ACC00724 Financial Analysis of the Company Assessment 2 Answer
In this report, implication of the financial analysis of the company has been done. The profitability, liquidity and financial stability of the company has been assessed. Afterward, the implication of the costing method and computation of the break-even point analysis have been done. The assessment of the budget variance have also been made to assess the financial data of the company.
Question 1 Financial Analysis
a) Calculation of liquidity and financial stability ratio
|Details||2019||2018||Industry average ratio|
|Current ratio||1.01 t||1.06 t||1.70 t|
|Liquidity ratio||0.78 t||0.88 t||1.00 t|
|Stability (financial stability ratio|
|Leverage ratio||4.91 t||4.59 t||2.5|
|Debt to Equity ratio||90%||70%||not given|
(Please check the excel file for the computation of the data)
b) Position of the company’s stability and financial leverage
The current ratio of company has been decreased by .5 times which reflects that company has decreased current assets. However, some changes in the current liabilities have also been ensured. The liquidity of the company is stable and showing to .78 times in 2019 which is .10 times lower due to the high blockage of the funds in its inventory. The debt ratio of company has also been maintained to 80% in 2019 which reflects that company has kept higher debt capital in its business. The leverage ratio has also been increased to 4.91 times in 2019 by .30 times (Mookdee, & Bellamy, 2017).The current assets of the company has decreased by 14$ which may negatively impact the business and resulted to negative outcomes. In addition to this, higher debt capital may also impact the business stability (Peter, 2016).
c) Option to lend money
This has revealed that the company has been facing issue in the paying of its lending with the available liquidity. The decreased liquidity ratio may result to the low cash inflows in its business operation. Therefore, on the basis of the debt capital structure and liquidity, it could be inferred that if company is having unsecured debts in the company then it would be wise not to invest in this company (Hogan, Hutson, & Drnevich, 2017). The high financial leverage, low profitability and reduction in the financial leverage are the major negative factors which may negatively impact the business growth. Therefore, investing in this company is not viable decision for the return making purpose.
Question 2 Break even sales
This is the point at which company would have no profit and no loss. This point is usually expected when a company is newly set up and new business in set up for the business.
This case has revealed that with the advertisement costing of $125000 will result to the stable sales in the process. In addition to this, advertisement costing will reduce the overall profit by $125000. The break-even point will be same and sales will increased to 25000 with the increased variable cost by $5 accompanied with the additional advertisement costing to $50000. The suggestion given by manger would result to the increased sales volume to 10,000 units and increased the costing to $740000 (Song, et al. 2017).
The break-even point in the give case would be 18500 units
|Computation of the net effect|
|Incremental profit statement||1st option||2nd option||3rd option|
|Increment in the costing|
|sales volume (units)||20000||20000||25000||24000|
|less : variable cost|
|selling and distribution cost||30||30||30||30|
|other variable cost||0||0||5||0|
|Total variable cost||80||80||80||80|
|Computation of the Break-Even sales|
|Details||Existing situation of the company||option-1||option-2||option-3|
|Fixed costing (Manufacturing||$400,000||$400,000||$400,000||$400,000|
|Fixed selling costing||$300,000||$300,000||$300,000||$300,000|
|Total fixed costing||$700,000||$825,000||$750,000||$740,000|
|Contribution per unit||$50||60||45||40|
|sales volume data||20000||20000||25000||$24,000|
Answer to question no-3
Costing and analysis
a) Overhead allocation rate
|Total labor hour||25,795|
|Total overhead rate||$24.00|
b) Calculation of total cost of the special order
|Computation of the total cost of the given special order|
|Details||Per unit||Total amount|
|2100 kg of raw material||$16.10|
|1400 hour of direct Labour||$12.70|
|525 hour of machine hour||$10.00|
|Total costing of the orders||$38.80||$13,580.00|
c) Computation of the overhead rate based on the labor hour
|Total costing of the special orders|
|Total overhead rate||$62.93|
|Total machine hour||525|
|Total cost of the project||$33,037|
d) Calculation of minimum price of special order for ABC ltd.
|Minimum price computation data|
|Details||Total amount||Total amount|
|2100 kg of raw material||$16.10|
|1400 hour of direct Labour||$12.70||$28.80|
|Total variable cost||$10,080.00|
e) Segment overhead costing
To understand the segmental analysis, concepts related to cost, nature of products is considered. There are many types of cost to identify the product specific cost and segment costing is the best costing method for evaluating the actual cost of the product. Organization having the complexities in the process distribute the work according to the work and operation. Activity based costing is another costing method which helpful to identify the actual cost of product in the process an operations (Peter, 2016). According to the activity based costing, it is based on the operation, or the cost distribution is depending on the correct method which offer the exact cost specifically assigned to specific job and service. For the awareness of allocated overheads and expenses factor, make expensive and non-value added operation provides more visibility for the proper absorption of the costing in the method (Mrdutt, et al. 2018).
On the other side if Business employ is follow the traditional costing approach is more simplistic and less accurate than actual based costing so that the organization not identify the actual cost and income aspects to the specific products. Under traditional costing strategy, the company charges all costs to the commodity, be it connected or not, and lose little benefit value (Lumpkin, & Ireland, 2018).
However, by using the strategy and proper costing methods company could easily absorb the costing in the different work segments. If company follows the segment costing approach then it distribute the direct and indirect cost for the particular work and operation and absorb the costing in the particular process to determine actual costing associated with the particular segment process (Lin, Liang, & Chen, 2011). The segment costing approach is used for the particular section which is helpful in determining the right cost associated with the process, and also assist in evaluating the cost of the product associated with the process. Any product that is not making profit is kept separate in the costing and cost center and product that is not profit making and cost center should then take appropriate action to make this profit center of the product. The organization uses multiple cost drivers based on the transaction-specific or product-specific for the allocation of cost to a particular products and process (Lee, 2019).
After analysis the undertaken computation in the given case study, it is inferred that the company has increased the financial leverage of the company which has negatively impacted the business sustainability. It could be concluded that the company's higher financial leverage may result in the capital's lower cost but it also negatively impacts the investment decision of the investors. The costing of the absorption is also useful in determining the correct costing associated with the operation for the better absorption of the costing in different process.