WESTMINSTER BUSINESS SCHOOL

ONLINE TIMED ASSESSMENT SEMESTER 2 2019/20

Module Code: 7ACCN018W

Module Title: Financial Analysis for Managers
Module Leader: Bijan Hesni
Release Time: Wed 13 May 2020 10:00 BST (GMT+1)
Submission Deadline: Thur 14 May 2020 10:00 BST (GMT+1)

Instructions to Candidates:

Please read the instructions below before starting the paper

 Module specific information is provided below by the Module Leader

 The Module Leader will be available in the first hour of timed release to
respond to any queries via a discussion board on blackboard

 As you will have access to resources to complete your assessment any

content you use from external source materials will need to be
referenced correctly. Whenever you directly quote, paraphrase, or
summarise someone else’s ideas, you have a responsibility to give due
credit to that person for their work. Support can be found at
https://www.westminster.ac.uk/current-students/studies/study-skills-
and-training/research-skills/referencing-your-work

 This is an individual piece of work so do not collude with others on your

answers as this is an academic offence.

 Plagiarism detection software will be in use

 Where the University believes that academic misconduct has taken

place the University will investigate the case and apply academic
penalties as published in Section 10 Academic Misconduct regulations.

 Once completed please submit your paper via the submission link
provided. You can only submit ONCE so please ensure you
submit the correct and complete document.

 Work submitted after the deadline will not be marked and will
automatically be given a mark of zero

7ACCN018W/S2/Online timed assessment/2019-20/BH

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Module Specific Information

SECTION A: All questions in this section are compulsory and must be

answered. It is worth 50 marks.

(Word limit guide for any discursive question or part of the

question is 30words per 1 mark. For example, for a 10 mark
question or part of a question your answer is expected to be
not much more than 300 words(30 words x 10 marks = 300)
You should not exceed the word limit by more than 10%

There is NO word limit on calculations

SECTION B: Answer TWO questions from this section which is worth 50

marks.

(Word limit guide for any discursive part of the question is

30words per 1 mark. For example, for a 10 mark question or
part of a question your answer is expected to be not much
more than 300 words
You should not exceed the word limit by more than 10%

There is NO word limit on calculations

All submissions are to be typed and submitted through Turnitin on Blackboard

as Microsoft Word/pdf file format.

Handwritten answers are NOT acceptable

 
Recommended duration of assessment: 3 hrs.

Please DO NOT copy & paste from any source including the text books,
lecture slides, answers to seminar questions and marking schemes to
the past exam papers. Any direct copying will be treated as an academic
offence.

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SECTION A

Answer ALL FIVE questions in this section. This section is worth 50

marks in total.

Question 1
Discuss the characteristics and major differences between the following three
main types of business structure:

a) Sole trader
b) Partnership including limited liability partnership
c) Corporation (private and public limited companies)
(10 marks)

Question 2
Explain in detail why the profit figure in the income statement in the financial
accounts is not the same as the figure for the cash balance in the balance
sheet.
(10 marks)

Question 3
Bart Ltd is considering a project which requires £460,000 of immediate cash
investment and is expected to last for four years. The residual value at the
end of the project is £29,500 which is included in the cash flow of year 4. The
net operating cash flows for the four years of the project are expected to be:

Year 1 Net cash flow £176,800

Year 2 Net cash flow (£83,100)
Year 3 Net cash flow £294,400
Year 4 Net cash flow £168,200

Required:
a) Calculate the payback for the following project and state clearly whether
the project should be accepted if it is company’s policy to only accept
projects with payback period of less than 3 years.
(3 marks)

b) Calculate the accounting rate of return (ARR) for the above project using
the average annual return on average investment.
(3 marks)

c) Explain the advantages and limitations of accounting rate of return (ARR)

as an investment appraisal technique.
(4 marks)
(Total: 10 marks)
Question 4
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Lisa Ltd produces a single product where the standard cost per unit based on
a budgeted production of 5,700 units in April 2020 was as follows:

Standard cost card for the product £

Direct materials (3 kg at £5.60 per kg) 16.80
Direct labour (0.6 hours at £12 per hour) 7.20
Budgeted fixed costs £9,960

The actual production in April 2020 was 5,920 units at the following costs:

Actual cost £
Direct materials (18,352 kg) 105,524
Direct labour paid (2,960 hours) 33,000
Budgeted fixed costs £10,150

Due to a short period of equipment breakdown during the month of April,

labour was idle for 120 hours.

