Accounting for Managers: Cash Cycle, Profitability Analysis and Special Order Decision Making

This article discusses cash cycle, profitability analysis and special order decision making in Accounting for Managers. It includes calculations for the cash cycle of Cash Convertors International Limited, evaluation of alternatives to boost profitability, and decision making for a special order. The subject is Accounting for Managers and the content is relevant for students studying this course in any college or university.

Accounting for Managers
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Contents
Solution 1:..................................................................................................................................3
Solution 2:..................................................................................................................................5
Solution 3:..................................................................................................................................9
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Solution 1:
Cash cycle is the net estimated period in which the company is expected to make all
payments and receive all payments. The cash cycle consists of debtor’s period creditor’s
period and inventories period. (Fridson & Alvarez, 2012)The lower the cash cycle better it is
for the company. Cash cycle is very important for the companies to maintain as it helps in
maintaining liquidity. Liquidity is very important for the management to keep the functions
of the company moving. Lack of liquidity may bring a pause in the operations of the
company which will harm the profitability and performance of the company. (Ramírez, 2018)
Following is the calculation done for the Cash Cycle Of Cash Convertors International
Limited for the last five years:
Particulars 2017 2016 2015 2014 2013
Inventory 20,991 17,612 27,684 25,562 21,783
Debtors 7,574 13,651 28,120 29,443 13,032
Creditors 21,288 19,821 26,450 26,794 20,048
Cogs 97,803 1,09,084 1,38,457 1,18,869 94,158
Sales 2,71,473 3,09,995 3,74,893 3,31,669 2,72,723
Inventory Turnover 72 76 70 73 42
Debtor Turnover 14 25 28 23 9
Creditor Turnover 77 77 70 72 39
Cash Cycle 10 23 28 24 12
2017 2016 2015 2014 2013
-
5
10
15
20
25
30
Cash Cycle
Cash Cycle
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The cash cycle of the last five years of the company show gradual increase in period and then
in the current year the cash cycle has been reduced to lowest of the last five years, with 10
days. This cash cycle depicts that the inventory has been moving as a faster rate, which has
led to increased production and sales. Overall the company is settling its cash positing in 10
days which is very good for the liquidity of the company.
The cash flow statement of the company show increase in cash inflows for the company in
the current year as compared to that of the last year. There has been an increase in net cash
inflow by $7,000,000 which has mainly been contributed by increased cash from operating
activities. The major movement in the cash from operating activities was contributed by the
tax figures. Last year the company paid tax whereas in the current year they have had refund
which has lead to increased cash in operating activities.
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Solution 2:
In order to boost up the profitability of a product, the management is required to take both
quantitative and qualitative steps. The quantitative steps include changes in cost and pricing
policy and the qualitative steps include increase in promotion and factoring. For the given
situation we have been provided by three alternatives, we would choose the alternative with
the highest returns.
Financial data of FreeWheels from last year
Sales 5,000
Selling price 420
Variable manufacturing cost 144
Fixed manufacturing costs 4,60,000
Variable selling and administrative costs 36
Fixed selling and administrative costs 5,00,000
Profit statement
Particulars Amount
Sales 21,00,000
Less:
Variable manufacturing cost 7,20,000
Fixed manufacturing costs 4,60,000
Variable selling and administrative costs 1,80,000
Fixed selling and administrative costs 5,00,000
Profit/Loss 2,40,000
Alternative 1:
Under the proposed alternative by Aaron Jacobsen we see that the proposed profits of the
company will increase to $388000 from $ 240000.
Proposal 1- Aaron Jacobsen
Sales 6,500
Selling price 420
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Variable manufacturing cost 172
Fixed manufacturing costs 4,60,000
Variable selling and administrative costs 36
Fixed selling and administrative costs 5,00,000
Advertisement charges 30,000
Profit statement
Particulars Amount
Sales 27,30,000
Less:
Variable manufacturing cost 11,18,000
Fixed manufacturing costs 4,60,000
Variable selling and administrative costs 2,34,000
Fixed selling and administrative costs 5,00,000
Advertisement charges 30,000
Profit/Loss 3,88,000
Alternative 2:
Under the proposed alternative by Joanne Arnett we see that the proposed profits of the
company will increase to $340000 from $ 240000.
Proposal 2- Joanne Arnett
Sales 4,500
Selling price 480
Variable manufacturing cost 144
Fixed manufacturing costs 4,60,000
Variable selling and administrative costs 36
Fixed selling and administrative costs 5,00,000
Advertisement charges 50,000
Profit statement
Particulars Amount
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Sales 21,60,000
Less:
Variable manufacturing cost 6,48,000
Fixed manufacturing costs 4,60,000
Variable selling and administrative costs 1,62,000
Fixed selling and administrative costs 5,00,000
Advertisement charges 50,000
Profit/Loss 3,40,000
Alternative 3:
Under the proposed alternative by Jennifer Saunders we see that the proposed profits of the
company will increase to $480000 from $ 240000.
