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.