ACC101  Accounting for Decision Making
Semester 2, 2016


Project Assessment

The material for this assessment is to evaluate three separate parts/questions.  You need to provide an answer to all three parts.    In you submission you should include as an appendix the  solution to the questions, showing your contributions to the work.  In the main part of the submission you need to provide your own individual write-up, along with your conclusions and recommendations[1]:

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The first two parts come from questions in the textbook (Birt et al. (2014)) and are:
  1. Question 9.59 on Yummy Burgers R Us developing next year’s budget, and

  2. Question 10.58 on Nardeb Company considering an incentive scheme that changes its cost structure.


The third part is a bank loan proposal by the Barton Company which comes from another book on financial decision making (all the needed information given in this document):
  1. Evaluate the Barton Company’s loan application and the actions of the firm’s financial controller.

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For your convenience, the questions are reproduced on the following pages with some modifications.

 

Due Date: Friday 18th November (before the end of the day).
Submission: via Moodle and Turnitin.
Marking Grid: See the course outline.

 

 

 

 

Part a.

Question 9.59[2]  - Yummy Burgers R Us operates a store in Melbourne City, and the following is its average monthly income statement:



















































Revenue$$
Food50,000
Beverages15,00065,000
Cost of sales
Food (50% of revenue)25,000
Beverages (20% of revenue)3,00028,000
Gross profit37,000
Operating expenses
Wages15,000
Operating supplies5,000
Administration3,000
Advertising2,500
Repairs and maintenance of equipment1,500
Utilities2,500
Depreciation1,000
Interest1,00031,500
Profit before tax$5,500

The owner is currently preparing the budget for next year and is considering the following alternatives:
  1. Reducing the cost of sales for food from 50 per cent to 45 per cent. This would be achieved by reducing portions and improved purchasing. There would be no other changes.

  2. Cutting the food cost from 50 per cent to 45 per cent and spending an additional $1500 on advertising. The advertising should attract new customers and increase the volume of both food and beverage revenue by 20 per cent on present levels. The new customers would also cause monthly other operating expenses to increase as follows:
















Wages$2000 Repairs150
Supplies400 Utilities400
Administration200   
Required (group)

Prepare a budgeted average monthly income statement for both alternatives.

Required (your individual response)

Advise the owner which alternative you consider best, with reasons.

 Part b.

Question 10.58[3]  - Nardeb Company is a software producer and sales company. Currently, it pays all sales staff on a fixed base salary. Recently, management has been considering switching sales staff across to an incentive-based reward system. Nardeb’s chief accountant Polly Xu has prepared some summarised numbers (see below) for senior management to consider.

Michael Day comments that he cannot see the difference, as the sales level and profit are unchanged. Xu argues that it is the difference in cost structure that matters. She argues that the entity is better off staying with the current structure, because the increase in profit is greater when sales levels increase than it would be with the incentive rewards.


















 With fixed rewards With incentive rewards
Sales $2,500,000$2,500,000
Variable costs 1,500,0002,000,000
Contribution margin 1,000,000500,000
Fixed costs 750,000250,000
Profit$250,000$250,000
 

Required (group)
  1. Explain the basis of Polly Xu’s argument.

  2. Calculate the Contribution Margin Ratio under each alternative.

  3. If sales were to increase by 10 per cent, which alternative would produce the highest increase in profit?

  4. Prepare an income statement for each alternative (under the assumption of the increased sales in c. above).

Required (your individual response)
  1. Briefly evaluate the contributions of Polly and Michael in the above situation, and then make your recommendations on the incentive rewards proposal. Are there any other factors that need to be considered in making such a management decision?

Part c.

Barton Company requested a sizeable loan from First Commonwealth Bank to acquire a large parcel of land for future expansion. Barton reported current assets of $1,900,000 ($430,000 in cash) and current liabilities of $1,075,000.

The bank initially denied the loan request for a number of reasons, including the fact that the current ratio was below 2:1.

When Barton was informed of the loan denial, the financial controller of the company immediately paid $420,000 that was owed to several trade creditors. The controller then asked the bank to reconsider the loan application.

Required (your individual response)

Please answer the following questions about Barton Company.

Based on these abbreviated facts, would you recommend that the bank approve the loan request?     Why?       Were the controller's actions ethical?

[1] This assessment is set at 1,000 words (this excludes calculations, tables, group work and appendix material), and is worth 15% of the subject/course mark/grade.

[2] from Birt, J., Chalmers, K., Maloney, S., Brooks, A. & Oliver, J. (2014). “Accounting: Business Reporting for Decision Making” (5th ed.), modified for this assignment.

[3] from Birt, J., Chalmers, K., Maloney, S., Brooks, A. & Oliver, J. (2014). “Accounting: Business Reporting for Decision Making” (5th ed.), modified for this assignment.

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