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BIZ201 Accounting For Decision Making

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BIZ201 Accounting For Decision Making

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Course Code: BIZ201
University: Laureate International Universities

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Country: United States

Question:

As part of the Wellness Centre Project, the plan is to build a small gym on the rooftop of the hotel. You have been appointed to help the Sales and Marketing manager to make decision whether to rent or buy specific equipment items.
The budget for the required equipment is $45,550 for the life of the equipment. The useful life of the equipment is predicted to be 3 years after which it will need to be replaced. At the end of its useful life, it is expected to be sold for the residual value of 5% of its original cost. From the renting options, choose the one that is the most beneficial for the business. The rent is expected to rise by 3% each year. The rent is paid at the beginning of each period. Servicing of the equipment is included in the rent price.
They have asked for your expertise to carry out a CVP analysis for this promotion. Calculate the following:

The contribution margin per unit of service (a unit of service is one night’s accommodation for one guest).
The contribution margin ratio.
The annual break-even point in units of service and in dollars of service revenue.
The number of units of service required to earn a target net profit of $ 100, 000 for the year (ignore income taxes).
Analysis the importance of CVP analysis and comment on effectiveness of this promotion based on your calculations.
a) Explain and evaluate the role and importance of financial information in business decision making
b) Apply relevant accounting concepts to simple business scenarios
d) Apply basic costing and budgeting techniques tobusiness decision making
e) Apply capital budgeting techniques to capital investment scenarios

Answer:

Case overview:
The report focuses on the Crystal Hotel Pty ltd. In the report, has been studied that how the various accounting and costing tool could are used by the companies to manage the performance of the business and make better decisions about the company. There are various techniques such as buy or rent budget, market feasibility etc which has been used in the report to reach over a conclusion about the performance of the business. It has been measured that how each of the decision related to business process and performance is made by a business.
Task 1:
On the basis of the evaluation on the new project, wellness centre of the firm, the company has mainly 2 options related to either buy the machinery or make it on rent, out of which one could be opted by the business on the basis of the cost and the profits of the business. Through the calculations, the overall budget of the company is $ 45,550. The rent and buy calculations have been made on the basis of the given figures in the case to make decision that whether the machinery must be bought or make it on rent.
The calculations express the buy option as better option in order to set up the machinery in the plant. In case of buying the machinery, the business would become the owner of the machinery and the owner would be in the position to make the use of machinery in any way. However, the buying option could be harmful for the business in order to make the changes in the machineries at the time of changing in the technology.
Further, the rent option could also be good in case of making the change in the machinery at the time of alternations and modifications in the technology. However, in case of rent, the business never becomes the owner of that machinery and it has to follow various terms and conditions according to lender.
The calculations brief the rent option as better option as in case of rent the machineries, the total expenses of the company at the end of the third year would be $ 12,519. However, if the buy option is taken into the concern than the total expenses of the company would be $ 43,024. So, it is suggested to the company to go for rent option.

 

BUY OPTION

 

COST

Discounted Residual Value

Servicing

Total Cost over 3 years

 Treadmill (3 pieces)

$18,171

$721

$600.00

$18,050

Elliptical Trainer (2 pieces)

$8,078

$321

$600.00

$8,357

Exercise Bike (4 pieces)

$13,328

$529

$600.00

$13,399

Rowing Machine (1 piece)

$2,726

$108

$600.00

$3,218

TOTAL COST

$42,303

$1,679

$2,400

$43,024

 

 

RENT OPTION

 

 

Discounted Value Year 1

Discounted ValueYear 2

Discounted ValueYear 3

Total Cost over 3 years

 Treadmill (3 pieces)

 

$1,824

$1,740

$1,659

$5,223

Elliptical Trainer (2 pieces)

 

$935

$892

$851

$2,678

Exercise Bike (4 pieces)

 

$837

$798

$761

$2,397

Rowing Machine (1 piece)

 

$776

$740

$706

$2,222

TOTAL COST

 

$4,372

$4,170

$2,318

$12,519

(Bromwich and Bhimani, 2005)
Task 2:
The case explains about the ne project of membership of the new gym of the business. It has been found that a new gym has been started by the business and it has planned an option for the visitors (basic membership or full package). The case explains that the charged fee on both the packages would be different and thus the business has planned to conduct the NPV technique on the project to evaluate that which package is better for the business.
In addition, the case and the calculations express that the net present value of the new project has been evaluated and it has been measured that the net present value if new packages of the business would be $392,705. The amount is quite higher and explains that if the project would be implemented than the business would be able to generate $ 392705. Company is suggested to make investment into this new project (Ward, 2012). The company is also suggested to entertain the external visitors with a different package so that the overall cash inflow of the business could be improved.

