Unit No 2; Managing Financial Resources and Decisions

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Unit No 2; Managing Financial Resources and Decisions

Task 3.
Heath limited is a medium size company dealing with the production and sales of electronic
parts. The management of the company has decided to expand and locate its production
capacity locally. The company has presented its expansion plan to the finance manager to
evaluate the financial position of the company and its ability to expand locally.
You have been asked to prepare a cash budget for four months starting from June 2015 on
the basis of the information given below:

The opening balance of cash on 1st June 2015 is £75000. Monthly credit sales for the four
months ending September 2015 are forecasted below: Customers are allowed one month
credit from the date of sale.

Months Amount (£)
June 550,000
July 630,000
August 770,000
September 820,000
Cash sales between June and September 2015 are:
Months Amount (£)
June 60000
July 70000
August 75000
September 85000
Cash purchases during the relevant periods are:
Months Amount (£)
June 310,000
July 450,000
August 500,000
September 520,000
A new supplier has offered 30 days credit to Heath limited starting from June 2015; this
means that goods bought on credit in June will be paid in July and so on. The company plans to make the following credit purchases from the supplier.
Months Amount (£)
June 55000
July 65000
August 60000
September 70000

The company pays rent of £30,000 quarterly in advance. Payments are due on 1st June & 1st September.
Other expenses are estimated as follows:
Months Amount (£)
June 75,000
July 80,000
August 90,000
September 95,000
The company will be repaying a Bank Loan of £15,000 per month. The last instalment is due
in September 2015. Other expenses are paid in cash within the same month.
Prepare the Cash Budget for four months ending September 2015. (Covers AC3.1)

Task3 (b) Paracha limited deals in the production of sports equipment. You have been
appointed as a production manager in the company and you have been asked by your line
manager to calculate the selling price and the targeted profit of the business.
The cost of equipment per unit is as shown below:
Variable Cost per unit: £150
Fixed Cost per unit: £100
Total Cost per unit: £250
The company is currently reviewing its selling prices and is considering cost-plus pricing
based on:
(i) Calculate the selling price per unit with 30% mark up on cost and calculate profits on 550
units sold. (Covers AC3.2)
You have been informed the fixed cost is fully recovered if 550 units are manufactured and
further production will not result in any additional fixed cost. The manager wants to know:
(ii) Calculate the selling price per unit after 550 units sold with 25% mark up and the profit on
additional 1500 units sold. (Covers AC3.2)
Task 3C.
Day Choice Ltd is a small company which manufactures electric items. The company has
three investment options. As a finance manager of the company you are required to provide
an investment appraisal report on which project would generate more benefits to Day Choice Ltd.
You are required to use the Net Present Value (NPV) and Payback Period techniques to
evaluate which project the company should select for its investment.
The following information is provided:
Discount rate: 10% (The estimated cost of capital per annum).
Note –The discount factors are as follows:
Year 1 = 0.909
Year 2 = 0.826
Year 3 = 0.751
Year 4 = 0.683
Cash Flow Project A Project B Project C
Investment (Cash Outflow) £130,000 £150,000 £190,000
Year 1- Cash Inflow £35,000 £50,000 £40,000
Year 2- Cash Inflow £45,000 £50,000 £50,000
Year 3- Cash Inflow £55,000 £50,000 £55,000
Year 4- Cash Inflow £65,000 £50,000 £65,000
Assess the viability of each project using the following investment appraisal techniques and
briefly explain which project you would recommend and why? (Covers AC3.3)
 Net present value (NPV)
 Payback Period (years)

(Task 3 covers assessment criteria AC3.1, AC3.2, AC3.3, )
Task 4:
The following information relates to the financial performances of a wholesale and a Retail
Wholesale Business     Retail Business
£                                 £
Sales 550,000                 450,000
Cost of sales 400,000     330,000
Gross Profit 150,000       120,000
Total expenses 65,000    45,000
Net Profit 85,000             75,000

Wholesale Business         Retail Business
£000                            £000
Fixed assets                    4,440                        6,550
Current assets                   0                                  0
Stock                              1,420                         2,370
Debtors                            1060                        2,690
Bank                                   30                             10
Total Current Assets          2510                        5,070
Total Assets                       6950                       11,620
Capital                              3,000                         5,500
Long Term Loans              2400                         3,170
Current Liabilities              1550                          2,950
Total Liabilities                  3,950                          6,120
Total Capital + Liabilities    6,950                         11,620
(a) Explain the main financial statements produced by a business. (Covers AC4.1)
(b) Compare appropriate formats of financial statements (Income statement and balance
sheet) for a Sole Trader and a Public Limited Company. (Covers AC4.2)
(c) Interpret financial statements using appropriate financial ratios and compare the following ratios for the wholesale and retail businesses:
(i) Gross Profit Margin
(ii) Net profit Margin
(iii) Current Ratio
(iv) Quick Ratio
(v) Gearing


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