Analysis of Cash and Credit Sales, Debt Collection, Cash Collected from Credit Sales - Assignment Example

QUESTION 1 Required a. Prepare schedules for monthly cash receipts and cash disbursements for the life of this Venture. Show all workings and supporting schedules. Cash sales = 10% of total sales Credit sales = 90% of total sales ANALYSIS OF CASH & CREDIT SALES September October November December January Unit Sales 12,000.00 22,000.00 32,000.00 40,000.00 - Cash Sales (10% × 12, 000× 50) (10% × 22, 000× 50) (10% × 32, 000× 50) (10% × 40, 000× 50)   60,000.00 110,000.00 160,000.00 200,000.00   Credit Sales (90% × 12, 000× 55) (90% × 22, 000× 55) (90% × 32, 000× 55) (90% × 40, 000× 55)   594,000.00 1,089,000.00 1,584,000.00 1,980,000.00   Total Sales 654,000.00 1,199,000.00 1,744,000.00 2,180,000.00   INFORMATION ON DEBT COLLECTION Discount Amount collected 30% of credit sales Cash within 10days: Discount of 4% 4% 96%     20% of credit sales Cash after 10 days: Discount of 2% 2% 98% 25% of credit sales cash one month following the sale 20% of credit sales Cash Two months following the sale CASH COLLECTED FROM CREDIT SALES September October November December January (96%×594,000) (96%×1,089,000) (96%×1,584,000) (96%×1,980,000)   30% of credit sales 171,072.00 313,632.00 456,192.00 570,240.00   (98%×594,000) (98%×1,089,000) (98%×1,584,000) (98%×1,980,000)   20% of credit sales 116,424.00 213,444.00 310,464.00 388,080.00     (25%×594,000) (25%×1,089,000) (25%×1,584,000)   25% of credit sales - 148,500.00 272,250.00 396,000.00       (20%×594,000) (20%×1,089,000)   20% of credit sales - - 118,800.00 217,800.00   Total from Credit 287,496.00 675,576.00 1,157,706.00 1,572,120.00   September October November December January (60,000+287,496) (110,000+675,576) (160,000+1,157,706) (200,000+1,572,120)   Cash Receipts 347,496.00 785,576.00 1,317,706.00 1,772,120.00   INFORMATION ON PAYMENTS MADE August Purchases paid in September and the september ones paid in October Discount Amount Paid 50% paid in the month of purchase : Discount of 4%   6% 94.00% 50% Paid the following month         ANALYSIS OF PURCHASES MADE September October November December January Total Sales 654,000.00 1,199,000.00 1,744,000.00 2,180,000.00   Add: Closing Balance 839,300.00 1,220,800.00 1,526,000.00 -   Less: Opening Balance 150,000.00 839,300.00 1,220,800.00 1,526,000.00   Purchases 1,343,300.00 1,580,500.00 2,049,200.00 654,000.00   Note: Closing balance is 70% 0f next months sales CASH PAYMENTS September October November December January Mail costs $2 $2 $2 $2   August & Sept Purchases 150,000.00 1,343,300.00 - -   4% Discount for 50% of monthly purchase   (50%×94%×1,580,500) (50%×94%×2,049,200) (50%×94%×654,000)   - 742,835.00 963,124.00 307,380.00   50% paid the following month     (50%×1,580,500) (50%×2,049,200)   - - 790,250.00 1,024,600.00   Total Cash Payments 150,002.00 2,086,137.00 1,753,376.00 1,331,982.00   b. Will had planned to simply write off uncollectables. However, his accounting professor suggested he turn them over to a collection agency. How much could Will let the collection agency keep (in dollars) so that so would be no worse off? Uncollectable passed on to a collectiong agency September October November December January (5%× 594,000) (5%×1,089,000) (5%×1,584,000) (5%×1,980,000)   5% of credit sales 29,700.00 54,450.00 79,200.00 99,000.00   QUESTION 2 Required: a) What is Briskay Aviation’s current monthly operating result? Occupancy rate 60%   Seats Available 250   Flights Per month 60   Ticket Price $120       (60%×250×60×$120) Total Revenue per month   $1,080,000 FIXED COSTS Flight Costs     Fuel $3,200   Crew $2,250   Others $7,900   Fixed Costs per flight $13,350 ($13,350×60) Total Fixed Costs   $801,000 VARIABLE COSTS Snack & Drink per passenger $10   Booking costs & Govt levies per passenger $6   Variable cost per passenger $16       (60%×250×60×$16) Total Variable costs   $144,000 Contribution ( Sales Less Variable Costs $936,000 b) What is the company’s current break-even point in passengers per flight, and occupancy %? Break Even = F (SP – VC) = 801,000 ÷ 104 = 7,701.92 ($7,701.92 ÷ 60) Break even per flight 128.37 Break even in occupancy (60% × 128.37) = 77.02 c) Next month (November), assuming food and drink costs do increase:  what ticket price would need to be charged to maintain the current contribution margin ratio? If food and drinks rise at 30% , the variable cost will change as below Snack & Drink per passenger $13 Booking costs & Govt levies per passenger $6 Variable cost per passenger $19 Contribution = Selling price - Variable cost 104 = x-19 Therefore, the selling price would be ($104+19) Ticket price = $123  if ticket prices are not increased, how many passengers would need to be achieved to maintain the company’s current after-tax operating result ? What occupancy rate would this represent? Contribution = Selling price - Variable cost Total Revenue per month $1,080,000 Total Variable costs $144,000 Contribution = $936,000 After tax operating results (1-0.25) × $936,000 $702,000 702000= ×-144000 x= ($702,000+144,000) Total Revenue= $846,000 Passengers ($846,000÷120) = 7,050 If 60% occupancy rate = (60%×250×60) = 9,000 passengers So?