Accounting for Business: Sales, Financial Viability, Break-Even Analysis

This article covers topics such as sales, financial viability, and break-even analysis in Accounting for Business. It includes a statement of financial position, payback period, net present value, and more.

ACCOUNTING FOR
BUSINESS

Table of Contents
Section A...............................................................................................................................................3
Question 1.........................................................................................................................................3
SECTON B............................................................................................................................................4
Question 3.........................................................................................................................................4
Question 4.........................................................................................................................................6
REFERENCES....................................................................................................................................12

Section A
Question 1
Sales 20000
Less:
Cost of good sold
Opening stock 2000
Purchase 15200
Closing stock (2500) (14700)
Gross profit 5300
Less:
Selling expense 700
Administrative cost 300 (400 – 100)
Distribution expense 200
Audit fees 70
Salaries and wages 930 (900 + 30)
Directior remuneration 300
Interest paid 80 (60 + 20)
Interim dividend paid 50
Machinary depreciation 500 (2500 * 20%)
Depreciation on building 120 (2400 * 5%) (3250)
Less: 2050
Tax liability (200)
Net profit 1850
Statement of financial position
Asset Amount
Current asset
Closing stock 2500
Debtors 1370 (1400 – 30)
Cash 50

Bank 130
Advanced administrative
expense
100 4150
Long term asset
Freehold premises 6000
Building 2400
Machinary 3000 11400
15550
Liability Amount
Current liability
Creditors 1000
Accrue salary 30
Debenture interest accrue 20
Provision for tax liability 200 1250
Long term liability
Accumulated depreciation on
building
520
Accumulated depreciation on
machinery
1000
5% Debenture 1600 3120
£1 Ordinary shares 8000
Retained profit 1390
Current year profit 1850 11240
15610
SECTON B
Question 3
Payback period
Year Cash inflows Cumulative cash inflows

1 600000 600000
2 700000 1300000
3 800000 2100000
4 500000 2600000
5 200000 2800000
6 300000 3100000
Initial investment 2000000
Payback period 0.9
Payback period 2 year and 9 months
Net present value
Computation of NPV
Year
Cash
inflows PV factor @ 10 %
Discounted
cash inflows
1 600000 0.909 545454.5455
2 700000 0.826 578512.3967
3 800000 0.751 601051.8407
4 500000 0.683 341506.7277
5 200000 0.621 124184.2646
6 300000 0.564 169342.179

Total discounted cash inflow 2360052
Initial investment 2000000
NPV (Total discounted cash
inflows - initial investment) 360052
Advising on financial viability of project
It is advisable that the company should accept the proposal as the payback period is
below three years which was instructed originally and also the net present value is positive
(Cañibano, 2018). Both the aspects allow the company to invest in the project.
Five non- financial factors to be considered by J Ltd
Non financial factors like competition, level of use of company, alternatives that are
available, legal factors and organisation culture. All these are the factors need to be
considered before make any decision.
Commenting on internal rate of return and its benefits in capital budgeting decision
IRR= 17%
This is a good return on investment is made. This method is effective under capital
budgeting practice as this incorporate with the time value of money (Huang, 2018). This is
also simple to calculate. This also matches up with the overall evaluation of the investment
decision making.
Question 4
a) Calculating Profit
Particulars Amount (£)
1. Total sales 100000 units @ 160
= 16000000
2. Total cost
a) fixed cost 3500000

b) variables cost 145000 * 100
= 14500000
Total profit Total sales – total cost
=16000000–18000000
=2000000 (loss)
b) Calculating break-even point for original budget
Particulars Formula Figures
Selling price per unit 160
Variable cost per unit 100
Contribution per unit Selling price per unit - variable
cost per unit
60
Fixed cost 3500000
BEP (in units) Fixed cost / contribution per
unit
58333
BEP (in value or monetary terms) BEP (in units) * selling price
per unit
9333333.3
c) Calculating break-even for Proposal 1
Selling price = 160 + (160*10%) = £176
Variable cost = £104
Sales = 130000 units
Particulars Amount (£)
1. Total sales 130000 units @ 176
= 22880000
2. Total cost
a) fixed cost 3500000

b) variables cost 145000 * 103
= 14935000
Total profit Total sales – total cost
=22880000 – 18435000
=4445000
Break-even analysis
Particulars Formula Figures
Selling price per unit 176
Variable cost per unit 103
Contribution per unit
Selling price per unit - variable
cost per unit 73
Fixed cost 3500000
BEP (in units)
Fixed cost / contribution per
unit 47945
BEP (in value or monetary terms)
BEP (in units) * selling price
per unit 8438356.2
d) Calculating break-even for Proposal 2
Selling price =£155
Variable cost = £100
Sales = 140000 units
Profit calculation
Particulars Amount (£)
1. Total sales 140000 units @ 155
= 21700000

2. Total cost
a) fixed cost 3500000
b) variables cost 145000 * 100
= 14500000
Total profit Total sales – total cost
=21700000 – 18000000
=3700000
Break even analysis
Particulars Formula Figures
Selling price per unit 155
Variable cost per unit 100
Contribution per unit Selling price per unit - variable
cost per unit
55
Fixed cost 3500000
BEP (in units) Fixed cost / contribution per
unit
63636
BEP (in value or monetary terms) BEP (in units) * selling price
per unit
9863636.4
e)Calculating break-even for Proposal 3
Selling price = 180
Fixed cost = 3500000 + 250000 = 3750000
Total sales (units) = 115000
Profit calculation:

Particulars Amount (£)
1. Total sales 115000 units @ 180
= 20700000
2. Total cost
a) fixed cost 3750000
b) variables cost 145000 * 100
= 14500000
Total profit Total sales – total cost
=20700000– 18250000
=2450000
Break even analysis
Particulars Formula Figures
Selling price per unit 180
Variable cost per unit 100
Contribution per unit Selling price per unit - variable
cost per unit
80
Fixed cost 3750000
BEP (in units) Fixed cost / contribution per
unit
46875
BEP (in value or monetary terms) BEP (in units) * selling price
per unit
8437500
f) Recommendation over project selection
Project 2 should be selected by the organisation. This contains the maximum break
even unit which will allow the company to make the best level of suitable profit decision
(Morris, 2018). The profit of this option will be the maximum for the company.
g) Limitation of analysis

The above analysis is assumed that the other factors associated with the business are
influencing in the same manner over every proposal (Zahid and Simga-Mugan, 2019). Also
the other influence elements related to the investment decision are affecting in the same
capacity.

REFERENCES
Books and Journal
Cañibano, L., 2018. Accounting and intangibles: Contabilidad e intangibles. Revista de
Contabilidad-Spanish Accounting Review. 21(1). pp.1-6.
Huang, L., 2018. The role of investor gut feel in managing complexity and extreme
risk. Academy of Management Journal. 61(5). pp.1821-1847.
Morris, R., 2018. Early Warning Indicators of Corporate Failure: A critical review of
previous research and further empirical evidence. Routledge.
Zahid, R. A. and Simga-Mugan, C., 2019. An analysis of IFRS and SME-IFRS adoption
determinants: a worldwide study. Emerging Markets Finance and Trade. 55(2).
pp.391-408.