Required:
a) Calculate total material cost variance, material price variance and
material usage variance.
(3 marks)
b) Calculate total labour cost variance, labour rate variance, labour
efficiency variance and idle time variance.
(4 marks)
c) Calculate fixed overhead expenditure variance.
(1 mark)
d) Briefly explain if management should investigate all variances.
(2 marks)
(Total: 10 marks)

Question 5
a) Define the following cost terms and in each case. You must give an
example for each of these cost categories:

i. Opportunity cost
ii. Committed cost
iii. Specific fixed cost
(3 marks)

b) In decision making, certain costs are considered to be irrelevant. List three

types of costs which are irrelevant and for each cost listed you should give
an example.
(3 marks)
c) Homer Ltd has received a job enquiry from a prospective customer and
wishes to provide a very competitive quotation in the hope that this job
may lead to future orders. The job requires two types of material. These
are M1 and M2.

7ACCN018W/S2/Online timed assessment/2019-20/BH

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The job requires 230 kgs of M1. Homer Ltd currently has 150 kgs of M1 in
stock that were bought for £82 per kg. The company has no other use for this
material and if not used for this new job it can be sold for £75 per kg.
The material is readily available in the market at a cost of £83.10 per kg but
the manufacturer only sells them in 200kg containers.

M2 is a toxic chemical and 62 kgs of it is required for this job. Homer Ltd
currently has 40 kgs of this chemical in store that was left over from another
job that was completed recently. If not used on this new job, the material must
be disposed of properly at a cost of £7 per kilo due to its toxicity nature. The
current purchase price of this chemical is £40 per kilo and it is readily
available.

Required:
Calculate the relevant cost of material M1 & M2 that need to be used for this
job.
(4 marks)
(Total: 10 marks)

[SECTION B STARTS ON THE NEXT PAGE]

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 SECTION B

Answer ANY TWO of the following three questions in this section.

Each question is worth 25 marks.

Question 6
a) Define a budget and explain FOUR of the key functions that budgeting
serves in an organisation.
(7 Marks)

b) Skinner Ltd plans to start a B2B business (selling office furniture only to
businesses) on 1st June 2020.

The following forecasts have been made for the three-month period June to
August 2020.

i) Sales are all on credit and are forecast to be £81,000 in June, £96,400
in July and £142,300 in August. Two third of the credit sales are paid
by customers one month after the date of sales and the remaining
customers pay two months after the date of sales.
ii) All purchases are on one month’ credit. The gross profit margin is 35%
of sales.
iii) Staff salaries are budgeted at £77,400 per year payable every month.
iv) Rent and rates are budgeted at £31,600 per year payable every three
months with the first payment due in June.
v) Overheads are expected to be £730 in June increasing by 10% in each
subsequent month. Half of overhead expenditure is paid in the month in
which they occur and the rest is paid in the following month.
vi) Advertising expenditure is budgeted to be £8,000 in June, £6,500 in
July and £9,000 in August. These are paid in the month following the
month of advertising.
vii)The bank balance on 1st June will be £24,500.

Required:
I. Prepare a cash budget for the three months period of June to August 2020
inclusive, using the above forecast sales and expenses figures.
NOTE: Your cash budget must include a ‘Total’ column.
(13 marks)

II. In general terms, outline FIVE measures that an organisation can consider
in dealing with any short-term cash flow problems that may be highlighted
by their cash budgets.
(5 marks)
(Total: 25 marks)

7ACCN018W/S2/Online timed assessment/2019-20/BH

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Question 7
Duffman Ltd is a company that manufactures high energy drinks. The
company has the capacity to produce 1,200,000 cans of drink per year.

To make each can of drink, the company uses £0.07 of aluminium, incurs
£0.03 of labelling cost and £0.95 of various chemicals, nutrition, additives and
water. The company’s total annual fixed costs are estimated at £268,700.

It is anticipated that demand and production for next year will be 795,000 cans
at a selling price of £1.75 per can. The company’s total investment is
£2,800,000 and the directors aim to produce a return on investment of at least
9% per year.

Required:
a) Calculate the company’s expected profit for the year and suggest whether
it meets the company’s minimum return on investment target.
(3 marks)

b) Calculate the minimum price per can of drink that the company can charge
that still provides it with the required return on investment.
(3 marks)

c) Calculate the company’s break-even point in number of cans, and in sales

value. Explain what break-even point indicates.
(3 marks)

d) Calculate the margin of safety as a percentage of expected level of sales

and briefly explain what this figure means.
(2 marks)

e) Suggest, with supporting calculations, which of the following two strategies

(if any) that the company is currently considering should be adopted:

I. Spending £25,000 on a marketing campaign to boost sales by 6% in

the next year
II. Reduce the current selling price by 10 pence. This is expected to
increase sales by 15%.
(4 marks)

f) Disco Stu who owns a chain of health clubs has offered to buy 96,000
cans of these energy drinks at a lower price of £1.40 per can. He wants
these drinks to be delivered to his clubs throughout the year which if
accepted, will cause Duffman Ltd to incur a total transportation cost for
the year of £18,000 for this order. Using supporting calculations, suggest
whether this order should be accepted, and if so, calculate the expected
total profit for the year?
(3 marks)

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g) Disco Stu is also willing to buy as many cans of drinks as Duffman Ltd can
produce if the price is right. The company will incur a total delivery cost for the
year of £22,500 for this order.

