Accounting for Managers (ACC00724) Assignment 2 Solution Analysis

This document presents a detailed solution to an Accounting for Managers assignment, addressing key concepts such as cash conversion cycles, financial data analysis, and special order pricing. The solution begins by calculating the cash conversion cycle for a company over a five-year period, analyzing trends and liquidity positions. It then delves into a profitability analysis based on financial data from FreeWheels, evaluating three alternative proposals and recommending the best option based on both quantitative and qualitative factors. Finally, the solution explores special order pricing, calculating bid prices under different production capacity scenarios and determining the optimal pricing strategy for the company. The document also includes a bibliography of relevant sources.

ACCOUNTING FOR MANAGERS

Contents
Solution 1:..................................................................................................................................2
Solution 2:..................................................................................................................................3
Solution 3:..................................................................................................................................6
Part 1.......................................................................................................................................6
Part 2.......................................................................................................................................7
Bibliography...............................................................................................................................8

Solution 1:
The net estimated time taken to receive and make all payments is known as the cash
conversion cycle. A shorter cash conversion cycle is always considered to be favourable for
the company. It helps to determine and maintain the liquidity position of the company. It is a
known fact that it is important for the company to have an adequate liquidity so that it does
not affect the performance and profitability of the company. The cash conversion cycle is
calculated by adding debtor’s period and inventories period and subtracting creditor’s period
from it. (Atkinson, 2012)
The following table shows the calculation of cash conversion cycle of Cash convertors
international limited for a period of five years:
Particulars 2017 2016 2015 2014 2013
Inventory
20,99
1 17,612 27,684
25,56
2 21,783
Debtors
7,57
4 13,651 28,120
29,44
3 13,032
Creditors
21,28
8 19,821 26,450
26,79
4 20,048
Cogs
97,80
3 1,09,084 1,38,457 1,18,869 94,158
Sales 2,71,473 3,09,995 3,74,893 3,31,669 2,72,723
Inventory Turnover
7
2 76
7
0 73 42
Debtor Turnover
1
4 25
2
8 23 9
Creditor Turnover
7
7 77
7
0 72 39
Cash Cycle
1
0 23
2
8 24 12

From the above table, it is observable that the cash conversion cycle is the lowest of the five
years. However, we can also see that there has been an increasing period over the five years.
The inventory has been moving faster because of which there has been an increase in the
production as well as sales volume. We can conclude that the company is at a good liquidity
position as it is able to settle it in 10 days.
There has been an increase in the cash inflows when compared to the previous years. (Datar
M. S., 2015) This increase is mainly because of the increase of cash inflow from operating
activities by $700000. This huge difference was cause because the company has tax refund
this year while it had to pay taxes in the last year.

Solution 2:
The following two tables provide us financial data of free wheels for the last year.
Financial data of FreeWheels from last year
Sales 5,000
Selling price 420
Variable manufacturing cost 144
Fixed manufacturing costs 4,60,000
Variable selling and administrative
costs 36
Fixed selling and administrative costs 5,00,000
Statement showing profit
Particulars Amount
Sales 21,00,000
Less: Manufacturing cost
Variable 7,20,000
Fixed 4,60,000
Less: Selling and administrative costs
Variable 1,80,000
Fixed 5,00,000
Profit/Loss 2,40,000
Let us analyse the entire three alternatives provided to us quantitatively as well qualitatively:
Alternative 1:
Proposal 1- Aaron Jacobsen
Sales 6,500
Selling price 420
Variable manufacturing cost 172
Fixed manufacturing costs 4,60,000

