Accounts for Managers: Analysis of Cash Flow and Profitability

This report provides a detailed analysis of accounting concepts relevant to managers, focusing on cash conversion cycles, profitability, and strategic decision-making. It begins with an introduction to accounting's role in assessing business performance and then calculates the cash conversion ...Read More

ACCOUNTS FOR
MANAGERS

Table of Contents
INTRODUCTION...........................................................................................................................1
QUESTION 1...................................................................................................................................1
Cash conversion cycle.................................................................................................................1
QUESTION 2...................................................................................................................................2
a) Perspective of production manager.........................................................................................3
b) Perspective of sales manager..................................................................................................4
c) Perspective of Marketing director...........................................................................................4
QUESTION 3...................................................................................................................................5
a) The FreeWheels’s annual factory capacity is 100,000 units...................................................6
b) The FreeWheels’s annual factory capacity is 90,000 units....................................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Accounting is an important element within helps for determining the real aspect and
position of business in organisational context. Importance of costing system subject to analyse
the cost and control the cost is defined in this report. Cash conversion cycle of organisation and
cash flow statement of Telstra Corporation for most two years reviewed. Qualitative and
quantitative support to the operations issues and conflicts are done in this report. Break even
analysis, profit calculation subject to assist management decisions are carried out with practical
scenarios. Evaluation of production for cycle world organisation carried out subject to determine
possible opportunities and potential disadvantages with accepting the contract.
QUESTION 1
Cash conversion cycle
This cycle presents the cash flow calculation to analyse and measure the cash flow
rotation with in operations and management. It mainly helps to determine the period of
converting inventories in to cash. It go through various stages to convert the inventories within
cash and emoluments. It is calculated by following formula;
Cash conversion cycle = Days inventories outstanding + Days sales outstanding – Days
payable outstanding
Days inventories outstanding = Inventories / cost of sales * 365
Days sales outstanding = Accounts receivable / net credit sales *365
Days payables outstanding = Accounts payable / cost of sale * 365
1

(Cash conversion cycle, 2016)
Cash conversion cycle of Telstra Corporation is calculated as follows;
Telstra Corp Ltd's Cash Conversion Cycle for the fiscal year that ended in Jun. 2018 is calculated
as
Cash Conversion Cycle Days Sales Outstanding + Days Inventory - Days Payable
44.74 + 25.24 - 47.09
22.89
Telstra Corp Ltd's Cash Conversion Cycle for the quarter that ended in Jun. 2018 is calculated
as:
Cash Conversion Cycle Days Sales Outstanding + Days Inventory - Days Payable
44.5 + 21.76 - 35.91
30.35
QUESTION 2
There is a case scenario given of Telesmart Ltd mnufactures which produce SIM cards.
CEO is under pressure from the Board of Directors to increase the profitability of the phones and
has asked executives from different departments for suggestions. There is an advise of three
managers are taken to assist the management decision.
Current state production
Current position
2

5,000 units $
Sales $420 per unit 2100000
Less:
Variable manufacturing cost $144 per unit -720000
Variable selling and administrative costs $36 per unit -180000
Contribution 1200000
less;
Fixed manufacturing costs -460000
Fixed selling and administrative costs -500000
Profit 240000
As per the above analysis it is seen that contribution is calculated as $1200000 and net
profit is calculated as $240000.
Break even point
Contribution per unit
Contribution/Production
units 240
PV ratio (Contribution/Sales)*100 57.14
Total fixed cost 960000
Break even point in units 4000
Break even point in sale Price 1680084
As per current production and sales position of organisation the break even in units is
analysed as 4000 units and in sale price it is calculated as $1680084.
a) Perspective of production manager
Aaron Jacobsen who is a production manager in the company and the improvement to the
quality of the product. As per his perspective, if organisation focus upon production quality then
it will be able to generate more profitability. As per quality improvement the organisation will
have to bear increased variable cost $28 per unit and $30000 national adverting campaign and it
increased 30% sales units. The contribution and profit calculation is done below.
6500 units $
Sales $420 per unit 2730000
Less:
3

