What is invoice discounting and its contribution in company growth?
The sale of invoice to finance firms for less than its face value as the firm continues collecting the debt
from its clients.
The method is actually a form of security that the company is able to collect enough cash in future to
pay off the debt. Therefore, the finance companies are expected to give out lower amount than that
indicated in invoice face value in order to shield themselves from risk and earn return amount they lend
to firm. There are several types of invoice discount which include confidential, funding and whole
turnover invoice discounting. Invoice discount has four merits that includes;
1) Ensuring fast funding of core business decisions
2) The firm can easily raise the funds without getting into too much hassle.
3) The help is provided in real-time since the company has close personal support from finance
company.
4) The costs are only the amount in face value minus loan given and no other hidden charge.
Source
https://www.marketinvoice.com/business-finance/what-is-invoice-discounting
Question 1.2
32.97%
The sensitivity analysis is a mathematical concept used in determining the level of uncertainty. The
method is mostly used in determining the effect of change in a given variable whenever there is a slight
change. The following shows the sensitivity analysis for the investment decision in case the variable cost
changes;
3.791*40,000 = 151, 640
Therefore,
Sensitivity = 50,000/151,640 = 0.3297
The sensitivity of variable costs on investment decision is 32.97%.
Question three:
Variable cost is 1.59
Variable cost per unit is total variable cost divided by the unit produced. The variable cost on the other
hand shows the cost of producing products or services that keeps on changing depending on the volume
of production. The variable cost per unit is calculated as shown below;
10500/1.05 =10000
13390/1.03 = 13000
Therefore, adopting high-low concept, we find variable cost per unit as shown below;
Unadjusted cost per unit = Change in cost/ change in output
= (13000 – 10,000) / (8000 – 6000) = 1.50 per unit
Adjusting the inflation effect of 1.06 = 1.50 x 1.06 = 1.59.
The adjusted variable cost per unit is $1.59.
Question Four
The sale price variance is $9,450(F)
The variance is a useful concept in cost management which compares standard price and actual price
results. The standard price is budgeted price multiplied by the number of products sold. The variance
result shows deviations between the two variable. The deviation is useful management tool that enables
the management to employ corrective measures to reduce deviation or appraise the employees for
demonstrating desirable results. The following shows sales price variance calculation;
15,750 (6.60-6) = 15,750*0.6 = $9,450
The sales price variance is favorable with a value of $9,450.
Question Five
The sales contribution margin is 1,500(F)
The calculation of sales volume contribution variance is as shown below;
First, calculate the change in the actual units of products sold which is given by;
The budgeted sales = 15,750/1.05 = 15,000 (Note: the standard price = budgeted price * actual units
sold)
Change in units = 15,750 - 15,000 = 750 Favorable
Sale volume contribution margin = 750 * $2 =$1,500
Question six
The material purchases budget is $395,000
The calculation of material purchases budget is as shown below;
Material usage (MU) = number of units * weight per unit
MU = 12,000 * 4Kg = 48,000Kg.
Opening inventory =3,000Kg
Closing inventory = 4,400Kg (12,000/12=1,000*1.1*4= 4,400)
Material purchases budget is then given by;
Material usage + closing inventory- opening inventory
Material Purchases budget = 48,000+4,400-3,000 = 49,400Kg
Material purchases budgets in dollars = (49,000*8) + (400*7.5)
= 392,000 + 3,000
= $395,000
Question Seven
The current expected market value of bond is $111.1
The calculation of current expected market value of bond is calculated using discounting method and is
calculated as shown below;
Since year 1 to 4 is the same, the present value is as shown below
Present value = Cash flow * discounting factor
Year 1-4; $6 * 3.717 = $22.3
Year 4; $100 * 0.888= $88.8
Market value = 22.3 + 88.8 = $111.1
Current expected market value of bond = $111.1
Question 8
The maximum amount paid by the company for the information is $140,000
Probability Probability Project A Project B Project C
1 0.3 400 800 500
2 0.2 500 300 600
3 0.5 700 200 400
Expected value 1 570 400 470
(Prob*Preference)
The expected value of information with payment for it is the NPV of $570,000.
However, with perfect or paid information, the expected value is given by;
Preference 1 = $800,000 with probability of 0.3
Preference 2 = $600,000 with probability of 0.2
Preference 3 = $700,000 with probability of 0.5
EV = (800,000*0.3) + (600,000*0.2) + (700,000*0.5)
=710,000
Value of the perfect information = Value of perfect information - Value of imperfect information
= 710,000 – 570,000
= $140,000
Section Two
Question 1
The zero based budgeting system has three main stages which include describing the nature of activities
present in decision packages, evaluation and ranking, and allocation of resources.
The three stages of zero based budgeting is as follows;
Description of processes in decision making basket- The description entails coming up with the decision
that are important for example, basing on minimum level and incremental levels beyond the minimum.
The packages would be mutually exclusive and thus requires the management to pick a more suitable
solution. For instance, the decision on whether to collect debt on their own or outsource the function.
Evaluation and ranking- After describing the packages, the management is required to make an
informed decision. Therefore, the packages are measured in net present values and non-financial
aspects are factored too. The packages are then ranked from more desirable to the least.
Allocation of resources- The ranking generates the priorities of funding since the management allocates
resources to more profitable packages. The stage involves costs, revenue and allocation of resources.
Reference
Question two
The worst profit is $300
Question C
What are two types of risk attitude and the appetite for risk?
Risk averse and risk seekers.
The risk averse