Calculate the price per can of drink that enables Duffman Ltd to supply Disco
Stu with the quantity of drinks that takes the company’s production to its
capacity and allow the company to earn overall the return on investment of
12%.
(For this part of the question, you should assume that the order by Disco Stu
in paragraph (f) was rejected).
(4 marks)

h) Discuss briefly why the break even analysis should only be used when
considering short term decision making
(3 marks)
(Total: 25 marks)

7ACCN018W/S2/Online timed assessment/2019-20/BH

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Question 8
Aerospace Technology plc has recently developed a new engine for light jet
engine aircrafts that is said to be 20% more fuel efficient than other jet
engines currently on the market. The research and development costs to-date
amounts to £1.6M, of which £210,000 of expenditure incurred have yet to be
paid.

The company is now considering going into production on 1st June 2020. The
demand (in sales value) for the new engine and spare parts over the next six
years are likely to be:

Year 1 £6.85M
Year 2 £7.24M
Year 3 £7.55M
Year 4 £8.16M
Year 5 £5.15M

Direct material costs of production in each year are 45% of sales. These costs
are expected to increase by an average of 3.5% per year.

Indirect costs of production in each of the five years of this project are as
follows:

Employees’ salaries £640,000

Depreciation £128,000
Overheads £676,000
Loan interest £ 82,000
---------------
Total Costs £1,526,000
---------------

(i) The employees’ salaries include the salary cost of a new project manager
who needs to be employed on a five-year contract at an initial salary of
£75,000. This will increase by 4% per year in the remaining four years.
All current employees in the company are on permanent contract and no
additional employees will need to be hired for this project.

(ii) 40% of the above overhead costs are specific to this project and the other
60% are a share of the company’s general fixed overheads. These costs are
expected to increase by 5% per year.

(iii) To manufacture the new engine, the company needs to invest in new
manufacturing equipment costing £12.35M of which 75% is payable as soon
as the production starts and the balance is due for payment after one year. It
is expected that the equipment would last for five years and at the end its life
will have a scrap value of £610,000.

[QUESTION 8 IS CONTINUED ON NEXT PAGE]

7ACCN018W/S2/Online timed assessment/2019-20/BH

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(iv) Additional working capital of £370,000 will be needed at the beginning of this
project which will be released at the end of the project.

(v) The company's nominal cost of capital is 8%.

* Ignore any taxation implications

Required:
a) Calculate the net present value of the above project and use this as the
basis for a recommendation as to whether the company should proceed with
this project. (NOTE: You must specifically state with reason which costs you
considered to be irrelevant)
(18 marks)

b) Explain the main reasons why the net present value (NPV) method is
preferred to other investment appraisal techniques such as the payback and
the accounting rate of return (ARR).
(4 marks)

c) Discuss briefly the assumptions underlying the Internal Rate of Return (IRR)
method of investment appraisal.
(3 marks)
(Total: 25 marks)

[END OF TIMED ASSESSMENT]

