Managing Financial Resources: Calculation of Profitable Output Level, Cost-Plus Pricing, and Financial Ratios

This report discusses the calculation of the most profitable level of output for UK Tools Ltd, the problems associated with cost-plus pricing, and the calculation of financial ratios using the balance sheet of Fortune Trading. The report provides insights into managing financial resources for businesses.

Managing Financial
Resources

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
Question 1....................................................................................................................................3
Question 2....................................................................................................................................4
Question 3....................................................................................................................................4
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................1

INTRODUCTION
The report will calculate the most profitable level of output of machines for the UK Tools
Ltd, firm producing vacuum cleaners. In this report the approach of cost plus pricing and
problems that are faced while following the approach will be highlighted. Further, in this report
on the basis of balance sheet of Fortune Trading ratios will be calculated.
MAIN BODY
Question 1
Table to Calculate Most Profitable Level Of Output Of Machines
Price Per Unit
Unit
s
Sold
Sale
s
Variabl
e Cost
Per
Unit
Total
Variabl
e Cost
Fixe
d
Cost
Profit
s
100 0 0 0 0 2500 -2500
95 10 950 20 200 2500 -1750
90 20 1800 20 400 2500 -1100
85 30 2550 20 600 2500 -550
80 40 3200 20 800 2500 -100
75 50 3750 20 1000 2500 250
70 60 4200 20 1200 2500 500
65 70 4550 20 1400 2500 650
60 80 4800 20 1600 2500 700
55 90 4950 20 1800 2500 650
50 100 5000 20 2000 2500 500
The above table shows that if UK Tools Ltd. will keep the selling price as £100 per unit
of machine, no units will be sold by the company. This situation will result in loss of £2500 for
the company. £2500 is the firm’s fixed costs. Fixed costs are to be paid even if the firm produces
or sales no units. At price level of £90 per unit the firm will be able to sell 10 units of machines.
The variable cost is £20 per unit so for 10 units of machines the total variable cost will be £200
and the resultant loss will be £1750. For very reduction of £5 in selling price per unit the firm’s
sales increases by 10 units. If the firm keeps the price as £75, the number of units sold will be 50,
variable costs are £1000 this results in firm earning a profit of £250. At all the level of sales
having price higher than £75 per unit the firm remains in loss. The most profitable level of output
is production of 80 units and selling them at the price of £60 per unit. This will allow firm to

earn profit of £700. All the price reduction after £60 per unit results in lower profit earnings for
the firm.
Question 2
Cost-Plus Pricing
Mark-up pricing is the other name for cost plus pricing. It is an approach used for pricing
in which certain rigid percent cost is added in the cost incurred by the company in production of
each unit of output (Cost plus pricing definition, 2022). The value that the firm arrives after this
addition is said to be as the selling price of the products the firm sells.
Associated Problems Competition is ignored: The costs set up using the cost plus pricing method differs from
the costs charged by the competitors for their products. This results in either the price by
the firm being too low or too high. Low prices result in creating difficulty for firm to
produce high quality products and high selling price by the firm results in experiencing
low sales by the firm. Cost of product overruns: Using cost plus pricing approach results to problems of lack of
scope with the engineering department to design unique and differential product and firm
end up launching products with simpler designs (Joshi, Krishnan and Mani, 2020). Contact Cost overruns: Seeing the approach from the government’s point of view. If
government appoints any contractor with cost plus pricing method being followed. The
contractor has no scope to curb the expenses and the tendency to add up as many costs as
possible in the project calls for the need to have incentives for cost reduction. Replacements cost are not considered: The concept followed in the cost plus pricing or
mark-up pricing method is historical or past prices based (Chen, Lei and Moinzadeh,
2022). The actual cost might have changed substantially.
Question 3
a) Current Ratio
Particulars Formula Figures
Current Assets 40000
Stock 12000
Debtors 12000
Investments 4000
Cash in Hand 12000

Current Liabilities 24000
Creditors 16000
Bank Overdraft 4000
Taxation (current) 4000
Current Ratio Current Assets / Current Liabilities 1.666667
As per the above tabulated computation the Current Ratio of Fortune Trading
Company is 1.66:1. It indicates that the firm have 1.66 current asset against each of its current
liability.
b) Quick Ratio
Particulars Formula Figures
Quick Assets Current Assets - Stock 28000
Current Assets 40000
Stock 12000
Current Liabilities 24000
Quick Ratio Quick Assets / Current Liabilities 1.166667
Quick Ratio of the firm is 1.66. Quick assets are calculated by reducing the amount of
stock from the current assets of the company. The ratio indicates the liquidity of the firm is good.
c) Debt-Equity Ratio
Particulars Formula Figures
Debt 72000
8% Loan on Mortgage 32000
Creditors 16000
Bank Overdraft 4000
Taxation 8000
Profit and Loss A/C 12000
Shareholders' Fund 48000
Equity Share Capital 40000
Capital Reserve 8000
Debt-Equity Ratio Debt / Shareholders' Fund 1.5
Debt to Equity Ratio of Fortune Trading is 1.5:1. It indicates that the company have more
debt than the equity. For every £1 of equity firm have £1.5 of debt.
d) Proprietary Ratio
Particulars Formula Figures
Shareholders' Fund 48000
Equity Share Capital 40000
Capital Reserve 8000
Total Assets 136000

Plant and Machinery 24000
Land and Buildings 40000
Furniture and Fixtures 16000
Stock 12000
Debtors 12000
Investments 4000
Cash in Hand 12000
Proprietary Ratio Shareholders' fund / Total Assets 0.352941
The proprietary ratio of Fortune Trading is calculated as 0.35:1. It means that for every
asset of the company the contribution of its shareholders is 0.35.
CONCLUSION
Based on this report calculation of most profitable level of output has been made clear.
The report has explained the meaning of cost plus pricing method. Various problems that comes
will adopting cost plus approach to pricing have been highlighted. In this report method for
calculation of current ratio, quick ratio, debt-equity ratio and proprietary ratio using the balance
sheet of the company have been done.

REFERENCES
Books and Journals
Chen, S., Lei, J. and Moinzadeh, K., 2022. When to lock the volatile input price? Procurement of
commodity components under different pricing schemes. Manufacturing & Service
Operations Management. 24(2). pp.1183-1201.
Joshi, S., Krishnan, R. and Mani, D., 2020. Pricing your outsourcing contract in
uncertainty. Strategic Finance. 101(11). pp.21-22.
Online
Cost plus pricing definition. 2022. [Online]. Available through: <
https://www.accountingtools.com/articles/cost-plus-pricing>
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