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ACC00724 Accounting For Managers
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ACC00724 Accounting For Managers
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Course Code: ACC00724
University: Southern Cross University
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Country: Australia
Questions:
Question 1
Refer to the company you studied for Assignment one. Using some of the information you gleaned there, as well as additional information, calculate the cash cycle period for each of the five years. Then, reviewing the Statement of Cash flows for the most recent two years, evaluate the trends of overall cash flows, but particularly those related to cash flows from operatingactivities.
Question 2
Telesmart Ltd. manufactures a high end smart phone with dual sim cards that is popular with young travelers. Related financial data for this product for the last year is as follows:
Sales 5,000 units Selling price $420 per unit Variable manufacturing cost $144 per unit Fixed manufacturing costs $460,000 Variable selling and administrative costs $36 per unit Fixed selling and administrative costs $500,000.The CEO is under pressure from the Board of Directors to increase the profitability of the phones and has asked executives from different departments for suggestions. Three managers have responded with the following ideas:
a) The production manager, Aaron Jacobsen, suggests making improvements to the quality of the product. These quality improvements would increase the variable costs by $28 per unit. This would be accompanied by a $30,000 national advertising campaign which he expects would boost sales volume by 30%.
b) The sales manager, Joanne Arnett, believes that the product is unique, but not yet well known enough. Based on her market research, she feels that advertising should be increased by $50,000 and that the product would also be able to bear an increase in price of $60 with sales volume reduced by 10% from the current levels.
c) The marketing director, Jennifer Saunders, wants to undertake a promotion campaign where a $30 rebate is offered to the first 1,500 phones sold. She expects that the rebate program would boost sales by an additional 1,000 units if spending on advertising was increased by $60,000.
You have been asked by the CEO, Sharon Whitmore, to comment on each of these three proposals before she presents them to the Board of Directors. Draft a report in response to this request. You are not asked to make one particular choice or recommendation, but rather to explore the potential strengths and weaknesses that includes discussion on the breakeven, potential profits and, where possible, the margin of safety related to each proposal. Keep in mind that the sales volumes should be treated as estimates only and your report should consider potential variations in actual sales and their effects. Give both qualitative and quantitative support to your comments.
Answer:
Formula for cash cycle is illustrated below (Arnold, 2015).
Cash cycle for the selected company i.e. JB Hi Fi is as illustrated below (JB Hi-Fi, 2017).
The relevant extract taken from the latest annual report of JB Hi Fi pertaining to statement of cash flows is given as follows (JB Hi-Fi, 2017).
With regards to cash flows from operating activities, there is an increase to the tune of $ 5 million in FY2017 over FY2016. The prime contributing factor is the healthy growth in customer receipts (owing to acquisition of Good Guys) which despite the corresponding increase in payment to suppliers and employees has led to improved operational cash flows in FY2017. This is emphasized from the fact that despite an increase in the tax outflow to the tune of $ 32 million in FY2017, the net cash flows from operations have shown a jump. The net cash outflow from investing activities has jumped tremendously in FY2017 owing to the $ 870 million acquisition of Good Guys by the company in FY2017. Further, the effect of the acquisition has been witnessed in cash flows from financing activities as well as the company has raised about $ 850 million through a combination of debt and equity (JB Hi-Fi, 2017).
Proposal 1: Enhance the product quality that result in rise in sale of the product volume by 30% with the increase in the variable cost and advertisement cost of $28 and $30,000 respectively.
Analysis
Quantitative analysis shows the increment in the profit via proposal plan.
Imperative points to note
Analysing the plant existing production capacity along with the effect on the total cost of the product under proposed plan is an essential aspect. The selection of correct strategy for the plan is pivotal for the increased profitability of the company and thus same should consider the actions taken by competition (Northington, 2015).
Proposal 2: Raise the price of the product that reduces sale of the product by 10% with the selling price and advertisement cost increase of $60 and $50,000 respectively.
Imperative points to note
It is apparent from the plan that sale would be reduced because of the increase price of product. Hence, it is critical to analyse the market environment and the respective consequences that can minimize the competitive advantage particularly due to market share loss (Damodaran, 2015).
Proposal 3: Use a promotion program by giving discount on price of initial 1500 units that raises additional sale of 1000 units extra at a campaign cost of $60,000.
Margin on costs and the incremental costs are the two main factors that are essential to analyse. The plant capacity is sufficient enough to complete the special order of 25,000 units without sacrificing on the current orders. Also, no surplus fixed, selling and administrative cost is required for the completion of special order. Thereby, only the variable costs would be considered for decision making. Free Wheels’s profit margin on costs is 100% which is reflected in the quotation amount as the quote provided has also comprised 100% margin on cost.
Company has several opportunities in the form of maximum utilization of production capacity that can increase the profit by $3 million. Also, the company can extend the business domain by inviting more clients along with the clients of the Cycle World for selling their product (Damodaran, 2015).
The crucial disadvantage is in the form of lower profitability as Cycle World is being offered the product at lower rates compared to the other customers. Thus, over reliance on them could adversely impact the profit margins. Further, it may dissuade the company from actively pursuing new clients as the capacity would reach close to 100% capacity (Brealey, Myers and Allen, 2014).
References
Arnold, G. (2015) Corporate Financial Management. 3rd ed. Sydney: Financial Times Management.
Brealey, R. A., Myers, S. C., and Allen, F. (2014) Principles of corporate finance, 2nd ed. New York: McGraw-Hill Inc.
Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York: Wiley, John & Sons.
JB Hi-Fi (2017) Annual Report 2017, [Online] Available at https://www.jbhifi.com.au/Documents/2017%20Annual%20Report.pdf [Accessed August 28, 2018]
Northington, S. (2015) Finance, 4th ed. New York: Ferguson
Parrino, R. and Kidwell, D. (2014) Fundamentals of Corporate Finance, 3rd ed. London: Wiley Publications
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