 

Membership (Basic 39/month, Full Package 80/month)

Membership Project

Cash Outflow

Cash Inflow

Net Cash Flow

Tax

After Tax CF

PV Factor

NPV

Year 0

$35,350

 

-$35,350

$0

-$35,350

1

–                             35,350

Year 1

$808

$222,200

$221,392

$66,418

$154,974

0.9259

                             143,495

Year 2

$808

$238,481

$237,673

$71,302

$166,371

0.8573

                             142,637

Year 3

$808

$256,212

$255,404

$76,621

$178,783

0.7938

                             141,924

NPV

 

 

 

 

 

 

$392,705

Task 3:
The case explains about the new promotional activities of the business. It brief how much profits could be generated by the business through promoting the centre in better manner in the market. The case brief that a wellness centre has been started by the business and now the management is planning to promote it through various promotional events. The case explains that various tools and sources are available through which the promotion could be done in better way by the business.
It has also been measured through the market feasibility that the business should promote the business and the wellness centre to improve the cash inflows and the profitability level of the business. The evaluation express that these promotional events are quite reasonable for the business and would improve the performance of the business.

 

Promotional Budget

Item

Price(excl GST)

GST

Price (incl GST)

Quantity Required

Total Budgeted Value

The Brisbane times (Quarter page strip)

1132

$113.20

$1,245

1

$1,245

Digital foyer advertising (weekly rate)

250.00

$25.00

$275

5

$1,375

Bus shelter poster (trail panel)

$550

$55.00

$605

3

$1,815

Digital Billboard (medium)

2500.00

$250.00

$2,750

1

$2,750

Printed Billboard

$600

$60.00

$660

3

$1,980

Flyers

$295

$29.50

$325

8

$2,596

Retail advertising

$358

$35.80

$394

8

$3,150

TOTAL

$5,685

$569

$6,254

29

$14,912

(Bergar, 2011)
Task 4:
The case explains about the various expenses which have been bear by the company in order to implement the promotional events to promote the wellness centre of the business. The case brief $ 80 per person as the night charges in which $ 35 is the variable expenses of the event and the total fixed cost of the business was $ 45,000. These figures explain about the total cost which has been bear by the business in order to host the event.
The calculations explain that the contribution margin of the business is $ 45 as well as the margin (CM) of the business is 44%. It further adds into the evaluation that the total breakeven point of the business is 1000 units and the break even amount of the business is $ 80,000. It also adds that if the company wishes to generate the total profit of 1,00,000 in the event then the company has to make sure that 3,222 units have been sold in the market (Madhura, 2015). 
In addition, it has been found that the cost volume profit analysis is very beneficial and effective for a business to make various decisions about the production and sales of the business. It takes the concern of variable expenses, fixed expenses, contribution margin etc to evaluate that how many units must be sold by the business to reach over a position where the profit and loss of the business is nil. The case explains that the CM of business is lower so it is important for the business to sell more tickets to achieve the BEP level (Zimmerman & Yahya-Zadeh, 2011).

CVP ANALYSIS

 

 

CM

 $      45.00

CMR

56.25%

Break-even (units)

1,000

Break-even ($)

 $80,000.00

Number of units of service required to earn a target net profit of $ 100, 000

3222

(Bonner, 2008)
Task 1:
On the basis of the evaluation on the new project, wellness centre of the firm, the company has mainly 2 options related to either buy the plant or make it on rent, out of which one could be opted by the business on the basis of the cost and the profits of the business. The rent and buy calculations have been made on the basis of the given figures in the case to make decision that whether the plant must be bought or make it on rent.
On the basis of the above stated task 1, it has been found that both the cases has some pros and cons. The buy option has its own pros and cons and the rent options also has its own pros and cons. Both of the options are better and vary according to the needs and the other factors of the business (Ward, 2012). 
The calculations brief the rent option as better option as in case of rent the machineries, the total expenses of the company at the end of the third year would be $ 32,987. However, if the buy option is taken into the concern than the total expenses of the company would be $ 38,480. So, it is suggested to the company to go for rent option.

 

BUY OPTION

 

CostYear 0

Discounted ServicingYear 1

Discounted ServicingYear 2

Discounted ServicingYear 3

Total Cost over 3 years

Zamioculcas Zamiifolia (20 pieces)

$800

$12,133

$11,235

$10,402

$34,570

Raphis Excelsa (10 pieces)

$1,360

 

 

 

$1,360

Howea Forsteriana (10 pieces)                

$570

 

 

 

$570

Chamaedorea Elegans (30 pieces)

$1,980

 

 

 

$1,980

TOTAL

$4,710

$12,133

$11,235

$10,402

$38,480

 

 

RENT OPTION

 

Discounted Value Year 1

Discounted ValueYear 2

Discounted ValueYear 3

Total Cost over 3 years

Zamioculcas Zamiifolia (20 pieces)

$1,407

$1,303

$1,207

$3,917

Raphis Excelsa (10 pieces)

$2,546

$2,358

$2,183

$7,087

Howea Forsteriana (10 pieces)                

$1,843

$1,706

$1,580

$5,128

Chamaedorea Elegans (30 pieces)

$5,607

$6,056

$5,192

$16,854

TOTAL

$11,403

$11,422

$10,161

$32,987

Task 2:
The case explains about the new plan of the business that whether the company should take the subscription of the software or buy it permanently has been evaluated. The case explains that the business is required a software for various process and the activities of the business and it has two option or either buy or take subscription.
In addition, the case and the calculations express that the net present value of the new plan has been evaluated and it has been measured that the net present value of licence would be $ 7,695 and the Subscription’s net present value is $ 5,758. The amount of subscription is quite lower and explains that if the subscription would be taken than the business would have to pay $ 5,758 in total. Company is suggested to make investment into the subscription project itself (Weygandt, Kimmel & Kieso, 2009). 

