Question 1a

2013
Jan Feb March Apr May June July Aug
Sales 10000 11000 12100 13310 14641 16105.1 17715.61 19487.17
COGS 3000 3300 3630 3993 4392.3 4831.53 5314.683 5846.151
Gross profit 7000 7700 8470 9317 10248.7 11273.57 12400.93 13641.02

2014
Sales 10000 11000 12100 13310 14641 16105.1 17715.61 19487.17
COGS 3000 3300 3630 3993 4392.3 4831.53 5314.683 5846.151
Bonus 0 1000 1000 1000 1000 1000 1000 1000
Discount (2%) 200 220 242 266.2 292.82 322.102 354.3122 389.7434
Gross profit 6800 6480 7228 8050.8 8955.88 9951.468 11046.61 12251.28

There is aslight reduction in the amount of gross profit in the two years. The GP in the year ended 2013 is slightly higher than
This is because the workers are paid 1000 for the 10% increment in the sales revenues each year. Besides, the discount of 2%
from the sales to obtain the gross profit.

Question 1b
Barbara
2014
Sales 1250 1281.25 1313.281 1346.113 1379.766 1414.26 1449.617 1485.857
COGS 375 384.375 393.9844 403.834 413.9298 424.2781 434.885 445.7572
Bonus 0 250 250 250 250 250 250 250
Discount (2%) 25 25.625 26.26563 26.92227 27.59532 28.28521 28.99234 29.71714
Gross profit 850 621.25 643.0313 665.357 688.241 711.697 735.7394 760.3829
Margin 0.68 0.484878 0.489637 0.49428 0.49881 0.503229 0.507541 0.511747

The sales representative is likely to offer an interest rate of 2% to the customers. Barbara will increase the sales revenues by 2
account for 12.5% of the total sales. The seller will have amargin of between 485 and 52%.
Chris
2014
Sales 3750 4031.25 4333.594 4658.613 5008.009 5383.61 5787.381 6221.434
COGS 1125 1209.375 1300.078 1397.584 1502.403 1615.083 1736.214 1866.43
Bonus 0 750 750 750 750 750 750 750
Discount (2%) 187.5 201.5625 216.6797 232.9307 250.4005 269.1805 289.369 311.0717
Gross profit 2437.5 1870.313 2066.836 2278.099 2505.206 2749.346 3011.797 3293.932
0.65 0.463953 0.476933 0.489008 0.50024 0.510688 0.520408 0.529449

Chris will generate 37.5% of the total sales. They are likely to increase the sales by 7.5% hence getting amonthly bonus of 750
clients adiscount of 5% hence will have amargin of between 46% and 55%.

Antony
2014
Sales 3000 3180 3370.8 3573.048 3787.431 4014.677 4255.557 4510.891
COGS 900 954 1011.24 1071.914 1136.229 1204.403 1276.667 1353.267
Bonus 0 600 600 600 600 600 600 600
Gross profit 2100 1626 1759.56 1901.134 2051.202 2210.274 2378.89 2557.624
Margin 0.7 0.511321 0.522001 0.532076 0.541581 0.550548 0.559008 0.566989

The seller will generate 30% of the sales revenues. They will increase the revenues by 6% and will receive abonus of 600 each
margin ranges from 51% to 59%.

Diane
2014
Sales 2000 2080 2163.2 2249.728 2339.717 2433.306 2530.638 2631.864
COGS 600 624 648.96 674.9184 701.9151 729.9917 759.1914 789.5591
Bonus 0 400 400 400 400 400 400 400
Gross profit 1400 1056 1114.24 1174.81 1237.802 1303.314 1371.447 1442.304
Margin 0.7 0.507692 0.515089 0.522201 0.529039 0.535615 0.541937 0.548016

The seller will generate 20% of the sales revenues. They will increase the revenues by 4% and will receive abonus of 400 each
margin ranges from 50 to 57%.

