BBUS1DAS-Principles of Accounting and Finance
Question 1
Your friend has $5,000 to invest in the share market and is deciding between an investment in Big Ltd or Small Ltd. In the most recent reporting period, Big Ltd made a profit after tax of $1,000,000, compared to Small Ltd’s profit after tax of $500,000. Based on this information, your friend believes Big Ltd is the better investment.
Required
a. As your friend has focused their investment decision only on one piece of information (profit after tax of the two companies for one specific reporting period), suggest other financial statement data, comparisons or methods of analysis that your friend could consider before deciding on an investment choice.
b. Identify any non-financial data that may be of interest to help with your friend’s investment decision
Question 2
“Using financial statement ratio analysis is useful for evaluating the performance and position of a business, however, there are some limitations of this type of analysis”.
Required
Critically explain the statement above. Include in your explanation descriptions of the examples of the limitations of financial statement ratio analysis this statement is referring to.
Question 3
Calabria Gourmet Meats Ltd is a popular producer of Italian sausages in the inner west of Sydney. The company’s accountant has gathered the following information:
• Depreciation on buildings and equipment is $19,000 per month.
• The meat for the sausages costs $1.10 per kilogram of sausages.
• Wages for production employees cost $0.70 per kilogram of sausages.
• The factory supervisor’s salaries total $10,000 per month.
• Electricity costs incurred are $4,000 per month to be connected plus usage charges of $0.20 per kilogram of sausages.
Required
a. Explain the difference between fixed and variable costs. As part of this explanation, include the costs above as examples of either fixed or variable costs.
b. Determine the total monthly fixed costs and the total variable cost per unit, then assume the company applies a cost-based pricing model to charge prices to customers, adding a mark-up of 75% on variable cost. What price should the company charge customers per unit, showing all calculations.
c. At the selling price you determined in part b, workout your Breakeven point for a month, in units and Sales Revenue dollars, showing all calculations.
d. Assume you require a monthly profit of $30,000, calculate how many units you must sell to achieve this, showing all calculations.
e. Define and then calculate the ‘Margin of Safety’, in both units and dollars, assuming you sell 40,000 units. Ensure you include all calculations.
Question 4
Wyndham Ltd is considering investing in a new project and has identified two alternatives: Project Hunter Valley and Project Coonawarra.
The details of each project are given below:
Both projects will have no residual value (will be worth zero) after the 3rd year.
Required
a. For each method, state the decision rule and identify the project that yields the most favourable result for Wyndham Ltd.
b.Draw an overall conclusion as to whether, based on the 3 methods, you would recommend Project Hunter Valley or Project Coonawarra and why.
