Question 1 James runs a sandwich kitchen stall in a food market in Central London. The variable costs (e.g. bread, cheese and other ingredients) per sandwich are £3. He sells each sandwich for £6. He also pays himself a salary of £1,500 each month. The kitchen stall rent is £800 per month and the delivery vehicle cost per month is £700. Required: James has asked you, as the management accountant, to work out the following tasks: A. Determine the break-even point in terms of quantity and sales value (see the formula sheet). CPU = £6 − £3 = £3 B/E Quantity: £3,000 ÷ £3 = 1,000 sandwiches/ per unit B/E Sales Value: 1,000 sandwiches × £6 = £6,000 B. Explain what the break-even point means and why it is important to business managers. - break-even (level of activity) - formula - fixed and variable costs - CPU - importance C. Calculate the profit James will make if he plans to sell 2000 sandwiches a month (see the formula sheet). *Total Selling Price: 2,000 sandwiches × £6 = £12,000 **Variable cost: 2,000 sandwiches × £3 = £6,000 Total selling price* – (fixed + variable**) £12,000 – (£3,000 + £6,000) £12,000 – £9,000 = £3,000 D. Calculate the margin of safety in terms of quantity and sales value (see the formula sheet). MOS quantity: 2,000 sandwiches – 1,000 (b/e quantity) = 1,000 sandwiches MOS sales value: 1,000 sandwiches × £6 = £6,000 Section C consists of TWO COMPULSORY questions Question 2 Vera owns a florist shop. She plans to expand her business by opening more branches in the next year. Thus, Vera has drawn up the following budget for her next financial year: Budget Income £200,000 Direct costs: Shops rent £15,000 Purchase of flowers £18,000 Cost of other flower accessories £4,500 Staff wages £50,000 Operating costs (power etc.) £8,000 Total direct costs £95,500 Indirect overhead costs: Manager’s pay £25,000 Shop expenses £8,000 Marketing expenses £6,000 Tax £6,000 Total indirect overheads £45,000 Total costs £140,500 Anticipated profit £59,500 Vera tried to manage the business using this budget, which she prepared well in advance of the start of the year. She informed each section of the firm what their budget limits were. Vera was determined to look at and find reasons for all variances from her carefully prepared budget. The final actual figures were as follows: i) Income £185,000. Sales were significantly below budget. There was reduced demand of special bouquets due to their relatively high prices. ii) Purchase of flowers £20,000. A local shortage of flowers meant Vera had to pay a higher price to local wholesalers who required immediate cash payment. iii) Cost of flower accessories was £3,200 as Vera found a low cost supplier. But the supplier also required immediate cash payment. iv) Rent was £15,000 as agreed in the lease. v) Staff wages £55,500. The government increased statutory minimum wage during the year but this was not factored into the budget. vi) Operating costs £5,000. The price of fuel and water went down during the year. vii) Manager’s pay £20,000. Vera cut the manager’s bonus. viii) Shop expenses £5,000. Cost savings were successfully implemented (e.g. recycling paperclips). ix) Marketing and distribution £10,500. An advertising campaign was run to try to increase sales. x) Tax was £8,000. Required: A. Prepare a clearly set out variance analysis of the business, comparing the budget figures with the actual results. State the variances and show whether they are adverse or favourable. BUDGET ACTUAL VARIANCE (difference between budget an actual) £ £ £ Fav/Adv. Income 200,000 185,000 15,000 ADV Direct costs: Shops rent 15,000 15,000 0 - Purchase of flowers 18,000 20,000 -2,000 ADV Cost of other flower accessories 4,500 3,200 1,300 FAV Staff wages 50,000 55,500 -5,500 ADV Operating costs (power etc.) 8,000 5,000 3,000 FAV Total direct costs 95,500 98,700 -3,200 ADV Indirect overhead costs: Manager’s pay 25,000 20,000 5,000 FAV Shop expenses 8,000 5,000 3,000 FAV Marketing expenses 6,000 10,500 -4,500 ADV Tax 6,000 8,000 -2,000 ADV Total indirect overheads 45,000 43,500 1,500 FAV Total costs 140,500 142,200 -1,700 ADV Anticipated profit 59,500 42,800 16,700 ADV Total cost= direct + indirect Anticipated profit= income – total costs B. Reconcile the actual profit to the budgeted profit figure. PROFIT RECONCILIATION £ Budgeted Profit 59,500 Add: Favourable variances 12,300 Less: Adverse variances 29,000 Actual Profit/Loss 42,800 Favourable/adv- do not calculate totals or profits Ensure you calculate your INCOME! C. Evaluate (ad/disav) Vera’s Flower Shop’s performance using the analysis of variances. Question 3 ABC Ltd is a wholesale business selling mobile phones. The below information is extracted from ABC Ltd accounts at the year ended August 31, 2018. Credit sales £203,400 Credit purchases £142,000 Cost of sales £140,000 Opening inventory £18,500 Closing inventory £9,000 Trade receivable £35,700 Trade payable £18,200 Required A. Calculate the operating cash cycle for ABC Ltd (see the formula sheet) Average inventories turnover period (18,500 +9,000)/2 x 365 140,000 36 days = sell inventory Add: Average settlement period for trade receivables (customers) 35,700 x 365 203,400 64 days = get money from our customer Less: Average settlement period for trade payables (suppliers) 18,200 x 365 142,000 47 days = pay our suppliers Operational Cash Cycle: 36 + 64 – 47 = 53 days 53 days = transfer inventory into cash B. What is the significance of the OCC to ABC Ltd? C. Briefly explain how working capital can be used as a source of finance in the short term, giving examples. Reduce the average inventories turnover period A shorter time in selling inventories Reduce the average settlement period for trade receivables Shorten the time we allow customers in paying for the inventories. ABC Ltd need to be careful here because shortening the time we allow customers in paying their bills/invoices, could mean customers buying from somewhere else. Therefore, we could lose customers. Increase the average settlement period for trade payables Increasing the time we take to pay our suppliers. This could happen if we build a strong/long relationship with our suppliers, where the trust is established. New suppliers might give shorter periods.