ACC00724 - Cash Cycle, Profitability Analysis & Strategies

This assignment focuses on accounting for managers, analyzing the cash cycle of Aristocrat Leisure, evaluating cash flow trends, and assessing profitability improvement plans for Telesmart Ltd. The cash cycle is computed, and the statement of cash flows for FY2017 and FY2016 are analyzed, highlighting increased operational cash flows due to higher customer receipts and strategic investments. Three profitability enhancement plans are evaluated through quantitative and sensitivity analyses, considering their impact on sales, costs, and break-even points. Additionally, the assignment addresses a special order scenario for Free Wheels, determining the bid amount based on factory capacity and incremental costs, while also weighing the opportunities and disadvantages of accepting the order. The horizontal analysis of Aristocrat Leisure over a five-year period is also examined, noting revenue increases from acquisitions and margin expansion.

ACCOUNTING FOR MANAGERS
Student Name
[Pick the date]

Question 1
The selected company is Aristocrat Leisure.
The applicable formula for cash cycle is highlighted below.
The computation of cash cycle for the company is summarised in the tabular format below.
The relevant extract of the statement of cash flows for FY2017 and FY2016 is indicated below.
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It is apparent from the above extract that the company has witnessed an increase in the cash
flows from operations in FY2017 in comparison to the previous year i.e. FY2016. This is despite
the fact that the income tax paid in FY2017 witnessed a significant increase from FY2016. The
primary factor contributing to enhanced cash flow from operations is the sharp rise in receipts
from customers while the payments made to employees and suppliers has shown only muted
growth. With regards to cash outflows from investing activities, there has been an increase in
FY2017 as compared to FY2016 owing to significantly higher spend on intangibles owing to the
acquisitions of new online gaming platforms. In relation to cash outflows from financing
activities, there has been a decrease in FY2017 as compared to FY2016. This may be attributed
to the decrease in repayments of borrowings. However, an interesting observation relates to the
increase of about 50% in the dividends paid which is indicative of the robust business
performance (Aristocrat, 2017).
Question 2
First proposed plan by production manager Aaron Jacobsen
 Quality enhancement of products
 Increase in variable cost ($28)
 Cost incurred in advertisement ($30,000)
 Increase in sales (30%)
Quantitative analysis for original and proposed plan
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Proposed plan has increased the
profit but there is a possibility
that sale would not increase by
30%.
Sensitivity analysis for original and proposed plan
Due to proposed plan, the sale may increase by 15% but it would not result in any extra profit as
compared with the profit derived through original plan.
Break-even sale is S and the breakeven is explained with no extra profit or for $240,000 as
profit.
Further, it is imperative to analyse the influence of increase in production on FC (fixed cost) and
VC (variable cost). Also, it is essential to find whether the existing plant capacity can
accommodate the higher production. The selection of appropriate strategy is another pivotal
element to consider (Damodaran, 2015).
Second proposed plan by sales manager Joanne Arnett
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 Increase in selling price per unit ($60)
 Cost incurred in advertisement ($50,000)
 Reduction in sales (10%)
Quantitative analysis for original and proposed plan
Proposed plan has increased the
profit but there is a possibility
that sale would reduce higher
than the expected.
Sensitivity analysis for original and proposed plan
Due to proposed plan even if the volume sale reduces by 20% and it would reduce the profit as
compared with the profit derived through original plan.
Break-even sale is S and the breakeven is explained with no extra profit or for $240,000.
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Further, it is imperative to analyse the influence of reduction in the production on market share
which may cause loss of the competitive advantage along with the effect on the VC (variable
cost) which may be unfavourable (Northington, 2015).
Third proposed plan by marketing manager Jennifer Saunders
 Promotional campaign
 Sale 1500 phone at discount price ($30)
 Cost incurred in advertisement ($60,000)
 Increase in sales (1000 unit)
Quantitative analysis for original and proposed plan
Proposed plan has increased the
profit but there is a possibility
that sale increase would not be
same as expected.
Sensitivity analysis for original and proposed plan
Due to proposed plan, the sale reduces but it increases the profit as compared with the profit
derived through original plan.
Break-even has been received when the sale has increased by 438 units.
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Further, it is imperative to analyse whether the company can accommodate the extra production
or not. Further, there is a strong possibility that competitor would offer the product at lower price
which means the expected sale would not incur and a downside risk on sales volume looms
(Parrino and Kidwell, 2014).
Question 3
(1) (a) The amount for the bid on the part of Free Wheels in order to enact contract with Cycle
World Ltd.
The annual factory capacity of Free Wheel is 100,000 units.
Production (Annual) = 12 * 6000 units = 72,000 units
Special order unit 25,000 units
Incremental fixed cost No
Incremental administrative cost No
Incremental sale cost No
Incremental variable cost $10 per unit
Direct material cost $75 per unit
Direct labour cost $35 per unit
Total cost for special order = $10+$75+$35 =$120 per unit
Mark-up margin 100%
Unit sale price $240
Total amount for bid to enact the contract = $240 *250,000 = $6 million
(b) The annual factory capacity Free Wheel is 90,000 units.
Production (Annual) = 12 * 6000 units = 72,000 units
Production capacity (Annual) 90,000 units
Current production would reduce by X units
while accepting the special order.
X = 7000 units
Additional units required to produce 18,000 units
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Incremental cost for 18,000 units $120
Cost saved (in the form of sale and
administrative expenses)
= 25* 7000 units = $175,000
Profit derived on 7000 units would be part of the special order that would be $120 per unit which
is lesser than the current profit i.e. $185 per unit.
Loss of profit = 7000 * (185 – 120) = 455,000
Total quote amount = $6 million + $0.455 million - $0.175 million
=$6.28 million
(2) Incremental costs expected for the production would be an imperative aspect for determining
the quote of special order. Here, no additional fixed expenses are required because the
company has surplus production capacity. Further, no administrative and selling expenses are
required and thus, these expenses would not be taken into account. Company has a policy to
earn 100% margin on total costs and the derived quote is also giving the 100% margin on
total costs (Arnold, 2015).
Opportunity: High profit can be derived because of the utilization of the production capacity.
Also, the company can easily make more clients and sustainable business relation. Company can
also invite the clients of Cycle World directly in order to derive more profit (Brealey, Myers and
Allen, 2014).
Disadvantages: Company would not be pay necessary attention in the growth of the sale by
accepting the special order. It is because the per unit profit for special order product is lower than
the per unit profit received if they sell directly to the customers. Hence, it also reduces the
profitability of the company (Damodaran, 2015).
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References
Aristocrat (2017) Annual Report FY2017, [Online] Available at
http://ir.aristocrat.com/static-files/a8c256c3-6910-4054-9a8e-87ca4fc05174 [Assessed September 4,
2018]
Arnold, G. (2015) Corporate Financial Management. 3rd ed. Sydney: Financial Times
Management.
Brealey, R. A., Myers, S. C., & Allen, F. (2014) Principles of corporate finance, 2nd ed. New
York: McGraw-Hill Inc.
Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York: Wiley,
John & Sons.
Northington, S. (2015) Finance, 4th ed. New York: Ferguson
Parrino, R. and Kidwell, D. (2014) Fundamentals of Corporate Finance, 3rd ed. London: Wiley
Publications
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