MANAGERIAL FINANCE
PROFESSIONAL 1 EXAMINATION - APRIL 2010
NOTES:
Section A – Answer Question 1 and Question 2 and either Part A or Part B of Question 3.
Section B – Answer Question 4 and either Part A or Part B of Question 5.
(If you provide answers to both Parts A and B in Question 3 and/or Question 5, you must draw a clearly
distinguishable line through the answer Part(s) not to be marked. Otherwise, only the first answer(s) to hand for
each of these questions will be marked.)
MANAGERIAL FINANCE TABLES ARE PROVIDED
TIME ALLOWED:
3 hours, plus 10 minutes to read the paper.
INSTRUCTIONS:
During the reading time you may write notes on the examination paper but you may not commence
writing in your answer book. Please read each Question carefully.
Marks for each question are shown. The pass mark required is 50% in total over the whole paper.
Start your answer to each question on a new page.
You are reminded that candidates are expected to pay particular attention to their communication skills
and care must be taken regarding the format and literacy of the solutions. The marking system will take
into account the content of the candidates' answers and the extent to which answers are supported with
relevant legislation, case law or examples where appropriate.
List on the cover of each answer booklet, in the space provided, the number of each question(s)
attempted.
The Institute of Certified Public Accountants in Ireland,17 Harcourt Street, Dublin 2.
THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND
MANAGERIAL FINANCE
PROFESSIONAL 1 EXAMINATION – APRIL 2010
Time allowed 3 hours, plus 10 minutes to read the paper.
1.
SECTION A
(Answer Questions 1 and 2 and either Part A or Part B of Question 3.)
C Limited, a video production company, is considering purchasing the technological rights for software which, with
the analysis of a golf swing expert, can diagnose problems in golfers’ swings and advise on how to correct same.
The license can be purchased from a recently formed US company AMGOLF Incorporated, for a one off payment
of €1,000,000, plus a royalty per instructional DVD produced. The license is for a three year duration. C Limited
plans to market this technology throughout Ireland and Europe.
C Limited has a WACC of 5% and management insist that all proposed investments achieve;
•
•
a positive NPV after three years.
a cash payback of 2.5 years or less.
The service will be offered through individual golf clubs. Each golf club that agrees to offer the service to members
will set aside five days over of a year, during which one video analyst and one swing expert will visit the club and
offer the service to members. It is expected that 100 clubs in Munster will be visited in year 1. Each year, C
Limited will recruit sufficient video analysts and swing experts (each working 250 days per year) to make the
projected number of visits.
Each club that agrees to the service will pay C Limited €200 per day, fixed for three years. In addition members
will pay a nominal €20 to have their swing analysed. If they wish to receive a more detailed swing analysis (which
is optional) they pay an additional €50, which includes a copy of their swing and related technical analysis on
DVD. The cost of purchasing each DVD for C Limited is €2, plus the payment of a royalty of €10 per DVD
produced, to be paid to AMGOLF INC. This royalty will remain fixed for the duration of the license. C Limited
expects that 20 members will visit its facility each day and that 30% of those will purchase the DVD.
The business is considered to be recurring i.e. the clubs that avail of the service will continue to use the service
on the same basis (other than the price charged to members for the DVD) each year thereafter.
Other relevant information includes:
•
•
•
The cost of purchasing DVDs for C Limited is expected to rise by €1 each year after year 1.
C Limited is confident that this is a relatively captive market and expects to increase prices charged to
members purchasing the DVD by 20% each year, commencing in year 2.
C Limited plans to extend the service to the Leinster region in year 2, visiting 400 clubs, and in year 3 to
visit a further 100 clubs in Connacht. Thereafter, it will consider entering the UK and continental European
markets.
Video Analysts are expected to be paid €30,000 per year in year 1. It is expected that Swing Experts will be paid
€50,000 per year in year 1. All wage costs are expected to increase by 10% per year commencing in year 2.
REQUIRED:
a)
Advise C Limited on whether they should purchase the proposed license based on a financial analysis alone.
(Ignore Taxation)
(17 Marks)
b)
Discuss four qualitative factors that C Limited should consider before making a final decision whether or not to
buy the proposed license.
(8 Marks)
[Total: 25 marks]
Page 1
2.
