Management and Cost Accounting - Research Paper Example

From the problem statement, the following can be deduced:

Contribution,  C = F + P = £30,000 + £10,000 = £40,000

And, C/S ratio  C/S = £40,000 / £120,000 = 1/3

Therefore, Break Even Sales in £, BEP_Sales = F/(C/S) = £30,000 / (1/3) = £90,000

# 1c:

Given that:  Unit-sale price, U = £15 per unit, Unit marginal cost = £9 per unit,

and, Sales in Jan in £, S = £120,000, and fixed cost in Jan in £, F = £30,000, then

The volume of sales in the number of units sold in January = (£120,000) / (£15 / unit) = 8000 units.

Therefore, corresponding marginal cost in January, V = (£9 / unit) * (8000 units) = £72,000

Hence, contribution, C = S – V = £120,000 - £72,000 = £48,000

Therefore, C/S ratio C/S = £48,000/£120,000 = 0.4

It follows, Break Even Sales in £, BEP_Sales = F/(C/S) = £30,000/0.4 = £75,000

# 2:

1. Accounting profit is the difference between cash received and cash paid [False]

Accounting profit also includes cash receivable and cash payable.

1. Depreciation reduces the cash position [False]

Depreciation is not a form or source of finance. However, recording depreciation expense does have two important financial effects:

It reduces the profit available for dividends and may reduce the cash outflow for dividend payments

It reduces taxable income and the amount payable for income tax, which may also reduce cash outflows.

1. Tax paid reduces the cash position [True]

1. A proposed dividend increases the cash position [False]

1. A decrease in debtors increases the cash position [True]

1. An increase in creditors decreases the cash position [False]

# 3:

Annual depreciation is charged to the profit and loss account. It is an application of the accruals concept, designed to spread the cost of fixed assets over their useful economic lives. Depreciation reflects the net book value of assets in the balance sheet and is not a cash flow.

Given:   Useful life:          10 years

               Cost of ferry:      £ 5 million

               Salvage Value:    £ 1 million

Then,

Using Straight line depreciation method, the annual depreciation = (£ 5 million - £ 1 million) / 10

                                                                                                                           = £ 0.4 million per year

                                                                                                                           = £ 400,000 per year

The annual depreciation of £ 0.4 million is a non-tax expense, and yields benefits by reducing the company’s tax liability.

Using the reducing balance method, we first compute the percentage to charge each year based on the formula,

% depreciation = [1 – (Salvage Value/Initial Cost)1/n ]* 100, where n is the useful life of the asset.

In the given example, n=10, salvage value = £ 1 million, and initial cost = £ 5 million.

Therefore, % depreciation = [1 – (£ 1 million / £ 5 million)1/10 ] * 100 = 14.86%

Year

Net Book Value, £ (in millions)

0

5

1

4.26

2

3.62

3

3.09

4

2.63

5

2.24

6

1.90

7

1.62

8

1.38

9

1.17

10

1

 It will be noted that the reducing balance method depreciates the asset more heavily in the early years of the asset’s economic life, and closely reflects the actual diminution in the market value of an asset. 

The reducing balance method is more useful for tax purposes, whereas, the straight-line depreciation method is generally used for stakeholder reporting.

# 4:

Given, that the total fixed costs F, incurred in the shoe business are:

F = Salaries £100,000 + Advertising £40,000 + other fixed expenses £100,000 = £240,000

Denoting sales per unit as Sunit, and variable cost per unit (here it is purchase cost) as Vunit, then

Contribution on per unit basis, Cunit, C = Sunit – Vunit = £45 - £25 = £20

Therefore, the breakeven point (in units sold), BEP_Units = F / Cunit = £240,000/£20 = 12,000 units

Margin of safety, M, expressed as units M_Units = Budgeted_Units – BEP_Units = 25,000 – 12,000 = 13,000 pairs of shoes

Or, Margin of safety expressed as £value, M_Value = (13,000 units) * (£45/Unit)= £585,000

If a selling commission of £2 per unit is additionally introduced, then, Cunit would reduce from £20 to £18 (implying that Vunit increases to £27).

Denoting, the number of pairs to be sold to earn a profit (P) of £20,000, as N, then

Total Profit, P, in £value, P = Total Contribution – Fixed Cost

= (Cunit * N) – F

Or,  N = (P + F) / Cunit = (£20,000 + £240,000)/ £18 = 14,445 pairs of shoes

If additional advertisement cost of £30,000 is incurred, then, F increases to, £270,000; simultaneously raising selling price by 12.5% implies, £45 * 1.125 = £50.625,

Implying, New Cunit     = £50.625 - £25= £25.625.

Then, the new breakeven point (in number of units sold)       BEP_Units = £270,000 / £25.625 = 10,537 units