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ACC00724 Analysis of Cash Flow Statement

Refer to the company you studied for Assignment one. Using some of the information you gleaned there, as well as additional information, calculate the cash cycle period for each of the five years. Then, reviewing the Statement of Cash flows for the most recent two years, evaluate the trends of overall cash flows, but particularly those related to cash flows from operatingactivities.
Telesmart Ltd. manufactures a high end smart phone with dual sim cards that is popular with young travelers. Related financial data for this product for the last year is as follows:
 Sales 5,000 units
 Selling price $420 per unit
 Variable manufacturing cost $144 per unit
 Fixed manufacturing costs $460,000
 Variable selling and administrative costs $36 per unit
 Fixed selling and administrative costs $500,000.

The CEO is under pressure from the Board of Directors to increase the profitability of the phones and has asked executives from different departments for suggestions. Three managers have responded with the following ideas:
a) The production manager, Aaron Jacobsen, suggests making improvements to the quality of the product. These quality improvements would increase the variable costs by $28 per unit.This would be accompanied by a $30,000 national advertising campaign which he expects would boost sales volume by 30%.
b) The sales manager, Joanne Arnett, believes that the product is unique, but not yet well known enough. Based on her market research, she feels that advertising should be increased by $50,000 and that the product would also be able to bear an increase in price of $60 with sales volume reduced by 10% from the current levels.
c) The marketing director, Jennifer Saunders, wants to undertake a promotion campaign where a $30 rebate is offered to the first 1,500 phones sold. She expects that the rebate program would boost sales by an additional 1,000 units if spending on advertising was increased by $60,000.

You have been asked by the CEO, Sharon Whitmore, to comment on each of these three proposals before she presents them to the Board of Directors. Draft a report in response to this request. You are not asked to make one particular choice or recommendation, but rather to explore the potential strengths and weaknesses that includes discussion on the breakeven,potential profits and, where possible, the margin of safety related to each proposal. Keep in mind that the sales volumes should be treated as estimates only and your report should consider potential variations in actual sales and their effects. Give both qualitative and quantitative support to your comments. 

Question 3
You are the accountant for FreeWheels Ltd, a tandem bicycle manufacturer that is located in Coffs Harbour and has customers in Australia and the USA. Their estimated current sales volume is 6,000 units per month and based on this level of production, the company has budgeted the following costs and prices per unit:
Manufacturing Costs per unit (Based on production of 6,000 units per month)
Direct Material Cost $75.00
Direct Labour Cost 35.00
Variable Factory Overhead 10.00
Fixed Factory Overhead 20.00
Total Manufacturing Cost 140.00
Selling & Administrative Costs
Variable Selling and Administrative Cost 25.00
Fixed Selling and Administrative Cost 20.00 45.00
Total Cost Per Unit 185.00
Selling Price Per Unit $370.00

Cycle World Ltd is an overseas company that sells bicycles all over the world, with the majority of their market in China and India. They have approached FreeWheels about obtaining a quote for a special one-off order as they would like to purchase 25,000 bikes. As this will be a special order sale, there will be no costs incurred for variable selling and administrative costs and no additional fixed costs will be incurred.
This order is because their existing supplier has suffered substantial earthquake damage to their premises, but the CEO of Cycle World Ltd also hinted to your CEO that if they are satisfied with the product, this might not be the last deal between the two businesses. 

Answer:

Cash Conversion cycle has been presented here-in-below:

Cash Conversion Cycle

Sl No

Particulars

2017 (Anon., 2017)

2016

2015 (Anon., 2015)

2014

2013 (Anon., 2013)

1

Inventory Turnover Period

58.36

60.57

59.95

60.05

63.34

2

Debtors Turnover period

32.03

30.71

31.41

36.15

43.46

3

Creditors Turnover Period

40.99

39.32

40.20

46.16

55.38

4

Cash Conversion Cycle

49.40

51.96

51.16

50.04

51.42

Note: Since data of purchase is not available, cost of sales have been taken into consideration.

Further, on analysis of Cash flow statement of past 2 years on may observe that cash flow from operating activity has shown an uptrend and has increased roughly by 5 Mio. Also, the same has been mainly on account of increase in receipt from customer. There has also been a significant increase in payment of expenses to employees. Further, one may also observe that cash and cash equivalent has increased.

Question 2

On analysis of the proposed suggestion given be respected personnel of the organisation, the following working has been obtained:

Profit point of view

Present Scenario

Sl no

Particulars

Per unit

Amount

1

Sales

5000

 

2

Selling Price

420

 

3

Variable Cost

144

 

4

Contribution

276

 

5

Contribution whole

 

1380000

6

Fixed Manufacturing Cost

 

460000

7

Variable Selling and Administrative Cost

 

180000

8

Fixed Selling and Administrative Cost

 

500000

9

Profit

 

240000

Suggestion 1

Sl no

Particulars

Per unit

Amount

1

Sales

6500

 

2

Selling Price

420

 

3

Variable Cost

172

 

4

Contribution

248

 

5

Contribution whole

 

1612000

6

Fixed Manufacturing Cost

 

460000

7

Variable Selling and Administrative Cost

 

234000

8

Fixed Selling and Administrative Cost

 

530000

9

Profit

 

388000

Suggestion 2

Sl no

Particulars

Per unit

Amount

1

Sales

4500

 

2

Selling Price

480

 

