ACCT 356 Assignment 2

Question 1: Financial Ratios

1A) Financial Ratios

1Ai) Current Ratio = Current Assets / Current Liabilities

Year Calculation Ratio

2010 117850 / 64926 = 1.815143394
2011 159023 / 83259 = 1.909979702
2012 334293 / 285095 = 1.172567039
2013 331316 / 234677 = 1.411795787
2014 135796 / 363640 = 0.373435266

1Aii) Receivables Turnover = Sales / Average Receivables

Year Calculation Ratio

2010 246169 / 42162 = 5.838646174
2011 421595 / [(42162+49542) / 2] = 9.194694617
2012 774879 / [(42162+ 49542+203935) / 3] = 7.863093164
2013 1054100 / [(42162+ 49542+203935+84678) / 4] = 11.08654096
2014 520041 / [(42162+ 49542+203935+84678+176572) /5]= 4.669162077

1Aiii) Day’s Sales in Receivables = 365 / Receivables Turnover

Year Calculation Ratio

2010 365 / 5.838646174 = 62.51449208
2011 365 / 9.194691617 = 39.69681803
2012 365 / 7.863093164 = 46.4193915
2013 365 / 11.08654096 = 32.92280264
2014 365 / 4.669162077 = 78.17248448

1Aiv) Inventory Turnover = COGS / Average Inventory

 Year Calculation Ratio
2010 206110/ 14621 = 14.096847
2011 366697 / [(14621+29622) / 2] = 16.57649798
2012 710697 / [(14621+29622+11331) / 3] = 38.3649
2013 960435 / [(14621+29622+11331+150491)/4] = 18.64334
2014 711430 / [(14621+29622+11331+150491+103279)/5] = 11.49901

1Av) Inventory Holding = 365 / Inventory Turnover

Year Calculation Ratio

2010 365 / 14.096847 = 25.89231497
2011 365 / 16.57649798 = 22.01712614
2012 365 / 38.3649 = 9.513904637
2013 365 / 18.64334 = 19.57803698
2014 365 / 11.49901 = 31.741863
1Avi) Rate of Return on Sales = Net Income / Sales

Year Calculation Ratio

2010 29105 / 246169 = 0.1182 = 11.82%
2011 36887 / 421595 = 0.08749 = 8.75%
2012 48999 / 774879 = 0.0632 = 6.32%
2013 64745 / 1054100 = 0.0614 = 6.14%
2014 -326463 / 520441 = -0.6273 = -62.73%

1Avii) Rate of Return on Assets = Net Income + Interest / Average Total Assets

Year Calculation Ratio

2010 (29105+10915) / 162087 = 0.2469 = 24.69%
2011 (36887+17920) / [(162087+213280)/2] = 0.2569 = 25.69%
2012 (48999+20780 / [(162087+213280+478401)/3] = 0.2452 = 24.52%
2013 (64745+27190) / [(162087+213280+478401+464210)/4] = 0.2790 = 27.90%
2014 (-326463+2301) / [(162087+213280+478401+464210+299556)/5] -1.00 = -100%

1Aviii) Return on Equity = Income – Dividends / Ave Equity

Year Calculation Ratio

2010 (29105-3419) / 93376 = 0.2751 = 27.51%
2011 (36887-7257) / [(93376+124462)/2] = 0.272 = 27.20%
2012 (48999-11265) / [(93376+124462+163325)/3] = 0.2969 = 29.69%
2013 (64745-15510) / [(93376+124462+163325+213426)/4]= 0.3312 = 33.12%
2014 -326463 / [(93376+124462+163325+213426-116268)/5 -3.41 = -341.00%

1Aix) Asset Turnover = Sales / Total Assets

 Year Calculation Ratio
2010 246169 / 162087 = 1.518746105
2011 421595 / 213280 = 1.96720743
2012 774876 / 478401 = 1.619726965
2013 1054100 / 464210 = 2.270739536
2014 520441 / 299556 = 1.737374648

