Cost Accounting and Break-Even Analysis of Philly Ltd

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Introduction to Accounting and Finance Assessment
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Table of Contents
Part A...............................................................................................................................................3
Part B...............................................................................................................................................7
Part C.............................................................................................................................................11
Reference List................................................................................................................................17
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Part A
Introduction
Financial position of the business firms has a huge importance in several areas of the business
firms. It helps to assume the unpredictable incidents in the business firms and by analysing the
risk; it makes the administration more effective to handle profitability in several places. This
report will outline the preparation of income statement of Dexter Plc. detailed income statement
of Dexter Plc will be given below and it will describe the detailed methods of preparing the
income statement and calculating financial position in business firm.
In the Books of Dexter Plc
Journal Entries
Date Particulars L.F. Amount (£) Amount (£)
Bank A/c … Dr 180000
To Capital A/c 180000
Rent A/c …Dr 90000
Advance Rent A/c …Dr 22500
To Bank A/c 1125000
Arrear Rates Paid… Dr 2400
Rates for the year… Dr 4500
To Cash A/c 6900
Delivery Van A/c …Dr 60000
To Bank A/c 60000
Wages Paid A/c …Dr 114825
Arrear Wages A/c … Dr 2175
To Bank A/c 117000
Electric Bills Paid A/c 5700
Arrears in Electric Bills A/c 2025
To Cash A/c 7725
Purchase A/c …Dr 486000
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To Creditors A/c 486000
Purchase A/c …Dr 39000
To Cash A/c 39000
Debtors A/c …Dr 504000
To Sales A/c 504000
Cash A/c … Dr 129000
To Sales A/c 129000
Trade Receivables A/c … Dr 438000
To Debtors A/c 438000
Creditors A/c …Dr 393000
To Trade Payables A/c 393000
Van Expenses A/c … Dr 33600
To Cash A/c 33600
Table 1: Entries for journals in Dexter Plc
(Source: Created by the learner)
In the books of Dexter Plc
Profit and Loss A/c
Dat
e
Particulars Amount
(£)
Dat
e
Particulars Amount
(£)
To Purchases 525000 By Sales A/c 833000
To Rent 90000 By Advance Rent 22500
To arrears paid 2400
To Rates paid 4500
To Wages Paid 114825
To Arrear wages 2175
To Electricity Bills 5700
To Arrears in electricity bills 2025
To Van Expenses 33600
To Net Profit B/d 75275
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855500 855500
Table 2: Account for profit and loss in Dexter Plc.
(Source: Created by the learner)
In the books of Dexter Plc
Balance Sheet as on 31st December, 2019
Assets Amount (£)
Delivery Van 60000
Trade Receivables 438000
Debtors 220775
Advance Rent Paid 22500
Total Assets 741275
Liabilities Amount (£)
Creditors 93000
Bills Payable 393000
Net Profit 75275
Capital 180000
Total Liabilities 741275
Table 3: Balance Sheet of Dexter Plc
(Source: Created by the learner)
Above tables of accounting, depict detailed journal, balance sheet and income statement of the
corporation. The income statement justifies that Dexter Plc has been able to huge amount of
profit and the balance sheet demonstrates the amount of liquidity of the corporation. Liquidity of
the business firm helps the administration to understand about the ability to meet the financial
obligations of the business firm. From the amount of liquidity in the business firm, it can be
stated that Dexter Plc is highly eligible to earn revenue and the profit and loss account of
business firm is showing that internal fraud of the company is managed effectively. It increases
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the profitability of business firm. From the financial documents in the business firm, it can be
stated that the financial governance inside the administration is very strong.
Conclusion
Detailed method of calculating the income statement and other financial documents help the
business firm to become updated to measure financial risk within the business firm. The above
report outlines the detailed financial reports and statements of the business firm. It has helped the
business firm to become more eligible to find out the unpredictable events. Knowing financial
situation of business firm helps to amplify profitability of business firms in this report the
statements of financial reports have been described in detail.
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Part B
Cost accounting is important for the business firms for maintaining the internal information of
the administrations. In this assignment, costing of Philly Limited will be calculated. The business
firm is up to producing a bulk portion of shelves for its business. In this portion, the cost and
other related information of costing of production will be quantified.
Given information about the costs of production in Philly Limited is as follows:
Variable Costs (per unit) Amount
Materials £ 5.25
Labour £ 2.95
Variable overheads £ 1.85
Table 4: Variable cost information
(Source: Created by the learner)
Fixed Costs Amount
Production £ 59,000.00
Selling etc. £ 47,600.00
Table 5: Information of fixed costs
(Source: Created by the learner)
a. What is the contribution that each shelf makes towards covering fixed costs if it is sold
for £13?
The sum of earning that is remained after deducting all the direct expenses is called contribution.
Formula of contribution = (Selling price per unit – Variable cost per unit)
Selling price = £13
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Total variable cost = £ (5.25+2.95+1.85) = £10.05
Contribution = £ (13 – 10.05)
= £ 2.95
Hence, it can be stated that the contribution of each shelf is £2.95.
b. What is the break-even point and margin of safety in terms of both units and revenue if
each shelf is sold for £ 13?