 

Licence

Membership

Cash Ouflow

PV Factor

PV of Cash outflows

Year 0

$6,900

1

$6,900

Year 1

$300

0.925925926

$278

Year 2

$309

0.85733882

$265

Year 3

$318

0.793832241

$253

TOTAL

$7,827

$4

$7,695

 

 

Subscription

Membership

Cash Ouflow

PV Factor

PV of Cash outflows

Year 0

 

1

$0

Year 1

$2,172

0.925925926

$2,011

Year 2

$2,237

0.85733882

$1,918

Year 3

$2,304

0.793832241

$1,829

TOTAL

$6,713

$4

$5,758

(Nielsen, Mitchell & Nørreklit, 2015)
Task 3:
The case explains about the new promotional activities of the business. It brief how much profits could be generated by the business through promoting the centre in better manner in the market. The case brief that a wellness centre has been started by the business and now the management is planning to promote it through various promotional events. The case explains that various tools and sources are available through which the promotion could be done in better way by the business. The total budget of the wellness centre for these promotional activities is $ 20,500 (Haney, 2009). The case explains that the given list must be managed by the promoters.
It has also been measured through the market feasibility that the business should promote the business and the wellness centre to improve the cash inflows and the profitability level of the business. The evaluation express that the following cost of the promotional activities of the business would be:

 

Venue Costing

Item

Price(excl GST)

GST

Price (incl GST)

Quantity required

Total Cost

Chair cover hire

$8

$0.80

$9

300

$2,640

Gift hampers

$15

$1.50

$17

10

$165

Open entertainment

$30

$3.00

$33

3

$99

Balloon Canterpieces

$5

$0.50

$6

30

$165

Guest gifts

$8

$0.82

$9

300

$2,706

Food

$30.08

$3.01

$33

300

$9,926

Beverages

$9

$0.90

$10

300

$2,970

AV system and staging

 

$0.00

$0

 

$0

Event staff rate

$22

$2.20

$24

$70

$1,694

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$20,365

Task 4:
The case explains about the various expenses which have been bear by the company in order to use the conferences hall as a meeting room. The case brief $ 100 per person has been charged on company as the night charges in which $ 40 is the variable expenses of the event and the total fixed cost of the business was $ 10,000. These figures explain about the total cost which has been bear by the business in order to host the event (Higgins, 2012). 
The calculations explain that the contribution margin of the business is $ 60 as well as the margin (CM) of the business is 40%. It further adds into the evaluation that the total breakeven point of the business is 167 units and the break even amount of the business is $ 16,667. It also adds that if the company wishes to generate the total profit of 50,000 in the event then the company has to make sure that 1000 units have been sold in the market.
In addition, it has been found that the cost volume profit analysis is very beneficial and effective for a business to make various decisions about the production and sales of the business. The benefits of the CVP analysis have been already stated in the above given Task 4 (Haney, 2009).

CVP ANALYSIS

 

 

 

CM

 $      60.00

CMR

0.60

Break-even (units)

167

Break-even ($)

 $16,666.67

Number of units of service required to earn a target net profit of $ 50, 000

1,000

Conclusion:
The overall case explains that the various accounting and costing tool could are used by the companies to manage the performance of the business and make better decisions about the company. Each of the techniques is different and offer different results to the business such as buy or rent budget, market feasibility etc. On the basis of each of these techniques, different suggestions have been given to the management of the company.  The company is suggested to control over the expenses and follow the efficiency accounting and costing process to improve the profitability level.
References:
Bonner, S. E. (2008). Judgment and decision making in accounting. Prentice Hall.
Chandra, P. (2011). Financial management. Tata McGraw-Hill Education.
Haney, L. H. (2009). Business Organization and Combination. BiblioBazaar, LLC.
Higgins, R. C. (2012). Analysis for financial management. McGraw-Hill/Irwin.
Madhura, L. (2015). Financial management. Tata McGraw-Hill Education.
Nielsen, L. B., Mitchell, F., & Nørreklit, H. (2015, March). Management accounting and decision making: Two case studies of outsourcing. In Accounting Forum (Vol. 39, No. 1, pp. 64-82). Elsevier.
Ward, K. (2012). Strategic management accounting. Routledge.
Weygandt J., Kimmel P., Kieso D. (2009). Managerial Accounting:Tools for business decision making. John Wiley & sons.
Zimmerman, J. L., & Yahya-Zadeh, M. (2011). Accounting for decision making and control. Issues in Accounting Education, 26(1), 258-259. 

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