Financial Statements And Make Or Buy Decision For Aluminium Windows Trading

a) Preparation of financial statements
i) Annual Purchases Budget for Aluminium Windows Trading

	January Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	February	March	April	May Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	June	July	August	September	October	November	December
Opening inventory	1,200	4,800	4,800	4,800	4,800	4,800	4,800	4,800	4,800	4,800	4,800	4,800
Sales	2,400	2,400	2,400	2,400	2,400	2,400	2,400	2,400	2,400	2,400	2,400	2,400
Closing inventory	4,800	4,800	4,800	4,800	4,800	4,800	4,800	4,800	4,800	4,800	4,800	4,800
Purchases (units)	6,000	2,400	2,400	2,400	2,400	2,400	2,400	2,400	2,400	2,400	2,400	2,400

Total annual purchases = 32400 units

Purchases = Sales + closing inventory – opening inventory

ii) Annual Operating Expenses budget for the year

Month	January	February	March	April	May	June	July	August	September	October	November	December
Sales Revenue	$3,84,000	$3,84,000	$3,84,000	$3,84,000	$3,84,000	$3,84,000	$3,84,000	$3,84,000	$3,84,000	$3,84,000	$3,84,000	$3,84,000
Advertising	$3,840	$3,840	$3,840	$3,840	$3,840	$3,840	$3,840	$3,840	$3,840	$3,840	$3,840	$3,840
Wages- shop	$12,000	$12,000	$12,000	$12,000	$12,000	$12,000	$12,000	$12,000	$12,000	$12,000	$12,000	$12,000
Sales commission	$38,400	$38,400	$38,400	$38,400	$38,400	$38,400	$38,400	$38,400	$38,400	$38,400	$38,400	$38,400
Vehicle running expenses	$2,500	$2,500	$2,500	$2,500	$2,500	$2,500	$2,500	$2,500	$2,500	$2,500	$2,500	$2,500
Delivery truck expense	$5,000	$5,000	$5,000	$5,000	$5,000	$5,000	$5,000	$5,000	$5,000	$5,000	$5,000	$5,000
Shop rent	$3,600	$3,600	$3,600	$3,600	$3,600	$3,600	$3,600	$3,600	$3,600	$3,600	$3,600	$3,600
Total selling expenses	$65,340	$65,340	$65,340	$65,340	$65,340	$65,340	$65,340	$65,340	$65,340	$65,340	$65,340	$65,340
Packing and Freight	$28,800	$28,800	$28,800	$28,800	$28,800	$28,800	$28,800	$28,800	$28,800	$28,800	$28,800	$28,800
Warehouse rental	$5,000	$5,000	$5,000	$5,000	$5,000	$5,000	$5,000	$5,000	$5,000	$5,000	$5,000	$5,000
Total distribution expenses	$33,800	$33,800	$33,800	$33,800	$33,800	$33,800	$33,800	$33,800	$33,800	$33,800	$33,800	$33,800
Power	$800	$800	$800	$800	$800	$800	$800	$800	$800	$800	$800	$800
Office salaries	$20,000	$20,000	$20,000	$20,000	$20,000	$20,000	$20,000	$20,000	$20,000	$20,000	$20,000	$20,000
Office rental	$10,000	$10,000	$10,000	$10,000	$10,000	$10,000	$10,000	$10,000	$10,000	$10,000	$10,000	$10,000
Total Administration expenses	$30,800	$30,800	$30,800	$30,800	$30,800	$30,800	$30,800	$30,800	$30,800	$30,800	$30,800	$30,800
Total operating expenses	$129,940	$129,940	$129,940	$129,940	$129,940	$129,940	$129,940	$129,940	$129,940	$129,940	$129,940	$129,940

Total Operating expenses for the year = $1,559,280

iii) Abbreviated Budgeted Income Statement of Aluminium Windows Trading for the Year using individual tax rate

