,094       3,605

Total Current Assets          11,674      10,990

Non-Current Assets          19,960      16,276

Total Assets                      31,634      27,266

Current Liabilities                 $                $

Accounts payable              4,880        4,300

Bills payable                      1,574        2,555

 long-term debt                 978          450

Accrued expense               720          728

Provisions                          3,420      2,345

Total Current liabilities     11,572      10,378

Non- Current Liabilities                      $              $

Long-term debt                              5,800        4,160

Accrued expenses (payroll)             5,425        4,730

Other non-current liabilities           2,390        2,055

Total Non-current Liabilities           13,615      10,945

Total Liabilities                               25,187      21,323

Total Equity                                     6,447        5,943

Total Liabilities And Equity            31,634       27,266

Required:

a. Calculate appropriate liquidity and financial stability ratios for the years ended 30 June 2018 and 2019. Research reveals that typical ratios in the industry for the current and quick ratios are 1.7:1 and 1.0:1 respectively. For financial stability ratios the Debt ratio (total liability/total assets) and the Leverage ratio (total assets/total equity), industry averages are 2.5:1 for the leverage ratio and 60% for the debt ratio. (must show your workings/calculations) (5 marks)

b. Comment on the liquidity and financial stability of the company, given the information available. (3 marks)

c. Would you, as one of the potential investors in unsecured notes, lend money to the company? Explain why or why not (2 marks)

Question 2 (5 Marks)

Dunning Ltd. manufactures a popular power nail gun suitable for the home renovator. Financial and other data for this product for the last twelve months are as follows:

Sales                                                           20,000 units

Selling price                                               $130 per unit

Variable manufacturing cost                     $50 per unit

Fixed manufacturing costs                        $400,000

Variable selling and administrative costs  $30 per unit

Fixed selling and administrative costs      $300,000.

The directors of Dunning Ltd. want to try to increase the profitability of this product and invited senior staff to suggest how this might be done. Three suggestions have been received.

•The accountant, Jim Jackson, believes that a price increase of $10 per unit is the best way to boost profits. He would spend an additional $125000 on national advertising and contends, that if this is done, sales volume would not drop appreciably from last year.

•The production manager, Tim Walter, thinks that an improved quality product could increase sales volume by 25% if accompanied by an advertising campaign costing $50000 aimed at tradespeople as well as home renovators. The improved quality would add $5 per unit to the variable cost. Mr Walter believes that the price should not be increased.

•The sales manager, Sandy Smith, wants to undertake a promotion campaign where a $10 rebate is offered on all nail guns sold during the three months beginning 1 April. Normally 6000 units are sold during that period and Ms Smith believes that this could be boosted to 10,000 units if an advertising campaign costing $40,000 were launched late in March.

You have been asked by the Dunning board to comment on each of these three proposals. Draft a report in response to this request. You are not asked to make an outright choice, but rather to analyse the potential strengths and weaknesses of each proposal by calculating break-even point.

The sales volumes forecast by each staff member should be treated as estimates only and your report should examine the effects of variations in actual sales from these forecasts and its respective break-even point. Show your calculations to support your comments and mention qualitative factors that may also be involved.

Question 3 (5 Marks)

ABC Ltd makes trailers. It receives a special order to produce 350 trailers for a local retail outlet. The order will take 2,100 kg of material that costs $16.10 per kg and will require 1,400 direct labour hours and 525 machine hours. The following are the expected/budgeted annual costs for ABC Ltd:

Direct labour               $327,600

Direct labour hours      25,795

Direct materials          $193,200

Indirect costs             $98,400

Machine hours            9,840

Required: (must show your calculations/workings)

a. Calculate the overhead allocation rate: note that the process is labour-intensive (1/2 mark)

b. Calculate the total costs of the special order (1 mark)

c. Calculate the cost of the special order if ABC Ltd uses machine time as the basis for allocating overheads (1/2 mark)

d. Calculate the minimum price per trailer that ABC Ltd could accept. (1 mark)

e. Write around 200 words explaining how segmenting the overheads can help in allocating overhead costs to individual jobs or services. You must support your discussion by readings and research and acknowledge the source of your information (referencing). (2 marks)

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