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Accounting For Business Decision Making

Introduction

Over the years, globalization increased the volatility and uncertainties in the external market, as now-a-days, firms are operate at international level which rises up the level of competition. In the corporations, top-managers have power and authority to devise different plans, strategies and policies in relation with proper and effective management of regular functioning. They use distinguish financial techniques and tools for making viable decisions like costing, budgeting, ratio analysis for the strategic financial evaluation, variance analysis and so forth. This report is prepared to guide that how different tools can be used to construct smarter plans and strategies for maximizing business performance and financial status.

TASK 1 Financial Statement Analysis

A. Calculation of ratios

Ratio evaluation technique is the most often used way to analyze various aspects of company’s performance and financial position i.e. efficiency, solvency, liquidity and so on. It is a quantitative analysis method that is helpful to evaluate the relationship in various components of the financial statements; income statement and balance sheet as well.

Profitability ratios:

This ratio provides a quick indication to the mangers about the effectiveness of corporate functioning denoting that whether Senkyo Sdn Bhd has generated positive return or not on their sales. In 2015, GP an NP ratio dropped down to 48.73% and 11.83% shows that company needs to make cost-control and revenue maximization decisions through marketing, quality assurance techniques and others to improve net return (Jami and Bahar, 2016). ROSF and ROCE also came down to 30.93% & 18.77% which depicts that Senkyo Sdn. Bhd. generated less return  on shareholder equity & total capital employed.

Liquidity ratios:

In 2015, Senkyo Sdn. Bhd’s CR and QR goes up to 5.50 & 1.26 times, although improved ratio is good, still, CR exceed the standard of 2.00 which is a sign of ineffective utilization of resources. However, quick ratio is around target of 1.00 to 1.26 due to very high inventory balance, therefore, company’s manager needs to create decisions in relation with the optimum resource utilization (Goldmann, 2017).

Efficiencyratios:

Stock turnover ratio declined to 0.93, as a result, inventory holding days goes up to 391.07 which is a poor sign and reflects slow movement of stock into sales. However, receivable turnover ratio goes declined to 14.20 which in turn increase collection days from 16.21 to 25.70 indicates slow collection from debtors which affect cash management strategies in an adverse manner. Similarly, non-current assets turnover ratio came down from 6.76 to 5.07 times reflects ineffective use of assets (Chiaramonte and Casu, 2016). Firm must make strategic decisions for enhancing the resource utilization efficiency for the growth and success.

Solvencyratios:

Debt to equity ratio came down from 1.65 to 1.86 because firm repaid their shareholders fund to a great extent in comparison to the repayment of long-term borrowings. It indicates higher risk because of heavy debt uses and also it goes beyond the industrial standard of 0.50:1. Hence, first must minimize their debt use and maximize equity source for the effective capital structure decisions (Ratio analysis, 2016).

B. Qualitative information for enhancing business performance

Ratio analysis only helps to analyze quantitative information, however, corporations like Senkyo Sdn Bhd also needs to evaluate their qualitative performance in order to make viable decisions for the growth & success. In such regards, following information is helpful for taking better decisions, mentioned below:

Customer satisfaction:

Senkyo Sdn Bhd can examine the satisfaction level of their clients. It can be evaluated using customer compliant rate, satisfaction score and so on. Rising satisfaction of the customers is a good sign of delivery of quality services whereas ineffective services indicate negative performance (Yoke Mui, Ahmad and Nabavi, 2016).

Technological advancement: 

Using latest, new and upgraded technologies maximize competitive strength of the business. Therefore, business needs to make growth plans and strategies using latest techniques.

Employee Satisfaction:

Satisfied workers works at a high level of efficiency and serve top-quality services to the customers. It is because; they are extremely motivated, inspired and encouraged to give superior quality goods & services to the public.

Environmental performance:

Senkyo offer their services in the society, therefore, it is a social responsibility of the firm to minimize environmental hazards, like wastage and emission of harmful gases by following environmental policies, standards and rules.

