Accounting and Finance: BEP, Capital Budgeting, and Income Statement

This assignment delves into core accounting and finance principles. Part A presents an income statement for Parksmead Ltd, including detailed working notes for calculations. Part B focuses on break-even analysis (BEP), determining contribution margins, calculating BEP and margin of safety, and evaluating a new sales strategy. Part C explores capital budgeting techniques by computing payback period, Average Rate of Return (ARR), and Net Present Value (NPV). It also explains the benefits and limitations of these tools and discusses the advantages and disadvantages of using budgets as a strategic technique. The assignment provides a comprehensive analysis of financial statements, cost-volume-profit analysis, and investment appraisal methods.

Introduction to Accounting and
Finance

Table of Contents
PART A...........................................................................................................................................3
PART B............................................................................................................................................7
a. Determining the contribution of the each microwave in regard to covering the fixed cost....7
b. Computation of BEP and the margin of safety if microwave is sold at the price of £40........7
c. Computation of profit that Parks mead Ltd would make by selling 60000 units of
microwaves at the price of £40...................................................................................................8
d. Evaluating and analysing the new strategy of Parksmead Ltd................................................9
e. Underpinning assumptions attached to the BEP model........................................................10
Part C.............................................................................................................................................11
a. Computing payback, ARR, and NPV of the firm .................................................................11
b. Explaining benefits and limitation of different capital budgeting tools ...............................13
c. Explaining main advantages and disadvantages of making use of the budget as the strategic
technique ..................................................................................................................................15
REFERENCES .............................................................................................................................17

PART A
Income Statement
For the year ended 31 December 2018
Particulars £ £
Revenues:-
Sales(604800+154800) 759600
Other income 0
Total Revenues 759600
Expenses:-
Cost of goods sold or cost of sales 291600
64800 356400
Depreciation 11000
Wages paid 140400
Add Outstanding wages at the end of the year 2610 143010
Electricity Expenses 9270
Van running expenses 40320
Bad debts 1800
Rent paid 135000
Less:- prepaid rent at the end of the year 27000 108000
Total Expenses:- 669800
Net profit before tax 89800
Less:- Tax paid 6930
Net profit after tax 82870
Working Notes

1 Total Sales
credit sales 604800
cash sales 154800
759600
2 Depreciation
Purchase Price of Van 72000
scarp value 6000
life in years 6
Depreciation 11000
3 Tax Computation
Tax upto 31 march 2018 2880
Add:- Tax from 1 april 2018 to 31 march 2019 5400
Less:- prepaid tax of 3 months
(from 1january 2019 to 31 march 2019) 1350
6930
4 Electricity Expenses:-
Expenses paid 6840
Add:- Outstanding expenses at the end of the year 2430
9270
Balance Sheet
For the year ended 31 December 2018

LIABILITIES ASSETS
£ £ £ £
Shareholder's Equity Fixed Assets
Equity share capital 216000 Delivery Van 61000
Reserves and surplus 82870
Long Term Liabilities
Current Liabilities Current Assets
Outstanding Wages 2610 Prepaid Rent 27000
Outstanding Electricity
Expenses 2430 Closing Inventory 273600
Trade Payables 111600 Trade Recievables 77400
Bank Overdraft 132840 Prepaid Tax 1350
Cash 108000
Total Liabilities 548350 Total Assets 548350
Working Notes
5 Reserves and surplus
Net profit after tax 82870
6 Trade Payables
Credit Purchases 583200

Less:- Payment to Trade Payables 471600
111600
7 Trade Recievables
Credit Sales 604800
Reciepts from Trade Recievables 525600
Closing Trade Recievables 79200
Bad Debts 1800
Net Trade Recievables 77400
8 Prepaid Rent of 3 Months
Annual Rent 108000
Rent Per month 9000
Rent For 3 months 27000
9 Closing Inventory
Cost of credit sales 291600
Add:- Cost of cash sales 64800
Total Cost of sales 356400
Credit Purchases 583200
Cash Purchases 46800
Total Purchases 630000
Total Purchases 630000
Less:- Total Cost of sales 356400
Closing Inventory 273600
10 Closing Bank balance

Issue of Equity 216000
Reciepts from Trade Recievables 525600
Total Reciepts 741600
Less:- Rent paid 135000
Tax paid(2880+5400) 8280
Delivery van purchased 72000
Wages paid 140400
Electricity Expenses 6840
Payment to Trade Payables 471600
Van running expenses paid 40320
Total Payments 874440
Bank balance(cr.) 132840
11 Cash Balance
Cash Sales 154800
Less:- Cash Purchases 46800
Cash at 31 December 2018 108000
12 Closing Balance of Delivery Van
Delivery van purchased 72000
Less:- Depreciation 11000
61000

