Task: Final Term Assignment (60% of the Final grade)
You must answer all the questions in the proposed business case. This task assesses the
following learning outcomes:
• Critically understand and apply all the steps and analysis of financial ratios.
• Properly elaborate a company´s financials.
• Critically interpret a company’s financials in relation to cost analysis and manufacturing productivity.
LAUNCH: WEEK 8 / DELIVERY: 13 DECEMBER, 2020, 23:59HRS ON MOODLE
Submission file format: Excel document with all the answers, clearly identifying all steps, results, journals and including comments besides each answer.
TASKS (100 points)
Problem 1.
You have been approached by a distant relative with a proposal to buy a 15 percent interest in a new clothing brand “Siam Red” . The firm manufactures prima cotton shirts, pants and other accessories like ties and hankerchiefs.
MCO103 MANAGERIAL ACCOUNTING Task brief & rubrics
Your relative, Uncle Pete shows you the increase in sales that has taken place over the last three years, as evident by the income statement, Exhibit 1. The annual growth rate is 25 percent. A balance sheet for a similar time period is shown in Exhibit 2, and selected industry ratios are presented in Exhibit 3. Note the industry growth rate in sales is only 10 to 12 percent per year. There was a steady real growth of 3 to 4 percent in gross domestic product during the period under study.
Exhibit 1
SIAM RED
Income Sheet
20X1 20X2 20X3
Sales (all on credit)............................................ $1,200,000 $1,500,000 $1,875,000
Cost of goods sold ............................................. 800,000 1,040,000 1,310,000
Gross profit ....................................................... $ 400,000 $ 460,000 $ 565,000
Selling and administrative expense*................... 239,900 274,000 304,700
Operating profit (EBIT) ..................................... $ 160,100 $ 186,000 $ 260,300
Interest expense ................................................. 35,000 45,000 85,000
Net income before taxes .................................... $ 125,100 $ 141,000 $ 175,300
Taxes ................................................................ 36,900 49,200 55,600
Net income ........................................................ $ 88,200 $ 91,800 $ 119,700
Shares ............................................................... 30,000 30,000 38,000
Earnings per share .............................................
*Includes $15,000 in lease payments for each year. $ 2.94 $ 3.06
$ 3.15
Exhibit 2
SIAM RED
Balance Sheet
Assets 20X1 20X2 20X3
Cash .................................................................. $ 30,000 $ 40,000 $ 30,000
Marketable securities......................................... 20,000 25,000 30,000
Accounts receivable .......................................... 170,000 259,000 360,000
Inventory ........................................................... 230,000 261,000 290,000
Total current assets ........................................ $ 450,000 $ 585,000 $ 710,000
Net plant and equipment .................................... 650,000 765,000 1,390,000
Total assets ....................................................... $1,100,000 $1,350,000 $ 2,100,000
Liabilities and Stockholders’ Equity
Accounts payable ..............................................
$ 200,000
$ 310,000 $ 505,000
Accrued expenses .............................................. 20,400 30,000 35,000
Total current liabilities .................................. $ 220,400 $ 340,000 $ 540,000
Long-term liabilities .......................................... 325,000 363,600 703,900
Total liabilities .............................................. $ 545,400 $ 703,600 $ 1,243,900
Common stock ($2 par) ..................................... 60,000 60,000 76,000
Capital paid in excess of par .............................. 190,000 190,000 264,000
Retained earnings .............................................. 304,600 396,400 516,100
Total stockholders’ equity ............................. $ 554,600 $ 646,400 $ 856,100
Total liabilities and stockholders’ equity ........... $1,100,000 $1,350,000 $2, 100,000
Exhibit 3
Selected Industry Ratios
20X1 20X2 20X3
Growth in sales ................................. — 10.00% 12.00%
Profit margin ..................................... 7.71% 7.82% 7.96%
Return on assets (investment) ............ 7.94% 8.86% 8.95%
Return on equity ................................ 14.31% 15.26% 16.01%
Receivable turnover........................... 9.02x 8.86x 9.31x
Average collection period .................. 39.9 days 40.6 days 38.7 days
Inventory turnover ............................. 4.24x 5.10x 5.11x
Fixed asset turnover .......................... 1.60x 1.64x 1.75x
Total asset turnover ........................... 1.05x 1.10x 1.12x
Current ratio ...................................... 1.96x 2.25x 2.40x
Quick ratio ........................................ 1.37x 1.41x 1.38x
Debt to total assets ............................ 43.47% 43.11% 44.10%
Times interest earned......................... 6.50x 5.99x 6.61x
Fixed charge coverage ....................... 4.70x 4.69x 4.73x
Growth in EPS .................................. — 10.10% 13.30%
The stock in the corporation has become available due to the ill health of a current stockholder, who is in need of cash. The issue here is not to determine the exact price for the stock, but rather whether Siam Red represents an attractive investment situation. Although you have a primary interest in the profitability ratios, you need to take a close look at all the ratios. You are yet to determine your investment strategy, as you prefer to analyze the overall condition of the firm. The firm does not currently pay a cash dividend, and return to the investor must come from selling the stock in the future. After doing a thorough analysis (including ratios for each year and comparisons to the industry), what comments and recommendations do you have about how you will proceed?
Problem 2
During this pandemic year, Siam Red sold 35,000 units of its disposable hankerchiefs for $16 each. Manufacturing and selling the product required $120,000 of fixed manufacturing costs and $180,000 of fixed selling and administrative costs. Its per unit variable costs follow.
Material $ 4.00
Direct labor (paid on the basis of completed
3.00 units)
Variable overhead costs 0.40 Variable selling and administrative costs 0.20
Through research and development, they discovered a new silk cotton hybrid fabric that will reduce material costs by 60% and direct labor costs by 40% and will not affect product quality or marketability. Management is considering an increase in the unit sales price to reduce the number of units sold because the factory’s output is nearing its annual output capacity of 40,000 units. Management is considering two options, the first being the company will keep the price at the current level and sell the same volume as last year. They expect an increase in income due to reduced costs of this new fabric. The second option, Siam Red will increase it price by 25%. This plan will decrease unit sales volume by 10%. They hypothesize, that under both options, the total fixed costs and the variable costs per unit for overhead and for selling and administrative costs will remain the same.
1. Compute the break-even point in dollar sales for both (a) plan 1 and (b) plan 2.
2. Prepare a forecasted contribution margin income statement with two columns showing the expected results of plan 1 and plan 2. The statements should report sales, total variable costs, contribution margin, total fixed costs, profit before tax, income taxes (30% rate), and net profit
Problem 3
Given the following selected account balances of Siam Red.
Sales $ 1,252,000
Raw materials inventory, Dec. 31, 2010 39,000
Goods in process inventory, Dec. 31, 2010 55,900
Finished goods inventory, Dec. 31, 2010 64,750
Raw materials purchases 177,600
Direct labor 227,000
Factory computer supplies used 19,840
Indirect labor 49,000
Repairs—Factory equipment 7,250
Rent cost of factory building 59,000
Advertising expense 96,000
General and administrative expenses 131,300
Raw materials inventory, Dec. 31, 2011 44,700
Goods in process inventory, Dec. 31, 2011 43,500
Finished goods inventory, Dec. 31, 2011 69,300
Prepare its manufacturing statement for the year ended on December 31, 2011.