Task 2 Cost Volume Profit Analysis

(A). Calculation of break-even point in dollar sales

Cost volume profit (CVP) analysis is a tool of marginal costing which is used to examine the cost and profit relationship at different sales volume. Break-even point is the critical and most important aspect of CVP technique that is helpful to determine that level at where sales becomes equal to the cost at nil return (Bergo and et.al., 2016). In accordance with the stated scenario, Linen Fasterners Sdn Bhd prepares three kinds of clothing fasteners, Velcro, Metal and Nylon in Klang at different selling prices and variable cost. It is essential for the firm to identify the total sales volume at where its total generated revenues from the three items becomes equal to the amount of expenditures incurred (Santos Almada, de Souza and Laia, 2016).

Break-even point (BEP) (In dollar) = Total Fixed cost/Profit volume ratio (PVR)

PVR/Contribution to sales ratio = Total contribution/total sales*100

Contribution = Total sales – Total variable cost

 

Velcro

Metal

Nylon

Total

Sales (selling price * sales units)

165000

300000

340000

805000

Variable cost (Variable cost per unit*total units)

125000

140000

100000

365000

Contribution (sales-variable cost)

40000

160000

240000

440000

PVR = 440,000/805,000*100

PVR = 54.66%

Calculation of Break-even point (BEP)

Total fixed cost (TFC)

400000

PVR

54.66%

BEP ( In dollar value)

(400,000/54.66%) = 731796.6

Linen Fasterners Sdn Bhd must generate minimum sales of 731,796.6RM through offering the three products to achieve maximum capacity utilization efficiency and beyond this level, it will generate favourable return.

(B). (i) Calculation of break-even point in units for each product

Items

Sales

Variable cost

Contribution margin

Velcro

1.65

1.25

0.4

Metal

1.5

0.7

0.8

Nylon

0.85

0.25

0.6

Total

4

2.2

1.8

 

Calculation of fixed cost on each product

Items

Fixed cost on each product

Common fixed cost

Total fixed cost

Contribution per unit (CPU)

BEP units (TFC/CPU)

Velcro

20000

240000

260000

0.4

50000 units

Metal

80000

240000

320000

0.8

100000 units

Nylon

60000

240000

300000

0.6

100000 units

Total

160000

 

 

1.8

250000 units

 

According to the results, it is examined that to achieve break-even point, Linen Fasterners has to sell 50,000, 100,000 and 100,000 units totalled to 250,000 units.

(ii) Calculation of overall profit of a company at BEP sales

Calculation of profitability

Sales

Units

Sales price per unit

Total sales

Velcro

50000

1.65

82500

Metal

100000

1.5

150000

Nylon

100000

0.85

85000

Total sales

 

 

317500

Less: Variable cost

 

 

 

Velcro

50000

1.25

62500

Metal

100000

0.7

70000

Nylon

100000

0.25

25000

Total variable cost

 

 

157500

Contribution

 

 

160000

Less: Total fixed cost

 

 

160000

Profit/loss

 

 

0

As already discussed, that BEP is the point where firm has zero return because of equal value of revenues and expenditures. It can be easily evident from the above statement as in this, at BEP units of sales in each item, profit is computed nil. If company sell more units then it will definitely generate return otherwise, will have loss (Dopson and Hayes, 2016).

(iii) Calculation of overall profit or sales at drop the Velcro and Metal products

Particulars

Amount (RM)

sales

340000

Less: variable cost

100000

Contribution

240000

less: Fixed cost

300000

Profit/loss

-60000

If Linen Fasteners sell only Nyoln items and abundant both the other goods, then, it will have business loss amounted to 60,000RM.  Therefore, it can be suggested to the decisions-makers not to drop the Velcro and Metal items and continue its production in future period.

