University Accounting Assignment which requires atleast 10 sources and all workings must be shown
Question 1 DORA Ltd is a local importer, distributor and retailer. The company is involved in the importation and distribution of branded and unbranded clothes, jewellery, and accessories, to a number of its owned shops in high streets and retail malls. DORA Ltd has been very profitable over recent years and has gained a good reputation in the retail industry. The Board of Directors is continually on the lookout for new opportunities of diversification and improved profitability. Part A The Chief Executive Officer (CEO) has discussed with you, as Marketing Manager, the possibility of opening a new shop in a mall in Sliema. DORA Ltd has the possibility of choosing between a shop of 80 sqm and a larger outlet of 200 sqm. You have been told that the intention is to open a store fully dedicated to the sale of bags (mainly women’s handbags). However, the Board of Directors is currently uncertain as to whether to open a branded bags store or an unbranded bags store. Their intention is to target a specific group of customers rather than to offer a collection of both branded and unbranded bags. The Chief Financial Officer (CFO) has also attended this meeting. Given that the decision is being taken close to month end, when the Finance Team is very busy with the preparation of monthly management accounts, you have been asked to assist her with the financial implications of the decision. So far, you have been presented with the following information: You have been asked to assist the CFO and the CEO with the following: 1. Advise as to which marketing strategy is being adopted by the Board of Directors. You are also asked to describe Porter’s three main Generic Competitive Strategies. You are also asked to provide two examples of companies/ brands adopting each of the three competitive strategies (450 words). (7 marks) 2. Estimate the projected profitability for the year for both options, using a contribution format income statement. (3 marks) 3. Estimate the (i) breakeven point; (ii) margin of safety in percentage form; and (iii) degree of operating leverage for each of the two scenarios. (9 marks) Note: Round up your answers to the nearest whole number, save for when showing the result to the degree of operating leverage calculation, in which case, you are asked to show your answer to the nearest 2 decimal points. 4. Based on your calculations, make recommendations regarding which option should be pursued (200 words). (6 marks) Part B In addition to selling its own imported goods, DORA Ltd also supplies a retail outlet in Republic Street, Valletta (ORA Ltd), with branded watches. The following are the estimated number of watches expected to be sold to ORA Ltd between the months of September to December 2020. Each branded watch is estimated to be sold at a price of €350. In order to try and increase the sale of watches over the Black Friday promotions period and during Christmas time, DORA Ltd offers the retailer a 10% cash discount. Generally, DORA Ltd grants a 30-day credit policy to all of its customers, including ORA Ltd. Although around 60% of sales are made on a cash basis, ORA LTD avails itself of the credit period for the remainder of the sales value. Based on past experience with the retailer, DORA Ltd estimates that 2% of ORA LTD’s debt will remain unpaid. DORA Ltd purchases its inventory of watches from an Italian supplier. DORA Ltd’s practice is to purchase 120% of the number of watches expected to be sold in the following month. Purchases are made on a monthly basis and are paid for immediately. Each watch is bought by DORA Ltd at an average cost of €240. It is estimated that two deliveries per month will be made to ORA Ltd in the event that less than 100 watches are sold to the retailer in that particular month. One additional delivery is expected to be made for every additional 50 watches sold. For each return trip delivery to Valletta, DORA Ltd generally incurs €9 in terms of fuel. Additionally, the delivery person is paid a monthly salary of €1,300. In those months where more than two deliveries are made to ORA Ltd, the delivery person is also paid a commission of €20 for each additional trip. DORA Ltd anticipates that it will replace its old van in October 2020. It has reached an agreement with a local car dealer for the part exchange of its existing van. The dealer will award DORA Ltd €2,000 cash in exchange for the old van. The new van costs €25,000 and will be paid for immediately. Depreciation on the new van will be incurred on a straight line basis at the rate of 10% per annum. DORA Ltd has a bank overdraft facility with a limit of up to €10,000. In the event that the overdraft is used, interest will be incurred at the rate of 4.5% per