Control systems, capital budgeting and breakeven.
Response to Andrew
Control systems are procedures designed to manage and coordinate all the transactions
and operations of a business. The main objective of control systems is to eliminate any weakness
in operation system that can be exploited by fraudsters. In the sales department, sales expenses
can be inflated to create room for fraud by dishonest employees. Also sales revenue should be
handled carefully and efficiently. The following are the procedures to handle sales expenses and
generally needed in the sales department:
a) Cut off procedures. These are procedures used to determine sales for a particular season.
They can range from a day to several days, weeks or months depending on the nature of
the business and the turnover of the products. Products that have a shorter shelf life need
a system that’s shorter to enable stock control systems to be effective and manageable
Control systems, capital budgeting and breakeven. 2
(Varshney, & Maheshwari, 2010). In our case the sales and products turnover is very
high and it requires a daily record to monitor the sales revenue and expenses.
b) Verification procedures. All revenues and expenses need to go through a verification
process. Expenses have to be authorized and approved before being incurred (Brealey et
al, 2009). A senior member of staff or a responsible employee needs to be charged with
the responsibility of authorizing expenses. This will prevent unnecessary expenditure as
the authorizing person has to account for all the expenses incurred.
c) Completeness. All transactions need to be completed on time. Pending transactions have
to be followed up and any unnecessary delays discouraged. This prevents a buildup of
pending cases which creates a fertile ground for fraud.
d) Presentations. The presentation of financial information has to be done in a structured and
consistent system. Sales expenses have to be matched with approval vouchers, purchase
receipts, and entry references. This prevents repeated expenses passing off as genuine
Information Brenda needs to get the equipment approved in the capital budget
This is a process used to determine whether a company actually requires to invest in
machines or equipment and if the process is economically viable. The following are the
methods used to do the calculations;
a) Net present value. This method uses the incremental cash flow expected from the project
in this case purchase of an offset printing press, to calculate a weighted average cost and
Control systems, capital budgeting and breakeven. 3
subsequent riskiness of the undertaking (Chris, 2008). It’s also known as the hurdle rate
because it depends greatly on the choice of discount rates which have to be carefully
b) Internal rate of return. This method is used to measure how efficient a project is. It gives
a zero Net present value. It starts with a negative cash flow and later positive. All projects
with higher internal rate of return than the hurdle rate should be accepted.
c) Profitability index. When deciding to invest, several options should be exploited. The
option of either buying or not buying the machine. Different types of machines with
different costs should also be considered and their profitability index calculated and
ranked. The one with the highest index should be selected.
d) Payback period. This is the time required for equipment to repay the cost incurred to
acquire it ( Arthur , & Sheffrin, 2003). The period required should be reasonable and not
very long as it will be uneconomical in the long run.
As large sums of money are required when making long term investment it is imperative
to calculate carefully the profits expected from such projects before embarking on them since
once the money has been invested it is not easy to get it back if the project fails.
Email to Carl:
Hi Carl, please find below the information you requested in regards to at what volume was the
old break-even and what is the new break-even? As well as your question where you asked, in
order to make the same profit how many more packages needs to be produced? I hope the
answers will be sufficient.
Control systems, capital budgeting and breakeven. 4
At what volume was the old break-even and what is the new break-even?
Packaging for cell phones.
Fixed monthly cost 257000
Variable cost 1.37 * 3300000 4521000
Total cost 4778000
Breakeven 4778000/3.24 1474691.36 =1474691
Fixed monthly cost 257000
Variable cost (1.37 + .15) * 3300000
Total cost 5273000
Old profit 3.24* 3300000 10692000
Less expenses 4778000
Control systems, capital budgeting and breakeven. 5
New profit 3.24 *3300000 10692000
Less expenses 5273000
In order to make the same profit how many more packages needs to be produced?
The number of extra of units to be produced are:
New total cost 5016000
Old total cost 4778000
Differences in cost 238000
Extra units to be produced 238000/3.24 = 73456.8
Control systems, capital budgeting and breakeven. 6
Arthur , S and Sheffrin, S, M. (2003). Economics: Principles in action . Upper Saddle River,
New Jersey. Pearson Prentice Hall. pp. 375. ISBN 0-13-063085-3 .
Brealey, R. , Myers, S. , Marcus, A., Maynes, E., and Mitra, D. (2009). Fundamentals of
Corporate Finance. McGraw-Hill Ryerson. USA. pp. 284. ISBN 978-0-07-098403-5 .
Chris, A. (2008) Writing Accounting Procedures for Internal Control , Bizmanualz.
Varshney, R, L. and Maheshwari, K.L. (2010). Managerial Economics. 23 Daryaganj, New
Delhi 110002: Sultan Chand & Sons. pp. 881. ISBN 978-81-8054-784-3