FIN704 - Managerial Accounting

Solution:
Answer No.1
Required Formula
BEPUnits = FC / (S.PPer Unit – VCPer Unit) Or Where
BEPUnits = Break Even Point in Units
FC = Fixed Cost
S.PPer Unit = Selling Price Per Unit
VCPer Unit = Variable Cost Per Unit
CMPer Unit = Contribution Margin Per Unit By putting values
BEPUnits = 54,000,000 / (36,000 – 29,200) BEPUnits = 54,000,000 / 6800
BEPUnits = 7941.18 or 7941 Units
Total Marks: 20
Semester Fall 2019 Managerial Accounting (FIN704) Assignment Solution

FC / CMPer Unit
BEPSales = BEPUnits * S.PPer Unit
Alternatively
BEPSales = FC / Contribution Margin to Sales Ratio
BEPSales = 7941 * 36,000 = Rs. 285,876,000 or Rs.285.88 million
Alternatively
BEPSales = 54,000,000 / (6,800/36,000 * 100) = 54,000,000 / 18.889% = Rs.285.88 million

b5631087-a658-4320-8d32-57c66f5ccb30-image.png

Answer 2.
Result will be higher break-even point if variable cost per Cam Shaft increases as a percentage of selling price.
Reason is that contribution margin will be decreasing on other hand if variable expenses will be increasing as a percentage of selling price. This means that more Cam Shaft units would be required to sell in order to generate enough contribution margins to cover fixed cost of the business.

Answer 3.
b09a3521-04da-4635-8b2d-b827f40a7de6-image.png

Assignment Solution
Net Operating Income 1,034 586
Required Working:
Current Sales = 160,000 Units
New Proposed Sales Volume = 160,000 * 125 / 100 = 200,000 Units Reduced Selling Price = 36,000 * 90 / 100 = Rs. 32,400 Per Unit
As, we can observe from the comparison of present and proposed structure, results are not favorable if factory decides to change the structure and increase the sales volume by reduction in selling price.25% increase in volume is not enough to off-set 10% reduction in selling price.
We can see a reduction in contribution margin both in terms of per unit (from Rs. 6,800 to Rs.3,200) and in total (from Rs. 1,088 million to Rs. 640 million) if factory decides to increase its sales volume up-to 200,000 units of Cam Shaft. On the other hand, fixed cost (Rs. 54 million) is same in both structures. So, less contribution margin will be available to cover fixed cost which ultimately decreases the net operating income from Rs. 1,034 million to Rs. 586 million (almost a 43.32% reduction ((586-1,034)/1,034).
Hence, 10% reduction in selling price will increase 25% sales volume but there will be reduction in contribution margin and net operating income of the business which is not favorable at all.

Accounts Receivable Management
How to prepare a good Accounts Receivable policy

Accounts receivable management incorporates is all about ensuring that customers pay their invoices. Good receivables management helps prevent overdue payment or non-payment. It is therefore a quick and effective way to strengthen the company’s financial or liquidity position. This Wiki explains the importance of receivables management, the benefits and how to prepare a good receivables process.

The importance of receivables management What is the benefit? Preparing good receivables management Which systems will you require? Automating receivables management

The importance of receivables management

Every company wants to buy low and sell high. But they can lose everything with poor receivables management during the last phase of the sales process (payment). Over half of all bankruptcies can be attributed to poor receivables management, which demonstrates its importance. Receivables management involves much more than reminding customers to pay. It is also about identifying the reason for non-payment. Perhaps a product or service was not delivered? Or there was an administrative error in the invoice? Good receivables management is a comprehensive process consisting of:

Determining the customer’s credit rating in advance Frequently scanning and monitoring customers for credit risks Maintaining customer relations Detecting late payments in due time Detecting complaints in due time Reducing the total balance outstanding (DSO) Preventing any bad debt in receivables outstanding

What is the benefit?

Good receivables management directly contributes to a company’s profit because it reduces bad debt. The company also has a better cash flow and higher available liquidity for use in investments or acquisitions. Furthermore, good receivables management boosts a company’s professional image.
Preparing good receivables management

In principle, good receivables management involves two steps. Firstly, you determine your strategy and then you specify the appropriate procedures.
Step 1. Determine the strategy

Which customers do you accept and under which conditions? Which customers do you monitor? Who should no longer be accepted, and when is the exit?

Step 2. Prepare appropriate procedures

What is your invoicing process like? What is your invoice like? When do you remind a customer by phone? When do you remind a customer in writing? What does the reminder look like? When do you engage a debt collection agency? When will you start legal proceedings? What is the role of your employees in this respect? Will you choose outsourcing or in-house management?

Which systems will you require?

Companies use different applications and systems to limit the risks and update the data. These can help you set up and design your receivables management.

Acceptance system. Based on credit information, you determine whether a new customer is accepted or not. This may be a manual or automated process. Monitoring system. This system checks the entire portfolio for continuous insight into existing customers and suppliers. This is essential, particularly with regard to chain parties. Invoicing system. Invoices may be sent manually or automated (sometimes as a digital invoice) and reminders must be logically aligned. Bookkeeping system. All receivables and payables are booked in this system, which provides insight into the cash flow and receivables risk. CRM system. The Customer Relationship Management (CRM) system lists information relating to agreements, contact and contracts with customers. Complaints can also be processed in this system to improve insight into the background of non-payment.

Automating receivables management

Automating receivables management allows you to link all the above systems. This improves workflow efficiency and provides better insight by generating cash flow and customer reports. Automatically linking credit information reduces the percentage of non-paying new customers. By automatically integrating the debt collections in the process, the percentage of non-paying existing customers also falls.

Source