Discuss
1a. how the Company can identify the right Economical Order Quantity to maintain (Doupnik and Perera
2012)
1b). The implications of holding stock
2a .Cash flow forecast for uni-food 2016
2b. The months that will experience cash shortage
2c) The cause of the cash shortage is that the business capital
how to improve the Cash Flow Uni-foods
NAME
UNIVERSITY
Accounts and Finance 2
1a).EOQ = √2 (Annual Usage in Units) (Order Costs)/ (Annual Carrying Cost per Unit)
EOQ = √2 (CoD/Ch
Where Co = Cost of Placing Order = £2
D = Annual demand = 20,000
Ch = Cost of holding one item for a year = £1.5
EOQ = √2 (2×20, 000/1.5
EOQ =230.94
1b). The implications of holding stock occur when stock outs are registered before the delivery of new orders.
The shortage experienced causes delay for customer’s orders who eventually search for reliable suppliers.
Alternatively excessive stocks lead to dead stock and holding of capital in stock instead of being utilized in
other operations that can be more productive for the company. The above implications above compel the
company to identify the right Economical Order Quantity to maintain (Doupnik and Perera 2012)
Accounts and Finance 3
- a)
Cash flow Forecast for UniFood 2016 The months that will experience cash shortage
Date Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Receipts
Sales 18000 18000 22000 22000 26000 20000 10000 10000 27000 28000 28000 25000
Credit Sales 2000 3000 3000 4000 4000 3000 2000 1000 1000 5000 6000 4000
Capital Amounting 10000
Total Receipts (A) 30000 21000 25000 26000 30000 23000 12000 11000 28000 33000 34000 29000
Payments
Cash Pymts to
supplier
2000 2500 3000 3000 3000 1500 1500 2000 3000 3000 3000 2500
Cr pymts to
supplier
6000 6500 7000 4000 6000 2000 1000 2000 6000 7000 7000 6000
Delivery Cost 1000 1200 1500 100 1200 900 800 1000 1000 1500 1500 1200
Rent and rates 40000
Insurance 960
General expenses 30 30 30 30 30 30 30 30 30 30 30 30
Stationary 20 20 20 20 20 10 10 10 20 20 20 10
Bank Loan 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000
Wages 8000 8000 8000 8000 8000 8000 8000 8000 8000 8000 8000 8000
Advertising 40 50 50 40 40 0 30 50 50 50 50 40
Vehicle Running 200 200 200 200 200 150 100 150 200 200 200 100
Vehicle Tax 250
Total Payments (B) 58540 19500 20800 16390 19490 13590 12470 14240 19300 21760 20800 18880
Net In/Out Flow
(A-B)
-28540 1500 4200 9610 10510 9410 -470 -3240 8700 11240 13200 10120
Opening Balance 5000 -23540 -22040 –
17840
-8230 2280 11690 11220 7980 16680 27920 41120
Closing Balance -23540 -22040 -17840 -8230 2280 11690 11220 7980 16680 27920 41120 51240
Accounts and Finance 4
2b) The months that will experience cash shortage are January, February, March and April.
2c) The cause of the cash shortage is that the business capital is insufficient to pay all the initial costs of
operating the business. The credit sales are also contributing to the shortage of cash. The rental charges are also
very high (Doupnik, Hoyle and Schaefer 2012).
2d) To improve the Cash Flow Unifoods should apply for some low cost financing from a convenient bank that
can advance a soft loan of £23540 or source for funding from an alternative source to facilitate the business
operations during the first four months of the year. Unifoods may also opt to shop for cheaper premises that are
within the same locality but which have the same goodwill or advantages as their present premises (Vance
2003).
4a) i.
Unifood
Project A Project B
Years Income balance Income balance
0 100,000 -100,000 100,000 -100,000
1 60,000 -40,000 60,000 -40,000
2 80,000 40,000 70,000 30,000
3 90,000 130,000 80,000 110,000
4 100,000 230,000 90,000 200,000
5 100,000 330,000 95,000 295,000
Payback
period
1 year and 6 months. 1 year and 7 months
(Hermanson, Edwards & Invacevich, 2011)
4b) ii.
