Analyse budgets and make appropriate decisions in Resco Limited using

Appendix A
Cost of goods sold

52,000

Opening stock (given)

Manufacturing cost:
Production units (Note 2) x total direct cost (Note 3) =10,080x65
Less: Closing stock (Note 8: 880 units x 65)
(or 10,000 units x total direct cost of 65 per unit)

655,200
707,200
57,200
650,000

Cash budget

Receipts
Cash from debtors:
Opening debtors
Sales
Less: Closing debtors (15% x 1.000.000)
Payments
Cash payments to creditors:
Opening creditors
Purchase [Note 4: (152,550+408,000)]

80.000
1.000.000
1.080.000
150.000

Less: Closing creditors (560,550 x 10%)

28,000
560,550
588,550
56,055

Wages (Note 5: 60,480 + 40,320)

Fixed production overhead
Administration, selling and distribution overhead
Capital expenditure
Dividend paid for 2011

532,495
100,800
100,000
150,000
50,000
75,000
1.008.295

(78,295)
2,000
(76,295)

Net receipts
Add: Opening cash
Budgeted closing cash balance (overdrawn)
Budgeted profit and loss account

Sales

(Note 1)
1.000.000
Less: Variable cost of sales (Note 8: 10,000 x 65)
Gross margin
Fixed production overhead (Note 6)
100,000
Depreciation [(250,000+50,000) x 20%]
60,000
Production margin
Administration, selling and distribution
Overhead (Note 9)
Budget net profit

650,000
350,000 Less:
160,000
190,000 Less:
150,000
40,000

Budgeted balance sheet

300,000
160,000
140,000

Fixed assets (at cost)

Less: Accumulated depreciation
Current assets
Raw materials (Note 7)
Finished stock (Note 8)
Trade debtors (15% x 1.000.000)
Less: Current liabilities
Trade creditors
[Note 4:10%x(152,550+408,000)]
Bank overdrafts (Note 12)

67,650
57,200
150,000
274,850
56,055
76,295

132,350

Financed by:
Share capital
Ordinary shares
Retained profits (17,500 + 40,000)

142,500
282,500
225,000
57,500
282,500

Note1: Preparation of the sales budget:

Units of EC2

Selling price per unit

Total sales value

10,000

100

1.000.000

Note 2: Preparation of the production budget

Sales of EC2
Less: Opening stock
Add: Desired closing stock (opening stock +10%)
Production required

units
10,000
800
9,200
880
= 10,080

Note 3: Preparation of the direct materials usage budget

Direct materials:
E: 5 units x 10,080 = 50,400 units
C: 10 units x 10,080 = 100,800 units
Note 4: Preparation of the direct materials purchase budget
Direct materials:
=
E
C
(units)
(units)
Usage (as per Note 3)
Less: Opening stock

50,400
4,500
45,900

100,800
12,000
88,800

Add: Desired closing stock

(opening stock + 10%)
Direct materials purchases

4,950
50,850
x 3
= 152,550

13,200
102,000
x 4
= 408,000

Note 5: Preparation of the direct labour budget

Machining
Assembling
Production units (as per Note 2)
10,080
10,080
x direct labour hours required
x 1 DLH
x 0.50 DLH
10,080 DLH
5,040 DLH
x direct labour rate per hour
x 6
x 8
Direct labour cost
=
60,480
=
40,320
Note 6: Preparation of the fixed production overhead budget
Given
100,000
Note 7: Calculation of the value of the closing raw material stock
Raw material
closing stock*
cost per unit
(units)

E
4,950
x
3
C
13,200
x
4
*Derived from Note 4.
Note 8: Calculation of the value of the closing finished stock

Unit cost:
Direct material E: 5 units x 3 per unit
15
Direct material C
40
Direct labour for machining: 1hour x 6 per DLH
6
Direct labour for assembling: 0,50 hour x 8 per DLH
4
Total direct cost
x units in stock
Closing stock value

total value

= 14,850
= 52,800
67,650

55
=
=

10
65
x 880
57,200

The expenses are being covered by income well as it is indicated in the

budgeted income statement above.
What are the results of the negative cash flow? What does a negative cash
flow mean?
b. Using Appendix B, calculate the unit cost of the new product and make
pricing decisions based on cost based pricing.
Using Appendix B, calculate the unit cost of the new product and make pricing
decisions based on cost based pricing.

Resco Limited has been asked by a customer to supply a specially designed

product. The maximum price that the customer has said that he can pay is 100 per
unit. The details of costs are as follows:
Cost classification
Direct cost

Description
Direct materials
Direct wages
Direct expenses
Prime cost
Administration

Production cost ()
40
30
10
80
15

Sales and marketing

5
100

Indirect costs or
overheads
Contract Price

Determine whether Resco Limited should accept the new order.

Use pg 354 to determine which pricing method is appropriate.
1. Below variable/prime cost
Describe
Is it appropriate?
Why?
2. At variable/prime cost
Describe
Is it appropriate?
Why?
3. At total cost
Describe
Is it appropriate?
Why?
4. At cost-plus
Describe
Is it appropriate?
Why?
Decision: sell at 100 which is the total cost.
Assess the viability of a project in Resco Limited using investment appraisal
techniques (Appendix C).

