UNIVERSITY OF WESTMINSTER

WESTMINSTER BUSINESS SCHOOL

EXAMINATION PAPER
SEMESTER ONE

January 2018

MODULE CODE: 7ACCN018W

MODULE TITLE: Financial Analysis for Managers

DATE:

TIME:

This is a CLOSED book exam.

INSTRUCTIONS TO CANDIDATES:

SECTION A: Answer All FIVE questions in this section

SECTION B: Answer ANY TWO questions in this section

TIME ALLOWED: 3 Hours

The use of silent non-programmable calculators is permitted

PLEASE DO NOT TURN OVER THIS PAGE UNTIL

INSTRUCTED TO DO SO BY THE INVIGILATOR

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SECTION A

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

marks in total.

Question 1
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. Sunk cost
iii. Fixed cost
(6 marks)

b) BH Ltd has been asked to bid for a contract. Two types of material will be
needed for this contract. These are 1,700 units of material X and 3,000
units of material Y.

There are 2,100 units of material X in stock that were bought for £4 ⋅30 per
unit last month in anticipation of another job which the company did not
get. Material X currently has no other use if not used for this contract. It
can however be sold at a price of 4.80 per unit. The replacement cost of
this material is £5⋅20 per unit. Material Y needs to be bought at a price of
£3.10 per unit.

What is the relevant cost of the materials to be used for this bid?
(4 marks)
(Total: 10 marks)

Question 2
Briefly discuss each of the following three main types of business structure:

i) Sole trader;
ii) Partnership; and
iii) Company (both public and private).
(10 marks)

Question 3
a) BH Ltd is considering a project which requires £230,000 upfront
investment and is expected to last for four years. There is no residual value at
the end of the project. The net cash flows for the four years of the project are
expected to be:

[QUESTION 3 IS CONTINUED ON THE NEXT PAGE]

Year 1 Net cash flow £73,400
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Year 2 Net cash flow £91,700
Year 3 Net cash flow £107,200
Year 4 Net cash flow £39,100

Required:
a) Calculate the payback for the following project and state clearly whether
the project should be accepted if it is company’s policy not to accept
projects with payback period of more than 3 years.
(3 marks)

b) Calculate the accounting rate of return (ARR) for the above project
(3 marks)

c) Explain briefly why despite its limitations, payback is still used as an

investment appraisal technique.
(4 marks)
(Total: 10 marks)

Question 4
Explain 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 5
Marylebone Ltd produces a single product and the standard costs per unit
based on a budgeted production of 33,100 units in October are as follows:

Standard cost card for the product £

Direct materials (2.7 kg at £9 per kg) 24.30
Direct labour (1.4 hours at £8 per hour) 11.20

In October 33,600 units were actually produced at the following costs:

Actual cost £
Direct materials (87,360 kg) 794,976
Direct labour (50,400 hours) 403,200

Required:

a) Calculate total material expenditure variance, material price variance

and material usage variance.
(5 marks)
b) Calculate total labour expenditure variance, labour rate variance and
labour efficiency variance.
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 (5 marks)
(Total: 10 marks)
(Total for Section A: 50 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 briefly explain FOUR of the key functions that
budgets are said to serve in an organisation.
(9 Marks)

b) Regents Ltd plans to start a business on 1st January 2018, selling prints of
famous paintings.

The following forecasts have been drawn up for the next three months.

i) Sales are all for cash and are forecast to be £39,000 in January,
£51,700 in February and £53,800 in March.
ii) The cost of buying each print is 65% of selling price and the suppliers
are happy to supply Regents Ltd on one month credit.
iii) Staff salaries are budgeted at £26,400 per year payable every month
iv) Rent and rates are budgeted at 52,800 per year payable every three
months with the first payment due in January
v) Overheads are expected to be £600 per month of which a third is paid
in the month in which they occur and the rest in the following month
vi) The company plans to carry out a series of newspaper advertising
campaigns. These are budgeted to be £16,000 in January and 10,000
in February and £9,000 in March. The invoice for these expenditures
are paid in the following month
vii)The bank balance on 1st January 2018 will be £6,000.