(iv) Preparation of segmented income statement

Particulars

Velcro (RM)

Metal (RM)

Nylon (RM)

Total (RM)

Sales

165000

300000

340000

805000

Less: variable cost

125000

140000

100000

365000

Contribution

40000

160000

240000

440000

less: Fixed cost

20000

80000

60000

160000

Product margin

20000

80000

180000

280000

Less: common fixed cost

 

 

 

240000

Net profitability/loss

 

 

 

40000

As per the profitability statement, it becomes clear that firm will have a positive return of 40,000 RM at the current level of sales.

Task 3 Short Term Decisions Making

(A) Closing divisions decisions of Tiles

Konstruck Sdn Bhd offers three kinds of products to the constructors that are blocks, bricks and tiles. Its income statement has been provided and as per this, operating income for the reported year is computed to 210,000RM. Out of three products, only blocks and bricks generated favorable return of 150,000RM and 230,000 RM whilst Tiles brought loss worth 45,000RM (Ahmad, 2016). This is the reason why managers are intending to disclose the production of Tiles as it will encourage saving by dismissal of line supervisor’s salary of 35,000RM and depreciation of 10,000RM totaled to 45,000RM. The viability of the decision can be examined here as follows:

BEP at the total production

BEP (RM) = Total Fixed Cost (TFC)/Profit Volume Ratio (PVR)

= (125,000 + 245,000)/(580,000/1450,000)*100

= 370,000/40%

= 925,000RM

BEP after discontinuance of Tiles

= (125,000 + 190,000)/(570,000/1300,000)*100

= 315,000/43.85%

= 718,421RM

As per the results, it become clear that if Konstruck Sdn Bhd’s managers eliminate Tiles from its production portfolio than, it will drive upward change in PVR from 40% to 43.85%. Moreover, BEP will come down from 925,000RM to 718,421RM. Lower BEP and high PVR indicates favorable position for the firm, therefore, it is clear Tiles product can be eliminated as it will drive good return to the business.

(B). Qualitative factors required for decision-making purpose

In removal of an item from the goods portfolio, companies not only need to consider only the quantitative factors i.e. cost, profit, sales etc, managers also have to pay focus on the qualitative factors before a decision on whether to keep or drop Tiles production, described hereunder:

  • In case, where Konstruck’s customers are extremely satisfied from the Tiles product and demand this in high volume, then, it becomes essential for the companies not to shut down the goods because it will drop down its consumer base. More importantly, if such buyers also purchase other goods like Bricks and blocks, then, it can be advised to the firm not to drop the Tiles production (Yoke Mui, Ahmad and Nabavi, 2016). Thus, the impact of discontinuing decisions on other products also must be examined by the management.
  • If in case, it is a possibility that in future, Tiles demand will go up, then, although, currently, firm is having loss, still, they must continue the production so as to get the benefits of larger sales value in the forthcoming years.
  • Before making a shut down decision, managers must evaluate that whether resources has been utilized optimally or not. It is because, it may be possible that only the ineffective utilization is the reason for loss incur, so, by putting necessary amendments in the policies and strategies, firm can make better decisions and convert loss into profit without and drop decisions.  

(C). Impact of Tile’s shut down decisions on Blocks and Brick’s sales 

As per the cited scenario, it is clearly mentioned that consumer buy all the items together, therefore, if Konstruck Sdn Bhd does not produce Tiles, then they will buy the remaining items elsewhere results in declining the Blocks sales and variable cost by 10% and Bricks by 8%.

Particular

Blocks

Bricks

Total

Sales

450

736

1186

Less: variable cost

225

441.6

666.6

Contribution

225

294.4

519.4

Less: Direct fixed cost

 

 

 

    Advertising

10

10

20

    Salaries

37

40

77

    Depreciation

53

40

93

     Total direct expenses

100

90

190

Product margin

125

204.4

329.4

Less: common fixed  expenses

 

 

125

Operating income

 

 

204.4

 

According to the computed results, it can be seen that if both the other products sales dropped down by 10% and 8%, then net operating income of the business will be 204,400RM which is below the current profitability of 210,000RM. Thus, it is considered better advise to not to shut down the production of Tiles and keep the Tile product line (Yoke Mui, Ahmad and Naba

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