Economics exam

Economics exam
Course Description: Accounting for Management Decisions
Take Home Exam Semester 2 2015 Information

This is an INDIVIDUAL assessment, students are expected to work independently on this assessment and every submission will be checked via Turnitin originality reports for collusion (i.e using or copying another student’s work). Please refer to class folio exercise 1.

This examination is comprised of FIVE questions. You MUST answer all questions in all sections.

Emphasis on:  Topic 8 Cost Volume Profit, Topic 9 Budgeting, Topic 10 Capital Investment Decisions, and Topic 11 Working Capital and Financing the Business.

Financial Ratio Analysis and Treasury Wine Estates Ltd research will NOT be examined.

Late submission paper will not be accepted and marked

Submission Format: This assessment must be submitted as a typed ‘Word’ document’ ONLY (no PDFs, Excel spread sheets or handwritten answers will be accepted). Marks will be allocated for full answers; all calculations must be clearly presented as part of your answers to the prescribed questions.
Submission Filename: Please name your take home exam in the following manner: your last name, your first Name, and your student number, for example: BondsJames3123007.
Submission Covering Pages: Write your full name and student number.

Submission via Turnitin Dropbox: You must submit your Take home exam via the ‘Take Home Exam 2015 Semester 2 Submission Box’, available in the Assignments tab on Blackboard.

NO referencing is required for this Take home exam; no originality report will be generated for students after submission.

Your report MUST be submitted electronically via Turnitin by 11.59pm on the due date.

Total pages inclusive this: 5 pages
QUESTION 1               (3 + 3 + 3 + 2 = 11 marks)

Projected cost information for a toner cartridge product to be introduced by Goodfields Manufacturing is as follows:

Expected variable unit costs:
Direct materials                 11.00
Direct labour                               5.60
Selling expenses                   2.00

Expected annual fixed costs:
Rent of building              28 000
Supervisor’s salary                         60 000
Maintenance contract                           15 500
Administrative expenses                      20 500

The product is to be sold for $40.00 per unit.


a)    Compute the number of units that must be sold to breakeven.

b)    Compute the number of units that must be sold if administrative expenses rise to $35 000, selling expenses fall by 50c a unit and a target profit of $120 000 is required.

c)    Calculate the profit that would be earned if 8000 units of the new product were sold.  Assume that the costs remain the same as in the original estimates.

d)    Explain why the salary of the factory supervisor is treated as a fixed cost of producing toner cartridge, but the wages of workers on the assembly line are treated as a variable cost.

QUESTION 2                                             (4 + 11 + 2 + 2 = 19 marks)

Joye and Paul (owners of the business) wish to prepare a budget for the two months ending 30 September 2015 for a gift shop operating as ‘Gifts Galore’. The following information is provided.

2015    Actual credit sales    Actual inventory purchases on credit    Actual Expenses
(including depreciation)
June    $600 000    $400 000    $95 000
July    $625 000    $470 000    $105 000

2015    Estimated credit sales    Estimated inventory purchases on credit    Estimated Expenses
(including depreciation)
August    $520 000    $295 000           $82 000
September    $480 000    $380 000           $81 000

?    Sixty percent of sales are collected in the month of sale and forty percent in the month following the sale.
?    Inventory is paid for in the month following delivery. Inventory on hand is kept to a minimum.
?    The expenses are paid in the month when they are incurred. Depreciation is $5000 per month.
?    Joye and Paul are planning to refurbish the shop at an estimated cost of $50 000.  $10 000 will be paid as a deposit in August and the balance will be paid in September, when the work is completed.
?    Joye and Paul each take out $4000 in cash per month for personal use.
?    The bank balance on the 1 August 2015 is $18 000.


a)    Prepare a schedule showing collections from debtors for August and September 2015.

b)    Prepare a cash budget for ‘Gifts Galore’ showing the monthly balances for August and September 2015.  (Note it is not necessary to include a total column for the two month period in the budget)

c)    On 30 September 2015 a loan of $100 000 is due for repayment. Will Joye and Paul be able to repay the loan when it falls due? Explain.

d)    Assuming that Joye and Paul will not have sufficient cash to repay the loan, list three suggestions of things they could do to improve their liquidity.

QUESTION 3                                       (4 + 6 + 2 = 12 marks)

Chima construction Ltd is deciding whether to purchase certain equipment in the coming year.  The capital budget has a cap of $6,800,000 for the year.  Stephen, project analyst at Chima construction Ltd, is preparing an analysis of the three projects under consideration by Rod, the company’s owner.

Project A    Project B    Project C
Projected cash outflow
Net initial investment    $5,000,000    $1,500,000    $4,000,000
Projected cash inflows
Year 1    $1,000,000    $400,000    $1,000,000
Year 2    $1,000,000    $1,000,000    $1,000,000
Year 3    $1,500,000    $1,000,000    $2,100,000
Year 4    $1,500,000    $500,000    $1,000,000
Year 5    $3,000,000    $300,000    $300,000
Required rate of return    11%    11%    11%


a) Calculate the payback period for each of the three projects.  Ignore income taxes.  Using the payback method, which project should Chima construction Ltd choose?

b) Stephen thinks that projects should be selected based on their NPVs.  Assume all cash flows occur at the end of the year except for initial investment amounts.  Calculate the NPV for each project.  Provide NPV projects ranking.

c) Which projects would you consider should be funded?  Briefly explain the reasons for your decision.

QUESTION 4                                         (4 + 2 = 6 marks)

The manager of AAA Finance is evaluating whether the company’s quarterly newsletter to its clients should continue to be produced in-house or whether it should be outsourced to a firm that specialises in producing newsletters for the finance industry.

If the newsletter remains in-house the costs per quarter are $8000 for printing, $10 000 for direct labour and $4000 in overhead. The overhead consists of a portion of the departmental supervisor’s salary which is allocated to the newsletter on the basis of direct labour hours.  If the report is produced externally it will cost $3.50 per newsletter for the 4000 copies needed per quarter.


a)    Is it cheaper for the newsletter to be produced in-house or outsourced?  Show calculations to support your answer.

b)    Give a reason why any of the above information is not a relevant cost in the decision.
QUESTION 5                 (2 + 3 + 3 + 2 + 2 = 12 marks)

A good friend of yours, who owns a fashion company, is confused by her firm’s statement of financial performance and statements of financial position, and comes to you for help.

The statement of financial performance for the financial year ended at 30 June 2015, prepared by an accountant, shows a net profit of $110,000.

However, there is only a $65,000 increase from 2014 to 2015 in the balance of her firm’s Cash at Bank account in the statement of financial positions for those years.

She has checked with other accounting experts and they report no error or fraud.

Yet, your friend is still very puzzled why the $65,000 increase in her firm’s Cash at Bank account from 2014 to 2015 does not equal the net profit of $110,000 made in the financial year that ended 30 September 2015.

She is concerned about firm’s working capital and has provided you with the following ratios:

2013    2014    2015
Receivables turnover (days)           43      47      40
Inventory turnover (days)           57      60      61
Payables turnover (days)           42      30      50


a)    Outline and discuss two reasons why a Net Profit amount can differ from the change in a firm’s Cash at Bank account from 2014 to 2015.

b)    Calculate the operating cash cycle period (days) for the 3 years and comments on management of working capital over the past 3 years.

c)    List three of the most common sources of short-term finance for entities.

d)    Explain the advantage of limited liability to companies.

e)    Explain how limited liability can be a disadvantage to some parties in business.