PART B
a. Determining the contribution of the each microwave in regard to covering the fixed cost
Selling Price (SP) 40
Variable Costs
Materials 15.75
Labour 8.85
Variable overhead 5.55
Total variable cost 30.15
Contribution 9.85
Contribution % 25%
It can be interpreted from the above that contribution per unit of microwave is 9.85 for
covering the fixed cost which accounts for nearly 25% of the selling price of the product.
b. Computation of BEP and the margin of safety if microwave is sold at the price of £40
Break even point: It refers to the point at which the business achieves the situation of no
profit and no loss. It helps in identifying the amount of revenue or the number of units required
to be sold in order to cover the fixed cost (Fatmawati, 2018). This technique is mainly utilized by
the production and management accountants. It is used for determining the point at which the
revenue is equals to the cost. This process can be sometimes be complex because there are
chances that the material cost and the other relevant cost might change suddenly.
Margin of safety: It refers to the difference between the break even point or the expected
profitability. It is the amount till which the company can lose it sales before inuring the no profit
situation. The MOS is very important as it assist in determining how safe the business in respect
to producing the products ((Brazauskas, 2016)). It helps in evaluating the risk in regard to the
production of the items and also aides in taking meaningful business decisions on account of
business expansion or entering into the new market. In simple terms, the MOS refers to the sum
of money which the organization can afford to lose before it starts inuring the actual lose.
Break Even Fixed Cost / Selling Price - Variable

Fixed Cost
Production 177000
Selling 142800
Total Fixed cost 319800
Break even units 319800/40 - 30.15
32467.01
Break even revenues Fixed cost / Contribution margin
319800/25%
1279200
Margin of Safety units Current sales units - Break even points
60000 - 32467
27532.99
Margin of safety in units Current sales - Break even sales
Current sales 2400000
Break even sales 1279200
Margin of safety 1120800
From the above computation, it can be inferred that at the selling price £40, the total
amount of fixed cost is £319800, the break even point will be 32467.01 in units and in terms of
amount it will be £1279200. Also, the margin of safety is 27532.99 units and £1279200 in
amount. This means that the revenue lower than this will lead to the situation of loss.
c. Computation of profit that Parks mead Ltd would make by selling 60000 units of microwaves
at the price of £40
Calculation of Profits

Units 60000
Sales 40 2400000
Variable Cost
Materials 15.75 945000
Labour 8.85 531000
Variable overhead 5.55 333000
Contribution 591000
Fixed Cost
Production 177000
Selling cost etc. 142800
Profit 271200
By producing and selling 60000 units of microwave at the price of £40, the company
would be earning the profit of £271200 with total contribution amount of £591000 as the total
variable cost has amounted to £1809000.
d. Evaluating and analysing the new strategy of Parksmead Ltd
Inputs provided:
Selling price increased by 8%
Selling units increased by 15%
New Strategy Existing New
Increase in sales price 8% 40 43.20
Increase in sales unit 15% 60000 69000
Calculation of Profits
Units 69000
Sales 40 2760000

Variable Cost
Materials 15.75 1086750
Labour 8.85 610650
Variable overhead 5.55 382950
Contribution 679650
Advertising 135000
Fixed Cost
Production 177000
Selling cost etc. 142800
Profit 224850
It does not seems viable to make an investment into the new strategy at it results into
reduction in the amount of profit. This strategy will cause increase in the selling price of the
product along with the increase in the sales units in order to meet up with the cost of
advertisement. Thus, it is preferable for the company to not go for this strategy as it is reducing
the profitability. But on the other side there are certain benefits of it in long term as it will led to
increase in the brand reputation and image.
e. Underpinning assumptions attached to the BEP model
The BEP analysis is of crucial importance to the business organization in respect to
determining the applicability of its cost functions in practice. It supports in classifying the
dynamic characteristics and the relations of the current cost and the sales volume. This analysis
is based upon certain assumptions which are stated below.
 It is based upon the fixed and the variable cost and does not take into consideration the
semi-variable cost.
 Both the cost and the sales remains linear.
 It is assumed that the price of the product will remain constant under any level of
production.
 Also, the volume of product production and the sales will be equal.

 The fixed cost will remain constant under the certain level of production.
 It is also assumed that the technological change and any enhancement in the efficiency of
the labour will be constant.
 The price of the item is assumed to remain constant.
 Under the situation of the multiple product, the product mix is taken as constant.
The break even point analysis can be utilized by the range of businesses. It will assist the
business organization irrespective of nature, occupation, field or size in determining the point
where it will achieve the situation of no profit no loss. It also supports the businesses in
determining the selling price of the product in order to attain maximum profitability (Messer,
2020). It can only be used if the organization is having cost bifurcated into fixed and variable as
these are very important in for deriving the contribution and then the break even point as well.
Therefore, this is useful in every types of business organization which helps in taking valuable
business decisions in order to accomplish the targets more effectively.
Part C
a. Computing payback, ARR, and NPV of the firm
Years
Cash
inflow
(in £)
Cash
outflo
w (in
£)
less:
Depre
ciatio
n (in
£)
Total
cash
outflo
w(in
£)
Add:
Depre
ciatio
n (in
£)
cash
inflows
(in £)
Add:
Scrap
value (in
£)
Net
cash
inflow
(in £)
1 34000
00
12800
00
14000
00
72000
0
14000
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00
2 34000
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12800
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14000
00
72000
0
14000
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00
3 34000
00
12800
00
14000
00
72000
0
14000
00 2120000 21200
00
4 34000
00
12800
00
14000
00
72000
0
14000
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00
5 34000
00
12800
00
14000
00
72000
0
14000
00 2120000 1000000 31200
00