J Limited has produced football boots for a number of years. To combat falling sales since 2007 the company has
recently diversified into producing hiking boots. It has just launched it first hiking boot product. ‘the K2’. The
budgeted price to be charged for a pair of K2 boots is €205. Management are keen to receive a report on the
results of the first month of production and sales for the K2. J Limited budgeted to sell 2,000 pairs of K2 in its first
month of production and sale, March 2010.
J Limited employs standard marginal costing to plan, report and control the costs and revenues pertaining to each
product. The standard cost card for the K2 is as follows:
Standard Cost Card – K2 (Pair of Hiking Boots)
Direct Materials
5 Kg @ €10 per Kg
6 hours @ €10 per hour
Direct Labour
Variable Overhead
6 hours @ €2.5 per hour
Standard Cost Per K2
=
=
=
=
€50
€60
€15
€125
Fixed Overheads of €100,000 are expected to be incurred in the month of March 2010.
The following actual costs incurred and revenues generated for the K2 product for the month ended March 2010
were as follows:
•
•
•
•
•
•
•
•
•
3,000 pairs of K2 boots were produced and sold.
Gross revenues totalled €600,000.
€12 per Kg was spent purchasing raw materials.
All raw material purchased were used in the month.
A total of €192,000 was incurred on raw materials for the month.
€189,000 was incurred on labour costs.
21,000 labour hours were worked on the K2 during the month.
Variable overheads incurred totalled €84,000.
There was an overspend of €25,000 on fixed overhead for the month.
REQUIRED:
a)
Prepare a performance report for the K2 product, which must include an operating statement that reconciles the
budgeted profit to the actual profit for the month ended March 2010.
(16 Marks)
b)
Explain the key differences between standard marginal and standard absorption costing.
Page 2
(4 Marks)
[Total: 20 Marks]
3.
Answer either Part A or Part B.
A new client, HM Limited, manufactures and sells one product - a fur coat. Until recently the business was
particularly successful and HM’s Managing Director, Damien Knight, had never considered the cost base of the
company, as clients seemed happy to pay whatever price they were asked.
During 2009, HM Limited’s sales declined and Damien has noticed increased price sensitivity among its
customers (for the first time in the company’s history). He has realised that he must look at the company’s cost
base carefully. A friend has advised Damien that he needs to understand how the company’s costs behave and
that he should as a minimum, understand the company’s contribution to sales ratio, break even point and margin
of safety.
Another factor concerning Damien is that recently he has found it difficult to source the quantity of fur he requires
to satisfy indicative sales demand. In addition, the Italian silk he uses to line the fur coats is often unavailable from
suppliers.
Damien has approached you for advice.
REQUIRED:
Part A)
Prepare a briefing note for Damien Knight that explains the terms break even point and margin of safety and why
it is important for him to understand the company’s cost behaviour.
[Total: 15 Marks]
OR
Part B)
Prepare a briefing note for Damien Knight that:
1)
2)
explains the term limiting factor; and
sets out how HM Limited can maximise profits/contribution if it experiences:
(i)
(ii)
A single limiting factor in the forthcoming year.
more than one limiting factor in the forthcoming year.
Page 3
[Total: 15 Marks]
SECTION B
(Answer Question 4 and either Part A or Part B of Question 5)
4.
The following multiple choice question contains 8 sections, each of which is followed by a choice of
answers. Only one of the offered solutions is correct. Each question carries 2.5 marks. Give your
answer to each section on the answer sheet provided.
The most recently audited Statement of Financial Position of Z PLC reads as follows:
Assets
Z PLC
Statement of Financial Position as at 30th April 2010
Non-Current Assets
Land and Buildings
Plant and Equipment
Fixtures and Fittings
Current Assets
Inventories
Trade Receivables
Cash and Cash Equivalents
Total Assets
Equity and Liabilities
€2 Ordinary shares
12% €5 Preference shares
Accumulated Profits
2,099
215
465
12
692
500
750
862
Non-Current Liabilities
8% Irredeemable Debentures
5% Debentues (Redeemable 30/04/2012)
€Ms
2,791
2,112
200
300
Current Liabilities
Trade Payables
Short Term Borrowings
179
0
Total Equity and Liabilities
Q1)
€Ms
1,612
412
75
179
2,791
Further relevant details relating to Z PLC’s Statement of Financial Position as at 30/4/2010 are as follows:
•
Ordinary shares are presently trading at €5.50 cum-div.