Question 1c
2014
Sales 10000 11000 12100 13310 14641 16105.1 17715.61 19487.17
COGS 3000 3300 3630 3993 4392.3 4831.53 5314.683 5846.151
Bonus 0 1000 1000 1000 1000 1000 1000 1000
Discount (2%) 200 220 242 266.2 292.82 322.102 354.3122 389.7434
Gross profit 6800 6480 7228 8050.8 8955.88 9951.468 11046.61 12251.28

The current bonus is fixed at 1000 each month. This amount is sustainabel as the volume increases the unit cost of the bonus
However, this may be discouraging and should instead be apercentage of the sales revenues. The company should reach an a
the two types of employees on the best bonus package.
 Sept Oct Nov Dec
21435.89 23579.48 25937.42 28531.17
6430.766 7073.843 7781.227 8559.35
15005.12 16505.63 18156.2 19971.82

21435.89 23579.48 25937.42 28531.17

6430.766 7073.843 7781.227 8559.35
1000 1000 1000 1000
428.7178 471.5895 518.7485 570.6233
13576.4 15034.04 16637.45 18401.19

r ended 2013 is slightly higher than that of 2014.

h year. Besides, the discount of 2% offered is also deducted

1523.004 1561.079 1600.106 1640.108

456.9011 468.3236 480.0317 492.0325
250 250 250 250
30.46007 31.22157 32.00211 32.80217
785.6425 811.5335 838.0719 865.2737
0.515851 0.519854 0.52376 0.527571

will increase the sales revenues by 2.5% and will

6688.042 7189.645 7728.868 8308.533

2006.413 2156.893 2318.661 2492.56
750 750 750 750
334.4021 359.4822 386.4434 415.4267
3597.227 3923.269 4273.764 4650.547
0.53786 0.545683 0.552961 0.559731

ence getting amonthly bonus of 750. He will offer the

 4781.544 5068.437 5372.543 5694.896
1434.463 1520.531 1611.763 1708.469
600 600 600 600
2747.081 2947.906 3160.78 3386.427
0.574518 0.58162 0.588321 0.594642

and will receive abonus of 600 each month. Antony's

2737.138 2846.624 2960.489 3078.908

821.1414 853.9871 888.1466 923.6724
400 400 400 400
1515.997 1592.637 1672.342 1755.236
0.553862 0.559483 0.564887 0.570084

and will receive abonus of 400 each month. Diane's

21435.89 23579.48 25937.42 28531.17

6430.766 7073.843 7781.227 8559.35
1000 1000 1000 1000
428.7178 471.5895 518.7485 570.6233
13576.4 15034.04 16637.45 18401.19

ncreases the unit cost of the bonus decreases.

es. The company should reach an agreement with
Statement of financial position
Current assets 1 2 3 4 5
Cash and cash equivalents 100000 102500 105062.5 107689.0625 110381.28906
Receivables 105000 107625 110315.625 113073.51563 115900.35352
Inventories 80,000 82000 84050 86151.25 88305.03125
Total current assets 285000 292125 299428.125 306913.82813 314586.67383

Property, plant and equipment

Gross PPE 200,000 205,000 210,125 215,378 220,763
Accumulated depreciation -70,000 -71,750 -73,544 -75,382 -77,267
Net property plant and equip 130,000 133,250 136,581 139,996 143,496
Total non current assets 130,000 133,250 136,581 139,996 143,496
Total assets 415,000 425,375 436,009 446,910 458,082
Current liabilities
Short term debt 40,000 41,000 42,025 43,076 44,153
Account payable 25,000 25,625 26,266 26,922 27,595
Total current liabilities 65,000 66,625 68,291 69,998 71,748
Non-current liability
Long-term debt 60,000 61,500 63,038 64,613 66,229
Other long term liability 40,000 41,000 42,025 43,076 44,153
Total non current liabilities 100,000 102,500 105,063 107,689 110,381
Total liabilities 165,000 169,125 173,353 177,687 182,129
Stockholder's equity
Additional paid in capital 100,000 102,500 105,063 107,689 110,381
Retained earnings 150,000 153,750 157,594 161,534 165,572
Total stockholder's equity 250,000 256,250 262,656 269,223 275,953
Total liability and equity 415,000 425,375 436,009 446,910 458,082

Liquidity
Current ratio 4.384615385 4.384615385 4.384615385 4.384615385 4.384615385
Quick ratio 3.153846154 3.153846154 3.153846154 3.153846154 3.153846154

The company is liquid as the current ratio and the quick ratio is above avalue of one for all the ten years under review. This sh
its short term obligations when they fall due.

