This project analyzes the financial performance of Fortune trading company and demonstrates the understanding of the use of cost information for business performance. It also analyzes the organization's budget through variance analysis.
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Managing Financial Resources Assessment 2
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TABLE OF CONTENTS INTRODUCTION..........................................................................................................................3 MAIN BODY...................................................................................................................................3 Question 1....................................................................................................................................3 Question 2....................................................................................................................................4 Question 3....................................................................................................................................5 Current Ratio :..................................................................................................................................5 REFERENCES................................................................................................................................8
INTRODUCTION Management of the financial resources is important as it helps the organization to obtain funds and also make investments when it sis important for the current activities. In this project the financial performance of Fortune trading company will be analysed. This project will be the demonstration of the understanding of the use of cost information for the business performance. This project will also be able to analyse the organizations budget through the use of variance analysis. MAIN BODY Question 1 The price and unit distribution from the given study helps in the calculation of the units which will be sold at different price levels. £Units Price P1100100 Price P295110 Price P390120 The given costs are as follows, Fixed cost is the cost which is fixed and will not change for an organization with any increase or decrease of production. Variable cost is given to change per unit of sale as changes as per the cost of production. Fixed cost2500 Variable cost @ per unit20 From the above case study the following different scenarios that can be created that will help the organization in the generation of profit. Sales 1P1*10010000 Fixed cost2500 Variable cost @ per unit202000
Profit5500 Sales 2P2*11010450 Fixed cost2500 Variable cost @ per unit202200 Profit5750 Sales 3P3*12010800 Fixed cost2500 Variable cost @ per unit202400 Profit5900 From the above calculation it can be found that the business will be most profitable if its decrease its price at P3 which is £90. This is due to the increase in the sales which provides it the profit of £5900. Question 2 Cost plus pricing is also known as the markup pricing which is the method that is used for the fixed percentage is added on top of the cost which it takes to produce the one unit of a product unit cost (Hosaka, 2019.). This is considered to be one of simplest pricing strategy which is used for the charging extra for each item over the cost. This is also considered to be the factor which is helpful for the deciding the wants for the sell pies for the 10% of the more than the ingredients cost for making them the price that would be the cost for 110% of the cost. An example of cost plus pricing, Material cost =£10 Labour cost = £30 Overhead costs = £15 Therefore, the total costs = £55 hence, if the mark up of the price needs to be at 50%. Formula for this would be,
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Selling price = 55.00(1+0.50) = 55.00(1.50) = £82.50 The problems of utilization of this approach is, The price can be set too high due to which the business may face a downfall in the sales of the organization. Due to this there is no guarantee of all the costs that will be covered or not. Because of such simple calculation of the selling price there are no calculated incentives from the sale. Question 3 Current Ratio : Current Ratio Particulars2020 Stock12000 Debtors12000 Cash in hand12000 Short term investments4000 Current Assets40000 Bank OD4000 Creditors16000 Taxation(current + future)8000 Current Liabilities28000 Current Ratio1.429 Current ratio is the liquidity ratio which is helpful for the measurement of the company's ability to pay the short-term obligations to be paid (Ding, Peng and Wang, 2019). It has been found that a good current ratio has been considered to be calculated from 1.5 to 3. Fortune trading has been able to have a current ratio of 1.429 which is a decent current ratio however, it needs to be improved which can be only done through increasing the efficiency of the operations of the organization. Quick Ratio Particulars2020 Current Assets40000
Inventory12000 Prepaid expenses4000 Current Liabilities28000 Formula Current Assets - Inventory - Prepaid Expenses] / Current Liabilities Quick Ratio0.86 Quick ratio is the indicator of the company which is helpful for the short-term liquidity position and measures the ability of the company for meeting its short-term obligations with its liquid assets (Alswalmeh and Qaqish, 2021). In this project the calculation of the quick ratio has been able to determine the key benefits of the organizational operations. The quick ratio of this organization is 0.86 which needs to be around 1 to be considered to be ideal. Hence, this organization needs to understand the operations. Debt equity ratio : Debt Equity Ratio Particulars2020 Short term Debt4000 Long Term Debt12000 Other fixed Payments2560 Shareholders equity40000 Formula Short term debt +Long term debt+ Other Fixed payments/ Shareholders equity Debt Equity Ratio0.464 The debt to equity ratio of this organization has been considered to be the factor which is helpful for the evaluation of the company's financial leverage and for its calculation through dividing the company's total liabilities (Indrayono, 2019). This is helpful metric to understand the corporate finances of the organization. The debt to equity ratio for this organization has been calculated at 0.464 which is good and for this organization improving this ratio will help the business in attracting new investors towards its operations. Proprietary ratio :
Proprietary ratio Particulars2020 Total Assets120000 Shareholders’ equity40000 Formula Shareholders equity/Total assets Proprietary ratio0.333333333 The proprietary ratio shows the percentage of the ownership of the shareholders in the organization. This is the shareholders equity and total asset's ratio which is effective for understanding the level of investment made by this organization for the management of the study. It can be said that the growth of the business can be considered to be the measured if the proprietary investment is higher.
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REFERENCES Books and Journals Hosaka, T., 2019. Bankruptcy prediction using imaged financial ratios and convolutional neural networks.Expert systems with applications.117. pp.287-299.. Ding, K., Peng, X. and Wang, Y., 2019. A machine learning-based peer selection method with financial ratios.Accounting Horizons. 33(3). pp.75-87. Alswalmeh, A. and Qaqish, M., 2021. The Ability of Financial Ratios to Predict the Index of Banking Sector in Amman Stock Exchange: An empirical study.International Journal of Business Ethics and Governance.4(1). pp.86-105. Indrayono, Y., 2019. Predicting returns with financial ratios: Evidence from Indonesian Stock Exchange.Management Science Letters.9(11). pp.1908-1908.