Optimizing Computer Screen Production: A Financial Management Analysis

The company is expanding its TV screen production unit to computer screen production. The gross profit and net operating income are £1,089,444.44 and £721,444.44 respectively. Under the marginal costing method, profits are £1,265,000 and £681,000. The selling price is calculated by adding a 20% profit margin to the total cost of production. The company's total cost and sales are £9,125,000 and £11,406,250 respectively. This leads to a profit of £228,125 and a profit per unit of £76.04. It can be concluded that the company can produce computer screen production, increasing business revenue and profitability.

Financial Management
and Accounting

Table of Contents
Introduction................................................................................................................................1
FINANCIAL MANAGEMENT................................................................................................1
Raise funds through equity financing....................................................................................1
Business expansion................................................................................................................2
Calculation of WACC, NPV and IRR...................................................................................2
Management accounting.............................................................................................................5
Preparation of income statement...........................................................................................5
Calculation of selling price....................................................................................................7
CONCLUSION..........................................................................................................................8
REFERENCES...........................................................................................................................9

INTRODUCTION
Financial management plays a vital role in the organization success. It is concerned
with efficient and effective management of the funds that helps to achieve business targets in
a great manner. It helps businesses to take effective financial decisions for the long term
sustainability of the organizations. Further, management accounting is also important as it
helps mangers in taking financial as well as non financial decisions effectively. In addition to
it, the present report describes different types of investment appraisal techniques in order to
take better investment decisions.
FINANCIAL MANAGEMENT
Raise funds through equity financing
Issue equity shares: All the entrepreneurs can raise funds through selling equity shares
in the market. Equity shareholders are considered as the owner of the company (Jenkinson
and Ljungqvist, 2001). The cost of getting funds in this way includes that equity shareholders
have controlling rights. Further, company is required to pay dividend to them.
 Initial public offering (IPO): In case of newly shares, company requires to issue
initial public offering. It is an offer to the public for the sale of shares and mostly used
by companies to raise expansion (Schmid, 2001). Offering rights: Further, for acquiring additional capital, company can offer rights to
their investors (Carpenter and Petersen, 2002). It includes warrants and sweat equity
shares to the shareholders.
Personal capital: Another way of increasing the business equity funds is that
entrepreneurs can invest their personal savings and mutual funds in their business (Zezhong
and Hong, 2008). They can use their own funds for the business venture with the objectives
of bringing higher return on the investment.
Venture capital: A business organization that has good track record may provide
venture capital to the investors for acquiring funds. Before investing in the organization,
investors identify the risk and return so as to predict future business trend (Puri and Zarutskie,
2012). Thus, they provide capital to such organization that may yield greater returns.
Preference share capital: Along with the equity shares, organization also can issue
preference shares. Preferences shareholders have two rights regarding the dividend and
repayment of their capital (Rasoolpur, 2015). On contrary, shareholders have not any voting
rights hence; they cannot control the business operations. Company should issue these kinds

of shares if the mangers do not want to diversify the business control and have adequate
amount of profit available for dividend payments.
Business expansion
As per the given scenario, company has three options for rapid expansion over the
upcoming five years. The advantages and drawbacks are explained here as under:
 1st option: Company can take loan of £10m from MidBarc Bank plc at initial annual
interest of 9%. The rate of interest is floating hence it may be possible that the rates
may be up and down in the future period (Yao, 2015). In case of higher rate, company
have to pay higher interest and vice versa. Therefore company cannot determine the
financial obligations correctly. For instance, at 9% interest rate, business requires to
pay £0.9m interest if rate goes increase to 9.25% then interest will be increased to
£0.925m. Therefore, it can increase or decrease the financial burden to the business.
However, the advantage is that if interest rates get decreases then financial obligations
also tend to decrease.
 2nd Option: Company can issue Eurodollar bond worth $15m at 8% fixed interest
rate. Therefore, the yearly interest amount will be $1.2m for five years. The advantage
of this method is that company has fixed financial liability and can manage funds in
order to make timely payments. However, the disadvantage is that it creates fixed
financial burden to the company (Chakraborty and Yilmaz, 2011). For instance, if
company is facing loss then it will be a reason for financial risk to the business results
in reducing the company's financial position.
 3rd Option: £10m convertible bond can be offered that will be redeemed at 6%. In
this case, company is required to make payment of £10.6m at the end of five years.
However, if company convert the bonds than it has to pay premium at 15% hence
total payments will be worth £11.5m. The advantage is that if investors convert the
bonds before maturity date than it can be converted at low and Zero coupon rate
(King and Mauer, 2014). However, disadvantage is that company is required to make
payments at premium at the point of redemption and conversion.
Calculation of WACC, NPV and IRR
Cash Flows: It is determined throough subtracting the cash expenditures to the total
cash revenues.