Operating cycle
Days of inventory 81.11111111 83.13888889 85.21736111 87.34779514 89.53149002
Days of sales outstanding 47.90625 49.10390625 50.33150391 51.5897915 52.87953629
129.0173611 132.2427951 135.548865 138.9375866 142.4110263
Question 2e
The management should put in efforts to make sure the operating cycle is significantly reduced. This can be achieved by redu

The company has apositive working capital indicating that the business is well managed.
Working capital 285000 292125 299428.125 306913.8281 314586.6738

Question 2f
There is need to have aggressive advertising in place to increase the inventory turnover.
The company can also modify the discount rates to make the debtors make early payments.
 6 7 8 9 10
113140.821289 115969.341821 118868.575367 121840.289751 124886.296995
118797.862354 121767.808912 124812.004135 127932.304239 131130.611845
90512.6570313 92775.473457 95094.8602935 97472.2318008 99909.0375958
330316.00752 346831.807896 364173.39829 382382.068205 401501.171615

226,282 231,939 237,737 243,681 249,773

-79,199 -81,179 -83,208 -85,288 -87,420
150670.45957 158203.982549 166114.181676 174419.89076 183140.885298
150,670 158,204 166,114 174,420 183,141
480986.46709 505035.790444 530287.579967 556801.958965 584642.056913

45,256 46,388 47,547 48,736 49,955

28,285 28,992 29,717 30,460 31,222
75335.2297852 79101.9912744 83057.0908381 87209.94538 91570.442649

67,884 69,582 71,321 73,104 74,932

45,256 46,388 47,547 48,736 49,955
113,141 115,969 118,869 121,840 124,886
191235.58 200797.36 210837.23 221379.09 232448.05

113,141 115,969 118,869 121,840 124,886

169,711 173,954 178,303 182,760 187,329
282,852 289,923 297,171 304,601 312,216
474,088 490,721 508,009 525,980 544,664

4.3846153846 4.3846153846 4.3846153846 4.3846153846 4.3846153846

3.1831501832 3.2117564975 3.2396817091 3.2669420347 3.2935533049

all the ten years under review. This shows and demonstrates that it can meet

91.769777268 94.064021699 96.415622242 98.826012798

54.201524699 55.556562816 56.945476887 58.369113809
145.97130197 149.62058452 153.36109913 157.19512661

reduced. This can be achieved by reducing the number of inventory.

330316.00752 346831.8079 364173.39829 382382.0682
Question 3a
standard Double Wardrobe (SDW)
Contribution

Sales 300
Variable costs
Direct material 48
Direct labour 32
Variable production overheads 10 90
Contribution 210
Contribution margin 70%

Question 3b (i) 120 units

Sales 25200
Costs
Direct materials 5760
Direct labour 3840
Variable overheads 1200 10800
Contribution 14400

Question 3b (ii) 120 units

Sales 25200
Costs
Direct materials 6804
Direct labour 5040
Variable overheads 1236 13080
Contribution 12120

Question 3b (iii) 112 units 112units

Sales 31920 31920

Costs
Direct materials 6350.4 5376
Direct labour 4704 3584
Variable overheads 1153.6 12208 1120 10080
Contribution 19712 21840

Question 3c (i)
Sales volume variance
Actual units sold 120
Budgeted unit sales 112
Standard contribution 210
1680

Question 3c (ii)
Sales price variance
=(Actual price-budgeted price)* standard units
9000

Question 3c (iv)
Direct labour rate variance
DL Rate Variance= (SR-AR) * AH
Standard rate $8
Actual rate 10.60606
Difference per hour ($3)
Actual hours 3.96
Direct labour rate variance -10.32

Direct labour efficiency variance

Actual hours * standard rate- standard hours * standard rate
Actual hours 3.96
Standard rate $8
Standard hours 4
Standard rate $8
Direct labour efficiency variance -0.32

Direct material price variance

(Actual price- budgeted price) * actual quantity
Actual price 0.7
Budgeted price 0.6
Actual quantity 81
8.1