•
Preference shares have an ex-div market value of €1.80.
•
Z PLC’s most recent board meeting agreed a dividend for the year of €0.50c per ordinary share. This will
be paid in one week’s time.
•
Z PLC expects an average annual rate of growth in dividends of 6%.
•
Redeemable Debentures (ex int) are presently trading at 88.33% of the value they were issued at.
•
Irredeemable Debentures (ex int) are trading at 110% of their par value.
•
Debenture interest is paid annually. All payments relating to the y/e 30/04/2010 have been made in full.
•
All preference share dividends have been paid for the year ended 30/4/2010.
•
Corporation tax of 20% is payable on profits in the year in which profits are reported.
Z PLC’s cost of Equity is:
a) 13.60%
b) 14.60%
c) 15.60%
d) 16.60%
Page 4
Q2)
Q3)
Q4)
Z PLC’s cost of Preference Shares is:
a) 13.33%
b) 23.33%
c) 33.33%
d) 43.33%
Z PLC’s approximate cost of redeemable debentures is:
a)
b)
c)
d)
4%
7%
11%
15%
Z PLC’s approximate WACC is:
a) 15%
b) 17%
c) 19%
d) 21%
One item of stock that Z PLC holds is a radio-controlled airplane. Relevant details pertaining to the airplane are
as follows:
Z PLC – Airplane
Purchase Price
Annual Demand
Ordering Cost
Annual Holding Cost
Q5)
Q6)
Q7)
Q8)
No buffer stocks are held.
€10 per unit
20,000 units
€1,000
25% of purchase price
Applying the Economic Order Quantity model, the EOQ for the airplane item is:
a) 1,000 units
b) 2,000 units
c) 4,000 units
d) 5,000 units
Assuming the EOQ model, the annual cost of holding the plane product is :
a) €1,250
b) €2,500
c) €3,750
d) €5,000
If Z PLC decided to order 5,000 units each time an order is made, without any prospect of a price reduction.
(assume instantaeneous replenishment of inventories). The annual inventory related costs (holding and ordering
cost combined) totals:
a) €10,250
b) €12,250
c) €14,250
d) €18,250
Assume Z PLC received a 1% price reduction for ordering in quantities of 5,000 units each time an order is made.
Calculate the change in total annual inventory related costs (including the quantity discount), compared to the
EOQ model totals:
a) €250
b) €750
c) €1,750
d) €2,750
Page 5
5.
Answer either Part A or Part B.
Part A)
D Limited, a manufacturer of photocopiers has been offered €785,000 to produce a prototype machine for a
potential future client. This client is a major distributor of photocopy machines. D Limited’s Financial Accountant
has prepared the following cost estimates to produce the prototype:
Cost Estimates – Prototype Photocopier
Direct Materials – X1 (1,000 Kgs)
Direct Materials – Y2
Direct Labour- Grade 2 - 300 hours@€50 per hr
Direct Labour – Grade 3 - 1,000 hours @ €40 per hr
Variable Overheads
Fixed Overheads Absorbed
Total Estimated Cost
€000s
100
40
15
40
30
25
250
D Limited expects to make a profit on the contract of €535,000. The Managing Director of D Limited has asked
you to review the costings. You have reviewed the Financial Accountant’s files and have found the following
footnotes:
•
•
•
•
•
•
Grade 2 labour hours are a limiting factor and presently earn a contribution of €30 per hour.
D Limited expects to have available 400 idle grade 3 labour hours. Additional labour of this type is hired
on a casual basis.
Material X1 is already in stock and initially cost €100 per Kg. The material is in short supply and is currently
used in a laser printer product which requires 2 Kgs per unit produced. Each laser printer produced
contributes €1,250 towards fixed costs.
Fixed overheads are an apportionment of D Limited’s head office costs. The proposed contract would
require extra production equipment to be leased at a cost of €10,000.
Material Y2 is in stock and cost €40,000. It is not used regularly and there is an option to sell it for scrap
for €20,000. €5,000 will to be incurred to transport the materials to the scrap dealer.