Table 1: Calculation of cash flows
2016 2017 2018 2019
Expected sales
(in units) 250000.00
262500.
00 275625.00 289406.25
Current market
price 50.00 50.00 50.00 50.00
Selling price 45.00 46.35 47.74 49.17
Revenue 11250000.00
1216687
5.00
13158475.
31
14230891.
05
Variable cost 4500000.00
4866750
.00
5263390.1
3
5692356.4
2
Contribution 6750000.00
7300125
.00
7895085.1
9
8538534.6
3
Cost of
promotion 500000.00
200000.
00 200000.00 200000.00
Other costs 675000.00
730012.
50 789508.52 853853.46
Fixed cost 1175000.00
930012.
50 989508.52
1053853.4
6
Total fixed cost 1355000.00
1100012
.50
1109508.5
2
1143853.4
6
Net profit 5395000.00
6200112
.50
6785576.6
7
7394681.1
7
Recovery from
working capital
Depreciation 3600000 3600000 3600000 3600000
Total cash
inflow 8995000.00
9800112
.50
10385576.
67
10994681.
17
It is assumed that depreciation is included in other costs. Therefore, for calculating
cash inflow, depreciation is added to the net profits. The total cash inflows in all the years are
increasing from 8995000£ to 10994681.17£ respectively. It shows that project will provide
increased return in all the subsequent years.

Table 2: Cost of equity
Dividend per share 0.50
Current market value 20.00
Growth rate of
dividends 5.00%
Cost of equity
(Dividend per share/ Current market value of stock)
+Growth rate of dividends 7.50%
Table 3: Cost of debt
Interest rate of bonds
before tax 11.00%
Marginal tax rate 35.00%
Cost of debt Interest rate before tax (1-tax rate) 7.15%
Table 4: Weighted average cost of capital
WACC
Cost of equity (ke) 7.50%
Cost of debt (kd) 7.15%
Weight of debt (Wd) 0.4
Weight of equity (We) 0.6
WACC Ke* We+Kd*Wd 7.36%
Cost of equity is 7.50% while the cost of debt is 7.15% for the given scenario. The
debt and equity ratio is 40:60 therefore weight assigned to 0.4 and 0.6 respectively for
calculating weighted average cost of capital. The weighted average cost of capital (WACC)
for is 7.36%.
Net present value: It is computed through discounting all the cash inflows at 7.36%.
Thereafter, subtracted it from the initial investment (Zimmerman and Yahya-Zadeh, 2011).
Table 5: Calculation of net present value
Year Cash inflow
PV factor
@7.36%
Present
value
2016 8995000.00
0.9314456
036
8378353.20
417288
2017 9800112.50
0.8675909
124
8502488.54
571774
2018 10385576.67 0.8081137 8392727.21

411 504677
2019 10994681.17
0.7527139
913
8275850.34
467232
2020 11110982.68
0.7011121
38
7790044.82
33262
Total present value
41339464.1
329359
Less: Initial investment 21,000,000
Net present value 20,339,464
Conclusion: According to the net present value method if the project indicate
positive net present value than the investment should be made and vice versa. As per the
given scenario, the total investment is amounted to 21000000£ however the present value of
total cash inflows is 41339464.1329359£. Therefore the investment will provide positive
return amounted to 20,339,464 at WACC 7.36%. Thus, it can be concluded that Mr. Robert
should make investment in such project. By doing this they can get return of 20339464£. on
the invested funds.
IRR: It is the rate at which the investment outlay will be equal to the discounted cash
inflows associated with the investment (Carmichael, 2011).
Table 6: Calculation of internal rate of return
Year Cash inflow
Initial investment -21,000,000
2016 8995000.00
2017 9800112.50
2018 10385576.67
2019 10994681.17
2020 11110982.68
Internal rate of return 38%
Conclusion: The decision rule of this method is that if the internal rate of return of
any project is greater than its cost of capital than funds can be invested and vice versa. In the
given scenario, it indicate that at 38% return rate the project total discounted cash inflows and
cash outflow will be same and the net present value will be zero. Further, the internal rate of

return of the investment is 38% that is higher than cost of capital which is 7.36%. Therefore it
can be said that Mr. Robert can make invest in this project as the project provide will provide
good return to him.
MANAGEMENT ACCOUNTING
Preparation of income statement
Income statement is prepared here in order to determine the net income on sales of
37000 TV. Under the absorption costing method, fixed production overhead is absorbed on
the basis of actual yield of 36000 units.
Table 7: Income statement under absorption costing
Particular Units Cost per unit Total
Sales 37000 100 3700000
Less cost of goods sold
opening inventory 5000 35 175000
Variable cost of production
Direct material 36000 40 1440000
Direct Labour 36000 20 720000
Direct expenses 36000 6 216000
Total variable cost 36000 66 2376000
Fixed production overhead 36000
10.111111111
1 364000
Total cost of production 36000
76.111111111
1 2740000
Cost of goods available for sale 41000
71.097560975
6 2915000
Less: Closing inventory 4000
76.111111111
1
304444.44444
4444
Cost of goods sold (COGS) 37000
76.111111111
1
2610555.5555
5556
Gross profit (Sales – COGS)
1089444.4444
4444
Variable selling overhead 37000 4 148000
Fixed selling overhead 140000