Direct material quantity variance

(Actual usage in units- standard usage in units) * standard cost per unit
Actual usage 81
standard usage 80
standard cost 0.6
0.6
Variable overhead variance
Actual hours worked * ( Actual overhead rate- standard overhead rate)
Actual hours worked 112
Actual overhead rate 10.3
Standard overhead rate 10
33.6
Question 3d
Profit reconcilliation statement
Contribution (budgeted) 19712
Add
Direct materials 974.4
Direct labour 1120
Variable overheads 33.6 2128
Contribution (actual) 21840

Question 3e Actual Budgetted

Question 3b (iii) 112 units 112units Variance

Sales 31920 31920

Costs
Direct materials 6350.4 5376 -974.4
Direct labour 4704 3584 -1120
Variable overheads 1153.6 12208 1120 10080 -33.6
Contribution 19712 21840

The company has adverse variances that is caused by the actual direct material, labour and variable overheads.

Question 3f
Sales 363.33
Variable costs
Direct material 56.7
Direct labour 42
Variable production overheads 10.3 109
Contribution 254.33
Contribution margin 70% 272.8571

363.3333

Question 3g
The business should strive to make sure that there is cost minimisation. This will make sure
the direct costs are minimal hence correcting the variances.
e overheads.
Part 4
Question 1
Year 0 Year 1 2 3 4 5 6 7
Cash outla 550000
Cost savings 120000 120000 120000 120000 120000 120000 120000
Depreciation 50000 50000 50000 50000 50000 50000 50000
Financial cost 5500 5500 5500 5500 5500 5500 5500
-550000 64500 64500 64500 64500 64500 64500 64500

NPV (5%) ($49,474.38)

NPV (20%) ($232,987.96)

ARR -17.27%
Payback period 451500
98500 7.179091 Years
IRR (5% NPV) 3.01%
IRR (20% NPV) 3.01%

Part e
The business should not invest in the project as it has and negative NPV and the internal rate of return of 3.01%
is very minimal. Using adiscounting rate of 5% yields an NPV of -49474.38 whereas arate of 20% yields areturn of
-232988 Besides, the ARR of -17.27% is also discouraging as the business will be receiving aloss from the project
instead of aprofit.

Part f
Gearing
Alternative
Stocks Amount Loan Leverage
100% 550000 0 0%
50% 275000 275000 50%
25% 137500 412500 75%
10% 55000 495000 90%
Advantages(High leverage)
The pros of having ahigh leverage position implies that the business can take advantage of the available opportunities
by using the loan and overdraft as ameans of financing. As aresult the firm can get high returns on the invested funds
The company can make arrangements with the lenders and bond holders may be converted to equity

Disadvantages n(Low leverage)

The firm has to make periodic interest payments. This is normally deducted from the profits of acompany hence reducing
the profits of afirm.
This also increases the default risk of acompany.

Advantages(Low leverage)
The company will have alow risk

Disadvantage
The business will grow at aslow rate as it depends on the retained earnings that are usually very minimal.
 8 9 10

120000 120000 120000

50000 50000 50000
5500 5500 5500
64500 64500 64500

ate of return of 3.01%

of 20% yields areturn of
g aloss from the project

f the available opportunities

turns on the invested funds
ed to equity
ts of acompany hence reducing

y very minimal.
Question 5a
Year 1 Year 2 Year 3 Year 4 Year 5
Sales 170000 238000 272000 306000 340000
COGS 51000 71400 81600 91800 102000
Gross profit 119000 166600 190400 214200 238000
Expenses
Software costs 3750 3750 3750 3750 3750
Sales handler 2083.333 2083.333 2083.333 2083.333 2083.333
Net profit 113166.7 160766.7 184566.7 208366.7 232166.7
67% 68% 68% 68% 68%
Question 5b
The online selling will increase the revenues by more than 20% in the 1st year, 40% in year 2, 60% in year 4 and 100% in year
The company will have anet profit margin of 685 in each of the fiscal year. This is and slight increase as co pared to the curren
margins made by the company.
The weakness is there is increased cost in the form of software costs and the sales handler salaries.
60% in year 4 and 100% in year 5.
crease as co pared to the current