annum on the previous month’s closing balance. As at 1 September 2020, DORA Ltd plans to have €11,500 in cash in the bank account reserved for this operation. You are required to: 1. Prepare a cash budget for the four-month period September to December 2020. (10 marks) 2. Advise the Board of Directors as to ways in which cash management can be improved (200 words). (6 marks) 3. Describe what you understand by the term ‘budgeting’, why budgeting is useful, and why it has been criticised over the years (450 words). (9 marks) Total: 50 marks Question 2 Alert Systems Ltd specialises in the provision of alarm systems for both commercial clients and residential homes. It generates revenue from two lines of business: - The installation of the alarm systems by their technicians; - Support of the installed alarm systems through yearly maintenance. A law firm has approached Alert Systems Ltd in order to install security alarm systems for their new offices. Alert Systems Ltd is keen on acquiring this client in the hopes of attracting further business through the law firm’s contacts and customers. The company’s accountant has provided you with the following information: (a) A presentation was delivered last week to the law firm highlighting the services that Alert Systems Ltd can offer. The total cost in relation to overtime of employees and materials used amounted to €300. (b) 200 metres of wire will be required to set-up the system. This wire is used on all installations provided by the company. There is currently 100 metres of wire in the system bought at €0.6/metre. The supplier of this wire has announced that the price has now gone up to €0.8/metre. Given the timeframe of this order, the company has no time to seek alternative suppliers. A local electrician is also ready to buy any unwanted wire from the company at €0.5/ metre. (c) The system will require 5 alarm covers. The company usually uses standard grey plastic covers. However, the law firm has requested these to be in green to match their branding. The company has 50 grey covers in stock bought at €3.5/cover. The technician said that green covers cost €5/cover plus expedited shipping cost of €10 in total since they can only be bought from abroad. Alternatively, the grey covers can be painted with green paint which costs €16 in total. The current market price of the grey covers is €4/cover. (d) The installation will require 3 technicians to work on the project for a week. Each technician is paid a full-time salary of €4,000 per month. One of the technicians is currently idle for the coming two weeks. The other two are currently working on Job Y which generates a throughput contribution of €6/hour. If this order was accepted, they would have to be diverted from Job Y for a week. This would mean that the contractual deadline of Job Y would be missed by a week which would cost Alert Systems Ltd a penalty of €200 as per contract. (e) The company employs a full-time engineer and she would need to spend 8 hours on this job. The engineer has a monthly salary of €6,000. As per her schedule, the engineer has a 4-hour slot available next week. Any additional hours would need to be worked overtime paid at time and a half. (f) An employee of Alert Systems Ltd will require to spend a day at the law firm’s premises to explain how the system works. He is paid a salary of €1,500/month but also receives a commission of €150 per day spent at a client’s site. (g) After each installation made by Alert Systems Ltd, a site inspector is required to make a visit to certify the work done. This is done by an independent contractor at a rate of €100/visit. (h) Overheads are charged to jobs at a rate of €15 per direct labour hour. This represents general company overheads such as rent, non-direct labour salaries and water and electricity. (i) Depreciation of company equipment is charged at €100/job. For this question, assume a month is made up of 4 weeks and a working week consists of 5 days of 8 hours each. Direct labour consists of the technicians’ time. Required: 1. Calculate both the total cost and relevant cost of this job, clearly showing how each cost has been arrived at. (10 marks) 2. For each cost, explain why it has been included or excluded from the total relevant cost. (300 words) (10 marks) 3. Explain the relevant cost principles used in (1) and how this will influence the final price to be charged to the law firm. Discuss what other factors should be considered when setting the price. (700 words) (17 marks) 4. As noted above, Alert Systems Ltd uses a business-wide OH absorption method based on direct labour hours. Discuss the advantages and limitations of this OH allocation method. Give your opinion as to whether such OH allocation method is appropriate for Alert Systems Ltd. (500 words) (13 marks) Total: 50 marks