Explain the calculation of unit costs and make pricing decisions using relevant information

SKU: Em007 Category:

Compare appropriate formats of financial statements for different types of business

 

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Learning Outcome

LO1: Understand the sources of finance available to a business

1.1 Identify the sources of finance available to a business

1.2 Assess the implications of the different sources

1.3 Evaluate appropriate sources of finance for a business project

 

LO2 : Understand the implications of finance as a resource within a business

2.1 Analyse the costs of different sources of finance

2.2 Explain the importance of financial planning

2.3 Assess the information needs of different decision makers

2.4 Explain the impact of finance on the financial statements

 

LO3 : Be able to make financial decisions based on financial information

3.1 Analyse budgets and make appropriate decisions.

3.2 Explain the calculation of unit costs and make pricing decisions using relevant information.

3.3 Assess the viability of a project using Investment appraisal techniques.

 

LO4 : Be able to evaluate the financial performance of a business.

4.1 Discuss the main financial statements.

4.2 Compare appropriate formats of financial statements for different types of business.

4.3 Interpret financial statements using appropriate ratios and comparisons, both internal and external.

 

Task 1

This tasks offers you the opportunity to achieve L.O. 1: 1.1, 1.2, 1.3

Task 1

Jon Christ is about to establish a small to medium sized business known as ‘Cosy Chairs’. ‘Cosy Chairs’ will be manufacturing special type of chairs which will bring comfort for those who have to sit long hours for their work.  Jon is strongly considering registering the business as a Public Limited liability company.

As a finance manager, you are required to

a.Identify the sources of finance available to a business. (AC 1.1)

b.Assess the implications of the different sources (AC 1.2)

c.Evaluate appropriate sources of finance for a business project (AC 1.3)

 

Task 2

This tasks offers you the opportunity to achieve LO2: 2.1, 2.2, 2.3, 2.4

a.Analyse the costs of different sources of finance (AC 2.1)

b.Explain the importance of financial planning (AC 2.2)

c.Assess the information needs of different decision makers (AC 2.3)

d.Explain the impact of finance on the financial statements (AC 2.4)

 

Task 3

This tasks offers you an opportunity to achieve LO3: 3.1, 3.2, 3.3

Task 3.1

Kurt Enterprises Cash budget for the second quarter of 2015

Jan

£

February

£

March

£

Receipts
  • Cash sales
20,00022,00025,000
  • Disposal of machinery
32,000
  • Receipts from customers
10,00013,50020,000
  • Bank loan
10,000
Total receipts 40,00040,50077,000
Payments
  • Wages and salaries
-11200-10000-12000
  • Operating expenses
-4500-2700-6000
  • Advertising
-2000-1200-3000
  • Raw material
-18000-16000-22000
  • Drawings
-12000
Total payments-47,700-29,900-43,000
Total receipts less payments-7,00010,60034,000
Opening balance3,000-15,00012,000
Closing balance-4000-4,40046,000

 

 

Martin Enterprise Cash budget for the second quarter of 2015

Jan

£

February

£

March

£

Receipts
  • Cash sales
20,00020,00025,000
  • Disposal of machinery
80,000
  • Receipts from customers
15,00030,00030,000
  • Bank loan
110,00020,000
Total receipts 225,00070,00055,000
Payments
  • Wages and salaries
24,50014,50016,500
  • Operating expenses
8,9007,5508,000
  • Advertising
2,50015002100
  • Raw material
5,00036003700
  • Drawings
6,300
Total payments4090027,15030,300
Total receipts less payments184,10042,85024,700
Opening balance-15,00087,00032,860
Closing balance169,100129,85057,560

 

You are required to;

a.Analyse the cash budgets for the first quarter of 2015 for Kurt and Martin Enterprise.

b.Make a decision on the actions to be taken to improve the cash budgets.

 

Task 3.2

Cosy Chairs Ltd wants to manufacture a special type of chair designed to alleviate the back pain. The costs are as follows:

  • Direct materials is £32 per chair
  • Direct labour is £40 per chair
  • Variable overheads are £15 per chair
  • Total fixed production overhead  £100,000
  • Number of chairs manufactured is 5,000
  • The selling price is £125 per chair and total sales are 4,500 cots.

 

You are required to;

a)Calculate the cost of producing a chair using marginal and absorption costing (AC 3.2)

b)Discuss why Cosy Chairs Ltd might use breakeven or contribution to price the chairs rather than full pricing method (AC 3.2).

 

Task  3.3

A market survey indicated that there is huge demand for revolving chairs. The net cash inflows directly associated with these chairs are:

YearRevolving chairs

£

150,000
253,000
360,000
467,000
572,000

 

There is the need to initially invest in a specialised machine of £90,000 for the revolving chair.

The estimated cost of capital is 7% per annum.

You are required calculate:

a.Payback period (AC 3.3)

b.The Net Present Value (NPV) (AC 3.3)

c.Advise Cosy Chairs Ltd whether the revolving chairs cots should be manufactured or not (with a justification)(AC 3.3).

 

Task 4

This tasks offers you an opportunity to achieveLO4: 4.1, 4.2, 4.3

Tasks 4.1 & 4.2

You are required to;

a)Explain the purpose of the Profit and Loss Account (or Income Statement), Cash flow Statement and the Balance Sheet.(AC 4.1)

 

a.You are required to compare the statements of financial position of J Bloggs (sole trader) and Blogg and Blagg (Partnership) business to identify the differences and similarities. (AC 4.2)

 

Task 4.3

The information was extracted from the statement of financial position and the income statements of company X and

Y for the same period

Company X

£

Company Y

£

Revenue489,168568,564
Cost of sales373,400429,883
Gross profit115,768138,681
Operating expenses31,42436,010
Operating profit84,344102,671
Trade payables38,32144,803
Trade receivables32,23739,876
Non-current liabilities46,22850,119
Capital employed80,00085,000

 

a.Using the information (above), calculate the ratios for company X and Y using the Formulae below: (AC 4.3)

 

RatioCompany XCompany Y
Gross profit margin

 

Gross profitx100%

Revenue

 

Operating profit margin

 

Operating profit x100%

Capital employed

 

Trade payable payment period

 

Trade payables x 365 days

Cost of sales

 

Trade receivable receiving period

 

Trade receivables x 365 days

Revenue

Gearing ratio

 

Non-current liabilities x100%

Capital employed

 

Interpretation of ratios

b)Using the results from the ratios you have calculated; please indicate with reason which company did better. (AC 4.3)

 

RatioWhich company did better (company X or Y)Please state the reason(s)
Gross profit margin

 

 

Operating profit margin

 

Trade payable payment period

 

 

Trade receivable receiving period

 

Gearing ratio

 

 

 

 

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