Accounting for Managers: Analysis of Cash Cycle and Proposals

This document presents a comprehensive solution to an Accounting for Managers assignment. It begins with an analysis of JB Hi-Fi's cash cycle, examining the company's operating and investing cash flows, and the impact of acquisitions and financing activities. The assignment then delves into three distinct proposals, providing both quantitative and qualitative analyses for each, including sensitivity analysis, break-even computations, and considerations of market factors and consumer preferences. The final section addresses a special order from Cycle World, offering a quote based on incremental variable costs and markup, considering different capacity scenarios, and evaluating the opportunities and disadvantages associated with the order. References to relevant financial management texts are included to support the analysis.

ACCOUNTING FOR MANAGERS
Student Name
[Pick the date]

Question 1
Cash Cycle (JB Hi-Fi)
Statement of Cash Flows (Latest)
The operating cash flow for the company has seen a y-o-y increase of $ 5 million for FY2017.
This may be explained on the basis of surge in customer receipts driven by Good Guys
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acquisition. Although a part of this increased customer receipts is negated by higher supplier and
employee payments in FY2017, but still the operating cash flows have witnessed increase. Also,
on account of Good Guys acquisition, an outflow of $ 870 million is realised by company in
FY2017 investing cash flows. In order to finance this acquisition, the company has raised capital
both as equity and debt to the tune of $ 850 million leading to significant inflows from financing
activities in FY2017 (JB Hi-Fi, 2017).
Question 2
Proposal 1
 Advertisement expense rise by $ 30,000
 Variable cost per unit rise by $ 28
 Resultant sales volume to increase by 30%
Quantitative analysis
Considering that sales increase may miss the estimates, following sensitivity analysis has been
conducted.
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It is apparent from above that the profits of the proposed plan are sensitive to the changes in the
sales volume.
Break even computation
The margin of safety is moderate in this proposal as apparent from the above computation.
Qualitative Analysis
 Availability of incremental production capacity to fulfil the higher sales
 Strategy adopted by competitors
 Technological considerations owing to industry being technologically oriented and
disruptive
Proposal 2
 Unit selling price raised by $60
 Incremental cost of advertisement $ 50,000
 Lower sale volume by 10%
Quantitative analysis
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Considering that sales decrease may miss the estimates, following sensitivity analysis has been
conducted.
It is apparent from above that the profits of the proposed plan are sensitive to the changes in the
sales volume.
Break even computation
The margin of safety is weak in this proposal as apparent from the above computation.
Qualitative Analysis
 Consumer preferences need consideration owing to higher price being charged.
 May lead to market share loss having future implications.
Proposal 3
 Sales of first units at discount
 Expected rise in sales by 1000 units
 Incremental cost of advertising campaign is $60,000
Quantitative Analysis
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.
Considering that sales increase may miss the estimates, following sensitivity analysis has been
conducted.
It is apparent from above that the profits of the proposed plan are sensitive to the changes in the
sales volume.
Break even computation
The margin of safety is high in this proposal as apparent from the above computation which
augers well to deal with any uncertainty.
Qualitative Analysis
 Existence of idle capacity to provide for extra units
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 Discount in sales may lead to price war amongst mobile sellers and later increasing price
may be difficult hampering profitability.
Question 3
(1) The objective is to offer quote for the special order received from Cycle World.
(a) In this case, it is assumed that annual capacity is 100,000 units. The underlying basis for
following quotation is to focus on incremental variable costs and applying the markup as
per current practice by the company (Damodaran, 2015).
(b) In this case, it is assumed that annual capacity is 90,000 units and hence cut down of
supply to current customer needs to take place as highlighted below (Arnold, 2015).
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(2) The quote for the special order is based on following two considerations (Parrino and
Kidwell, 2014).
 Incremental variable costs driven by output level
 Mark up applied to costs
For fulfilling the special order, an estimation of the overall variables costs has been taken.
These costs are essentially those that are production oriented. After the computation of costs,
the mark up is applied to reach the eventual price per unit. Finally, the unit price and quantity is
taken into consideration to reach order quote (Petty et. al., 2015).
Opportunities
 Future orders from Cycle World can enhance capacity utilisation
 Higher capacity utilisation from special order acceptance would lead to better profits for the
company
 As capacity utilisation approaches 100%, company can look for expansion.
Disadvantages
 Decline in profitability owing to lower unit profit from special order Concentration risk owing to higher share of orders from Cycle World Shifting of concentration from direct customers to other businesses.
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References
Arnold, G. (2015) Corporate Financial Management. 3rd ed. Sydney: Financial Times
Management.
Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York: Wiley,
John & Sons.
JB Hi-Fi (2017) Annual Report 2017, [Online] Available at
https://www.jbhifi.com.au/Documents/2017%20Annual%20Report.pdf [Accessed September 8,
2018]
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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