Financial Analysis of Pacific Telemet Ltd & Go-Go-Ltd

Desklib provides past papers and solved assignments for students. This report analyzes profitability and pricing strategies.

Accounting for Managers
1

Table of Contents
Question 1:............................................................................................................................................3
Question 2:..........................................................................................................................................13
Part 1):.............................................................................................................................................13
Part 2):.............................................................................................................................................15
Question 3:..........................................................................................................................................17
References:..........................................................................................................................................18
2

Question 1:
Introduction:
This report is related to financial problems that are faced by the financial managers during the
managerial decision-making. Pacific Telemet Ltd. is a leading smartphone production
company and facing trouble in the attainment of goals of profitability. To improve the sales
volume and profitability, three different proposals are advised by the production, marketing,
and sales manager and, this report is prepared to provide a descriptive analysis of such
proposals. By adopting the recommendations of this report, the company will be able to
improve overall organizational profitability up to the desired level.
In a given case, Pacific Telemet Ltd is suffering from profitability issues so management of
the company is looking for the game-changing alterations in business strategy. In order to
improve overall business operations and remove the profitability issues, company CEO is
investigating the suitability of proposals that are offered by the departmental managers of the
company. An elucidative view of such proposals is explained below:
Current condition of Profitability:
Particulars Amount
Sales 5520000
Less:
Variable production cost 2208000
Fixed manufacturing costs 360000 2568000
Contribution 2952000
Less:
Variable selling and administrative
costs 432000
Fixed selling and administrative costs 600000 1032000
Net income 1920000
3

Break-even analysis:
Particulars Amount
Fixed manufacturing costs 360000
Fixed selling and administrative costs 600000
Total fixed cost 960000
Sales price per unit 460
Variable production cost 184
Variable selling and administrative
costs 36
Contribution per unit 240
BEP point in units
Total fixed costs / per unit
contribution
4000
According to the directors, existing profitability conditions are really not suitable for the
long-term growth of the company so significant improvement is required so that the company
can attain its long-term aims of becoming a market leader. Following changes in sales
strategy are suggested by the departmental managers:
a): Analysis of the production manager’s proposal:
Production manager of the company is asking that quality improvement will be a most
suitable way to attract maximum customers and improve the overall profitability. According
to the production manager, quality improvement will create an additional variable cost of $
36 per unit and it will occur along with additional marketing cost of $ 60000. By adopting
this advice, the company can improve sales by 30%.
4

Income statement:
Particulars
Amount $
Proposed by
manager
Possible change in
sales (+10%)
(15600 add 10%)
Possible change in
sales (-10%) (15600
less 10%)
Sales (30%
improvement) 7176000 7893600 6458400
Less:
Variable production
cost 2870400 3157440 2583360
Additional
production cost @
36/ unit 561600 617760 505440
Fixed
manufacturing costs 360000 3792000 360000 4135200 360000 3448800
Contribution 3384000 3758400 3009600
Less:
Variable selling and
administrative costs 561600 617760 505440
Fixed selling and
administrative costs 600000 600000 600000
Additional
marketing costs 60000 1221600 60000 1277760 60000 1165440
Net income 2162400 2480640 1844160
5

Break-even analysis:
Particulars Amount $
Fixed manufacturing costs 360000
Fixed selling and administrative costs 600000
Additional marketing cost 60000
Total fixed cost 1020000
Sales price per unit 460
Variable production cost 184
Variable selling and administrative
costs 36
Additional variable cost 36
Contribution per unit 204
BEP point in units
Total fixed costs /
per unit
contribution
5000
6

1 Analysis of strength and weakness of the proposal:
Strength Weaknesses
This proposal is related to enhancement in
product quality to ensure that more
customized and specified product is going to
be delivered to customers. Enhancement in
quality will work to improve the customer
satisfaction level and goodwill of company
among the market. This proposal will ensure
increment in long-term market acceptance
and profitability. Improvement of $ 242400
in net income is expected from this project.
It is also considerable that break-even point
of current sales level is 4000 units and it will
reach to 5000 units after the adoption of the
proposal (Squareup, 2019). Also, adoption of
this proposal will create a reduction of $ 36
in contribution per unit. There is a significant
fluctuation in expected sales is possible and a
reduction of 10% sales from the expected
level will create loss conditions for the
company. These facts are required to be
considered during the decision-making about
the proposal.
7