1Ax) EPS = Income – Dividends / # Shares Outstanding

Year Calculation Ratio

2010 (29105-3419) / 70699487 = 0.000309
2011 (36887-7257) / 81541569 = 0.0003633
2012 (48999-11265) / 86169014 = 0.000437
2013 (64745-15510) / 86169014 = 0.0005713
2014 (-326463) / 86169014 = -0.000378

1Axi) Debt Ratio = Total Liabilities / Total Assets

Year Calculation Ratio

2010 68711 / 162087 = 0.4239143
2011 88818 / 213280 = 0.416438
2012 315076 / 478104 = 0.658602
2013 250784 / 464210 = 0.540238
2014 -415824 / 299556 = -1.38813
1Axii) Times Interest Earned = EBIT / Interest

Year Calculation Ratio

2010 40366 / 10915 = 3.698213
2011 56753 / 17920 = 3.167020
2012 70082 / 20780 = 3.372569
2013 90109 / 27190 = 3.314049
2014 -324162 / 2301 = -140.878

1B) Analysis of Ratios

Liquidity:

Forge Group’s liquidity appears to be their biggest weak point. Their current ratio never rose

above 2, even during their most promising year (2013), meaning that they were not at all liquid.
The receivables turnover appears good; however it may represent terms that are too tight.

Assuming that terms are 30 days, day’s sales in receivables shows that Forge Group rarely

collected receivables within credit terms. It is good to see that day’s sales in receivables were

steadily reducing from 62 days in 2010 and almost reached 30 days in 2013, before the trading

halt in 2014. Inventory turnover is on par, considering the scale of the projects, and inventory

holding, while not improving, is fine.

Profitability

Forge Group’s rate of return on sales started strong at 11.82%, however it steadily decreased

until it was nearly half that in 2013, startling considering 2013 was their most promising year.

However their rate of return on assets was consistently between 25% and 30% (until 2014, of

course). The return on equity is great ,as it is consistently higher than the rate of return on assets,

meaning that Forge Group was investing at a higher rate than borrowing, resulting in good

leverage. Asset turnover, while fantastic in 2013 (as expected) was constantly below 2 – not

good, but not bad either, but some improvement would have been good to see. EPS was

extremely low across the board, but progressively increased from 2010 to 2013.

Solvency:

Forge Group’s debt ratio was nice and low, meaning that there was low financial risk. It did

spike by 0.2 in 2012, but gave the impression of going back down in 2013. The times interest

earned ratio was high, meaning that it should have been easy to pay off interest. Of course, both

the debt ratio and times interest earned ratio was extremely poor in 2014.

Question 2: Project Costing & Risk

2A) Resurface Without Testing

Cost of landscaping = 22000 – 5000 = 17,000

Cost of installation = 16,000

Total landscaping & installation = 33,000

Cost reduction (volunteers) = (25,000)

Net Cost, landscaping & installation = 8,000

NPV = 120000 + 7000 – 22000 – 45000 – 8000 – 55000

NPV = -3,000

2B) Complete Testing

2Bi) Remove and Replace

NPV = 120000 + 7000 – 22000 – 18000 – 45000 – 8000 -73000

NPV = -44,000

2Bii) Resurface After Testing

NPV = 120000 + 7000 – 22000 – 1800 – 45000 – 8000 – 55000

NPV = -21,000

2Biii) Test, No Need to Replace or Resurface (not required – just wanted to see)
NPV = 120000 + 7000 – 22000 – 18000 – 45000 – 8000

NPV = 34,000

2C) Weighted NPV & Suggestion

Option Probability NPV Weighted NPV

A) 100% -3,000 -3,000
Bi) 40% -44,000 -17,600
Bii) 40% -21,000 -8,400
Biii) 60% 34,000 20,400
The school should test the soil. There is a 60% chance that it is not contaminated. If the soil is

found to not be contaminated, they should neither replace nor resurface the playground. This

would result in a positive NPV. However, there is a 40% chance that the soil is contaminated. If

that is the case, the school should resurface. They would have a negative NPV, but it is higher

than the NPV would be if they removed and replaced the soil.