Proposal 3- Jennifer Saunders
Sales 6,000
Selling price 420
Variable manufacturing cost 144
Fixed manufacturing costs 4,60,000
Variable selling and administrative costs 36
Fixed selling and administrative costs 5,00,000
Rebate 45,000
Advertisement charges 60,000
Profit statement
Particulars Amount
Sales 25,20,000
Less:
Variable manufacturing cost 8,64,000
Fixed manufacturing costs 4,60,000
Variable selling and administrative costs 2,16,000
Fixed selling and administrative costs 5,00,000
Rebate 45,000
Advertisement charges 60,000
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Profit/Loss 4,80,000
Therefore from the above evaluation of various alternatives we can see that the alternative
proposed by Jennifer is likely to provide highest profits.
Decision making is a very important function of the management of the company. The
management is required to take into consideration both the qualitative and quantitative factors
into consideration before making a final call. While considering the quantitative factors, the
management goes for the option which earns highest profit and provides least cost. But
sometimes these options do not provide long term success. Therefore t is important that the
company also takes into consideration other qualitative factors also. The management needs
to check if the alternative would provide long term benefits. They should also take into
consideration the impact of suck decision on the customers and community. The availability
of factors also plays a vital role in decision making process.
Therefore, based on the discussion we would suggest the management to opt for the
alternative proposed by Jennifer Saunders.
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Solution 3:
Part 1:
When the management is proposed with a special order, it has to take into consideration
various factors before making the final decision. In the given case the company has been
approached for a special order of 25000 bikes, we have to make the decision accordingly:
When the annual factory capacity is 100000 units:
When the annual capacity for production of bikes is 100000 units and the regular production
is required for 72000 units, it leaves FreeWheels with a spare capacity of 28000 units. The
special order constitutes of 25000 units. Therefore, the management can fulfil the whole
special order without compromising with the current demand. Under such circumstances the
price to bid should be minimum the variable costs which are being incurred due to acceptance
of special order. In this case this is $ 140 per unit.
When the production capacity is 100000 unit
Spare capacity = 100000-72000
= 28000
Special order for = 25000
Cost statement for special order
Direct Material Cost
187500
0
Direct Labour Cost 875000
Variable Factory Overhead 250000
Fixed Factory Overhead 500000
Total Manufacturing Cost 3500000
Units 25000
Bid Price 140
When the annual factory capacity is 90000 units:
When the annual capacity for production of bikes is 90000 units and the regular production is
required for 72000 units, it leaves FreeWheels with a spare capacity of 18000 units. The
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special order constitutes of 25000 units. Therefore, the management cannot fulfil the whole
special order without compromising with the current demand. Under such circumstances, the
price to bid should be minimum the variable cost incurred and loss of profits due to stop in
production of regular products. Therefore, the management should bid a minimum of $191.80
per unit for the special order when the annual capacity is 90000 units.
When the production capacity is 90000 unit
Spare capacity = 90000-72000
= 18000
Special order for = 25000
Loss of Profits from 7000 units = 1295000
Cost statement for special order
Direct Material Cost
187500
0
Direct Labour Cost 875000
Variable Factory Overhead 250000
Fixed Factory Overhead 500000
Total Manufacturing Cost 3500000
Loss of profits from existing demand
(7000*185) 1295000
Total Cost 4795000
Units 25000
Bid Price 191.8
Part 2:
The annual capacity to produce bike of FreeWheels is100000 units, and the company current
produces 72000 units per annum. This leaves the company with a spare capacity of 28000
units. Now if the company is offered to produce any units till 28000 units, the company
should accept the offer even at a minimum bid offer as it won’t be required to make any
capital investments. Only the variable costs which would be involved in the production of the
units of this new order. In the given case the company has been offered to produce 25000
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units. The spare capacity available with the company is for 28000 units, this means that the
magnet can opt for the production of this special order.
The price which should be charged for this order should only be the costs which are being
incurred because if acceptance of this order, in this case which are the variable costs related
to production only. Therefore the management should charge anything above $140 per unit
for the special order.
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Bibliography
Fridson, M., & Alvarez, F. (2012). Financial Statement Analysis: A Practitioner's Guide.
New York: John Wiley & Sons.
Ramírez, C. Z. (2018). The Impact of IFRS 16 on Key Financial Ratios: A New
Methodological Approach. Accounting in Europe .
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