Variable overheads represent electricity costs incurred on the proposal.
REQUIRED:
1)
Determine the profit on the proposed contract if relevant costing principles are employed.
2)
(12 Marks)
Detail four non-financial issues that D Limited should consider in their decision whether or not to accept the
contract.
(8 Marks)
OR
Page 6
[Total: 20 Marks]
P.T.O
Part B)
X Limited’s management have experienced difficult trading conditions for the last eight months. The company’s
management team recently decided to embark on a cost reduction programme. This includes :
•
•
•
•
•
considering restructuring the company so as to reduce ‘middle management’ costs.
evaluating outsourcing of non-core activities.
discussing efficiency gains with all staff members.
reviewing the company’s investment in working capital.
attempting to reduce the company’s overdraft, on which interest is currently charged at 10% per annum.
This is 9% above the current bank base rate.
X Limited projects sales of €36 Million for the forthcoming year ended 31st May 2011. One half of all sales are
on credit with customers taking on average three months to settle their outstanding account. X Limited currently
experiences bad debts of 1.5% of all credit sales. X Limited’s management team are of the firm view that the
company’s credit control procedures are inadequate and that the company needs to strengthen its performance
in this area, through outsourcing or otherwise.
The company’s Financial Accountant has asked you to assist in the review of the company’s working capital
investment. This is linked to a proposal she has been working on for some time, on the potential for outsourcing
debtor collection to a factoring agency. The proposal, if implemented, will result in the elimination of the
company’s Credit Controller role. The Credit Controller has an annual cost of €34,000.
The draft contract from the factoring agency includes the following proposed terms:
•
•
•
•
Non-recourse factoring will be provided.
An annual commission of 3% of all debtors factored.
80% factor finance will be provided at a cost of base rate plus 6%.
All debts will be collected within 30 days.
REQUIRED:
Prepare a briefing note for X Limited’s management team which :
(i)
(ii)
Provides a financial evaluation (for the year ended 31st May 2011) of the proposal to outsource debt collection;
and
(11 Marks)
Lists six procedures that would be undertaken by an effective credit control function.
END OF PAPER
Page 7
(9 Marks)
[Total: 20 Marks]
SUGGESTED SOLUTIONS
THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND
SOLUTION 1
a)
MANAGERIAL FINANCE
PROFESSIONAL 1 EXAMINATION – APRIL 2010
The proposal achieves a positive NPV of €2,151,845 and pays back in the second year. Thus it meets both C
Limited’s investment criteria, and on financial grounds alone, should be invested in. Detailed workings are as
follows:
Swing Software Proposal
Details
Licence Purchase
Income from clubs
Base Income from members
DVD Income
DVD Cost
Royalty Payment
Wages
Total Annual Cashflow
Discount Factor
Present Value
Net Present Value
Note
1
2
3
4
5
6
Year 0
-1,000,000
-1,000,000
1
-1,000,000
Note 1
Clubs Visited
Days Per Club
Rate Per Day
Club Contribution
Note 2
Clubs Visited
Members analysed per day
Days Per Club
Members Analysed
Base Cost
Basic Members Contribution
Year 1
100,000
200,000
150,000
-6,000
-30,000
-160,000
254,000
0.9091
230,911
500,000
1,200,000
900,000
-45,000
-150,000
-880,000
1,525,000
0.8264
1,260,260
Year 1
100
5
200
100,000
Year 2
500
5
200
500,000
600,000
1,728,000
1,296,000
-72,000
-180,000
-1,161,600
2,210,400
0.7513
1,660,674
2,151,845
Year 3
600
5
200
600,000
Year 2
500
20
5
50,000
24
1,200,000
Year 3
600
20
5
60,000
28.8
1,728,000
Year 1
3,000
2
6,000
Year 2
15,000
3
45,000
Year 3
18,000
4
72,000
Year 1
100
20
5
10,000
3,000
50
150,000
Note 5
Members purchasing DVD
Royalty Per DVD
DVD Royalty
Year 1
3,000
10
30,000
Page 9
Year 3
Year 1
100
20
5
10,000
20
200,000
Note 3
Clubs Visited
Members analysed per day
Days Per Club
Members Analysed
Members purchasing DVD
Price Per DVD
DVD Income
Note 4
Members purchasing DVD
Price Per DVD
DVD Cost
Year 2
Year 2
500
20
5
50,000
15,000
60
900,000
Year 2
15,000
10
150,000
Year 3
600
20
5
60,000
18,000
72
1,296,000
Year 3
18,000
10
180,000
Note 6
Clubs Visited
Days Per Club
Days Visited
Video Analysts Required
Swing Experts Required
Video Analysts Wages Cost
Swing Experts Wages Cost
Total Wages Costs
Year 1
100
5
500
2
2
30,000
50,000
160,000
Year 2
500
5
2,500
10
10
33,000
55,000
880,000
Year 3
600
5
3,000
12
12
36,300
60,500
1161,600
Other Qualitative Considerations
•
can we attract the video analyst and swing experts to provide the level of service?