3

Variable Cost

144

 

4

Contribution

336

 

5

Contribution whole

 

1512000

6

Fixed Manufacturing Cost

 

460000

7

Variable Selling and Administrative Cost

 

162000

8

Fixed Selling and Administrative Cost

 

550000

9

Profit

 

340000

Suggestion 3

Sl no

Particulars

Per unit

Amount

1

Sales

6000

 

2

Selling Price

420/390

 

3

Variable Cost

144

 

4

Contribution

276/246

 

5

Contribution whole

 

1611000

6

Fixed Manufacturing Cost

 

460000

7

Variable Selling and Administrative Cost

 

216000

8

Fixed Selling and Administrative Cost

 

560000

9

Profit

 

375000

On the profit profit if one consider the best suggestion which maximises the profit of the group shall be suggestion 1 under which the profit has been maximised.

Break even point of view

Present Scenario

Sl no

Particulars

Per unit

Amount

1

Sales

5000

 

2

Selling Price

420

 

3

Variable Cost

144

 

4

Contribution

276

 

5

Variable Selling and Administrative Cost

36

 

6

Net Variable

240

 

7

Fixed Manufacturing Cost

 

460000

8

Fixed Selling and Administrative Cost

 

500000

9

Break even quantity

 

4000

Suggestion 1

Sl no

Particulars

Per unit

Amount

1

Sales

6500

 

2

Selling Price

420

 

3

Variable Cost

172

 

4

Contribution

248

 

5

Variable Selling and Administrative Cost

36

 

6

Net Variable

212

 

7

Fixed Manufacturing Cost

 

460000

8

Fixed Selling and Administrative Cost

 

530000

9

Break even quantity

 

4670

Suggestion 2

Sl no

Particulars

Per unit

Amount

1

Sales

4500

 

2

Selling Price

480

 

3

Variable Cost

144

 

4

Contribution

336

 

5

Variable Selling and Administrative Cost

36

 

6

Net Variable

300

 

7

Fixed Manufacturing Cost

 

460000

8

Fixed Selling and Administrative Cost

 

550000

9

Break even quantity

 

3367

Suggestion 3

Sl no

Particulars

Per unit

Amount

1

Sales

6000

 

2

Selling Price

420/390

 

3

Variable Cost

144

 

4

Contribution

276/246

 

5

Variable Selling and Administrative Cost

36

 

6

Net Variable

240/210

 

7

Fixed Manufacturing Cost

 

460000

8

Fixed Selling and Administrative Cost

 

560000

9

Break even quantity

 

4437.5

Suggestion 2 is best

Margin of Safety View point

Present Scenario

Sl no

Particulars

Per unit

Amount

1

Sales

5000

 

2

Selling Price

420

 

3

Break even quantity

4000

 

4

MOS Quantity

1000

 

5

Margin of safety sales

 

420000

Suggestion 1

Sl no

Particulars

Per unit

Amount

1

Sales

6500

 

2

Selling Price

420

 

3

Break even quantity

4670

 

4

MOS Quantity

1830

 

5

Margin of safety sales

 

768679.2

Suggestion 2

Sl no

Particulars

Per unit

Amount

1

Sales

4500

 

2

Selling Price

480

 

3

Break even quantity

3367

 

4

MOS Quantity

1133

 

5

Margin of safety sales

 

543840

Suggestion 3

Sl no

Particulars

Per unit

Amount

1

Sales

6000

 

2

Selling Price

420/390

 

3

Break even quantity

4438

 

4

MOS Quantity

1562

 

5

Margin of safety sales

 

656040

Suggestion 1 is best

Qualitative parameter

Suggestion 3 shall be best as the same is practical as discount under initial sales shall entice the customer and intense advertisement shall result in increased sales and the future sales can be made without discount. Thus, it shall be the most practical solution under the present scenario.

Question 3

Statement showing cost of production

Sl No

Particulars

Present Scenario

Scenario 1

Scenario 2

Scenario 3

1

Present Sales per year

72000

72000

72000

72000

2

Direct Material Cost

75

75

75

75

3

Direct Labour Cost

35

35

35

35

4

Variable Factory overhead

10

10

10

10

5

Fixed Factory over head

20

   

6

Variable selling and Admin cost

25

   

7

Fixed selling and Admin Cost

20

   

8

Cost of production

185

120

120

120

9

Additional cost on account of production being bottleneck

   

18.20

10

Total cost

185

120

120

138.20

Since profit data has not been provided, the contribution analysis has not been undertaken. Further, the additional cost on account of restricted production has been considered as bottleneck in scenario 3 and the additional cost of 65*7000 has been allocated over 25000 products.

Part 2 of question 2

If the production capacity had been 1,00,000 units company can think of long term vision and say yes to the present deal as the same shall expand the production capacity and economies of scale might also be achieved. Further, company will be able to pitch in a new customer and shall be able to make profit from it in the long run.

On social front, increased production creates positive image for the company in the form of employment generation and better market image. On economic front increase in profits over the long run and customer acquisition.

Further, I shall propose CEO of the company to charge dollar 120 per unit under the initial stage to acquire the customer and reap benefits of increased sales and profit in long run. The same shall be in line with the qualitative and quantitative requirements.

Bibliography

Anon., 2013. JB HI-FI.

Anon., 2015. JB HI-FI. 

Anon., 2017. JB HI-FI


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