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ACC00724 Accounting for Managers - Southern Cross University

Question 1

Solution:

A. Name the ratios that a financial analyst might calculate to give some indication of the following cases:

1. A company's earning power.

The earning power of the company can be determined by comparing the total assets with the earning power ratio. Thus, the net profit margin ratio can be used to estimate the earning capacity over the period (Kimmel, 2018).

2. The extent to which internal resources have been used to finance acquisition of assets.

The debt to asset ratio can be used to estimate the total assets that are being funded by internal resources.

3. Rapidity with which accounts receivables are collected.

The accounts receivable turnover ratio can be used to estimate the efficiency of the company to collect its debt or account receivables over the period.

4. The ability of the entity's earnings to cover its interest commitments.

The interest coverage ratio can assist to estimate the ability of the company to pay interests on the outstanding debts.

5. The length of time taken by the business to sell its inventories.

Inventory turnover ratio can be used to estimate the time length taken by the company to sell its inventories (Phylaktis, 2014).

B. Calculate and briefly discuss the suitability of the ratios mentioned for each of the above cases.

Profit margin ratio

2018

Net profit

94,500

Sales

8,50,500


11.11111



Debt to asset ratio

2018

Debt

63,000

Asset

4,34,070


0.145138





Accounts receivable turnover ratio

2018

Sales

8,50,500

Average accounts receivable

307125


2.769231



Interest coverage ratio

2018

EBIT

1,57,500

Interest payments

6300


25



Inventory turnover

2018

Sales

8,50,500

Inventories

2,20,500


3.857143

C. Given the above financial statements, comment on the company's profitability and liquidity.

The company is able to generate profit in the year 2018. The debt level is low in comparison to the asset of the company. The organization has efficient profitability and liquidity.

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Question 2

Solution:

A. Calculate the break-even point.

Break-even point= Fixed Costs/(Sales price per child-Variable cost per child)

                                 = 5600/ (600-200)

                                  = $14

B. Koala Bear's target profit is $10,400 per month, calculate the number of children who must be enrolled to achieve the target profit.

Number of child = 10,400/14

                              = 743

C. By how much should Koala Bear increase fees per child to meet the target profit of $10,400, assuming the same number of children as in requirement B?

Increase in cost = $3000+$1000

                              = $4000

Increase fees per child = 4000/743

                                          = $5.3

D. How can a company with multiple products calculate its break-even point? Discuss and support your discussion by readings and research.

A company with multiple products can calculate the breakeven point by using the following formula:

Break-even in units = Fixed Costs/(weighted average selling price-weighted average variable          

                                       expenses)

The formula is almost similar to the formula which is used by a company selling a single product. The main difference is that the "weighted average" term is placed in front of variable cost and selling price. The weighted average selling price includes all the selling price of all the goods an organization sells and decreases them into a single selling price (Watson and Head, 2019). The weighted average product cost includes all the costs of the goods an organization sells and decreases them into a single product cost.

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Question 3

Solution:

A. Calculate the predetermined overhead rates that should be used during 2014 in Department A and B.

Department A

Predetermined overhead rates= Estimated manufacturing overhead cost/ Estimated operating activity

                                                          = 162,500/80,000

                                                     = $2.03 per direct labor hour

Department B

Predetermined overhead rates= Estimated manufacturing overhead cost/ Estimated operating activity

                                                        = 215,000/172,000

                                                   = $1.25 per direct labor hour

B. Calculate the total overhead cost applied to job 145.

Total overhead cost

 

Department A

Department B

Direct material used

$450

$250

Direct labour cost

$120

$180

 

$570

$430

C. What would be the total cost of job 145? If the job contained 10 units, what would be the cost per unit?

 

Department A

Department B

Direct material used

$450

$250

Direct labour cost

$120

$180

Manufacturing overhead

$260

$358

 

$830

$788

Department A = 162,500/50000= 3.25

Manufacturing overhead = 3.25*80= $260

Department B= 215,000/12000 = 17.91

Manufacturing overhead = 17.91*20= $358

If the job contained 10 units then the cost per unit would be total cost/cost per unit

 

Department A

Department B

Total cost

830

788

Number of units

10

10

Cost per unit

$83

$78.8

 

 

 

D.  What factors should be considered in selecting a base to be used in calculating the overhead absorption or recovery rates? Discuss. Your discussion should be supported by readings and research.

The factors that should be considered to select the base in order to calculate the overhead absorption are as follows:

  • The overheads attributable to the provided cost center
  • The number of absorption base units that are machine-hours, labor hours, etc.
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