•
has the technology been tested?
•
Will the technology detract or compliment our existing product range ?
•
can we agree an early exit clause in the event that the anticipated sales volume does not materialize?
•
can we increase the permitted volume in the event that demand is higher than anticipated?
•
what will be the potential to extend the licence beyond the three year initial duration?
•
can we guarantee geographical exclusivity for the licence ?
•
how might the economic downturn affect the golfing industry ?
SOLUTION 2
Report
To: Board of Directors, J Limited
From: Advising Management Accountant
Subject: K2 Performance - Month Ended April 2010
Date: 8th August 2010
Introduction
This report explains the differences between employing standard marginal costing system and a standard
absorption costing system and presents the April 2010 operating statement for the newly launched K2 hiking boot.
Standard Marginal Costing Vs Standard Absorption Costing
Marginal costing does not include fixed overhead in unit costs. Fixed costs are treated as a period charge in the
profit and loss account. By contrast absorption costing absorbs fixed overheads in unit costs. As a result the under
or over absorption of fixed costs may occur. Where an organisation employs a standard marginal costing rather
than a standard absorption costing there will be two changes to the calculation of variances, namely:
•
there is no fixed overhead volume variance. This is because with marginal costing fixed overheads are not
absorbed into unit costs. Thus, the under or over absorption of fixed overhead does not occur.
•
the sales volume variance will be valued at standard contribution margin, not standard profit margin.
J Ltd K2 Operating Statement Month Ended April 2010
Variances
Details
Note
Favourable
Adverse
Budgeted Contribution
1
Less:Budgeted Fixed Costs
Budgeted Profit
Variances
Sales Price
Sales Volume
Direct Materials Price
Direct Materials Usage
Direct Labour Rate
Direct Labour Efficiency
Variable Overhead Expenditure
Variable Overhead Efficiency
Fixed Overhead Expenditure
Sub Totals
Net Variance
Actual Profit
2
3
4
5
6
7
8
9
10
11
Page 10
80,000
21,000
101,000
Total
160,000
-100,000
60,000
-15,000
-32,000
-10,000
-30,000
-31,500
-7,500
-25,000
-151,000
-50,000
10,000
Conclusion
During April 2010 actual profit exceeded budgeted profits. The main cause of this improvement has been the
increased unit sales. There are a number of cost and efficiency overspends which management must address
urgently in order to correct performance in future months.
