Problem2 final v2.0

29 Aug 201029 Aug 2010

MANAGERIAL ACCOUNTING(ACC 720)

PROBLEM2 – Datuk Kassim

By:MOHD NOOR SATAPA

2010610062AZAMIAH JAMALUDDIN

2010425354MIMI SADINA ABU SAMAH

2010840986NURHIDAYAH ISMAIL

2010408618

1.0 Issues & AssumptionsIssues & Assumptions

AnalysisAnalysis2.0

Management Action & SolutionsManagement Action & Solutions3.0

Future Strategy and RecommendationsFuture Strategy and Recommendations4.0

ConclusionConclusion5.0

1.0 Issues & Assumptions1.0 Issues & Assumptions

Datuk Kassim has a small publishing company. He kept it simple with minimum investment. He managed to earn profit in its early stage. Company suddenly gain publicity thus increase sales by

25% To fulfil demand, he began to invest heavily in

machinery and equipments. Result in high investment, he only earn 16¢ profit from

every RM1 sold. Situation getting worse, his sales drop 25% from

previous peak level.

Case background:


Underlying issues found in Datuk Kassim case are:

Datuk Kassim has no detail planning and budgeting for his business.

Due to above, Datuk Kassim is struggling to meet the load of monthly expenses to keep his business afloat.


Assumptions made before analyze the case:

Datuk Kassim’s business publishes books and in average each book is published and sells at Datuk Kassim’s business publishes books and in average each book is published and sells at

RM100

Datuk Kassim sold books monthly on average ofDatuk Kassim sold books monthly on average of 1000 units

Monthly expenses on factory rent, machinery equipment, employee salary is estimated at Monthly expenses on factory rent, machinery equipment, employee salary is estimated at

RM40,000

Printing & royalty fees to writers per book is atPrinting & royalty fees to writers per book is at RM84

His knowledge on budgetary planningHis knowledge on budgetary planning None


AnalysisAnalysis2.0




2.0 Analysis2.0 Analysis

Fixed Cost

Variable Cost

Mixed Cost

COST BEHAVIOUR

Datuk Kasim need to understand his business cost behavior:


Datuk Kasim also need to understand his Cost-Volume Profit analysis:

COSTCOST

VOLUMEVOLUME

PROFITPROFIT

But first he needs to adhere with CVP analysis assumptions: The behavior of both costs and revenues is linear throughout the publishing activity. Costs are either fixed or variable. Number of books published is the only factor affecting costs. All units published are sold. When more than one book published, the sales mix will remain constant.


CONTRIBUTION MARGIN (CM):

CM per unit = Unit Selling Price - Unit Variable Cost

= RM100 - RM84

= RM16

CONTRIBUTION MARGIN RATIO (CM Ratio):

CM Ratio = CM per UnitUnit Selling Price

= RM16/RM100

= 0.16 or 16%


CVP Income statement for Datuk Kassim business:

Total (RM) Per Unit (RM)

Sales (1,000 books) 100,000 100

Variable Cost 84,000 84

Contribution Margin 16,000 16

Fixed Cost 40,000

Net Income -24,000

CVP Income Statement for Month Ended 31st Aug 2010


BREAK EVEN POINT (BEP):

Break Even Point = Fixed CostCM per Unit

= RM40,000 / RM16

= 2,500 unit of books sold

Margin of Safety Ratio = (Actual Sales - Break Even Sales)Actual Sales

= (RM100,000 - RM250,000) / RM100,000

= -1.5

MARGIN OF SAFETY RATIO (MoS Ratio):


AnalysisAnalysis2.0




3.0 Management Action (Way Forward)3.0 Management Action (Way Forward)

Determine product mixDetermine product mix

Reason of understanding and applying of CVP analysis concept:

Maximizing use of production facilitiesMaximizing use of production facilities

Setting selling pricesSetting selling prices

1.1.

2.2.

3.3.

Elements to be analyzed :

Mix of product sold

fixed costs

Selling price

CVP CVP

Sales Volumevariable costs

3.0 Management Action & Solutions


Contribution = Unit Selling - Unit Variable Margin Price Cost

CONTRIBUTION

MARGIN

Variable Cost

Dir/MatDir/Machine

hrs

Dir/ Labor

Dir/energy

3.1 VARIABLE COST PER UNIT

reducing variables cost will give a direct impact to get a higher CM and as well a lower break-even

Break-Even = Fixed CostPoint Contribution Margin



M/C deprec.

insurance

Loan interest

FIXED COST

Factory rental

Admin staff wages

Break-Even = Fixed CostPoint Contribution Margin

3.2 TOTAL FIXED COST

reducing the total fixed cost will help the business to achieve low BEP per unit book – meaning a higher net income per unit book will gained.