Main techniques are: Net Present Value, Payback Period, Internal Rate of Return
and Return on Capital Employed
Define each of the above and describe their advantages and disadvantages.
The ones to be used are Net Present Value and Internal Rate of Return.
(B) NPV FOR THE TWO PROPOSED PROJECTS BY RESCO
LONDON PROJECT (project A) @ 10%
= (-200) + (200.909) + (800.826) + (-800.751)
= (-200) + 181.8 + 661.12 - 601.04
= 41.88
CHELTENHAM PROJECT (project B) @ 10%
= (-150) + (50.909) + (100.826) + (150.751)
= (-150) + 45.45 + 82.64 + 112.69
= 90.79
(C) IRR CALCULATION FOR LONDON PROJECT (project A)
PROJECT A @ 10%
= (-200) + (200.909) + (800.826) + (-800.751)
= (-200) + 181.8 + 661.12 601.04
= 41.88
PROJECT A @ 30%
= (-200) + (200.769) + (800.592) + (-800.455)
= (-200) + 153.8 + 473.6 364
= -63.4
IRR WILL LIE BETWEEN 10% AND 30%
R1 = the lower discount rate = 10%
R2 = the higher discount rate= 30%
NPV1 = NPV @ 10% = 41.88
NPV2 = NPV @ 30% = -63.4
THEN:
IRR= R1+ NPV1 / (NPV1-NPV2) (R2-R1)
IRR= 10 + 41.88 / (41.88 + 63.4) (30-10)

IRR= 10 + (0.398 20)

IRR= 10 + 7.95
IRR= 17.95%
IRR FOR CHELTENHAM PROJECT (project B)
PROJECT B @ 10%
= (-150) + (50.909) + (100.826) + (150.751)
= (-150) + 45.45 + 82.64 + 112.69
= 90.79
PROJECT B @ 33%
= (-150) + (50.752) + (100.565) + (150.425)
= (-150) + 37.6 +56.5 + 63.75
= -7.85
IRR WILL LIE BETWEEN 10% AND 33%
R1 = the lower discount rate = 10%
R2 = the higher discount rate= 33%
NPV1 = NPV @ 10% = 90.79
NPV2 = NPV @ 30% = -7.85
THEN:
IRR= R1+ NPV1 / (NPV1-NPV2) (R2-R1)
IRR= 10+ 90.70/ (90.79+ 7.85) x (33-10)
IRR= 10 + (0.92 23)
IRR= 10 + 11.17
IRR= 21.17%
On the basis of the answers say which project to adopt and why?

Interpret financial statements using appropriate ratios and comparisons, both

internal and external using appendix E
Please see attached appendix E for the calculation of the ratios.
Liquidity ratio
Profitability ratio

Efficiency ratio
Gearing ratio
Investors ratio
Calculation of Ratios
A: Profitability Ratios
1 Return on Capital Employed (ROCE)

= Profit before interest and x

tax (PBIT)

100%

Capital Employed *

[*where, Capital Employed = Total Assets - Current

Liabilities]

2014: [2,631/(50,164-20,206) ] X 100= 8.78%

2015: [-5,792/(44,214-19,805)]X100= -23.73%

2 Profit Margin on Sales

(Operating Profit Margin)

2014: (2,631/63,557)X100= 4.14%

2015: (-5,762/62,284)X100= -9.25%

Operating Profit
Sales

100%

B Liquidity Ratios

3 Current Ratio

Current Assets
Current Liabilities

2014: (13,085/20,206)= 0.65

2015: (11,819/19,805)= 0.60

4 Quick Ratio / Acid Test Ratio

= Current Assets less Stock

Current Liabilities

2014[(13,085-3,576)/20,206]= 0.47
2015[(11,819-2,957)/19,805]= 0.45

C: Efficiency Ratios (measured in Days or in Times)

5 Stock Turnover Period

Average Stock

x 365 days

Cost of Sales

2014{(3,744+3,576)/2]/60,926}X365=
21.9 days
2015{(3,576+2,957)/2]/68,076}X365=
17.51 days

Stock Turnover

Cost of Sales
Average Stock

6 Debtors Turnover Period

Average Debtors
Sales

2014: {(2,525+2,190)/2]/63,557}X365=
13.54 days
2015: {(2,190+2,121)/2]/62,284}X365=
12.63 days

Debtors Turnover

Sales
Average Debtors

x 365 days

7 Creditors Turnover Period

Average Creditors

x 365 days

Purchase

2014:
{(17,937+18,296)/2]/60,758}X365=
108.83 days
2015:
{(18,296+17,797)/2]/67,457}X365=
97.65 days

Creditors Turnover

Purchase
Average Creditors

8 Fixed Assets Turnover

Sales
Fixed Assets

2014: (63,557/34,592)= 1.84 times

2015(62,284/32,256)= 1.93 times

D: Gearing Ratio (measured in Percentage or in
Times)

9 Gearing Ratio

Prior Charge Capital #

Equity & Preference Share Capital &
Reserve + Total Long Term Debt

[# where, Prior Charge Capital = Total Long Term Debt + Preference Share
Capital]

or

Total Liabilities less Current Liabilities

Capital Employed

2014: ](35,442-20,206)/ (50,16420,206)]X100= 50.86%

2015: (37,143-19,805)/(44,21419,805)X100= 71.03%

10 Interest Cover

Profit before interest and Tax

Interest Charge

2014: (2,631/432)= 6.09 times

2015: (5,792/571)= 10.14 times
Note: interest charged taken is the
net interest.

E: Investors' Ratios (Shareholders' Ratios) (measured in

Percentage or in Times)

11 Earnings per Share (EPS)

Earnings ^
Number of Ordinary Shares

[ ^ where, Earnings = Net Profit after Tax and Preference Dividend]

2014: 32.09p (given)

2015: 9.42p (given)

12 Price / Earnings Ratio

= Market Value of the Share

EPS

2014: (28.56/32.09)= 0.89

2015: (12.52/9.42)= 1.33