Accounting for Managers: Financial Analysis, RFG Case Study

This report provides a financial analysis of RFG, focusing on cash flow statements, evaluating financial proposals, and determining special order quotations. The cash flow analysis examines operating, investing, and financing activities, noting key changes in FY2017. Three proposals are quantitatively...Read More

ACCOUNTING FOR MANAGERS
RFG
STUDENT ID:
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Question 1
The relevant input computations for the cash cycle are given below.
Extract from cash flow statement (RFG, 2017).

Cash Flow From Operating Activities – This has declined in FY2017 by about $1million
which could be attributed to the higher tax outflow in FY2017 by about $2.2 million when
compared to FY2016. Receipts from customers have shown a robust increase in FY2017 but
these gains have been nullified by corresponding surge in payments to suppliers and
employees (RFG, 2017).
Cash Flow from Investing Activities – There is an increase in the outflow from investing
activities by about $ 70 million in FY2017 compared to previous year. This is on account of
higher outflow on purchase of PP&E. Also, there has been an outflow to the tune of $ 67
million in FY2017 owing to business acquisition (RFG, 2017).
Cash Flow from Financing Activities – In FY2017, there is a cash inflow of $ 31.9 million as
compared to outflow of $ 32.2 million in FY2016. The main reason for the same is the
proceeds from equity issue to the tune of $ 35.6 million (RFG, 2017).

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Question 2
Proposal 1
It focuses on improvements in quality by having $ 28 incremental variable cost per unit.
Besides, with advertisement spent increasing by $ 30,000, a 30% sales volume increase is
expected.
Quantitative Analysis
Proposal 1 Profits > Existing profits
However, it is imperative to consider the impact of lower sales increase than anticipated
through the use of sensitivity analysis as indicated.
Only with a 20% increase in sales, the profit shows some significant increase.
Assume X is the break even volume of sales required to generate the current profit of $
240,000.

Qualitative factors are listed below (Damodaran, 2015).
 Presence of spare capacity to accommodate the increase in production
 Additional resource allocation to current product or development of new product for
competitive edge over competition.
Proposal 2
Unit price is increased to the tune of $ 60 through higher advertisement expenses of $ 50,000
leading to lower volume sales by 10%.
Quantitative Analysis
Proposal 2 Profits > Existing profits
However, it is imperative to consider the impact of higher sales decrease than anticipated
through the use of sensitivity analysis as indicated.

A higher decrease in sales than anticipated can clearly adversely impact the profit.
Assume X is the break even volume of sales required to generate the current profit of $
240,000.
The margin of safety is quite thin for this proposal which makes it quite risky. Qualitative
factors are listed below (Petty et. al., 2015).
 It may reduce the customer base along with market share.
 The company may face greater competition from low cost manufacturers.
 Also, the customer preferences need to be considered.
Proposal 3
The proposal involves a promotional campaign which involves that initial 1500 mobile
phones have a discounted price of $ 390. However, if an advertising expense of $ 60,000 is
also taken, then a higher sales volume of 6000 units (i.e. 1000 units increase) would be
generated.
Qualitative Analysis

Proposal 3 Profits > Existing profits
However, it is imperative to consider the impact of lower sales increase than anticipated
through the use of sensitivity analysis as indicated.
Clearly even if proposed sales increase halves to 500 units, then also, incremental profits are
earned as compared to original plan.
Assume X is the break even volume of sales required to generate the current profit of $
240,000
The above computation hints at a high margin of safety. Qualitative factors are listed below
(Arnold, 2015).
 Discounted price may initiate a price war with competitors and hence raising rates
later may be an issue.
 The presence of idle capacity for ramping up production is necessary.

Question 3
1a) The monthly production is 6000 units thus implying an annual production of 72,000 units.
The given firm capacity is given as 100,000 units and hence no cuts would have to be taken
to accommodate special order.
As no new capacity is being set up, hence incremental fixed cost for special order is zero.
Also, amongst the variable cost, owing to direct order, no selling and administrative expenses
would arise (Brealey, Myers and Allen, 2014). The incremental cost per unit of the special
order is expressed in table below.
On the current orders, the company applies 100% mark up and hence the same is extended
here leading to quotation per unit of 120*2 = $ 240.
Quotation for the special order = 25000*240 = $ 6,000,000
b) Now owing to production capacity being 90000, for special order acceptance, the current
supply to customers would have to be curtailed.
Reduced supply to current customers = 90000 -72000 + 25000 = 7,000
Compared to the previous case, in this case the company would bear some loss of profit as
the profit arising from selling directly to customers is higher than the corresponding
profitability in special order. Also, the variable selling and administrative cost on 7000 units
would be saved amounting to (7000*25) = $175,000
Differential profits = 185 -120 = $ 65
Total loss of profits owing to special order = 65*7000 = $ 455,000
Therefore, final quote = $600,000 - $175,000 + 455,000 = $ 628,000

2. The special order quote is based on namely two parameters, incremental cost per unit and
markup applied. It is essential that no fixed cost would be considered since for making the
special order, no incremental capacity is required. Also, since the order is directly sourced, no
administration and selling costs are incurred. Thus, after computation of production costs, a
mark-up of 100% as per the current practice of company is applied for reaching the quote
amount (Arnold, 2015).
Opportunities
 Higher capacity utilisation leading to greater profit generation.
 The order from Cycle World is potentially a beginning to receive bigger orders in the
future.
 The company can market products to Cycle World customers and hence enhance sales
further.
Disadvantages
 The profitability is adversely impacted since profit per unit is lower on special order
than direct client.
 Increased dependence on Cycle World can limit the attention the company gives to
direct customers and thus increase concentration risk.

References
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.
Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M., & Nguyen, H. (2015).
Financial Management, Principles and Applications, 6th ed.. NSW: Pearson Education, French
Forest Australia
RFG (2017) Annual Report 2017, [Online] Available at
http://www.rfg.com.au/wp-content/uploads/2018/02/RFGLAnnualReport2017.pdf [Accessed
September 8, 2018]