Fixed administration overhead 80000
Total 368000
Net operating income 37000
721444.44444
4445
Table 8: Income statement under marginal costing
Particular Units Per unit Total
Sales 37000 100 3700000
Less: variable cost of goods sold
Opening stock 5000 35 175000
Variable cost of goods manufactured
Direct material 36000 40 1440000
Direct Labour 36000 20 720000
Direct Expenses 36000 6 216000
Total variable cost 36000 66 2376000
Variable cost of goods available for sales 41000 2551000
Less: Closing inventory 4000 66 264000
37000
61.8108108
108 2287000
Add; Variable selling overhead 37000 4 148000
Total variable cost 37000
65.8108108
108 2435000
Contribution (sales -Total variable cost) 37000
34.1891891
892 1265000
Less-Fixed cost
Fixed production overhead 364000
Fixed selling overhead 140000
Fixed administration overhead 80000
Total fixed cost 584000
Net operating profit (Contribution – Total fixed
cost) 681000
Reason for difference: Under the absorption costing method, net operating income is
7214400£ while marginal costing method implies net operating income amounted to
681000£. The reason for such differences is that under the absorption costing method, Gross

profit is determined through subtracting total cost of production from the total sales.
However, operating income is the difference between gross profit and total selling and
administration overhead (DRURY, 2013). On contrary, under the marginal costing method,
total variable cost is deducted from sales so as to determine contribution. Under this method,
if the selling and variable cost are variable in nature than it must be subtracted from the sales
to calculate gross profit. However, net operating income is calculated by subtracting
contribution to the total fixed cost (Jorgensen, Patrick and Soderstrom, 2012). As per the
given scenario, the cost of goods sold under both the methods are 2610555.55£ and 2435000£
respectively. The reason for such difference is that under the absorption costing method fixed
production overhead of 364000£ are included while calculating cost of goods sold. However,
under the marginal costing method it is the deducted from the gross profit to calcualte net
operaeting income. Moreover, variable selling and distribution overhead amounted to
148000£ are included in the marginal costing method for calucalting total cost whereas under
the absorption costing method all selling and distribution expenditures are subtracted from
the gross profit in order to determine net operaeting income. Further, it is different because
under the absorption costing method closing invenotry valued at 76.11£ per unit while under
the marginal costing method it is valued at 66£ per unit. Therefore the gross profit and the net
operating income tends to very. Under the absorption costing method the gross profit and net
operating income are 1089444.44£ and 721444.44£ respectively while under the marginal
costing method the profits are 1265000£ and 681000£.
Calculation of selling price
The present scenario says that business is expanding their TV screen production unit
to computer screen production. The selling price is calculated by adding profit margin to the
total cost of production (Kaplan and Atkinson, 2015).
Table 9: Calculation of total cost and sales
Particular Cost per unit Units Total
Direct material 75 30000 2250000
Direct labour (300000 Labour
hours) 150 30000 4500000
Variable overhead 50 30000 1500000
Total variable cost 275 30000 8250000
Fixed corporate overhead and
depreciation 875000

Total cost 304.1666666667 30000 9125000
Profit margin (20% on sales and
25% on cost) 76.0416666667 30000 2281250
Sales 380.2083333333 30000 11406250
Calculation of Labour hour for 30000 units
= 30000 units*10 hour per unit
= 300000 labour hour
Calculation of fixed overhead and depreciation
= Total Corporate Overhead /Total labour hour* Labour hour for 30000 units
= (900000£+ 150000£)/ (60000 + 300000) * 300000
= 1050000£/360000*300000
= 875000£
Calculation of profit percentage on cost
Assume sales = 100
Profit = 20%*100 = 20
Cost = Sales – profit
=100 – 20 = 80
Profit percentage on cost = 20/80*100 = 25%
As per the given scenario, selling price per product will be 380.208£. By setting that
selling price company can get 20% profitability. The total cost and sales of the company is
9125000£ and 11406250£ respectively. Thererfore, company can earn profit amounted to
2281250£ while profit per unit will be 76.04£. On the basis of above computation, it can be
concluded that company can produce computer screen production. It helps them to increase
the business revenue as well as profitability. Thus, company can achieve larger market share
that helps organization to compete effectively.
CONCLUSION
The present report concludes that financial management helps in taking efficient
financial decisions in order to move business in a right direction. Further, this report is
described that managers can take qualified business decisions through managing accounting
in an effectual manner. It helps to achieve business targets and objectives that lead to enhance
business growth as well as development.

REFERENCES
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Online
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<https://research.stlouisfed.org/publications/review/01/11/15-28Schmid.pdf>.
[Accessed on 23rd December, 2015].