Unifood Accounting Rate of Return
Project A Project B
Years Income ARR Income ARR
0 100,000 100,000
1 60,000 60,000
2 80,000 70,000
3 90,000 80,000
4 100,000 90,000
Accounts and Finance 5
5 100,000 95,000
Total 530,000 495,000
Less 100 430% 395%
ARR Average annual returns/Initial inv
(Bodie, Kane & Marcus 2008)
4c) iii.
Unifood
NPV
Project A Project B
Year Cash flow Cash flow
0 -100,000 -100,000
1 60,000 60,000
2 80,000 70,000
3 90,000 80,000
4 100,000 90,000
5 100,000 95,000
Discount Rate 10.00% 10.00%
PV for future cash flows $318,672.97 $292,960.61
NPV $218,672.97 $192,960.61
(Brealey, Myers & Allen 2005)
4b)
The best project to invest in is project A. The payback period for the first project is shorter. The Accounting rate
of return is 430% which is also higher than that of project B. The NPV for Project A is also higher than that of
project B. The NPV for project A is £218,672.97 while that of project b is £192,960.61 (McLaney 2003). The
other factors which should also be considered are the other extra expenses like the preliminary expenses. It may
be costly to commence trading on some projects hence all the total costs should be considered (Harrington
2003).
5).
Accounts and Finance 6
The Gross Profit Margin for Unifood is 65.76% while the Net Profit Margin is 15.31%. The total costs for the
project would amount to 84.69%. The profitability ratios for Unifood are good and above average. The total
costs are a little high but they can be brought down by strategically moving to cheaper premises.
The efficiency ratios for Unifood are: Average collection Period Days in a Year/Inventory Turnover. To obtain
the turnover the average stocks have to be obtained and which are not available (Helfert 2007).
Date Totals Analysis
Receipts
Sales 254000
Credit Sales 38000
Capital Amounting 10000
Total Receipts (A) 302000 302,000
Payments
Cash Pymts to
supplier
30000
Cr pymts to supplier 60500
Delivery Cost 12900 103400
Gross Profit 198,600 65.7616 (Gross Profit
Margin)
Rent and rates 40000
Insurance 960
General expenses 360
Stationary 200
Bank Loan 12000
Wages 96000
Advertising 490
Vehicle Running 2100
Vehicle Tax 250
Total Costs 255760 255760 84.6887
Net In/Out Flow (A-B) 46240 15.3113 (Net Profit
Margin)
Opening Balance 52240
Closing Balance 98480
To improve the working capital, Unifood should cut down on its revenue costs. For example, Unifood should
look for a way to reduce its rental income which is very high (Fridson 2002).The wages are also very high the
company should find a way of reducing the high wages (Samuels et al 1998).
Accounts and Finance 7
References
Bodie, Z., Kane, A., & Marcus, A. J., 2008, Investments (7th International ed) Boston: McGraw-Hill. 303.
Brealey, R.A, Myers, S. C., Allen, F., 2005, .Principles of Corporate Finance Boston: McGraw-Hill/Irwin.
Fridson, M., 2002, Financial Statement Analysis: A Practitioner’s Guide. New York: John Wiley.
Harrington, D, R., 2003, Corporate Financial Analysis: Decisions in a Global Environment. 4th ed. Chicago:
Richard D. Irwin, Inc.
Helfert, E, A., 2007, Techniques of Financial Analysis: A Modern Approach. 9th ed. Chicago: Richard D. Irwin,
Inc.
Hermanson, R.H., Edwards, J.D., & Invacevich, S.D., 2011, Accounting Principles: A Business Perspective.
First Global Text Edition, Volume 2 Managerial Accounting, 37-73.
Vance, D. (2003). Financial analysis and decision making: tools and techniques to solve
financial problems and make effective business decisions. New York: McGraw-Hill.
Doupnik, T.S., Hoyle, J.B. and Schaefer, T.F., 2012, Advanced Accounting. Boston: Irwin/McGraw-Hill, Print.
Doupnik, T.S, and Perera, H.B., 2012, International Accounting. New York: McGraw-Hill Irwin, 2012. Print.
McLaney, E. J., 2003, Business Finance: Theory and Practice (5 th Ed). London: Pearson Education Ltd.
Samuels, J. M., Wilkes, F. M. and Brayshaw, R. E., 1998, Management of Company Finance (7 th Ed).
International Thomson Business Press.
