Planning of Receipts - Business Plan Example

ACC203 – Management Accounting [Name] [Student ID] QUESTION 1: BUDGETING 1. Yes indeed, the revised subscription/membership plan and fee structure would certainly improve the ability of Hawthorn Leisure Works (HLW) to plan its cash receipts. As we can see there are two sources of revenue available to HLW in the existing scenario that consist of yearly memberships/subscriptions and court fee. Here court fee is subject to the usage of the court which may vary at times like no hard and fast rule there for HLW to estimate revenues from court fee. On the other hand membership fee is one time at the start of year and it is and therefore it is certain. If new/revised plan is implemented then the variable factor which is subject to fluctuations is taken out and simply yearly membership will become the sole source of revenue which would be certain and would enable better planning of cash receipts. 2. REVENUE CALCULATIONS UNDER BOTH THE PLANS Following are calculations based on the data given in the problem Current Plan Membership income: Individual members (2000*25%*$45) = $22500 (25% members are of individual category) Student members (2000*25%*$30) = $15000 (25% members belongs to student category) Family members (2000*50%*$100) = $100000 (50% family members category) Total Membership Income (22500+15000+100000) = $137500 Court fee income: As there are total 10 courts so the income will be aggregate of all. Throughout peak season (181 days) Prime hours: (4 hours * 10 * 95% * $12 * 181 days = $82536 Non-prime hours: (8 hours * 10 * 55% * $8 * 181 days) = $63712 Throughout non-peak season (184 days) (12 hours * 10 * 30% * $6 * 184 days) = $39744 Total court fee 82536+63712+39744 = $185992 Total Revenue under present plan $137500+$185992 = $323492-------------------------------------------------------------------------- (1) Calculation of Revenue under Proposed Plan During promotional campaign Individual (1000 * 45% * $250) = $112500 Family (1000 * 45% * $450) = $202500 After promotions Individual (1000 * 25% * $300) = $75000 Family (1000 * 25% * $500) = $125000 Total proposed revenue (112500+202500+75000+125000) = $515000------------------------------------------- (2) Comparing the figures presented in (1) and (2) we see a substantial increase in revenue by $191508. Assumption: We have assumed that the percentage of continuing members is same for each class of membership. 3. (A) Key factors to be considered in assessment of newly proposed plan No. of memberships that will continue under new plan. Projected memberships under the newly proposed plan. Availability of court for the members for peak and non-peak seasons. Usage of court capacity in prime and non-prime hours. 3. (B) HLW should make a comparison of the revenue income under both the plans to assess the proposal completely. Moreover cash inflows & outflows should also be analyzed before any decision. 4. Under the current plan HLW is receiving cash throughout the year in the form of court fee hence there would be a constant inflow and outflow of cash. Unlike, if newly proposed plan is implemented then the circumstances would get changed. There will not be any regular inflow of cash and heavy cash inflow would occur at the time of membership renewals at the start of year. Hence the planning ability of the HLW’s cash receipt will be streamlined under new cash management practice. It would invest the extra cash that it get in the annual memberships in some productive investment and utilize when needed. QUESTION 2: PRICING & POSSIBLE PLANT CLOSURE Calculations of the best selling price for standard and commercial cases Statements of total contribution at different selling price for standard case Unit of Currency is dollar$ Particulars Selling price 18 20 21 22 23 Less: variable cost Direct material 7 7 7 7 7 Direct labor 4 4 4 4 4 Variable manufacturing overhead 1 1 1 1 1 Variable selling and administrative cost 4 4 4 4 4 Total variable cost 16 16 16 16 16 contribution 2 4 5 6 7 Sales volume(thousands) 120 100 90 80 50 Total contribution(thousands) 240 400 450 480 350 Statements of total contribution at different selling prices for commercial case Unit of Currency is dollar$ Particulars Selling price 25 27 30 32 35 Less: variable cost Direct material 8 8 8 8 8 Direct labor 4 4 4 4 4 Variable manufacturing overhead 2 2 2 2 2 Variable selling and administrative cost 5 5 5 5 5 