Net = Contribution - FixedProfit Margin Cost



3.3 EFFECT OF SALES VOLUME ON PROFIT

SALES = VARIABLE + FIXED + TARGETCOST COST NET INCOME

Therefore, at a given selling price (e.g. RM100/unit), target net income, fixed cost and variables - sales volume can be determined required to achieve desired profit.

able to assess early prediction and determine how accurate the gross sales volume level, and monitor the sales volume whether it is actually on track to make the profits or otherwise.



PRODUCT POSITIONINGPRODUCT

POSITIONING

PRODUCTFEATURE

PRODUCTFEATURE

CHANNEL DECISIONCHANNEL DECISION

MARKETING STRATEGY

MARKETING STRATEGYPROMOTIONPROMOTION

UNIT SELLING PRICE

UNIT SELLING PRICE

TARGET MARKET SELECTION

TARGET MARKET SELECTION

3.4 UNIT SELLING PRICE



3.4 UNIT SELLING PRICE

Contribution = Unit Selling - Unit Variable Margin Price Cost

TARGET NET = CONTRIBUTION - FIXEDINCOME MARGIN COST


3.0 Management Action & Solutions3.5 SALES MIXED

SALES MIX = SALES OF INDIVIDUAL PRODUCTTOTAL SALES OF THE COMPANY

BEP = FIXED COSTWEIGHTED-AVERAGE UNIT CM

WEIGHTED-AVERAGE = (UNIT CM X SALES MIX %) + (UNIT CM X SALES MIX %)UNIT CM


AnalysisAnalysis2.0




4.0 Future Strategy & Recommendations


BUSINESS PLANBUSINESS PLAN

PARTNETSHIP & VENDORSPARTNETSHIP & VENDORS

NEW TECHNOLOGYNEW TECHNOLOGY

MARKET RESEARCHMARKET RESEARCH

RECOMENDATIONSRECOMENDATIONS

To have a business plan To have a business plan

Sub-contracting the printing process & binderies Hire freelance to do editing, proof-reading & layout.

Sub-contracting the printing process & binderies Hire freelance to do editing, proof-reading & layout.

To venture into new technology e-books, print on demand, accessible publishing

To venture into new technology e-books, print on demand, accessible publishing

Conduct market research on new product & innovative Widen product range covering high-end to low-end

Conduct market research on new product & innovative Widen product range covering high-end to low-end



FINANCIAL PLANFINANCIAL PLAN

BUDGETARY PLANNINGBUDGETARY PLANNING

CAPITAL BUDGETINGCAPITAL BUDGETING

RECOMENDATIONSRECOMENDATIONS

Have a proper financial planning. Ensure his business is liquid & ultimately profitable Apply for financial facility like Revolving Credit or Overdraft

Have a proper financial planning. Ensure his business is liquid & ultimately profitable Apply for financial facility like Revolving Credit or Overdraft

To prepare for budgetary planning for control & evaluation To ensure business run on pre-allocated budget To use master budget

To prepare for budgetary planning for control & evaluation To ensure business run on pre-allocated budget To use master budget

Use to determine company long term investment To implement Cash Payback Technique

Use to determine company long term investment To implement Cash Payback Technique


AnalysisAnalysis2.0




5.0 Conclusion5.0 Conclusion

Understand & know the importance of having basic business knowledge.

Know it is important to know the impact of changes in market condition & customer demand to his business.

Gain better understanding of his business structure, competitive advantage and capital requirements.

By now Datuk Kassim should :

Restructure, have new business plan, have a strategic plan and make a proper budget

With our future recommendations & a master budget:

Datuk Kassim can have ideas on how to manage his business effectively thus allow him to project future cash flow.

THE END

&

THANK YOU



Cost Of Capital Annual Cash = Cash PaybackInvestment Inflow Period

Assume RM12K spent on a machine with useful lifetime of 8 years. Annual Saving of 6K in cash outflows are expected from operations.

Cash Income per year = Net Income + Depreciation Expense

Thus, P = RM12K / RM6K = 2 YEARS

Problem2 final v2.0

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