ACC00724: Financial Analysis Assignment Solution for Grafton Pty Ltd

This assignment provides a comprehensive financial analysis of Grafton Pty Ltd, focusing on liquidity and financial stability. It calculates and interprets key financial ratios, including the current ratio, quick ratio, and debt-to-assets ratio, for the years 2018 and 2019. The analysis evaluates the company's ability to meet short-term obligations and its overall financial health, comparing its performance to industry averages. Additionally, the assignment evaluates three proposals by Dunning Ltd to enhance profitability, analyzing the impact of changes in revenue, variable costs, and fixed costs on the company's profits. Finally, the assignment covers overhead allocation methods, calculating overhead allocation rates and determining the total costs of trailers and special orders. The document includes calculations, interpretations, and recommendations based on the financial data provided.

Financial Analysis

ACCOUNTING 1
Contents
Question 1........................................................................................................................................2
Question 2........................................................................................................................................4
Question 3........................................................................................................................................8
References......................................................................................................................................11

ACCOUNTING 2
Question 1
A.
Financial
Analysis
Liquidity Ratio 2018 2019
Industry
Averages
Current ratio Current assets 10990 11674
Current
liabilities 10378 11572
1.06 1.01 1.7
Quick ratio Quick assets 5537 5961
Current
liabilities 10378 11572
0.53 0.52 1
Financial
Stability 2018 2019
Industry
Averages
Leverage Ratio Total Assets 27266 31634
Total Equity 5943 6447
4.59 4.91 2.5
Debt (to assets)
ratio
Total
Liabilities 21323 25187

ACCOUNTING 3
Total Assets 27266 31634
78.20
%
79.62
% 60%
B.
Liquidity Ratio
The liquidity ratio states the company ability to pay its short term obligations. According to the
evaluation of liquidity ratio of the company, it is observed that current ratio has been decreases
continuously from its last years such as 1.06 to 1.01 from 2018 to 2019. The current assets and
current liabilities of the company have been increases from the last year but with the minor
percentage due to which the chance of facing the challenges has been increases and the liquidity
ratio has been affected. The average ratio of industry is 1.7 which is high from the company
current ratio. Due to increasing current liabilities with the current assets, the liquidity position
has been affected. By evaluation of quick ratio, it is observed that the company has 0.52 ratios in
2019 which is less than the industry average ratio. Industry Average ratio of the company is 1
which is high as compare to the company quick ratio. It represents that liquidity position of the
firm is not strong. The poor liquidity position describes that the firm is not able to pay its all
short term or long term liabilities effectively (Robinson, 2020).
Financial Stability
As per leverage ratio, it has been seen that the firm debt ratio is 78.20 and 79.62% in the year
2018 and 2019 respectively which is high as compare to industry average ratio such as it is 60%.

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It describes that the firm capability to pay the short term or long term liabilities. Leverage Ratio
of the company is high as compare to industry average ratio (Zainudin, and Hashim, 2016).
C.
According to determination of ratios, it is observed that the financial position of the firm is
moderate as it has poor liquidity position and moderate financial stability. Being an investor, I
really want to lend the money in the firm as it has high total assets which that can be used by the
company to giving the return to shareholders and its investors.
Question 2
There are three proposals have been introduces by the organization Dunning Ltd with the motive
to enhance the profitability position of the firm and those three proposals has been evaluated
below:
Given
Description Rate (Amount
$)
Revenue 140 2800000
Less: Variable costs
Variable manufacturing costs 50 1000000
Variable selling and administrative
costs 30 600000
Contribution (R-VC) 1200000
Less: FC (Fixed Costs)
Fixed manufacturing costs 400000
Fixed selling and administrative costs 300000
Profits 500000

ACCOUNTING 5
Option 1
Description Rate (Amount
$)
Revenue 150 3000000
Less: Variable costs:
Variable manufacturing costs 50 1000000
Variable selling and administrative
costs 30 600000
Contribution (R-VC) 1400000
Less: Fixed Costs
Advertising costs 125000
Fixed manufacturing costs 400000
Fixed selling and administrative costs 300000
Profits 575000
Option 2
Description Rate (Amount
$)
Revenue 140 3500000
Less: Variable costs:
Variable manufacturing costs 55 1375000
Variable selling and administrative
costs 30 750000
Contribution (R-VC) 1375000
Less: Fixed Costs
Advertising costs 50000
Fixed manufacturing costs 400000
Fixed selling and administrative costs 300000
Profits 625000

