Part a
Question - Yummy Burgers R Us operates a store in Melbourne City, and the following is its averagemonthly income statement:
|
Revenue
|
$
|
$
|
|
Food
|
50,000
|
|
|
Beverages
|
15,000
|
65,000
|
|
Cost of sales
|
|
|
|
Food (50% of revenue)
|
25,000
|
|
|
Beverages (20% of revenue)
|
3,000
|
28,000
|
|
Gross profit
|
|
37,000
|
|
Operating expenses
|
|
|
|
Wages
|
15,000
|
|
|
Operating supplies
|
5,000
|
|
|
Administration
|
3,000
|
|
|
Advertising
|
2,500
|
|
|
Repairs and maintenance of equipment
|
1,500
|
|
|
Utilities
|
2,500
|
|
|
Depreciation
|
1,000
|
|
|
Interest
|
1,000
|
31,500
|
|
Profit before tax
|
|
$5,500
|
The owner is currently preparing the budget for next year and is considering the followingalternatives:
1. Reducing the cost of sales for food from 50 per cent to 45 per cent. This would be achieved byreducing portions and improved purchasing. There would be no other changes.
2. Cutting the food cost from 50 per cent to 45 per cent and spending an additional $1500 onadvertising. The advertising should attract new customers and increase the volume of bothfood and beverage revenue by 20 per cent on present levels. The new customers would alsocause monthly other operating expenses to increase as follows:
|
Wages
|
$2000
|
|
Repairs
|
150
|
|
Supplies
|
400
|
|
Utilities
|
400
|
|
Administration
|
200
|
|
|
|
Required (group)
Prepare a budgeted average monthly income statement for both alternatives.
Required (your individual response)
Advise the ownerwhich alternative you consider best, with reasons.
Part b.
Question - Nardeb Company is a software producer and sales company. Currently, it pays all sales staffon a fixed base salary. Recently, management has been considering switching sales staff across toan incentive-based reward system. Nardeb's chief accountant Polly Xu has prepared somesummarised numbers (see below) for senior management to consider.
Michael Day comments that he cannot see the difference, as the sales level and profit areunchanged. Xu argues that it is the difference in cost structure that matters. She argues that theentity is better off staying with the current structure, because the increase in profit is greaterwhen sales levels increase than it would be with the incentive rewards.
|
|
With fixed rewards
|
With incentive rewards
|
|
Sales
|
$2,500,000
|
$2,500,000
|
|
Variable costs
|
1,500,000
|
2,000,000
|
|
Contribution margin
|
1,000,000
|
500,000
|
|
Fixed costs
|
750,000
|
250,000
|
|
Profit
|
$250,000
|
$250,000
|
Required (group)
a. Explain the basis of Polly Xu's argument.
b. Calculate the Contribution Margin Ratio under each alternative.
c. If sales were to increase by 10 per cent, which alternative would produce the highest increasein profit?
d. Prepare an income statement for each alternative (under the assumption of the increased sales in c. above).
Required (your individual response)
a. Briefly evaluate the contributions of Polly and Michael in the above situation, and then make your recommendations on the incentive rewards proposal. Are there any other factors that need to be considered in making such a management decision?
Part c.
Barton Company requested a sizeable loan from First Commonwealth Bank to acquire a large parcel of land for future expansion. Barton reported current assets of $1,900,000 ($430,000 in cash) and current liabilities of $1,075,000.
The bank initially denied the loan request for a number of reasons, including the fact that the current ratio was below 2:1.
When Barton was informed of the loan denial, the financial controller of the company immediately paid $420,000 that was owed to several trade creditors. The controller then asked the bank to reconsider the loan application.
Required (your individual response)
Please answer the following questions about Barton Company.
Based on these abbreviated facts, would you recommend that the bank approve the loan request? Why? Were the controller's actions ethical?