Additional variable cost $28 per unit -182000
Variable manufacturing cost $144 per unit -936000
Variable selling and administrative costs $36 per unit -234000
Contribution 1378000
Less:
Fixed manufacturing costs -460000
Fixed selling and administrative costs -500000
National advertising campaign -30000
Profit 388000
Contribution is calculated as $1378000 and net profit is calculated as $388000.
Break even point
Contribution per unit
Contribution/Production
units 272
PV ratio (Contribution/Sales)*100 56.67
Total fixed cost 960000
Break even point in units 3529
Break even point in sale Price 1694118
The breakdance sales in units and price are subsequently calculated as $3529 and
$1694118.
b) Perspective of sales manager
Joanne Arnett, sales manager give suggestion regarding increasing profitability. As per
her market research, If advertising will increased by $50000 then the sale price of products will
increased by $60 per unit and sale volume will decreased by 10%.
4500 units $
Sales $480 per unit 2160000
Less:
Additional variable cost $28 per unit -126000
Variable manufacturing cost $144 per unit -648000
Variable selling and administrative costs $36 per unit -162000
Contribution 1224000
4

less;
Fixed manufacturing costs -460000
Fixed selling and administrative costs -500000
Additional advertising expenses -50000
Profit 214000
As per above profit calculation contribution is analysed as $1224000 and net profit for
$214000.
Break even point
Contribution per unit
Contribution/Production
units 212
PV ratio (Contribution/Sales)*100 50.48
Total fixed cost 960000
Break even point in units 4528
Break even point in sale Price 1901887
Break even it defined as 4528 unit and in sale price it is calculated as $1901887.
c) Perspective of Marketing director
Jennifer Saunders is a marketing director wants to undertake a promotion campaign in
which $30 per unit will be given to the first 1500 phones sold and it is expected that sales units
will be increased by 1000 units and advertising expenses will increased by $60000. By
considering all these aspects calculation is done below:
6000 units $
Sales $420 per unit 2520000
Less:
Rebate
$30 per unit for first
1500 units -45000
Variable manufacturing cost $144 per unit -864000
Variable selling and administrative costs $36 per unit -216000
Contribution 1395000
less;
Fixed manufacturing costs -460000
5

Fixed selling and administrative costs -500000
Additional advertising expenses -60000
Profit 375000
As per above calculation the contribution is measured as $1395000 and profit is
calculated as $375000.
Break even point
Contribution per unit
Contribution/Production
units 232.5
PV ratio (Contribution/Sales)*100 55.36
Total fixed cost 960000
Break even point in units 4129
Break even point in sale Price 1734194
Break even presents following results as 4129 in units and $1734194 in sales price.
Suggestion
As per above analysation of three option it is seen that the contribution and profit is found
more in suggestion provided by Aaron Jacobsen. The board of directors should opt the advise
regarding increasing the sales units and profitability.
QUESTION 3
1. FreeWheels Ltd. bid for this contract in
each of the following circumstances
At present capacity
Production of 72000 units
Sales 370 26640000
Less:
Direct Material Cost 75 5400000
Direct Labour Cost 35 2520000
Variable Factory Overhead 10 720000
Fixed Factory Overhead 20 1440000
Gross profit 16560000
6

Selling & Administrative Costs
Variable Selling and Administrative
Cost 25 1800000
Fixed Selling and Administrative Cost 20 144000
Net profit 14616000
According to above calculation the net profit is calculated as 1461600 at capacity of
72000 units annually. The organisation will be able to earn profit for $14616000.
a) The FreeWheels’s annual factory capacity is 100,000 units
Production of 100000 units
Sales 370 37000000
Less:
Direct Material Cost 75 7500000
Direct Labour Cost 35 3500000
Variable Factory Overhead 10 1000000
Fixed Factory Overhead 20 2000000
Gross profit 23000000
Selling & Administrative Costs
Variable Selling and Administrative Cost 25 2500000
Fixed Selling and Administrative Cost 20 144000
Net profit 20356000
At capacity of 100000 production units, organisation will be able to generate profit of
$20356000.
b) The FreeWheels’s annual factory capacity is 90,000 units
Production units 90000 Units
Sales 370 33300000
Less:
Direct Material Cost 75 6750000
Direct Labour Cost 35 3150000
Variable Factory Overhead 10 900000
Fixed Factory Overhead 20 1800000
7

Gross profit 20700000
Selling & Administrative Costs
Variable Selling and Administrative
Cost 25 2250000
Fixed Selling and Administrative Cost 20 1440000
Net profit 17010000
The above calculation defines that if organisation produce 90000 thousand units annually
then it will be able to generate profit of $1710000.
2. Justification for the bid price
It is seen that Cycle World Ltd will be able to complete the orders of 25000 bikes under
the scheme special order. It has a annual capacity level of 100000 units at which 100% resources
are required to utilise in terms of direct labour, direct material and direct expenses.
CONCLUSION
The above report summarise the accounting procedure and concept subject to managers.
Justifications and clarifications are made to boost the sales volume and increase the profitability.
Cash conversion cycle present the the period of converting inventories in cash for a specific
period. Justification and recommendations regarding the production management and decisions
are also categorised.
8