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Option 3
Description Rate (Amount
$)
Revenue 130 3120000
Less: Variable costs:
Variable manufacturing costs 50 1200000
Variable selling and administrative
costs 30 720000
Contribution (R-VC) 1200000
Less: Fixed Costs
Advertising costs 40000
Fixed manufacturing costs 400000
Fixed selling and administrative costs 300000
Profits 460000
As per the determination of all three proposals, in the first option, the revenue of the company
has been increases by $ 10 per unit. In this, the company spent money in advertisement from
which it gets the amount of profits of $ 575000. In the 2nd option among three proposals, it has
been found that the company mainly focuses on improving the quality of product due to which it
invests in variable cost with $ 5. In this option, it is required to invest in advertisement campaign
with $ 50000 which increases the volume of sale by 25% that means 25000 units of sales. The
overall profit is $625000. In the last proposal, the company provides the rebate on $10 on one of
the goods, due to which the quantity of sales has been increases in units. Thus, the previous
quantities were 6000 units and the rebate in selling price lead increase the selling unit as 10000
units has been sold. In this proposal, advertising cost investment $40000 has been invested for
additional benefits due to which the company gets the overall profit of $460000. At the end, it

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can be said that second proposal is right to choose as it helps to earn the maximum profit (Dale,
and Plunkett, 2017).
Question 3
A. Calculation of overhead allocation rate
Description Quantity/
Hrs Rate (Amount
$)
Direct Material 193200
Direct Labor 25795 12.7
0 327600
Total Direct Costs 520800
Indirect Costs 98400
Total Costs 619200
Overhead allocation rate = Indirect Costs/Labor Hours 3.81
B. Total costs of 350 trailers
Description Quantity/
Hrs Rate (Amount
$)
Direct Material 2100 16.1
0 33810
Direct Labor 1400 0.00 0.00
Total Direct Costs 33810.00
Indirect Costs 1400 0.00 0.00
Total Costs 33810.00
C. Total costs of the special order on the basis of
machine time

ACCOUNTING 8
Description Quantity/
Hrs
Rat
e
(Amount
$)
Direct Material 2100 16.1
0 33810
Direct Labor 1400 16.1
0 22540.00
Total Direct Costs 56350.00
Indirect Costs 525 10.0
0 5250.00
Total Costs 61600.00
D. Minimum price per trailer
Description
Quantity/
Hrs Rate
(Amount
$)
Direct Material 2100 16.1 33810
Direct Labor 1400
12.7
0 17780.19
Total Direct Costs 51590.19
Minimum price 350 147.40
E.
Overheads define the ongoing expenses those are incurred while operating the business.
Overheads are the expenditure that cannot be easily identified with any particular cost unit.
(Walls Street Mojo, 2019). It is required for the company to determine the overhead cost per unit
because it directly impacts the net profit. There are many techniques to allocate the overhead cost
as it is depend on different segments as per the services and duties. There are different segments
from which the cost has been allocated such as factory administration is a segment and overhead

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cost might be equipment cost and the rent of any facilities those are lend by the company from
third parties. There are also some more examples of segments on which the overhead cost has
been allocated such as Depreciation of factory equipment is a segment, in which the overhead
cost has been allocated on machine hour’s basis, computer services is a segment and number of
computer used by the company is basis of allocation. It can be said that allocation of overhead
cost is easy to allocate due to segmentations of overhead of the same product (Toppr, 2019).

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References
Dale, B.G. and Plunkett, J.J. (2017) Quality costing. Oxon: Routledge.
Robinson, T.R. (2020) International financial statement analysis. John Wiley & Sons.
Toppr. (2019) Cost Accounting, Cost and Costing. Available From:
https://www.toppr.com/guides/fundamentals-of-accounting/fundamentals-of-cost-accounting/
meaning-of-cost-costing-and-cost-accounting/ [Accessed 24/01/2020].
Walls Street Mojo. (2019) Overhead Costs. Available From:
https://www.wallstreetmojo.com/overhead-costs/ [Accessed 24/01/2020].