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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