accounting for management

accounting for management
Paper instructions:
Scenario 1

TASK 1 & 2

Scenario 2

Task 1 & 2

Scenario 3

Task 1,2,3 & 4

Scenario 4

Task 1 & 2
Scenario 1

Lens Lawnmower business has been operating for a few years. They provide the following

information:

Current sales – Sqgmachines a year £80 each

Fixed costs £2000

Variable costs £50 per unit

Len is considering spending money on advertising his business. He thinks that he could
spend £1000 on 10 weekly adverts in the local newspaper. He would have to bear this cost
even if the campaign did not result in extra sales.

Task 1 Produce a break even graph which shows Lens potential performance taking into
consideration the additional advertising costs.

The chart should be named and properly labelled.
identify the fixed cost line
total cost line
profit area
the break-even point
the margin of safety
Task2 Answer the follbwing queries:
How many mowers would Len now have to sell to break even?
Use the formula to check this
How much income would Len receive if he sold 150 mowers?
What profit / loss would he make if he sold 150 mowers?
From the chart(s) what profit / loss would he make if he still sold 80 mowers, even

after the advertising cost.
Scenario 2
Mike Anderson is going to start a new business called ”Art Supplies”.

He has asked for your’ass«istance in preparing a cash budget for his first six months of
trading. He makes the following information available to you:

He will introduce £20000 of his personal savings into the business when it starts on 1
September 2012.
Fixed assets costing £8000 will be purchased in early September. The supplier has agreed
accept a 50% deposit payable at time of delivery. The remainder should be paid in equal
instalments over the next four months.
An initial stock of goods costing £5000 will be purchased for cash in September.
Forecast sales are as follows: _ Forecast purchases are:
September 2012 £3000 £1000
October £6000 £2000
November £6000 £2000
December £10500 £3500
January 2013 £10500 £3500
February £10500 £3500
Mike plans to allow two months for customers to pay him. Suppliers will allow Mike one
month to pay them.
Premises will be rented at £500 per month – but there will be a three month rent free
period at the start. General expenses_amount to £850 per month and will be paid in full
each month.
Mike intends to draw £1000 per month in cash from the business.
Task 1 Prepare a cash budget for the first six ‘months of the business.
Task 2 Following completion of the cash flow budget, you are required to advise
Mike whether, or not, he will have a requirement for additional funding.
What advice would you give to Mike? 3

Scenario 3
Draco and Sons run a fun fair. The business, which has been trading for several years,
is run by Andrew Draco and his two sons Ralph and Richard. The business is a sole trader in
the name of Andrew Draco only. They have up to £350,000 to invest in a new ride and are
trying to decide between the two with the following expected cash flows:
Ride A -will be built over a period of three months, requiring a 50% deposit to be paid
immediately – with the balance being paid one year from now. Receipts from the ride are
expected to be £90000 in the first nine months; £120000 in the next year and £135000 for
each of the next two years. Maintenance costs are expected to be £8000 per annum.
Ride B – will take a year to build with the whole cost – E350000 to be paid immediately.
Receipts in the first year of operation are expected to be £loo000; £140000 for each of the
next three years, and £100000 in the final year. Maintenance costs are expected to be
£12000 per annum.
Assume cash flows arise at the end of the year to which they relate unless told otherwise
Draco have a cost of capital of 6%.
The discount factors at 6% are as follows:
W Time 2 Time 3 Time 4 Time 5 \ Time 6
a 0.890 0.840 0.792 0.747 \ 0.705 l
You are asked to undertake the following:

 
Scenario 3
Draco and Sons run a fun fair. The business, which has been trading for several years,
is run by Andrew Draco and his two sons Ralph and Richard. The business is a sole trader in
the name of Andrew Draco only. They have up to £350,000 to invest in a new ride and are
trying to decide between the two with the following expected cash flows:
Ride A -will be built over a period of three months, requiring a 50% deposit to be paid
immediately – with the balance being paid one year from now. Receipts from the ride are
expected to be £90000 in the first nine months; £120000 in the next year and £135000 for
each of the next two years. Maintenance costs are expected to be £8000 per annum.
Ride B – will take a year to build with the whole cost – E350000 to be paid immediately.
Receipts in the first year of operation are expected to be £loo000; £140000 for each of the
next three years, and £100000 in the final year. Maintenance costs are expected to be
£12000 per annum.
Assume cash flows arise at the end of the year to which they relate unless told otherwise
Draco have a cost of capital of 6%.
The discount factors at 6% are as follows:
W Time 2 Time 3 Time 4 Time 5 \ Time 6
a 0.890 0.840 0.792 0.747 \ 0.705 l
You are asked to undertake the following:

 

ask 1.

Compute the net present values,.s.f each project
Based on your results

fortask

1, advise Draco3nd Sons which ride should be

I
Task 3:

chosen for investment. Give reasons for your comments. Compute the paybact purioJ, of each ride project, Does this change the

comments you made in response to task 2?
Task 4:

ln the scenario above, Draco and Sons already has f350000 in the bank.

lf the circumstances were different and they had to seek funding for the investment, you would be approached for your advice about this.
You are to prepare a report for Draco and Sons outlining their funding requirements, identify possible sources of funding (which can be internal or

external) and state the advantages and disadvantages of each source. lndicate whetherthe funding options are longterm or short term, and what

the potential costs and payment terms are?
How would your advice change if Draco and Sons became a limited company?

Scenario 4 John Smith operates a hardware shop – located on a side street near the town centre. business is struggling and he plans to discuss the issue with his banker, He prepares the attached financial statements for you to review.
His

Task 1:

You are to undertake an analysis of the business Iooking at profitability,

Iiquidity and efficiency. Within each of these areas, select appropriate ratios to aid your review – stating the formula and showing the calculation. Your analysis should cover each of the three years. This could be presented in a
table format.

Task 2:

Having undertaken the analysis, you should interpret your results and

 

present your findings in report format for Mr Smith. The results for task should be included as an appendix,
John Smith

Trading Profit and loss account _ 2011 2010 2009
Period ended 31 October
Sales 74480 78042 82458

Cost of sales
Opening stock 13750 10500 8000
Purchases 49086 44375 42140
Closing stock T‘ 18000 13750 10500
44836 41125 39640
Gross profit 29644 36917 42818
Expenses
Premises costs 9600 8000 8000
Wages ‘ 4250 8250 7500
Advertising 2000 2400 1200
Office administration 2480 3560 4450
v. 18330 22210 21150
Net profit 11314 14707 21668

ohn Smith
BALANCE SHEET 2011 2010 2009
Ao».
FIXED ASSETS
Office equipment 100 100 100
CURRENT ASSETS
Stocks 18000 13750 10500
Debtors 3800 4500 2800
Cash at Bank .\ 3249 12460
I 21800 21499 25750
CURRENT LIABILITIES
Bank Over draft 3240
Trade Creditors , 4600 3800 2444
Loan 3600
11440 3800 2444
NET CURRENT ASSETS 10360 17699 23316
10460 17799 23416
Capital Accounts
At start of period 17799 23416 18727
Net profit 11314 14707 21668
Drawings ? 18653 20324 16979
At end of period . 10460 17799 23416
Fixed assets consist of office equipment that is several years oid
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