Total variable cost 19 19 19 19 19 Contribution 6 8 11 13 16 Sales volume(thousands) 175 140 100 55 35 Total contribution(thousands) 1050 1120 1100 715 560 Decision Standard: The highest contribution in standard case is coming from selling price $22 i.e. $4, 80,000 hence management should select this selling price Commercial: The highest contribution in standard case is coming from selling price $27 i.e. $11, 20000 hence management should select this selling price 2(a) The management of company should continue its operations until January 1 of the next year in order to minimize their financial losses if administration shut down for a period of 6 months it would be considered as a temporary shutdown in this case fixed cost are constant and irrelevant of the decision. Then in this case the total contribution of standard and commercial cases would be $9,10,000 therefore it is recommended that company should continue till January 1st of the next year for minimizing on their loses Calculations are presented below Statements of total contribution at given volume of sales Unit of Currency is dollar$ Particulars Standard Commercial Total Selling price 23 35 Less: variable cost Direct material 7 8 Direct labor 4 4 Variable manufacturing overhead 1 2 Variable selling and administrative cost 4 5 Total variable cost 16 19 Contribution 7 16 Sales volume(thousands) 50 35 Total contribution(thousands) 350 560 910 2(b) The strategic factors that should be considered in deciding whether the Fremantle plant should be closed down during the last six months of the current year are given below Workforce: in order to retain the skilled and trained work force the plant should not be closed down even temporarily as it will lose the manpower and when company start its normal productions the cost to recruit manpower is saved Customers: the plant should not be closed down in order to retain the old and loyal customers otherwise company will lose them to competitors Mantainence of Plant and Machinery: when a plant is closed down the idle machinery get deteriorate so it will be a new cost in case company temporarily gets shutdown Inventory: the stock of inventory is likely to get obsolete in case of closure QUESTION 3: ACTIVITY-BASED COSTING 1(a) Calculation of the material handling rate that would have been used by Eloise Smith’s predecessor at East Coast Marine Material handling rate is the rate at which the total material handling department cost will be changed to direct material cost. The calculation consist of dividing the total material handling department cost to summation of the direct material cost involved. Following table shows its calculation Particulars Amount in $ Payroll $180 000 Employee benifits 36 000 Telephone 38 000 Other utilities 22 000 Materials and supplies 6 000 Depreciation 6 000 Total material handling dept. cost 288 000 Material handling rate =  MHR= = 10% 2(b) Revised Material Handling Cost Particulars Amount in $ Amount in$ Total material handling dept cost 242 000 Less: direct costs Direct govt. Payroll 180000 Fringe benefits(20% of 180 000) 36000 Direct phone line 2800. 218800 Material handling cost applicable to purchase order 23200 Divided by total no. of purchase order 23200 Material handling cost per purchase order 1 Hence the material handling cost /purchase order is $1 3). The purchase order might be more reliable cost driver than the dollar amount of direct material as the resources used in production are consumed in the process of purchase order 4 Calculate the difference due to the change to the new method of allocating material handling costs to government contracts Previous method Amount ($) Govt. Material 2 006 000 Material handling rate 10% Total previous method 20060 Less: cost under new method Directly traceable 218800 Purchase orders 80 000 Total new method 298800 Net reduction 278740 Hence the change in new method brings a net reduction by $278740 6 (a) Discussion on ethical conduct Following are the ethical issues referred to as standards of ethical conduct for management accountants i) Competence ii) Integrity iii) Objectivity 6(b) several steps that Smith could take to resolve the ethical conflict. Following are steps that should be taken to resolve ethical conflicts i) Follow policies of PAI ii) If above method should not work matter should be taken to supervisor iii) If still unresolved the resignation is the only option left . Read More