Supporting Notes
Note 1) Budgeted Contribution
Budgeted Unit Sales * Standard Contribution Margin Per Unit
=
160,000
2,000*80
Note 2) Sales Price Variance
(Actual Unit Price - Budgeted Unit Price ) * Actual Units Sold
(200 - 205) * 3000
=
-15,000 Adverse
Note 3) Sales Volume Variance
(Actual Units Sold - Budgeted Unit Sales ) * Standard Contribution Margin Per Unit
(3,000-2,000) * 80
=
80,000 Favourable
Note 4) Direct Materials Price Variance
(Standard Unit Cost - Actual Unit Cost ) * Actual Units Purchased
(10 - 12) * 16,000
=
-32,000 Adverse
Note 5) Direct Materials Usage Variance
(Standard Unit Usage (for the actual level of production)- Acutal Units Used) * Standard Cost Per Unit
(15,000 - 16,000) * 10 =
- 10,000 Adverse
Note 6) Direct Labour Rate Variance
(Standard Hourly Rate - Actual Rate Per Hour ) * Actual Hours Worked
(10 - 9) * 21,000
=
21,000 Favourable
Note 7) Direct Labour Efficiency Variance
(Standard Hours (for the actual level of production)- Acutal Hours Worked) * Standard Rate Per Hour
(18,000 - 21,000) * 10 =
-30,000 Adverse
Note 8) Variable Overhead Expenditure Variance
(Standard Hourly Cost - Actual Cost Per Hour ) * Actual Hours Worked
(2.5 - 4) * 21,000
=
-31,500 Adverse
Note 9) Variable Overhead Efficiency Variance
(Standard Hours (for the actual level of production)- Actual Hours Worked) * Standard Cost Per Hour
(18,000 - 21,000) * 2.5 =
-7,500 Adverse
Note 10) Fixed Overhead Expenditure Variance
(Budgeted Fixed Overhead - Actual Fixed Overhead)
(100,000 - 125,000)
=
-25,000 Adverse
Note 11) Actual Profit
Actual Sales Revenues
Less: Actual Costs Incurred
Direct Materials
Direct Labour
Variable Overheads
Fixed Overheads
Total Costs
Actual Profit
600,000
192,000
189,000
84,000
125,000
-590,000
10,000
Page 11
SOLUTION 3
(a)
Briefing Note
To: Damien Knight, MD, HM Limited
From: Mr X, Accountant
Date:18th May 2010
Subject: Cost Behaviours and Related Issues
Contribution/Sales (C/S) Ratio
Measures the contribution (selling price less variable cost) delivered per € of sale. It is expressed as a ratio. The
higher this ratio the more intrinsically profitable the business will be.
Margin of Safety
A measure which calculates in percentage terms by how much budgeted/actual sales planned/achieved exceed
the break even point sales. The higher the margin of safety the better.
Cost Behaviours
Organisations need to be able to understand which costs are variable in nature and those that are fixed. By doing
so the organisation can:
•
determine unit costs
•
set prices to achieve acceptable margins
•
determine unit and overall business break-even points
•
make decisions such as the acceptance of a one –off contract
•
budget with increased accuracy
•
set standard costs
(b)
Briefing Note
To: Damien Knight, MD, HM Limited
From: Mr X, Accountant
Date:18th May 2010
Subject: Availability of Resources
Purpose
If it is likely that fur and Italian silk will be in short supply for the forthcoming year they could be considered limiting
factors.
Limiting Factor
A limiting factor exists when an organisation is prevented from making continuing profits, usually as a result of a
shortage of some necessary input resource. The limiting factor is the resource which presents the constraint. In
most organisations sales demand normally constitutes the limiting factor. However, it may also be an/any
combination of an input resource such as silk or fur.
Optimising Profit/Contribution with one Limiting Factor
Where there is a single limiting factor in existence, it’s use is optimised by applying the following rule:
PRODUCE FIRST THAT UNIT OF PRODUCTION WHICH DELIVERS THE HIGHEST CONTRIBUTION PER
UNIT OF LIMITING FACTOR.
Optimising Profit/Contribution with more than one Limiting Factor
If additional constraints are faced then the problem becomes significantly more complex. A technique such as
simplex method of linear programming could be used to determine the optimum quantity of each product to be
produced subject to the three constraints.
This would involve the following three steps:
Step
Step
Step
Step
1
2
3
4
–
–
–
–
State the problem algebraically, including the objective function and non-negativity constraints.
Formulating the initial simplex tableau
Running iterations to determine the optimal solution
Interpreting the final simplex tableau.