Selling price of each shelf = £ 13
In terms of unit:
Break-even point formula = Fixed cost / (Selling price – Variable cost)
= £ (59000+47600) / (13 – 10.05)
= 36136 units (approx)
Margin of safety formula = (Actual sales – Break-even point)/ Selling price per unit
= ((53000 * 13) – (36136 * 13)) / 13
= 16864 units
From the above quantifications, it can be settled that to reach break-even point the business firm
needs to sell minimum 36136 units of shelves and the margin of safety for Philly Limited is
16864 units.
In terms of revenue:
Contribution margin= £2.95
Contribution margin percentage = 22.69%
Breakeven point in terms of revenue formula = (Fixed expenses / Contribution margin
percentage)
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Breakeven sales = 106600 / 22.69% = £469810.5
Margin of safety sales percentage = ((53000*13) – 469810.5) / 689000 = 32%
c. Calculate the profit the company makes if it produces and sells 48,000 shelves at £13 per
shelf.
PV ratio formula = 2.95 / 689000 = 4.3
New Volume of sales = Fixed cost + Desired level profit / PV ratio
48000 * 13 = 106600 + Desired level profit / 4.3
Desired profit level = £ 2224820
d. Philly Ltd is considering whether to spend £45,000 on marketing and advertising but
consequently raising the selling price by 9%. At this new sales price and with the
advertising, sales (in units) will increase by 17%. Analyse the decision.
Increased fixed cost = £ (106600 + 45000) = £ 151600
New selling price = 13+ 13*9% = £14.17 per unit
Present unit of sales = 53000
New sales = 53000 + 17% * 53000
= £ 878682
The decision will be good for the company, as the level of benefit of the establishments will be
augmented after taking this decision. It is depicting that the cost will increase but it will cover up
by the profit made by the administration.
e. Identify and explain the underpinning assumptions attached to the break-even model
including analysing whether the model can successfully be utilised by a range of differing
businesses.
Break-even model is an effective analysis to be applied in business firms. It helps to understand
whether the administration is able to make profit or not. It also helps to recognise the required
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amount and unites for selling the products to reach up to the break-even level. It is required in
the business firms for these benefits of the model. On the other hand, this model has several
limitations and the limitations have made this model less popular to some administrations. It has
several assumptions of this model will be elucidated below:
This model assumes that all the costs can be separated within the system of production in
administration. Costs in the system behave in a linear way and the total fixed cost of production
will remain within the costing system. All the level of sales will be done with the same prices of
selling per unit and the prices of products will be same for all the output levels. Change in the
technological method and efficiency will be same in the process of production in business firms.
This model assumes that cost and revenue will be based on common activity of the process.
Output for the volume of sales will be the only factor that will affect the cost of business firms.
The above assumptions of this model are considered to be its greatest limitation. Break even
model is not used by many business firms. It is unable to be applied in the firms where several
products are produced. This model assumes all the products to be same within a production
process. Fixed cost of the production is not always same and this model assumes that the fixed
cost of the production process remains same. It is another disadvantage of this mode for which it
is unable to be applied in the business firms. Selling price of the products depend on different
levels of sales. This model assumes that the price of selling will be same and for this reason, it is
difficult to apply in various business firms.
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Part C
a. Calculate the Payback Period, the Accounting Rate of Return, and the Net Present Value
of the machine, and provide recommendations as to whether Sankrust should buy the
machine.
Net present value
Year Projected Cash flow (A)
0 40000000
1 10600000
2 10600000
3 10600000
4 10600000
5 10600000
6 5000000
Cost of capital 7%
Net present Value £ 81,115,704.62
Table 6: Discounted cash flow for net present value
(Source: Created by the learner)
Net present value method comprehends future quantity of return from particular speculation
(Shaw, 2016). In this calculation, it can be seen that the amount of return from the project is very
high in compared to early investment of project. It depicts that the assignment is highly
advantageous for organisation as the total inflow from the project will be much higher from the
total outflow of cash in the business firm.
Payback period
Year Projected Cash flow (A)
0 40000000
1 10600000
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2 10600000
3 10600000
4 10600000
5 10600000
6 5000000
Cost of capital 7%
Payback period 1.98 Years
Table 7: Payback period of the project
(Source: Created by the learner)
The payback period of the certain assignment is 1.98 years. This is a very minor for repayment
of the loan in the business firm (Cantador and Cortés-Cediel, 2018). From the period of payback
period it can be recommended that the project will be a high paying one thus the investment will
be highly worthy for the business firms. This method is one of the simplest methods and helps to
understand the total time of repaying the initial investments to the business firm.
Recommendation for this project after calculating of payback period is positive and it will help
to amplify the earning of administration.
Accounting rate of return
Year Projected Cash flow (A)
0 40000000
1 10600000
2 10600000
3 10600000
4 10600000
5 10600000
6 5000000
Cost of capital 7%
Accounting Rate of Return 15%
Table 8: Accounting rate of return for the project
(Source: Created by the learner)
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