Variable selling and administrative
costs 36
Fixed selling and administrative costs 5,00,000
Advertisement charges 30,000
Profit statement
Particulars Amount
Sales 27,30,000
Less: Manufacturing cost
Variable 11,18,000
Fixed 4,60,000
Less: Selling and administrative costs
Variable 2,34,000
Fixed 5,00,000
Advertisement charges 30,000
Profit/Loss 3,88,000
Alternative 2:
Proposal 2- Joanne Arnett
Sales 4,500
Selling price 480
Variable manufacturing cost 144
Fixed manufacturing costs 4,60,000
Variable selling and administrative
costs 36
Fixed selling and administrative costs 5,00,000
Advertisement charges 50,000
Statement showing profit
Particulars Amount
Sales 21,60,000
Less: Manufacturing cost

Variable 6,48,000
Fixed 4,60,000
Less: Selling and administrative costs
Variable 1,62,000
Fixed 5,00,000
Advertisement charges 50,000
Profit/Loss 3,40,000
Alternative 3:
Proposal 3- Jennifer Saunders
Sales 6,000
Selling price 420
Variable manufacturing cost 144
Fixed manufacturing costs 4,60,000
Variable selling and administrative
costs 36
Fixed selling and administrative costs 5,00,000
Rebate 45,000
Advertisement charges 60,000
Statement showing profit
Particulars Amount
Sales 25,20,000
Less: Manufacturing cost
Variable 8,64,000
Fixed 4,60,000
Less: Selling and administrative costs
Variable 2,16,000
Fixed 5,00,000
Rebate 45,000
Advertisement charges 60,000

Profit/Loss 4,80,000
It is obvious that the management of the company will choose the alternative which will
provide highest profits. (Datar S. , 2016) Therefore, the alternative proposed by Jennifer must
be accepted.
However, the management cannot take its decision based on the quantitative factors only it
also has to look upon the qualitative factors. Based on the quantitative factors the company
will choose the alternative which will provide highest profits and lowest cost but there are
certain qualitative factors also that have to be considered. The management has to analyse the
impact of their decision on the customers and the society as a whole. It should check whether
this proposal will lead to long term success or not. (Girard, 2014)

Solution 3:
Part 1.
(a)
When the production capacity is 100000 unit
Spare capacity = 100000-72000
= 28000
Special order for = 25000
Cost statement for special order
Direct Material Cost 1875000
Direct Labour Cost 875000
Variable Factory Overhead 250000
Fixed Factory Overhead 500000
Total Manufacturing Cost 3500000
Units 25000
Bid Price 140
The bid price for this circumstance is $140 per unit.
(b)
When the production capacity is 90000 unit
Spare capacity = 90000-72000
= 18000
Special order for = 25000
Loss of Profits from 7000 units = 1295000
Cost statement for special order
Direct Material Cost
187500
0
Direct Labour Cost 875000

Variable Factory Overhead 250000
Fixed Factory Overhead 500000
Total Manufacturing Cost
350000
0
Loss of profits from existing demand
(7000*185)
129500
0
Total Cost
479500
0
Units 25000
Bid Price 191.8
The bid price for this circumstance is $191.8 per unit.
Part 2.
Free wheels produce 72000 units per annum whereas its annual capacity to produce bikes is
100000 units. So, there is a spare capacity of 28000 units available. (Horngren, 2012) The
company must accept the offer to produce additional units if the special order is less than or
equal to 28000 units as their will be no additional capital investments. (Mattessich, 2016)The
company has been offered to produce only 25000 units and so the company must accept the
offer as it will have to incur variable costs only. So, based on the above calculations the
management can charge anything above $140 per unit for these 25000 units.

Bibliography
Atkinson, A. A. (2012). Management accounting. Upper Saddle River, N.J.: Paerson.
Datar, M. S. (2015). Cost accounting. Boston: Pearson.
Datar, S. (2016). Horngren's Cost Accounting: A Managerial Emphasis. Hoboken: Wiley.
Girard, S. L. (2014). Business finance basics. Pompton Plains, NJ: Career Press.
Horngren, C. (2012). Cost accounting. Upper Saddle River, N.J.: Pearson/Prentice Hall.
Mattessich, R. (2016). Reality and accounting. [S.I.]: Routledge.