ACC10707 Session 2, 2017 Assessment 3

Business Analysis and Interpretation

1. The following information relates to a landscaping business. At 30 June 2018, it had a bank balance of $26500. Provided below are estimates for receipts and payments for the three months ending 30September 2018.

a. make a monthly cash budget for the three months ending 30 September 2018. 12 Marks.

b. The owners were wondering what the effect would be on the cash position if they did not buy the new equipment, but instead took advantage of a new rental arrangement. The equivalent equipment would cost $10000 per month under the rental arrangement. Redraft the cash budget to show the impact of the rental alternative. Based on the information available, should they lease or buy the equipment? 9 marks.

2. The landscaping business plans to introduce various aged trees to their product range in 2018. They have provided the following information relating to its planned activities.

I year old2 years old3 years old

Sales mix (250,000 units)125,00075,00050,000

Selling price$20$28$45

Variable cost/unit121827

Total fixed cost = $402,800

Required

a.Calculate the break-even point in total units and units per product based on the 2018 data. 15 marks.

b.Calculate the before tax profit (loss) that would be achieved in 2018 based on the above data. This calculation relates to the information from question 2 only. 2 marks.

c.Management is concerned about competition for some of its trees, and wants to increase its sales of 3 years old trees relative to 1 year old trees. This initiative would increase annual fixed costs by $50 000 and alter the sales mix to 30 per cent for 2 years old trees, 30 per cent for 3 years old trees and 40 per cent for 1 year old trees. On the available data, would you recommend the initiative? Show workings. 15 marks.

3. Deciding between two machines

Our landscaping business is now considering the purchase of one of two acceptable pieces of equipment. Each of these two pieces of equipment is expected to have individual advantages. The Office Manager who has calculated the information below is quite conservative and likes to rely on the Accounting Rate of Return (ARR) as the chief decision-support tool. The assistant office manager, on the other hand, is a new business graduate and has worked out the expected Internal Rate of Return (IRR) for the two items of equipment as shown below.

Required

a. What more financial information does the company owner need to make a decision? 2 mark.

b. Would you as the owner rely only on this information to make a decision? If not, why not? 2 mark.

c. If the calculated returns all exceed the entity's required minimum rate, which design would you recommend to the owner? Why? 3 marks.

Total of 60 marks which will be divided by 4 to represent 15% of available marks for subject ACC10707