a) The major brand building and advertising spend is an operating KPI and it is an outcome.
b) The loan approval times is a strategic KPI and it is a driver.
c) The loan approved is an operating KPI and it is an outcome.
d) The loan application number received online is an operating KPI and it is an outcome.
e) The loan numbers sent for collection is an operating KPI and it is an outcome.
f) The probability of the loan book is a strategic KPI and it is a driver.
g) The percentage of loans funded against the loan approved a strategic KPI and it is a driver.
|
Statement showing Sales budget |
||
|
Particulars |
Product A |
Product B |
|
Budgeted Sales Unit |
16200 |
11800 |
|
Price per unit |
$ 14.35 |
$ 12.20 |
|
Total Sales |
$ 232,470.00 |
$ 143,960.00 |
|
Statement showing Production Budget |
||
|
Particulars |
Product A |
Product B |
|
Budgeted Sales Unit |
16200 |
11800 |
|
Closing Inventory |
8100 |
6600 |
|
Less: |
||
|
Opening Inventory |
5100 |
2600 |
|
Planned production |
19200 |
15800 |
|
Statement showing Purchase Budget |
||
|
Particulars |
Component X |
Component Y |
|
Units Required for production |
||
|
Product A |
96000 |
38400 |
|
Product B |
47400 |
63200 |
|
Total |
143400 |
101600 |
|
Add: |
||
|
Closing inventory |
46000 |
19500 |
|
Less: |
||
|
Opening Inventory |
38000 |
13500 |
|
Budgeted Purchase Unit |
151400 |
107600 |
|
Statement showing Purchase Budget |
||
|
Particulars |
Component X |
Component Y |
|
Budgeted Purchase Unit |
151400 |
107600 |
|
Price |
$ 0.68 |
$ 0.24 |
|
Purchase Budget |
$ 102,952.00 |
$ 25,824.00 |
|
Statement showing total labor hour and cost |
||
|
Particulars |
Product A |
Product B |
|
Hours Per unit |
2 |
1 |
|
Production unit |
19200 |
15800 |
|
Total Labor Hours required |
38400 |
15800 |
|
Rate per hour |
$ 4.50 |
$ 4.00 |
|
Budgeted Labor Cost |
$ 172,800.00 |
$ 63,200.00 |
|
Statement showing Contribution per unit |
||
|
Particulars |
Product A |
Product B |
|
Sales |
$ 232,470.00 |
$ 143,960.00 |
|
Less: |
||
|
Purchase |
$ 74,496.00 |
$ 47,400.00 |
|
Labor |
$ 172,800.00 |
$ 63,200.00 |
|
Contribution |
$ (14,826.00) |
$ 33,360.00 |
|
Budgeted Sales Unit |
16200 |
11800 |
|
Contribution/(loss) per unit |
$ (0.92) |
$ 2.83 |
|
Statement showing Profit or loss forecast |
||
|
Particulars |
Product A |
Product B |
|
Contribution |
$ (14,826.00) |
$ 33,360.00 |
|
Less: |
||
|
Overhead Expenses |
$ 25,000.00 |
$ 25,000.00 |
|
Profit or loss |
$ (39,826.00) |
$ 8,360.00 |
|
Statement showing Breakeven point |
|
|
Particular |
Amount |
|
Sales Price |
$ 250.00 |
|
Less: |
|
|
Variable Cost |
$ 185.00 |
|
Contribution |
$ 65.00 |
|
Fixed Costs |
$ 250,000.00 |
|
Break Even Units |
3846 |
|
Statement showing Calculation of profit |
|
|
Particular |
Amount |
|
Sales unit |
5000 |
|
Sales |
$ 1,250,000.00 |
|
Less: |
|
|
Variable Cost |
$ 925,000.00 |
|
Contribution |
$ 325,000.00 |
|
Less: |
|
|
Fixed Costs |
$ 250,000.00 |
|
Profit |
$ 75,000.00 |
|
Statement showing Calculation of profit |
|
|
Particular |
Amount |
|
Sales unit |
8100 |
|
Sales |
$ 2,025,000.00 |
|
Less: |
|
|
Variable Cost |
$ 1,498,500.00 |
|
Contribution |
$ 526,500.00 |
|
Less: |
|
|
Fixed Costs |
$ 250,000.00 |
|
Lease Cost |
$ 200,000.00 |
|
Profit |
$ 76,500.00 |
The calculation above shows that leasing of new equipment will help in increasing profit by $1500 (76500-75000). Therefore, it can be said that company should lease the new equipment.
