Accounting for Management Decisions - Pacific Cruises - Working Capital Ratio - NPV and IRR - Accounting and Finance Assessment Answer

Assessment task:

Accounting for Management Decisions Accounting and Finance Assessment Answer

Questions:

QUESTION ONE
Pacific Cruises provides standard riverboat cruises for tourists on the Hawkesbury River. The average cruise has 90 passengers on board. Each passenger pays $100 for a day’s cruising. The riverboat cruises 120 days each year in meeting current demand. There are 14 crew who are each paid an average of $130 per cruise. The crew is paid only when the boat sails. Other variable costs are for refreshments, which average $20 per passenger per cruise, and fuel which averages $400 per cruise. Total annual fixed costs are $380,000.

REQUIRED
(a)    Calculate revenue and variable costs for each cruise
(b)    Calculate the number of cruises needed annually to break even
(c)    Using the contribution margin approach calculate the number of cruises needed to annually earn $500,000 profit over breakeven. Discuss whether this profit goal is realistic under current conditions and possible assumptions and limitations of the “cost / volume / profit model” at such higher volume levels. 
(d)    Pacific Cruises is considering replacing the existing one-day cruises as detailed above with a one-day luxury cruise costing more at $180 per passenger. Under this new proposal it is estimated that demand will increase, requiring the boat to cruise for 150 days each year with each cruise taking 50 passengers. Other costs to change from the original offer include refreshments, up from $20 to $30 per passenger, and annual fixed costs to increase from $380,000 to $450,000. All other variable costs remain the same per passenger as per the standard cruise offer. 
(i)    Calculate the number of cruises needed annually to break even.
(ii)    Given Pacific Cruises wants to maximize total yearly profit discuss, justifying your answer, whether they should continue with the existing standard cruise or replace it with the luxury cruise. Comment on the level of risk of each proposal and the possibility of making a loss.  (Please note the boat has the same useful life / residual value under either the standard or luxury offer. The boat remains docked at the harbour when not in use having no alternate use.) Show all workings/ calculations as part of your answer. 

(i)    Calculate the number of cruises needed annually to break even.
(ii)    Given Pacific Cruises wants to maximize total yearly profit discuss, justifying your answer, whether they should continue with the existing standard cruise or replace it with the luxury cruise. Comment on the level of risk of each proposal and the possibility of making a loss.  (Please note the boat has the same useful life / residual value under either the standard or luxury offer. The boat remains docked at the harbour when not in use having no alternate use.) Show all workings/ calculations as part of your answer. 

(e)    Explain to Pacific Cruises’ management how they would be able to integrate cost-volume-profit analysis into their broader planning.  As part of your answer, discuss three ways to increase profit and explain how cost volume profit analysis is useful in evaluating the different alternatives considered. 

QUESTION TWO
Modern Kitchens specializes on sell prefabricated kitchens. The company has stores in all major capital cities throughout Australia. It’s been established since 2001 and has seen tremendous growth but more recently has seen several overseas competitors enter the Australian market resulting in an increase in competition. This increased competition has placed significant pressure on containing costs and drawn management’s attention to a review of working capital practices. Detailed below are relevant figures and ratios to assist you in evaluating Modern Kitchen’s working capital management. 

REQUIRED:
(a)    Calculate (show full workings to your answer):
(i)     the dollar value of actual net working capital each year from 2016 to 2019 for Modern Kitchens. 
(ii)    the duration of the operating cash cycle each year from 2016 to 2019 for Modern Kitchens. 
(iii)    interpret the meaning of each of the figures calculated above 

(b)    Review Modern Kitchens’s working capital management performance utilizing calculations in (a) above and information provided such as trends / benchmark figures / industry averages and budgets 

(c)     Once you have analyzed their performance, provide some strategies and recommendations to assist in improving any weaknesses in working capital management referring to the management of components of working capital including cash, inventory, accounts receivable and accounts payable.  As part of your recommendations identify the associated potential benefits and costs of each recommendation.

QUESTION THREE
Easy Spread Ltd is a food processing company whose main product is margarine. The CEO, Grant, is contemplating expanding the business by selling its margarine products into the growing Indonesian market. He asks you, as the company’s accountant, whether financial planning structures and processes within the company are set up to deal with this expansion of operations and greater financial complexity associated with export trading. 

You know that the company has developed very detailed processes for preparing its production and cash budgets. But other areas of budgeting, especially financial, and capital budgets have not been formally established. You tell the CEO you will look into it and provide him with advice in next month’s meeting.  

The budget committee of the company has provided the following information:
•    Cash sales are 70% of total sales.  
•    Debtors are expected to pay: 60% of in the month of sales; and 40% in the month following the sale.

    REQUIRED:

(a)    Prepare a schedule of expected receipts from debtors for June and July 2019.  (Show all workings as part of your answer).

(b)    Distinguishes between the various types of budgets and their purpose that the company should put in place as part of the overall planning and control process. 

(c)    Provide three examples of how the sales budget will impact budgets set in other related parts of the organization. 

(d)    Discuss the steps that would be necessary to establish a fully integrated set of budgets that will enable effective planning and control for the company in the future and gain positive co-ordination and behavioral change necessary to attain corporate objectives. 
(e)    Discuss one major advantage and disadvantage Net Present Value has as a capital evaluation technique as compared to other techniques such as Payback and Internal Rate of Return.

QUESTION FOUR

(a)    Project A returns a net present value of $50,000 and generates an IRR of 9%. Interpret the meaning of these two results highlighting any connection between the NPV and IRR
(b)    Prepaid Insurance is considered a current asset. With reference to asset definition and recognition criteria describe why Prepaid Insurance is an asset and secondly why it is classified as a current asset. 
(c)    Compare the major purpose and informational content of the balance sheet, income statement and cash flow statement
(d)    “The carrying amount of a fixed asset (Cost less accumulated depreciation) measures the market value of the asset.” Discuss, stating whether you agree or disagree with the statement and why. 
(e)    Discuss the major considerations when choosing between using straight line, units of production and reducing balance methods of depreciation under accrual accounting 
(f)    Organizations providing credit to a company structure, such as suppliers selling goods on credit and banks loaning money, take on greater risk due to limited liability of stakeholders. Describe the concept of limited liability and discuss three legal safeguards that assist such third parties to minimize their potential risk of not being repaid amounts owing

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