You are appointed a Director of a specialist product and marketing company called Vic Ltd and have been asked to produce prospectus for one of its client’s in Buckinghamshire. The client is uncertain how many prospectus that they will need and has therefore asked you to prepare quotes for 1000, 2000 and 3000 copies.
The total cost and profit information of producing the prospectus are:
Fixed cost
Maintenance cost: 15 hours at £30 per hour
Machine set-up cost: 16 hours at £19 per hour
Artwork: 12 hours at £20 per hour
Typesetting: 9 hrs at £15 per hour
Direct costs of production
Paper costs £140 per 1000 sheets/copies
Direct Labour per 1000 copies 11 hours at £27 per hour
Other overhead/fixed cost
Overheads are charged at 46% of direct labour costs
Profit 26% on cost price
Required
1. Complete the table on page 3 to calculate how much it will cost you to produce 1,000, 2,000 and 3,000 copies (12 marks)
2. Complete the table below to prepare quotations for 1000, 2000 and 3000 copies
(6 marks)
3. Explain why it costs more per copy when only 1000 prospectus are produced
(2 marks)
4. Evaluate the importance of the statement of profit or loss, the statement of financial position and cash flow to 3 different stakeholders (10 marks)
Cost profit table
1000 copies
2000 copies
3000 copies
Fixed costs:
Maintenance cost
450
450
450
Setting up cost
304
304
304
Artwork
240
240
240
Typesetting
135
135
135
Direct costs
Direct materials: paper
140
280
420
Direct labour
297
594
891
Other fixed/overhead cost:
Overheads
136.62
273.24
409.86
Total Cost Price
1,702.62
2,276.24
2,849.86
Profit (26%)
442.68
591.82
740.96
Selling Price
$2,145.3
$2,868.06
$3,590.82
Cost per prospectus to client
$2.1453
$1.4340
$1.1969
For the 1000 copies, the cost is $2.145 while for the 3000 copies, the cost is $1.20. The 1000 copies
Cost more because of a higher proportion of fixed costs which are distributed to a smaller number
of units. For the 3000 copies, the fixed costs of $1,126 are distributed over a larger number of units.
Importance to Stakeholders
The statement of profit/loss shows the company’s revenues and profits to the investors, and such
Information enables them to evaluate whether the firm is viable for investment (a consistently profitable
The company is seen as a better investment). The creditors want to know whether the company
Is generating sufficient revenues and profits to cover its interest expense as well as pay for goods or
services provided on credit. For instance, a bank will not be comfortable lending to a firm making losses
And the suppliers will be aggressively pushing for payment. The government is also interested in
The profit and loss statement to determine the appropriate tax to charge a company, given the
Revenues and the expenses.
The investors are interested in the statement of financial position to see whether the asset base of the
The company is growing. For instance, if it is a bank and the assets are declining, the investors will
Be concerned that the management is making poor investment decisions. The creditors are also
Interested in the statement of financial position to determine whether the company has sufficient
working capital to repay the debts. For the suppliers, they might revise their credit terms is they find
Out that the firm does not have adequate cash and receivables to cover the current liabilities. The
Statement of financial position is also important to the government (the tax authorities) in determining
The capital expenditure investments made by a company over the course of the year. Such information
Is crucial for determining the temporary differences for tax purposes.
The investors are interested in the cash-flow statement to determine whether a company is generating
Sufficient cash from its operations to pay dividends and sustain future operations. For a company with
Negative cash-flows, the investors might question the going concern and the ability to pay dividends.
The creditors want to determine whether a company can generate sufficient cash to pay back the debts.
For instance, the suppliers want to find out if the cash-flows from operations are enough to pay for the
Goods and services provided on credit terms. For financial institutions, they want to know whether the
The company has sufficient cash to pay the interest instalments. The public is also interested in the
Cash-flow statement to assess whether the company has the money to support social and
Community programs. For instance, charities will approach companies with positive cash balances
And as them to support particular community initiatives.
Question Two Total 40 marks
Eleanor Simpson Ltd is a manufacturing business which sells " distributes goods to the construction sector. Eleanor Ltd budgeted figures are as follows:
Sales
Purchases/creditors
Wages/Salaries
Other Expenses
£
£
£
£
January
75,000
36,500
27,500
25,500
February
80,000
55,000
28,000
30,500
March
82,500
60,000
28,250
29,000
April
95,000
44,500
28,500
28,500
May
75,000
45,500
26,500
30,000
June
117,500
50,500
30,000
32,000
Other additional information
a. Sales income is received in the month after the sale, sales for December 2014 were £65,000
b. Other expenses include £1,200 of depreciation
c. All expenses are paid in the month they are incurred
d. The bank balance at 1 January 2015 is £8,250
e. Stock at 1 January 2015 is valued at £25,500 and at 30 June 2015 is expected to be £27,350.