The Accounting rate of return is a capital budgeting technique that does not consider time value of money. The formula for calculation is:
ARR= Average Annual Income / Initial Investment
The main strength of ARR is that it is easy to calculate and simple to understand. The primary weakness is that is ignores the time factor of money.
|
Statement showing Accounting Rate of Return |
|||
|
Particulars |
Forecast 1 |
Forecast 2 |
|
|
Average cash flow |
$ 6,000.00 |
$ 7,600.00 |
|
|
Less: |
|||
|
Annual Depreciation |
|||
|
Project Cost |
$ 20,000.00 |
||
|
Residual value |
$ 2,000.00 |
||
|
Depreciable Amount |
$ 18,000.00 |
||
|
Estimated Life |
5 |
||
|
Annual Depreciation |
$ 3,600.00 |
$ 3,600.00 |
|
|
Average Annual Income |
$ 2,400.00 |
$ 4,000.00 |
|
|
Accounting Rate of Return |
Average Annual Income/Initial Investment |
12% |
20% |
The calculation above shows that ARR of Forecast 2 is more so this project should be rejected
|
Statement Showing Payback period |
|||
|
Particulars |
Forecast 1 |
Forecast 2 |
|
|
Initial Investment |
$ 20,000.00 |
$ 20,000.00 |
|
|
Average Annual Cash flow |
$ 6,000.00 |
$ 7,600.00 |
|
|
Payback Period |
Initial Investment/Cash flow |
3.33 |
2.63 |
The payback period of Forecast 2.63 and hence it should be accepted.
|
Statement showing calculation of Internal rate of Return |
||
|
Years |
Forecast 1 |
Forecast 2 |
|
Initial Investment |
$ (20,000.00) |
$ (20,000.00) |
|
1 |
$ 6,000.00 |
$ 6,000.00 |
|
2 |
$ 6,000.00 |
$ 7,000.00 |
|
3 |
$ 6,000.00 |
$ 12,000.00 |
|
4 |
$ 6,000.00 |
$ 3,000.00 |
|
5 |
$ 6,000.00 |
$ 10,000.00 |
|
Internal Rate return |
15% |
25% |
The IRR of Forecast 2 is high so it should be accepted.
|
Statement showing calculation of NPV Forecast 1 |
|||
|
Years |
Cash Flow |
PV factor |
Discounted Cash Flow |
|
Initial Investment |
$ (20,000.00) |
$ (20,000.00) |
|
|
1 |
$ 6,000.00 |
0.91 |
$ 5,454.55 |
|
2 |
$ 6,000.00 |
0.83 |
$ 4,958.68 |
|
3 |
$ 6,000.00 |
0.75 |
$ 4,507.89 |
|
4 |
$ 6,000.00 |
0.68 |
$ 4,098.08 |
|
5 |
$ 6,000.00 |
0.62 |
$ 3,725.53 |
|
Net Present Value |
$ 2,744.72 |
||
|
Statement showing calculation of NPV Forecast 2 |
|||
|
Years |
Cash Flow |
PV factor |
Discounted Cash Flow |
|
Initial Investment |
$ (20,000.00) |
$ (20,000.00) |
|
|
1 |
$ 6,000.00 |
0.91 |
$ 5,454.55 |
|
2 |
$ 7,000.00 |
0.83 |
$ 5,785.12 |
|
3 |
$ 12,000.00 |
0.75 |
$ 9,015.78 |
|
4 |
$ 3,000.00 |
0.68 |
$ 2,049.04 |
|
5 |
$ 10,000.00 |
0.62 |
$ 6,209.21 |
|
Net Present Value |
$ 8,513.70 |
The NPV of Forecast 2 is higher than Forecast 1 so it should be accepted.
References
Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.
Dhamija, S., 2015. Financial Accounting for Managers, 2/e. Pearson Education India.
DRM13, M., 2016. ACCOUNTING FOR MANAGERS.
Webster, W.H., 2016. Accounting for managers.
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