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ACC10707 Garden Supply Company

  1. A garden supply company has the following business transaction estimates relating to the third quarter of 2018. 

Credit Sales                                                                                                     160960

Cash Sales                                                                                                        122104

Receipts from Accounts Receivable                                                                 97546

Wages                                                                                                               60080

Office Furniture                                                                                                12109

Prepayments                                                                                                       4722

Administrative Expense                                                                                     18818

Depreciation on Office Furniture                                                                       1454

Depreciation on PPE                                                                                          35000

Provision for doubtful debts                                                                              1454

Receipt of Loan                                                                                                  20000

Credit Purchases                                                                                                85450                  

Payments of Accounts Payable                                                                         69110

Accrued Wages and other expenses                                                                 9854   

Prepayments - Other                                                                                         1597

The cash balance at 1 July 2018 was $106826.

Required

Prepare a cash budget for the quarter ending 30 September 2018. Note that 1 mark will be deducted for each incorrect posting to the cash budget.

  1. The garden supply company is considering introducing various aged trees to their product range in 2019. They have provided the following information relating to its planned activities.

                                                                                                I year old       2 years old               3 years old

Sales mix                                                                              245,000                 125,000                     75,000

Selling price                                                                            $15                           $25                           $40

Variable cost/unit                                                                     10                              16                             25

Total fixed cost = $351,900

Required

  1. Calculate the contribution margin, sales mix and weighted average cost margin for each product. Also calculate the break-even point in total units and units per product based on the 2019 data.                                                                                                                                                                
  2. Management is concerned about competition for some of its trees, and wants to alter its sales mix of trees. The total number of trees forecast to be sold remains as per question 2a. This initiative would increase annual fixed costs by $60 000 and alter the sales mix to 40 percent for 1 year old trees, 30 per cent for 2 years old trees and 30 per cent for 3 years old trees . On the available data, would you recommend the initiative Show workings.  
  1. The garden supply company is also considering buying a small truck which costs $126 500 and is expected to earn annual net cash inflows of $63 400, $57 400, $47 000 and $39 900, before it wears out sufficiently to be unreliable and must be sold for an estimated $17 400. 

Required

  1. If funds can earn 5 per cent, what is the small trucks NPV
  2. If funds earn 8 per cent, what is the small trucks NPV
  3. Advise management on your recommendation regarding purchase of the small truck subsequent to your NPV calculations.
  4. What advice would you give management if the required payback period was two years

Show calculations for a, b and d.

Answer:

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Garden Supply Company

For the quarter ending 30-September-2018

Particulars

 

Amount

 

   

Cash balance 01-July-2018

 

$106,826

   

Receipts

   

Cash Sales

$122,104

 

Receipts from Accounts Receivable

$97,546

 

Receipt of Loan

$20,000

$239,650

 

   

Payments

   

Wages

-$60,080

 

Office Furniture

-$12,109

 

Prepayments

-$4,722

 

Administrative Expense

-$18,818

 

Payments of Accounts Payable

-$69,110

 

Prepayments - Other

-$1,597

-$166,436

 

   

Cash balance 30-September-2018

 

$180,040

Solution 

Particulars

1 year old

2 years old

3 years old

Selling price

$15

$25

$40

Variable cost/unit

10

16

25

Contribution margin

$5

$9

$15

Sales mix      = 245,000:125,000:75,000

                   = 0.55:0.28:0.17

Particulars

1 year old

2 years old

3 years old

Sales mix (a)

0.55

0.28

0.17

Contribution margin (b)

$5

$9

$15

Weighted average contribution margin for each product (a x b)

$2.75

$2.53

$2.53

Total weighted average contribution margin        = $2.75 + $2.53 + $2.53

                                                                   = $7.81

Total contribution margin     = (245,000 + 125,000 + 75,000) x $7.81

                                      = 445,000 x $7.81

                                      = $3,475,000

Total profit                        = Total contribution margin – Fixed assets

                                      = $3,475,000 - $351,900

                                      = $3,123,100

Weighted average cost margin for each product   = Total profit / Total sales

                                                                   = $3,123,100 / 445,000

                                                                   = $7.02

Break-even point (in units)  =       Fixed costs / 7.81

                                      =       351900 / 7.81

                                      =       45,058

Break-even point (in units) product wise

=       (Fixed costs / Total weighted average contribution margin) x (Sales / total sales)               

 1 year old     =       (351900 / 7.81) x (245000 / 445000)

                   =       24,807                  

2 years old     =       (351900 / 7.81) x (125000 / 445000)

                   =       12,657                  

3 years old     =       (351900 / 7.81) x (75000 / 445000)

                   =       7,594

(b)

Total profit                        = Total contribution margin – Fixed assets

                                      = $3,475,000 - $351,900

                                      = $3,123,100

New sales mix for 1 year old          =       40% x 445000

                                                =       178000                  

New sales mix for 2 years old         =       30% x 445000

                                                =       133500                  

New sales mix 3 years old             =       30% x 445000

                                                =       133500

New fixed cost         =       Old fixed cost + additional costs

=       351900 + 60000

                             =       $411,900

Particulars

1 year old

2 years old

3 years old

Sales mix (a)

178,000

133,500

133,500

Contribution margin (b)

$5

$9

$15

Total contribution margin (a x b)

$890,000

$1,201,500

$2,002,500

Total contribution margin     = $890,000 + $1,201,500 + $2,002,500

                                      = $4,094,000

Total profit                        = Total contribution margin – Fixed costs

                                      = $4,094,000 - $411,900

                                      = $3,682,100

Increase in profit due to change in sales mix        =       $3,682,100 - $3,123,100

                                                                    =       $559,000

Change in sales mix leads to increase in profit. Therefore, management should accept this new initiative.

Solution 3

Cost of small truck             =       $126,500.00

Salvage value of truck        =       $17,400.00

Year

Cash flows

Present Value Factor @ 5%

Present Value of cash flows

0

-$126,500.00

1.00000

-$126,500.00

1

$63,400.00

0.95238

$60,380.95

2

$57,400.00

0.90703

$52,063.49

3

$47,000.00

0.86384

$40,600.37

4

$57,300.00 (39900 + 17400)

0.82270

$47,140.85

 

   

$73,685.66

NPV    =       $73,685.66

Year

Cash flows

Present Value Factor @ 8%

Present Value of cash flows

0

-$126,500.00

1.00000

-$126,500.00

1

$63,400.00

0.92593

$58,703.70

2

$57,400.00

0.85734

$49,211.25

3

$47,000.00

0.79383

$37,310.12

4

$57,300.00

0.73503

$42,117.21

 

   

$60,842.28

NPV    =       $60,842.28

NPV is positive in both of above cases. Therefore, management should purchase trucks in both of above cases.

(d)

Year

Cash flows

Cumulative Cash flows

0

-$126,500.00

-$126,500.00

1

$63,400.00

-$63,100.00

2

$57,400.00

-$5,700.00

3

$47,000.00

$41,300.00

4

$57,300.00

$98,600.00

Payback period                  =       2 + (5700 / 47000)

                                      =       2.12 years

Actual payback period is 2.12 years whereas requirement is to have payback period of maximum 2 years. Therefore, based on this criteria, management should not purchase truck.

This problem has been solved.


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