Accounting for Managers: Cash Cycle, Proposal Analysis, and Special Order Quotation
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This article covers the cash cycle of JB Hi Fi, analysis of three proposals, and special order quotation. It includes sensitivity analysis, break-even analysis, and imperative points to note.
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ACCOUNTING FOR MANAGERS Student Name [Pick the date]
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Question 1 Formula for cash cycle is illustrated below (Arnold, 2015). Cash cycle for the selected company i.e. JB Hi Fi is as illustrated below (JB Hi-Fi, 2017). The relevant extract taken from the latest annual report of JB Hi Fi pertaining to statement of cash flows is given as follows (JB Hi-Fi, 2017). 1
With regards to cash flows from operating activities, there is an increase to the tune of $ 5 million in FY2017 over FY2016. The prime contributing factor is the healthy growth in customer receipts (owing to acquisition of Good Guys) which despite the corresponding increase in payment to suppliers and employees has led to improved operational cash flows in FY2017. This is emphasized from the fact that despite an increase in the tax outflow to the tune of $ 32 million in FY2017, the net cash flows from operations have shown a jump. The net cash outflow from investing activities has jumped tremendously in FY2017 owing to the $ 870 million acquisition of Good Guys by the company in FY2017. Further, the effect of the acquisition has been witnessed in cash flows from financing activities as well as the company has raised about $ 850 million through a combination of debt and equity (JB Hi-Fi, 2017). Question 2 Proposal 1:Enhance the product quality that result in rise in sale of the product volume by 30% with the increase in the variable cost and advertisement cost of $28 and $30,000 respectively. Analysis ï‚·Quantitativeanalysis shows the increment in the profit via proposal plan. 2
ï‚·Sensitivity analysis shows that if rise in sale is only 15% not 30% as mentioned in proposal. No additional profit has obtained (Parrino and Kidwell, 2014). ï‚·Break even analysis ï‚·Imperative points to note Analysing the plant existing production capacity along with the effect on the total cost of the product under proposed plan is an essential aspect. The selection of correct strategy for the plan is pivotal for the increased profitability of the company and thus same should consider the actions taken by competition (Northington, 2015). Proposal 2:Raise the price of the product that reduces sale of the product by 10% with the selling price and advertisement cost increase of $60 and $50,000 respectively. 3
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Analysis ï‚·Quantitativeanalysis shows the increment in the profit via proposal plan. ï‚·Sensitivity analysis shows that fall in sale is 20% not 10% as mentioned in proposal. Total profit has been reduced from the initial plan. ï‚·Break even analysis ï‚·Imperative points to note It is apparent from the plan that sale would be reduced because of the increase price of product. Hence, it is critical to analyse the market environment and the respective consequences that can minimize the competitive advantage particularly due to market share loss (Damodaran, 2015). 4
Proposal 3:Use a promotion program by giving discount on price of initial 1500 units that raises additional sale of 1000 units extra at a campaign cost of $60,000. Analysis ï‚·Quantitativeanalysis shows the increment in the profit via proposal plan. ï‚·Sensitivity analysis shows that despite lower rise in sales, incremental profit is generated. ï‚·Break even analysis ï‚·Imperative points to note Analysing the plant existing production capacity under proposed plan is an essential aspect. Sustainability in the competitive market is critical factor to analyse as the other competitive can 5
also sell their product on high discount which indirectly reduces the sale of company by a significant number (Parrino and Kidwell, 2014). Question 3 (1)Quotation amount required for the bid in order to enact a contract needs to determine. (a)Capacity = 100,000 units annually (b)Capacity = 90,000 units annually (2)Margin on costs and the incremental costs are the two main factors that are essential to analyse. The plant capacity is sufficient enough to complete the special order of 25,000 6
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units without sacrificing on the current orders. Also, no surplus fixed, selling and administrative cost is required for the completion of special order. Thereby, only the variable costs would be considered for decision making. Free Wheels’s profit margin on costs is 100% which is reflected in the quotation amount as the quote provided has also comprised 100% margin on cost. Company has several opportunities in the form of maximum utilization of production capacity that can increase the profit by $3 million. Also, the company can extend the business domain by inviting more clients along with the clients of the Cycle World for selling their product (Damodaran, 2015). The crucial disadvantage is in the form of lower profitability as Cycle World is being offered the product at lower rates compared to the other customers. Thus, over reliance on them could adversely impact the profit margins. Further, it may dissuade the company from actively pursuing new clients as the capacity would reach close to 100% capacity (Brealey, Myers and Allen, 2014). References Arnold,G.(2015)CorporateFinancialManagement.3rded.Sydney:FinancialTimes Management. Brealey, R. A., Myers, S. C., andAllen, F. (2014)Principles of corporate finance,2nd ed. New York: McGraw-Hill Inc. Damodaran, A. (2015).Applied corporate finance: A user’s manual3rd ed. New York: Wiley, John & Sons. 7
JBHi-Fi(2017)AnnualReport2017,[Online]Availableat https://www.jbhifi.com.au/Documents/2017%20Annual%20Report.pdf[AccessedAugust28, 2018] Northington, S. (2015)Finance, 4thed. New York: Ferguson Parrino, R. and Kidwell, D. (2014)Fundamentals of Corporate Finance,3rd ed. London: Wiley Publications 8