7ACCN018W/S2/Online timed assessment/2019-20/BH

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Present Value of £1

Period 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
(after
n
years)
1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091
2 0.9803 0.9612 0.9426 0.9246 0.9070 0.8900 0.8734 0.8573 0.8417 0.8264
3 0.9706 0.9423 0.9151 0.8890 0.8638 0.8396 0.8163 0.7938 0.7722 0.7513
4 0.9610 0.9238 0.8885 0.8548 0.8227 0.7921 0.7629 0.7350 0.7084 0.6830
5 0.9515 0.9057 0.8626 0.8219 0.7835 0.7473 0.7130 0.6806 0.6499 0.6209
6 0.9420 0.8880 0.8375 0.7903 0.7462 0.7050 0.6663 0.6302 0.5963 0.5645
7 0.9327 0.8706 0.8131 0.7599 0.7107 0.6651 0.6227 0.5835 0.5470 0.5132
8 0.9235 0.8535 0.7894 0.7307 0.6768 0.6274 0.5820 0.5403 0.5019 0.4665
9 0.9143 0.8368 0.7664 0.7026 0.6446 0.5919 0.5439 0.5002 0.4604 0.4241
10 0.9053 0.8203 0.7441 0.6756 0.6139 0.5584 0.5083 0.4632 0.4224 0.3855
11 0.8963 0.8043 0.7224 0.6496 0.5847 0.5268 0.4751 0.4289 0.3875 0.3505
12 0.8874 0.7885 0.7014 0.6246 0.5568 0.4970 0.4440 0.3971 0.3555 0.3186
13 0.8787 0.7730 0.6810 0.6006 0.5303 0.4688 0.4150 0.3677 0.3262 0.2897
14 0.8700 0.7579 0.6611 0.5775 0.5051 0.4423 0.3878 0.3405 0.2992 0.2633
15 0.8613 0.7430 0.6419 0.5553 0.4810 0.4173 0.3624 0.3152 0.2745 0.2394
16 0.8528 0.7284 0.6232 0.5339 0.4581 0.3936 0.3387 0.2919 0.2519 0.2176
17 0.8444 0.7142 0.6050 0.5134 0.4363 0.3714 0.3166 0.2703 0.2311 0.1978
18 0.8360 0.7002 0.5874 0.4936 0.4155 0.3503 0.2959 0.2502 0.2120 0.1799
19 0.8277 0.6864 0.5703 0.4746 0.3957 0.3305 0.2765 0.2317 0.1945 0.1635
20 0.8195 0.6730 0.5537 0.4564 0.3769 0.3118 0.2584 0.2145 0.1784 0.1486
21 0.8114 0.6598 0.5375 0.4388 0.3589 0.2942 0.2415 0.1987 0.1637 0.1351
                     
                     

Present Value of an Annuity of £1 for n Periods

No. of
Years 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091
2 1.9704 1.9416 1.9135 1.8861 1.8594 1.8334 1.8080 1.7833 1.7591 1.7355
3 2.9410 2.8839 2.8286 2.7751 2.7232 2.6730 2.6243 2.5771 2.5313 2.4869
4 3.9020 3.8077 3.7171 3.6299 3.5460 3.4651 3.3872 3.3121 3.2397 3.1699
5 4.8534 4.7135 4.5797 4.4518 4.3295 4.2124 4.1002 3.9927 3.8897 3.7908
6 5.7955 5.6014 5.4172 5.2421 5.0757 4.9173 4.7665 4.6229 4.4859 4.3553
7 6.7282 6.4720 6.2303 6.0021 5.7864 5.5824 5.3893 5.2064 5.0330 4.8684
8 7.6517 7.3255 7.0197 6.7327 6.4632 6.2098 5.9713 5.7466 5.5348 5.3349
9 8.5660 8.1622 7.7861 7.4353 7.1078 6.8017 6.5152 6.2469 5.9952 5.7590
10 9.4713 8.9826 8.5302 8.1109 7.7217 7.3601 7.0236 6.7101 6.4177 6.1446
11 10.3676 9.7868 9.2526 8.7605 8.3064 7.8869 7.4987 7.1390 6.8052 6.4951
12 11.2551 10.5753 9.9540 9.3851 8.8633 8.3838 7.9427 7.5361 7.1607 6.8137
13 12.1337 11.3484 10.6350 9.9856 9.3936 8.8527 8.3577 7.9038 7.4869 7.1034
14 13.0037 12.1062 11.2961 10.5631 9.8986 9.2950 8.7455 8.2442 7.7862 7.3667
15 13.8651 12.8493 11.9379 11.1184 10.3797 9.7122 9.1079 8.5595 8.0607 7.6061
16 14.7179 13.5777 12.5611 11.6523 10.8378 10.1059 9.4466 8.8514 8.3126 7.8237
17 15.5623 14.2919 13.1661 12.1657 11.2741 10.4773 9.7632 9.1216 8.5436 8.0216
18 16.3983 14.9920 13.7535 12.6593 11.6896 10.8276 10.0591 9.3719 8.7556 8.2014
19 17.2260 15.6785 14.3238 13.1339 12.0853 11.1581 10.3356 9.6036 8.9501 8.3649
20 18.0456 16.3514 14.8775 13.5903 12.4622 11.4699 10.5940 9.8181 9.1285 8.5136
21 18.8570 17.0112 15.4150 14.0292 12.8212 11.7641 10.8355 10.0168 9.2922 8.6487
22 19.6604 17.6580 15.9369 14.4511 13.1630 12.0416 11.0612 10.2007 9.4424 8.7715

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