Faculty of Business and Law

Masters in International Business Management

Session 2020/2021

SUBJECT: BA7002: Financial Resources Management

DATE: 22 October 2020

TIME:

Instructions to Candidates

This paper contains THREE questions

Answer all THREE questions

Number of Pages: 1 – 3
Part 1

Required:

(a)
Product X Product Y
Direct Material 6,000 9,000
Direct Labour 15,000 15,000
Variable Overheads 3,000 6,000
Total 24,000 30,000

No. of units 3,000 3,000

Marginal cost per unit 8 10

(b)
Product X Product Y
Total Marginal Cost (3000 units) 24,000 30,000
Add: Total fixed overheads 12,000 18,000
(150000/75000*6000) (150000/75000*9000)
Total absorption cost 36,000 48,000
Absorption cost per unit 12 16

(c)
Product X Product Y
Sale Price per unit 15 15
Variable cost per unit (8) (10)
Contribution per unit 7 5

Fixed cost per unit (4) (6)

(12000/3000) (18000/3000)

Profit/ (Loss) per unit 3 (1)

(d)
In the above calculation we can see that in case of product X the sale price per unit
i.e. £15 covers all the production costs incurred i.e. variable £8 as well as fixed costs
£4, giving rise to a profit of £3 from the sale of a single unit of the product. Therefore,
company should produce product X.

While in the case of product Y the sale price per unit i.e. £15 covers the variable
costs £10 giving rise to contribution margin of £5 but if we add fixed cost £6 per unit
in production cost this gives rise to a loss of £1. Therefore, it is recommended that
company should not produce product Y because it will cause losses to the company
in long run.

(e)

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I don’t believe that absorption costing is appropriate for short-term decision
making. The reasons supporting my point are below:
Deviated Profit and Loss
When absorption costing is used it shows the profits of the company on higher
levels than they are during the accounting period under consideration. The
reason behind this is that whole costs that are fixed are not deducted from the
sales untils all the products produced by the company are sold.
The above phenomenon also misleads the management of the company as
well as the investors who are investing or are willing to invest in the company.
Operational efficiency is ignored
Absorption costing does not provide a good analysis of cost and volume as
compared to the analysis given by variable costing. If fixed costs constitute a
major component of costs of production(total), it’s not easy to find out
differences in costs which are being occurred at different production levels.
This situation leads to a difficulty for the management to make the best
judgment out of the analysis and decide procedures for best operational
efficiency.
Fails for Product-Line Analysis
Variable costing has been much helping than absorption costing in a situation
in which a company is willing to have a comparison between different
products’ potential of raising profits for the company. It is comparatively easy
to trace the profit differences rising from the production of an item in
comparison to another item by looking exclusively at the variable costs
incurred for the production.

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Part 2

(a)

Product A
Year 1 Year 2 Year 3 Year 4 Year 5
Fixed costs (other
570,000 570,000 570,000 570,000 570,000
than depreciation
Depreciation cost (900,000/5) 180,000 180,000 180,000 180,000 180,000
Total Fixed Costs 750,000 750,000 750,000 750,000 750,000

Revenue per unit

500 500 500 500 500
(given)
Variable cost per
350 350 350 350 350
unit (given)

Total fixed
costs/ (Sale
Breakeven point
price per unit- 5,000 5,000 5,000 5,000 5,000
(in units)
Variable cost
per unit)

Product B
Year 1 Year 2 Year 3 Year 4 Year 5
Fixed costs (other
240,000 240,000 240,000 240,000 240,000
than depreciation
Depreciation cost (800,000/5) 160,000 160,000 160,000 160,000 160,000
Total Fixed Costs 400,000 400,000 400,000 400,000 400,000

Sale price per unit

500 500 500 500 500
(given)
Variable cost per
400 400 400 400 400
unit (given)

Total fixed
costs/ (Sale
Breakeven point
price per unit- 4,000 4,000 4,000 4,000 4,000
(in units)
Variable cost
per unit)

(b)
150
After analysing the break-even point, and keeping in mind the
working capital requirements of the company, it is concluded the
100
even though proposal A provided more contribution margin
than proposal B, proposal B still provides increased number of
50
units other than break-even units due to low costs associated
with the proposal in terms of fixed costs. 2000 0
This decreases the company risk as it has low fixed costs Contribition Margin
1500
to cover by sale of product resulting from proposal B than
proposal A. Remaining units after deducting breakeven 1000

500
3
0
Remaing Break-Even Units
units from demand of product is calculated to be 2000 for product from proposal B
and 1000 of product resulting from proposal B.
This will contribute to increased profits from proposal B that would ultimately fulfil
company’s working capital requirements per annum, which could be invested in
future ventures.