b): Analysis of the sales manager’s proposal:
According to the recommendations of the sales manager, marketing events are required to
enhance so that more people can know about products. She offered an increment of $ 120000
in marketing spending, an improvement of $ 60 in sales price and a reduction of 12% in sales
volume.
Current sales volume = 12000
New sales volume = 12000 – 12% = 10560 units
Old sales price = 460 per unit
New sales price = 460 + 60 = 520 per unit.
Income eventuation under proposal:
Particulars
Amount $
Proposed by
manager
Possible change in
sales (+10%)
(10560 add 10%)
Possible change in
sales (-10%) (10560
less 10%)
Sales ( 10560 *
520) 5491200 6040320 4942080
Less:
Variable production
cost 1943040 2137344 1748736
Fixed
manufacturing costs 360000 2303040 360000 2497344 360000 2108736
Contribution 3188160 3542976 2833344
Less:
Variable selling and
administrative costs 380160 418176 342144
Fixed selling and
administrative costs 600000 600000 600000
Additional
marketing costs 120000 1100160 120000 1138176 120000 1062144
Net income 2088000 2404800 1771200
8

Breakeven point:
Particulars Amount
Fixed manufacturing costs 360000
Fixed selling and administrative costs 600000
Additional marketing cost 120000
Total fixed cost 1080000
Sales price per unit 520
Variable production cost 184
Variable selling and administrative
costs 36
Contribution per unit 300
BEP point in units
Total fixed costs / per unit
contribution
3600
Margin of safety:
Particulars
Proposed by
manager
Possible change in
sales (+10%)
Possible change in
sales (-10%)
unit @ 10560 unit @ 11616 unit @ 9504
Selling price 520 520 520
Total sales 5491200 6040320 4942080
BEP sales (3600*520) 1872000 1872000 1872000
Margin of safety (Actual sales - BEP sales ) / actual sales
65.91% 69.01% 62.12%
Strength Weaknesses
Improvement in marketing efforts is an This proposal is coming with an estimation
9

effective business strategy to improve
profitability. This proposal is referring to the
increment in marketing efforts to enhance the
customer awareness about the product.
Through the adoption of this proposal, the
company can improve net profitability by $
168000. It will also work to reduce the BEP
level of 3600. All these advantages are
indicating that the proposal is acceptable for
the company. The margin of safety which is
an indicator of sales risk is presenting that
chances of reduction in sales is less so the
company can adopt this proposal (Woodruff,
2018).
that price increment will for the reduction in
the sales volume by 12%. This estimation of
reduction is based on prediction and it is
possible that the company will face the loss
of sales at a higher rate. Expected level of
sales is also based on predictions and any
alteration in budgeted and real outcomes will
create serious changes in profitability. For
example, after the 10% reduction in excepted
sales, net income will be reduced to $
1771200 which is lower than existing net
income $ 1920000.
10

c): Analysis of marketing manager’s proposal:
Marketing manager of the company advised that discount of $ 40 to first 2500 customers will
create additional sales of 2000 units but it requires an additional investment of $ 50000 in the
advertisement.
Current sales in units = 12000
Expected increment in units = 12000 + 2000 = 14000
Sales price for first 2500 units = 420
Sales price for remaining 11500 units = 460
Expected Total sales = (2500*420) + (11500* 460) = $ 6340000
Income analysis:
Particulars
Amount $
Proposed by
manager
Possible change in
sales (+10%)
Possible change in
sales (-10%)
Sales 6340000 6984000
569600
0
Less:
Variable production
cost 1943040 2137344 1748736
Fixed manufacturing
costs 360000 2303040 360000 2497344 360000
210873
6
Contribution 4036960 4486656
358726
4
Less:
Variable selling and
administrative costs 380160 418176 342144
Fixed selling and
administrative costs 600000 600000 600000
Additional marketing
costs 50000 1030160 50000 1068176 50000 992144
11

Net income 3006800 3418480
259512
0
BEP analysis:
Particulars Amount
Fixed manufacturing costs 360000
Fixed selling and administrative costs 600000
Additional marketing cost 50000
Total fixed cost 965000
Sales price per unit (Average) 452.86
Variable production cost 184
Variable selling and administrative
costs 36
Contribution per unit 232.86
BEP point in units
Total fixed costs / per unit
contribution
4337
Margin of safety:
Particulars
Proposed by
manager
Possible change in
sales (+10%)
Possible change
in sales (-10%)
unit @ 14000 unit @ 15400 unit @ 12600
Selling price 452.86 452.46 452.46
Total sales 6340000 6984000 5696000
BEP sales
(4337*452.86) 1964054 1964054 1964054
Margin of safety (Actual sales - BEP sales ) / actual sales
69.02% 71.88% 65.52%
12