% = 7,050 (60%×9,000)÷7050 = 76.6% occupancy rate d) In addition to the increase in costs of food and drink, if aviation fuel prices increase by 20% in December, how many passengers would then be needed to maintain the company’s current after-tax operating result, without increasing ticket prices? What occupancy rate would this represent? Occupancy rate 60%   Seats Available 250   Flights Per month 60   Ticket Price $120       (60%×250×60×$120) Total Revenue per month   $1,080,000 FIXED COSTS Flight Costs     Fuel $3,200   Crew $2,250   Others $7,900   Fixed Costs per flight $13,350 ($13,350×60) Total Fixed Costs   $801,000 VARIABLE COSTS Snack & Drink per passenger $10   Booking costs & Govt levies per passenger $6   Variable cost per passenger $16       (60%×250×60×$16) Total Variable costs   $144,000 Contribution ( Sales Less Variable Costs $104 $936,000 Profit $135,000 Total Fixed Costs (801000+ 20% ×3200×60)= 839,400 Total Variable costs (60%×250×60×$19) $171,000 Profit = sales - fixed costs-variable costs 135000 (x-839400-171,000) x = (135,000+839,400+171,000) $1,145,400 Total Passengers = (1,145,450÷120) = $9,545 If 60% occupancy rate = (60%×250×60) = 9,000 passengers So?% = 9,545 (60%×9,000)÷9,545 = 56.6% occupancy rate QUESTION 3. (a). Cost of each product in the sample using the firm’s current (2014) allocation base. All production overheads are allocated on the basis of units produced. Therefore; Allocation rate = total overhead cost ÷ number of units produced Allocation rate = $ 16500000 ÷ 2500000 = $ 0.66 per unit J-275 R-895 T-28A Y-477 Units 200,000 1,000 14,000 90,000 Material cost ($) 235,000 590 2,800 50,000 Labour cost ($) 65,000 80 1,100 10,000 Overheads allocation ( 0.66) 132,000 660 9,240 59,400 Total costs of products($) 432,000 1330 13,140 119,400 (b) Two allocation bases; First allocation base is based on the units produced. This means the number of units produced is the cost driver. Therefore; Allocation rate = 350,000 ÷ 2,500,000 = $ 0.14 per unit of each product The second allocation rate is based on the number of expeditors. Therefore; Allocation rate = 1,300,000 ÷ 25 = $ 52,000 per expeditor. If 25 expeditors = 2,500,000 units 1 expeditor = 100,000 units Therefore the expeditors cost is allocated to the four products based on the number of expeditors in the production of each product in the sample. The costs of each product; Costs of each product J-275 R-895 T-28A Y-477 Units 200,000 1,000 14,000 90,000 Material cost 235,000 590 2,800 50,000 Labour cost 65,000 80 1,100 10,000 General overheads (0.14 per unit) 28,000 140 1,960 12,600 Expediting cost ( 52,000 per expd) 104,000 520 7,280 46,800 Cost of each product 632,000 2,330 27,140 209,400 (c). Product lines involves a number of different products that are produced or manufactured at the same time. Product lines incur common costs but there are other cost that are directly attributed to each product respectively. These costs are costs relating to direct materials, direct labour and direct expenses. The cost of each product is different using the two different cost allocation approaches; the current method of cost allocation where overheads are allocated using a single allocation rate and the new method where two allocation rates are used. QUESTION 4 PART A a. Why Murphy will be reluctant to build the new plant. ROI is given by Divisional margin divided by divisional investment. ROI = 1,380,000 ÷ 7,500,000 × 100 = 18.4% Comparing the rate of investment for the new plant and the current rate of investment, the ROI of the new plant 18.4% is lower hence Murphy will be reluctant to build the plant. b. The residual income is given by; Profit before tax – ( required rate of returns × investment ) RI = 1,380,000 – ( 15% × 7,500,000 ) = $ 255,000 Murphy may will to build the new plant because his decision is based on the dollar returns earned from the investment. From the investment in the new plant, the WD will realize a residual income of $ 255,000. PART B 1. For the first proposal, if Murphy’s compensation is made fixed then this will demotivate Murphy and make him reluctant to make any investments. Unless the fixed compensation is reasonable, then Murphy will decline any investment proposals made. For the second proposal, Murphy may be induced into accepting proposal on investment. These compensation arrangements will encourage Murphy to concentrate on maximizing absolute amounts rather than percentages. This arrangement will also induce Murphy into investing since he is assured of his compensation basing it on the amount of returns by comparing the amount charged on capital invested and the residual income. However, this proposal still has a shortcoming in that it is not easy to determine the cost of capital The third proposal may be effective based on the degree of competition that may be posed on the managers across the board. Murphy’s performance if evaluated by comparing the RIs of other firms, the benefit of this is that it will improve the performance of Murphy over a period of time and this would mean his compensation will not be based on ROI and RI of WD. The disadvantage of this is that it is not an effective way of evaluating performance since firms have different capital and cost structures. 2. I would recommend the second proposal where Murphy’s compensation is based on the division IR. This is of benefit even to the firm since investment decisions on whether to accept or not will be based on the residual income that will be realized from the investment. Read More