Question 3: Mix / Variance

3.1) Sales-Mix & Sales Quantity Variance

Sales mix percentages:

Budget Actual
Dryers 10000/50000 = 0.2 8820/42000 = 0.21
Washers 40000/50000 = 0.8 33180/42000 = 0.79

Sales-Mix Actual All (Actual Sales- Budget Sales- Budget CM

Variance = UnitsSold * Mix - Mix )* per Unit
Dryers = 42000 * (0.2-0.21) * 275 = 115,500 U

Washers = 42000 * (0.8-0.79) * 375 = 157,500 F

Total = 42,000 F

The sales mix variance is $42,000 favorable.

Sales Quantity (Actual All Budget All Budget Sales Budget CM

Variance = UnitsSold - UnitsSold ) * Mix * per Unit

Dryers = (42000-50000) * 0.2 * 275 = 440,000 U

Washers = (42000-50000) * 0.8 * 375 = 2,400,000 U

Total = 2,480,000 U

The sales quantity variance is $2,480,000 unfavorable.

3.2) Market Share & Market Size Variance

Market size = Units Sold / Actual Market Size

Actual Market Share

Dryers = 8820/ 0.25 = 35,280

Washers = 33180 / 0.24 = 138,250

Budget Market Share:

Dryers = 10000 / 0.2 = 50,000

Washers = 40000 / 0.25 = 160,000

Market Share Actual Size (Actual Market Budget Market Budget CM

Variance = in Units * Share - Share )* per Unit

Dryers = 35280 (0.25-0.2) * 275 = 485,100 F

Washers = 138250 (0.24-0.25) * 375 = 518,437.50 U

Total = 33,337.50 U

The market share variance is $33,337.50 unfavorable

Market Size (Actual Size Budget Size in Budget Market Budget CM

Variance = in Units - Units )* Share * per Unit

Dryers = (8820 – 10000) * 0.2 * 275 = 64,900 U

Washers = (33180 – 40000) * 0.25 * 375 = 639,375 U

Total = 704, 275 U

The market size variance is $704,275 unfavorable.

3.3) Variance Discussion

The biggest cause for the large variance was the over-budgeted sales quantity. Clean-It-Up only

sold 88% of the dryers and 82% of washers that were budgeted. This is what impacted the
market size variance and the sales quantity variance, resulting in both being unfavorable. They

were also sold at a significantly lower price.

Clean-It-Up underbudgeted the market share for dryers by 5%, which would be a good thing,

were it not for the fact that they underbudgeted the market share of washers, for which they get a

larger contribution margin per unit sold. This had a huge negative impact on the market share

variance, driving what would have been a favorable variance way down into the unfavorable

range.

The sales mix variance was favorable as Clean-It-Up accurately budgeted the mix of washers and

dryers that would be sold. Again, washers have a higher contribution margin per unit sold, so the

fact that they slightly underbudgeted the amount of washers vs. amount of dryers that would be

sold made the variance favorable.

Question 4: Customer Profitability:

4A) Customer Profitability Analysis

Customer
1 2 3 4 5 6
Revenue 600 735 420 90 165 60
Costs:
Clown (40) (40) (40) (40) 0 (40)
Food (240) (300) 0 0 (60) 0
Cake (60) 0 0 (60) (40) 0
Clean (30) (60) 0 0 (30) 0
Favours (100) (125) 0 0 (25) 0
Decor (65) (80) (95) 0 (65) 0
Costumes 0 0 (6.6) 0 (6.6) 0
Op. Inc 65 130 278.4 (10) (61.6) 20
*costume cost per party = 40 / 25 = 1.6 + 5 = 6.6 per party

