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.

2. 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.

3. 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.

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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.