ACCOUNTS

ASSIGNMENT

2020

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Contents

Scenario 1:....................................................................................................................3

Conclusion:...................................................................................................................6

Scenario 2.....................................................................................................................7

NPV:..............................................................................................................................7

Discount rate 10%........................................................................................................7

Discount rate 20%........................................................................................................8

IRR:...............................................................................................................................8

Analysis:........................................................................................................................8

Reference.....................................................................................................................9

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 Scenario 1:

a.

Contribution per hour=Net Sales – Total Variable Cost

¿ £ 45−£ 20

¿ £ 25

Break−even=¿ Cost /Contribution per hour … … … …(eq . 1)

As the contribution is a per hour rate so we will also convert fixed cost in per hour

rate. Fixed cost is given in yearly rate so ,first of all we will divide it by 12 as a year

has 12 months to convert it in per month rate.

¿ Cost per Month=£ 80,000/12

¿ £ 6,667 per month.

Now we have to convert this per month rate into per hour rate. One month has 30

days and 1 day has 24 hours and so, to get per hour rate we will multiply 30*24=720.

Now divide this 720 with the fixed cost per month to fixed cost per hour.

¿ Cost per Hour=£ 6,667 /720

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¿ £ 9.26 per hour

Now put the values in equation 1

£ 9.26
Break−even∈hours=
£ 25

¿ £ 0.37

¿ Cost
Break−even∈units= … … … … (eq 2)
Contribution Margin per unit

Contribution per month=25∗1000=£ 25000

¿ cost per month=£ 80,000/12

¿ £ 6,667

Now put the above in equation 2

£ 6667
Break−even∈units=
£ 25000

¿ £ 0.266

b.

Price per hour is £45 and a total hour per month is 1000.

Sales=Price× No. of quantity

¿ £ 45 × 1000

¿ £ 45000

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Variable cost per hour is 20

Variable cost =£ 20× 1000

¿ £ 20,000

Profit Margin=Sales−Variable cost – ¿ cost

¿ £ 45,000−£ 20,000−£ 6,667

¿ £ 18,333

No, it is not possible for CC to achieve the proposed profit of £30,000 per month as

the profit margin we calculated is £18,333 because there variable cost is too high. If

they want to earn the profit of £30.000, they should control the variable cost.

c.

10 % of £ 45=£ 4.5

New sales rate=£ 4.5+ £ 45=£ 49.5

New Sales=49.5∗1000

¿ £ 49,500

New profit margin=Sales – Variable Cost – ¿ Cost

¿ £ 49,500 – £ 20,000 – £ 6,667

¿ £ 22,833

If we increase 10% charge in hourly rate even then Cork Coaching (CC) cannot

make the profit of £30,000.

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 d.

If the hour’s capacity is increased by 500 and old hour’s capacity is 1000 so the new

hour’s capacity is now (1000+500=1500)

Cost of trainer =£ 5× 1,500

¿ £ 7,500

Sales are again calculated on the basis of new capacity of hours that is 1500.

Sales=Price× No. of quantity

¿ £ 45∗1500

¿ £ 67,500

Now we will calculate the profit as the sales is altered.

Profit=Sales – Variable cost – ¿ cost – Trainer cost

¿ £ 67,500 – £ 20,000 – £ 6,667 – £ 7,500

¿ £ 33,333

Conclusion:

After hiring the trainer, we will bear the cost of the trainer but we will achieve the

target profit. Trainer cost is measured at full capacity, this is the maximum cost of the

trainer that we have to bear and we reach the target profit. So, it is recommended

that CC should hire the trainer.

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 Scenario 2

First of all we will calculate the depreciation by straight line method.

Depreciation=(Cashoutflow – Residual value)/total no .useful life

¿(1000−7000)/3

¿ 31,000

Now this depreciation is add back into the cash flow as these cash flows are after

tax. After deduction of tax, depreciation is always added back.

Year Cash flows Depreciation Cash flow+

Depreciation

1 30,000 31,000 61,000

2 (1000) 31,000 30,000

3 4000 +7000 31,000 42,000

*7000 is the residual value that is added in the last year cash flow.

NPV:

CF CF CF
Net p resent value ( NPV ) = + + −ICO
(1+ k ) (1+k ) (1+ k )3
1 2

£ 61000 £ 30,000 £ 42,000

¿ + + – 100,000
( 1.1 )1 ( 1.1 )2 ( 1.1 )3

¿ £ 55,454+ £ 24,793+ £ 31,555

¿ £ 111802 – £ 100,000

¿ £ 11,802

As the NPV is positive so it is feasible to purchase the equipment.

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Discount rate 10%

Year Discount factor CF Discount

factor*CF
0 1.000 (100,000) (100,000)
1 0.909 £61,000 £55,449
2 0.827 £30,000 £24,810
3 0.751 £42,000 £31,542

Discount rate 20%

Year Discount factor CF Discount

factor*CF
0 1.000 (100,000) (100,000)
1 0.833 £61,000 £50,813
2 0.694 £30,000 £20,820
3 0.579 £42,000 £24,318

IRR:

Np v L −Np v IRR
IRR=i L + ( i H −i L ) ( Np v L−Np v H )
IRR=0.15+(.20−0.15)(11801−0)/(11801−(−4049))

¿ 0.15+(0.05)(11,801/15,850)

¿ 0.15+(0.05)0.744

IRR=0.1872

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Analysis:

As the cost of the capital is 10% and the IRR is 18% it means that cost of the project

is 10% giving us the profit of 18%. NPV is most appropriate because it uses the

reinvestment assumption that it invest at the market rate. NPV is the strongest.

 Whereas IRR has weakness of reinvestment at project rate value additively

and the multiple IRR

Reference

Maheswari S.N. (1994) Management Accounting & Financial Control, 9th edition,

sultan chand & sons. Available online assessed on 29 April 2020.

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