Accounting for Decision Making Solved Examples

Question 1
Retail outlets purchase snowboards from Slopes Inc., throughout the
year. However, in anticipation of late summer and early fall purchases,
outlets ramp up inventories from May through August.
Outlets are billed when boards are ordered. Invoices are payable within
60 days. From past experience, Slopes’ accountant projects 20% of
invoices will be paid in the month invoiced, 50% will be paid in the
following month, and 30% of invoices will be paid two months after the
month of invoice. The average selling price per snowboard is £450.
To meet demand, Slopes increases production from April through July,
because the snowboards are produced a month prior to their projected
sale. Direct materials are purchased in the month of production and are
paid for during the following month (terms are payment in full within 30
days of the invoice date). During this period there is no production for
inventory, and no materials are purchased for inventory.
Slopes plans to purchase a delivery van in July 2019 amounting to
£2,000. The van will not be put in use until October 2019.
Projected Sales Units
May 80
June 120
July 200
August 100
September 60
October 40

Direct Materials and Direct Manufacturing Labour Utilization and
Cost
Units per board Price per unit
Direct materials
(yard) 11 £23 per yard
Direct manufacturing
labour (hours) 5 £25 per hour

The beginning cash balance for July 1, 2019, is £10,000. On October 1,
2018, Slopes had a cash crunch and borrowed £30,000 on a 6% oneyear note with interest payable monthly. The note is due October 1,
2019. Using the information provided, you will need to determine
whether Slopes will be in a position to pay off this short-term debt on
October 1, 2019.
Required:
Write a brief report to the management of Slopes Inc. This report should
have an introduction, body and conclusion.
(Maximum word limit: 500 words)
This report should cover the following areas:
• Prepare a cash budget for the months of July through September 2019.
(30 marks)
• Will Slopes be in a position to pay off the £30,000 one-year note that
is due on October 1, 2019? If not, what actions would you
recommend to Slopes’ management?
(10 marks)
• Suppose Slopes is interested in maintaining a minimum cash balance
of £10,000. Will the company be able to maintain such a balance
during all three months analysed? If not, suggest a suitable cash
management strategy.
(10 marks)
Total: 50 marks

Question 2
New Bio Ltd is considering the purchase of a special-purpose bottling
machine for £46,000. It is expected to have a useful life of four years
with no terminal disposal value.
The plant manager estimates the following savings in cash operating
costs:
Year Amount
1 £20,000
2 £16,000
3 £12,000
4 £10,000
Total £58,000
New Bio Ltd uses a required rate of return of 16% in its capital budgeting
decisions. Assume all cash flows occur at year-end except for initial
investment amounts.
Required:
Write a brief report to the Managing director of New Bio Ltd. This report
should have an introduction, body and conclusion.
(Maximum word limit: 500 words)
This report should cover the following areas:
• Calculate the following for the special-purpose bottling machine:
1. Net present value
2. Payback period
3. Internal rate of return
4. Accounting rate of return based on initial investment
(Assume straight-line depreciation. Use the average annual
savings in cash operating costs when computing the
numerator of the accounting rate of return)
(30 marks)

• Comment on your results and discuss the advantages and
disadvantages of the above-mentioned capital appraisal techniques.
(15 marks)
• Recommend, with reasons, if New Bio Ltd should purchase the
special-purpose bottling machine.
(5 marks)
Total: 50 marks