Required
a) Prepare a cash budget for six months ending 30th June 2015 using the template provided in page six (6)
(20 marks)
b) Prepare a forecast profit and loss account for the six months ending 30th June 2015 using the template in page seven (7)
(20 marks)
Cash budget for six months ending 30th June 2015
Jan £
Feb £
Mar £
Apr £
May £
Jun £
Receipts
Debtors/Sales
65,000
75,000
80,000
82,500
95,000
75,000
Payments
creditors
36,500
55,000
60,000
44,500
45,500
50,500
Wages/salaries
27,500
28,000
28,250
28,500
26,500
30,000
Other expenses
25,500
30,500
29,000
28,500
30,000
32,000
Total Payment
89,500
113,500
117,250
101,500
102,000
112,500
Net Cash flow
-24,500
-38,500
-37,250
-19,000
-7,000
-37,500
Opening bank balance
8,250
-16,250
-54,750
-92,000
-111,000
-118,000
Closing Bank Balance
-16,250
-54,750
-92,000
-111,000
-118,000
-155,500
Forecast profit and loss for six months ending 30 June 2015
£
£
Sales
525,000
Opening Stock
25,500
Purchases
292,000
Cost of goods available for sale
317,500
Less: closing stock
(27,350)
Cost of sales
(290,150)
Gross Profit
234,850
Less:
Wages and salaries
169,750
Depreciation
1,200
Other expenses
175,500
Less: total expenses
(346,450)
Net Profit/Loss
(111,600)
Question Three Total 30 marks
High Wycombe Plc specialises in training and consultancy for large companies in High Wycombe. A new client wants to set up a new company in Slough. However, the client is not sure whether to set up as a sole trader, go into partnership or a limited company. The client wants to know the advantages and disadvantages of the three forms of companies named above. Using the space provided below please state the advantages and disadvantages which will enable the client to make an informed decision.
Answer Question Three
Sole Proprietorship. A sole trader is the sole owner, and the client would have complete control over
Management of business operations. A sole trader also has unlimited liability, meaning that the owner
and the business are one entity, and he bears all the risks.
Advantages. A sole trader is easy to form because it requires fewer legal formalities, and it is also easy
To wind-up as well. Since the client is solely responsible for decision making, it allows for quick decision
Making and action can be taken promptly since there is consulting with other people. A sole trader
Allows for greater flexibility in business operations, and it means that the client can try new approaches
Easily in the training and consultancy business. The sole trader enjoys all the profits alone and this
Is enough motivation to work harder and put in place efficient business operations.
Disadvantages. A sole trader has unlimited liability, meaning that he bears all the risks of the
Business alone. He bears all the losses alone and in the event of winding up, the client’s personal
Assets can be seized to pay the business debts. Since the client is the sole owner and manager, the
Business would lack continuity after his/her death, incapacitation, or bankruptcy. As a result, the
The success of the business is directly linked with the client’s personal affairs. A sole trader also suffers
From limited managerial experience. The owner cannot be conversant in all activities such as finance,
Marketing, operations, and the client might be forced to hire professional managers.
Partnership. A partnership is a business that is owned jointly by two or more people who pool their
Financial resources and agree to share the profits and losses. The partners have unlimited liability
Meaning that they are jointly and individually liable to the debts of the business.
Advantages. A partnership is easy to form since it requires a partnership deed, which shows the rights
And the responsibilities of each partner. Since the client has a partner, it means that the business has a
Wider experience and knowledge base. For instance, one will provide training while the other will
Specialize in business consultancy. Also, with the partners consulting with each other, it facilitates
Better decision making; there is less opportunity to make hasty and reckless decisions which are
Quite rampant for a sole trader. The partners will share the profits according to an agreed ratio, and this
Provides the motivation to work harder. Since the partners would pool their financial resources together,
A partnership form of business has access to more resources.
Disadvantages. A partnership has unlimited liability meaning that the client and his/her partner(s)
Are personally liable for the obligations and debts. As a result, in the event of bankruptcy, their personal
The property will be used to clear the entity’s liabilities. There is a higher probability of conflict within a
Partnership since the individuals have to reach a consensus before making major business decisions.
The partners will occasionally have difference in opinions and prolonged disagreements might lead to
The winding up of the company. Also, the partnership has an uncertain life because of the death or
The bankruptcy of one partner brings the operations of the entity to an end.
Limited Company. A limited company is a recognised legal entity which is separate from its owners.
It means that as a legal person, it can be sued and enter into contracts, and the owners have limited
Liability (not personally liable for the debts). A limited company can either be private or public, and
The owners (shareholders) will own stock to represent their stake.
Advantages. The primary advantage is the limited liability of the owners; the client
Would not be personally liable for the debts of the company (his/her property will not be utilised to
Repay the debts). Also, a limited company has a certain life compared to the sole trader and partnership
Because the death or bankruptcy of one owner does not end the life of the business. It also has
The advantages of having a wider base to raise financial resources by either selling stock or
Borrowing from financial institutions.
Disadvantages. A primary drawback of limited companies is the legal work and documentation
Required for registration. The client would have to pay licence fees and consult a lawyer
To draw up the memorandum of association and the articles of association documents. Another
The disadvantage is the fact that the client has to consult with the management team before making
Decisions (and this might delay decision making).
Therefore, if the client wants t to have control over all aspects of the business, a sole trader is the best
Option. However, if he/she wishes to reduce personal liability, a limited company is the best form of
Business.
End of paper