Page 12
SOLUTION 4
1)
2)
Cost of Equity (Gordon's Growth Model)
[.5*(1+.06)/(5)] +.06 =
16.60%
Cost of Preference Shares
Dividend Payable/Ex Div. Market value
= 60/(180) * 100 =
3)
Cost of Redeemable Debentures (IRR Calculation)
Year
Value
€000s
-265
0
1
2
Year
0
1
2
4)
5)
6)
7)
8)
33.33%
Discount @ 10%
Net C flow
€000s
-265.00
12.00
312.00
Net Present Value +
Interest
€000s
Tax Relief
€000s
Redeem
€000s
15
15
-3
-3
300
D factor
PV
€000s
-265
10.908
257.712
3.62
1
0.909
0.826
IRR(Cost of Debentures)=10%+[3.62/(3.62+18.69)]*(15%-10%) =
WACC
Note
Ordinary Shares (ex div)
1
Preference Shares (ex div)
2
Iredeemable Debentures
3
Redeemable Debentures at MV
4
Weighted Average Cost of Capital
MV
1,250,000,000
270,000,000
220,000,000
265,000,000
2,005,000,000
EOQ
Discount @ 15%
Net C flow
D factor
€000s
-265.00
1
12.00
0.87
312.00
0.756
Net Present Value % Cost
16.60%
33.33%
5.82%
10.81%
% Weight
62.34%
13.47%
10.97%
13.22%
100.00%
Net C flow
€000s
-265.00
12.00
312.00
PV
€000s
-265
10.44
235.872
-18.69
10.81%
WACC
10.35%
4.49%
0.64%
1.43%
16.91%
4000
Annual Holding Cost
4000
Average Stock = 2000 units * 10 * .25
ANNUAL STOCK HOLDING COSTS
€5,000
ORDER QUANTITY
5000
€6,250
€4,000
€10,250
Annual Holding Costs = 2500 units * 10 * .25
Annual Ordering Costs = 4 orders * 1000
TOTAL HOLDING AND ORDERING COSTS
TOTAL EOQ COSTS
TOTAL INVENTORY COSTS AT 4000 ORDER LEVEL
DISCOUNT (20000*10*.01)
OVERALL ANNUAL SAVINGS
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-€10,000
€10,250
-€2,000
-€1,750
Solution 5
(a)
C Limited - Relevant Cost of Photocopier
Detail
€000s
Explanatory Note
100,000
X1 - Cost
X1 – Opportunity Cost
625,000
Opportunity Cost
Y2
15,000
NRV
Grade 2 Labour
15,000
Grade 2 (300 @ €30)
9,000
Opportunity Cost
24,000
Casual Hours only
Grade 3 Labour
Variable Overhead
30,000
Relevant as variable
Fixed Overheads - Central Apportionment
0
Irrelevant as non-incremental
Fixed Overheads - Specific
10,000
Relevant as incremental
TOTAL RELEVANT COST
828,000
PRICE OFFERED
785,000
LOSS ON CONTRACT
43,000
Other
•
•
•
•
•
•
•
Considerations
should the company in principle accept loss making contracts
likelihood of further business from a major client
perhaps providing unrealistic price expectations
goodwill of clients for whom the G2 labour hours must be transferred
goodwill of clients for whom the X1 material must be transferred
ability to gainfully employ idle labour
ability to provide additional casual labour
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(b)
Briefing Note
To: Management Team, X Limited
From: Mr Bead, Financial Consultant
Date: 24th April 2010
Subject: Credit Control
Introduction
This note informs you on various issues related to improving your company’s credit control.
Projected Cost of Debtors – Do Nothing
The projected cost of debtors for the year ended 31st May 2011 if nothing changes is estimated at €870,000.
Details are as follows:
X Limited
Financial Evaluation Year Ended 31/5/2011
Present Position
Projected Credit Sales
Average Debtor Balance (3 Months)
Bad Debts @ 1.5% Gross
Cost of Investment in Debtors
Projected Cost of Present Debtors
€
18,000,000
6,000,000
-270,000
-600,000
-870,000
(6,000,000*10%)
Proposed Cost of Debtors – Outsourcing
The projected cost associated with the outsourcing option is €620,000. It is broken down as follows:
X Limited
Financial Evaluation of Outsourcing Proposal – Y/E 31/5/2011
Annual Credit Sales
Factor Commission 3%
Factor Finance @ 7%
Overdraft Cost @ 10%
Credit Controller Savings
Projected Cost of Proposal
€
18,000,000
-540,000
-84,000
-30,000
34,000
-620,000
(18,000,000/12*80%*7%)
(18,000,000/12*20%*10%)
Conclusion
There is a projected €250,000 annual saving to X Limited if the factors proposal was agreed and implemented
for the forthcoming year.
Credit Control Procedures
•
credit vetting (checks)
•
setting credit limits
•
sending out monthly statements
•
chasing overdue accounts
•
taking legal action for recovery
Page 15