(c)
Product A Product B
Sale price per unit A 500 500

Variable costs per unit B 350 400

Contribution margin per unit C=(A-B) 150 100

Break even units D 5000 4000

Total demand E 6000 6000
Remaining units F=(E-D) 1000 2000

Contribution margin per unit C 150 100

Expected Profit G= (C X F) 150,000 200,000

(d)
According to the above analysis it is clearly indicated 2000
that proposal B more suitable to the be accepted. This
1500
is mainly due to the following main reasons;
Risk: Since, the variable costs associated with 1000
proposal B are less than proposal A, it enables the
company to account for the fixed costs with fewer 500
number of units. This leaves the company with 2000
0
units to obtain profits while only 1000 units from Remaing Break-Even Units
proposal A. 200000

Return: Due to increased number of units available 150000 to

obtain profits return from proposal B is more than 100000
proposal A as per calculation in part C. This further
contributes to the feasibility of proposal B, rather than 50000
proposal A. 0
Expected Return

(e)
I strongly agree with the statement due to some of the following reasons;
1. This method involves unrealistic assumptions such as constant sale price of
products. Sometime, discounts are also offered on bulk sale which cannot be
predicted and accounted for while using this method
2. This method also ignores waste material factor in production. According to this
method, output always equals to input which is not the case always. Sometimes,
portion of input is also wasted.
3. Constant variable cost is also an unrealistic assumption, as sometimes, due to better
negotiations with the suppliers, costs associated to variable factors might decrease,

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 or due to inflation they might increase also. This factor of change is also ignored by
this method.
Break-even analysis method is normally considered a better planning aid rather than a
decision tool.

Part 3

(a) Prepare a cash flow forecast (cash budget) for the three months ending 30
June 2012.

Cash Budget
April-12 May-12 June-12

Opening balance - 40,400 40,600

Capital 55,000

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 Cash received from cash Sale 6,400 7,200 8,000
Cash received from credit Sale - - 1,600

Payment for Purchases - - (4,000)

Payment for Furniture (18,000) - -
Payment for Insurance (3,000) - -
Payment for Operating expenses - (7,000) (7,000)

Closing balance 40,400 40,600 39,200

(b) Prepare a forecast income statement for the three months ending 30 June
2012.
Income Statement
April-12 May-12 June-12 Total

Sales 8,000 9,000 10,000 27,000

Cost of sales

Purchases 4,000 4,500 5,000 13,500

Opening Inventory - - - -

Closing inventory - - (2,000) (2,000)

(11,500)
Expenses

Depreciation expense (3,200) (3,200) (3,200) (9,600)

Insurance expense (1,000) (1,000) (1,000) (3,000)

Other operating expenses (7,000) (7,000) (7,000) (21,000)

(33,600)

Loss (18,100)

(c) Advise ‘Myrto’ Cosmetics on the key issues that have emerged from the
financial information you have prepared.
Following are some of the key issues that have emerged from the financials
information prepared as above;
1) Increased operating expenses have mainly contributed towards the loss of
“Myrto” Cosmetics. Optimizing operational expenses could prove
beneficial for the company in terms of loss converting into profit
2) 2 months credit period of remaining sale of each month (20%) should be
decreased, as this could pose liquidity issues for the company in future.
Moreover, this 20% is being restrained for investment in other ventures

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 due to credit allowance.
3) Closing inventory at 30-June-20 might be overstated, as according to
previous trends profit margin was 50%, however, company has sold goods
at 70% margin in the month of June according to closing inventory.
4) This increase in profit margin, could cause a loss of customers to the
company as they might prefer companies with cheaper sale prices.

(d) Critically examine the usefulness to business managers of cash flow

forecasts (cash budgets).

Some of the following conclusions relating to the usefulness of cash budgets to

business managers are as follows;
Advantages
1. Cash budgets allow companies to control to future financial health by making
informed decisions. This also allows the company for a steady growth
2. Cash budgets allows companies to attentively plan for cash inflows, to invest
in ventures.
3. Shortages in cash flows are timely predicted and appropriate strategies are
also devised for them, which enables the company to avoid solvency issues in
the long run
Disadvantages
1. Some of the unpredictable factors are ignored by cash budgets
2. Forecasts obtained from cash budgets are a rough estimate and might
provide the wrong predictions
3. Cash budgets are highly dependent upon the intellect of the individual
preparing such forecasts. Ignorance from any one individual along the chain
could create a forecast that might not predict the true picture of the company.