Required:
Prepare a cash budget for the three months period of January to March 2018
inclusive, using the above forecast sales and expenses figures. Your cash
budget must include a ‘Total’ column.
(13 marks)

c) In general terms, outline three measures that an organisation can take to

deal with any short term cash flow problems identified by their cash
budgets.
(3 marks)
(Total: 25 marks)

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Question 7
Baker Ltd, a technology company, have recently developed a new protective
cover for smart phones which is superior in quality to all the available phone
covers currently in the market. The company is now considering going into
production on 1st January 2018 which is the start of the company’s
accounting year.

A market survey carried out last month costing £23,500, which has yet to be
paid, indicated the demand for the new phone cover to be:

Year 1 74,000
Year 2 160,000
Year 3 95,000
Year 4 30,000

The selling price for each phone cover will be set at £12

Estimated unit cost of producing each unit of phone cover in year 1 is:

Labour £1.05
Material £3.85
Supervision £1.23
Depreciation £1.70
Overheads £4.10
---------
Total Costs £11.93
=====

(a) The selling price, material costs and overheads will increase by 3% per
year due to inflation.

(b) The supervision cost refers to the salary of an existing supervisor, who
would have to be moved from his present work to supervise the production
and sales of the new phone covers. This person’s existing work can be
undertaken by a new supervisor to be employed on a four-year contract at an
annual salary of £34,000.

(c) Material cost is based on the cost of material purchased a few months ago
which is currently used in production of other products within the company.
The current price of this material sufficient to make one unit of the new phone
cover is £3.70.

(d) To manufacture the new phone covers, the company needs to purchase a
new equipment costing £195,000 payable as soon as the production starts. It
is expected that the equipment would last for four years and at the end its life
will have a scrap value of only £14,000. The purchase of this equipment will
be entirely financed by a four-year bank loan carrying an interest of 8% per
year.

[QUESTION 7 IS CONTINUED ON NEXT PAGE]

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(d) As a result of a 'no redundancy' policy, the company has a surplus of labour
and therefore no additional staff will be employed for the production of the new
phone covers.

(e) 70% of the overhead costs in the estimated production cost represent a
share of the company’s fixed costs and the rest is specific to the production of
the new phone covers.

(f) There is a need for additional working capital of £48,000 at the beginning of
the project; this will be released at the end of the project.

(g) The company's cost of capital is 10%.

(h) 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.
(19 marks)

b) Outline two factors, other than financial factors, that the company should
consider before embarking on this project
(2 marks)

c) It is suggested that the because of the underlying assumptions/limitations of

the Internal Rate of Return (IRR) method of investment appraisal, sub-
optimal investment decisions could sometimes be made. Briefly explain two
of these assumptions/limitations.
(4 marks)
(Total: 25 marks)

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Question 8
Baker Ltd is a company that manufactures high quality cycle helmets. The
company has a capacity to produce 50,000 helmets per year’

To make each helmet, the company uses £38 of direct material and 1.5 hours
of direct labour at £12 per hour. Variable overheads amount to £6.30 per unit
of production. The company’s total annual fixed costs are estimated at
£104,000.

It is anticipated that demand and production for next year will be 28,000 units
at a selling price of £69 per helmet.

Required:

a) Calculate the company’s expected profit for the year.

(4 marks)

b) Calculate the company’s break-even point in number of helmets and in

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

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

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

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

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

I. Spending £16,000 on a marketing campaign to boost sales by 10% in

the next year
II. Reduce the current selling price by 5%. This is expected to increase
sales by 15%
(6 marks)

e) A Middle Eastern company has offered to buy 30,000 of these helmets at

a lower price of £65 per unit. Should this order be accepted, there will be
an additional fixed cost of £17,000. Using supporting calculations, suggest
whether this order should be accepted. What would be the total profit for
the year if this order is accepted?
(4 marks)

f) Outline three of the main assumptions of cost-volume-profit analysis.

(3 marks)
(Total: 25 marks)

[END OF EXAMINATION PAPER]

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Present Value of £1

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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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