Customer Rank: 3, 2, 1, 6, 5, 4
4B) Customer Profitability Analysis

Customer
1 2 3 4 5 6
Revenue 600 735 420 90 165 60
Rev per child 30 29.40 9.33 6.00 33.00 5.00
Costs, current: (535) (605) (141.6) (100) (226.6) 40
Op. Inc, current 65 130 278.4 (10) (61.6) 20
% Rev, current 10.83% 17.69% 66.29% -11.11% -37.33% 33.33%

Customer
1 2 3 4 5 6
% Rev, target 50% 50% 50% 50% 50% 50%
Revenue, target 1070 1210 283.20 200 453.20 80
Rev per child 53.50 48.40 6.29 13.33 90.64 6.67
Costs, current (535) (605) (141.6) (100) (226.6) 40
Op. Inc, target 535 605 141.6 100 226.6 40

In order to make a return of 50%, Mark should have charged his customers as follows:

Customer Price
1 53.50/child
2 48.40/child
3 6.29/child
4 13.33/child
5 90.64/child
6 6.67/child

Mark has underquoted his customers. The first thing Mark should do is consider introducing

tiered pricing with a flat fee plus a fee per child. Mark’s biggest loses occur in areas such as

decorating and clean up, in which his costs double if a party has more than 20 children while his

costs remain on a per child basis. Therefore, Mark should create a tiered cost structure in which

he charges a flat fee for parties of a certain number of children (for example, 10, 15, 20, 25, 30,
30+) and then add a fee per child on that price. A mix of fixed and variable pricing would help

negate areas in which Mark appears to be losing money.

Question 5: Risk Mitigation

5A) Big Boom is facing the risk of the substandard material provided by their supplier resulting

in performance or safety issues in their product. While it is a big deal if their product does not

show it’s signature blue colour, it is a bigger deal if Big Boom’s products are unsafe and can

cause hard. The company must recognize the importance of fire safety. Big Boom should use the

Avoidance strategy – that is, they should avoid the risk by not using the substandard materials.

This strategy is recommended because more than anything, Big Boom must consider the safety

of their customers, the negative impact on their reputation if customer do get injured, and the

financial impact that may result. There is no amount of acceptable risk in this scenario.

5B) Big T is faced with the fact that their product has been found to be rancid, going against their

product guarantee. Big T should employ a Reduction strategy to try to reduce the impact of the

risk. They have no way of knowing if the rancidity was due to storage conditions, faulty

packaging, issues during transportation, etc. and should therefore issue a statement to inform

their customers of the potential issue and educate them in the correct way to store the product.

They should also further investigate what caused the issue and attempt to reduce the risk by

mitigating it at its source.

5C) Julie’s eBooks is dealing with complaints about the fact that they do not sell hard copy

books. The risk is the potential customers that will turn away because they do no wish to

purchase ebooks. Julie’s eBooks should use the Retention strategy, meaning that they should
accept the risk involved in this particular venture. This risk mitigation strategy is recommended

because the nature of the business is selling ebooks, not hardcopy books – it’s in the name

(“Julie’s eBooks”). Julie’s eBooks should not worry about customers that are looking for

hardcopy books over ebooks because they are part of a different target market. There is a low

amount of acceptable risk in this scenario.

5D) Big Apple is faced with more than an 100% raise in shipping charges. While this seems like

a huge amount, it will only raise their total cost of production by 7%. Big Apple should use the

Retention risk management strategy in this case, as there is an acceptable cost of risk and there is

no alternative.

5E) True North is facing a discrepancy in a quote provided to a key customer. The customer was

quoted twice the labour charges that would be incurred. True North should Reduce the risk by

immediately contacting the customer and letting them know the correct quote. The risk here is

losing any relationship that had been built with the customer, and True North should recognise

the importance of maintaining a strong relationship with key customers.