Particulars	Amount
Sales revenue	$46,08,000
Less: Expenses
Selling expenses	$7,84,080
Distribution expenses	$4,05,600
Administration expenses	$15,59,280
Operating income	$18,59,040
Less: Income tax	$6,04,403
Net income	$12,54,637

Working Notes

Income tax for sole proprietor

Up to 14000 @10.5%	$1,470
$14000-$48000 @ 17.5%	$5,950
$48000-$70000 @30%	$6,600
Over $70000 @33%	$5,90,383
Income tax	$6,04,403

(IRD) iv) Abbreviated Budgeted Income Statement of Aluminium Windows Trading for the Year using company tax rate

Particulars	Amount
Sales revenue	$46,08,000
Less: Expenses
Selling expenses	$7,84,080
Distribution expenses	$4,05,600
Administration expenses	$15,59,280
Operating income	$18,59,040
Less: Income tax @28%	$5,20,531
Net income	$13,38,509

(Tradingeconomics)

b) Yes, we recommend the company to turn into limited liability as the net income is higher under limited liability as compared to sole proprietorship

Advantages of limited liability over sole proprietorship

Financial factors

i) Income of sole proprietors is taxed on a personal income tax basis whereas that of limited liability is taxed on a corporate tax basis. As we can see the taxes paid are less in limited liability when the level of income is high.
ii) The limited company is not exposed to certain federal taxes like limited companies

Non-financial factors

i) The liability of members of the company is limited to their share in the company unlike sole proprietorship where the proprietor is completely liable personally also and in case of losses may have to pay from personal assets.
ii) There is flexibility in management as they are not required to have board members or annual meetings and thus the operations are more flexible.

Make or Buy Decision

a) ABC Trading should make the component as the variable cost of $30 is less than the buying cost of $40 and also the company has spare capacity which it can easily use to produce the component. The fixed costs will not be affected because the company is already incurring the fixed costs and an additional production will only reduce the fixed cost per unit. The company will save $10 by making the product. The use of spare capacity will not increase the fixed costs.
b) If ABC Trading produced the component at a cost of $30, it will lose contribution margin from another product of $25 so the total cost of manufacturing the component will be $55 which is more than the buying cost. Hence the company should buy at $40 rather than making in this case.

Flexible Budgeting

a) The favourable or unfavourable variance analysis of the product X in the un-flexed budget is as follows:

	This quarter	This quarter			Year to date	Year to date	Year to date
	Budget($)	Actual ($)	Variance (Actual-budget)	Variance (U/F)	Budget($)	Actual ($)	Variance (Actual-budget)	Variance (U/F)
Cost of sale	28,750	31,938	3,188	U	54,688	58,125	3,437	U
Electricity	1,875	2,000	125	U	3,750	3,666	-84	F
General expense	5,563	5,979	416	U	10,625	11,038	413	U
Consultancy fee	3,125	3,125	–	NA	6,250	6,250	–	NA
Advertising	5,563	5,131	-432	F	10,125	9,619	-506	F
Wages	15,938	17,400	1,462	U	31,250	33,419	2,169	U
Total expenses	60,814	65,573	4,759	U	1,16,688	1,22,117	5,429	U

b) Since the quantities sold was more than the budgeted, the flexible budget and the variance analysis is given below:

	This quarter	This quarter			Year to date	Year to date	Year to date
	Budget($)	Flexible budget($)	Actual($)	Variance (U/F)		Budget($)	Flexible budget($)	Actual($)	Variance (U/F)
Cost of sale	28,750	35,424	31,938	-3,486	F	54,688	67,383	58,125	-9,258	F
Electricity	1,875	2,310	2,000	-310	F	3,750	4,621	3,666	-955	F
General expense	5,563	6,854	5,979	-875	F	10,625	13,092	11,038	-2,054	F
Consultancy fee	3,125	3,850	3,125	-725	F	6,250	7,701	6,250	-1,451	F
Advertising	5,563	6,854	5,131	-1,723	F	10,125	12,475	9,619	-2,856	F
Wages	15,938	19,638	17,400	-2,238	F	31,250	38,504	33,419	-5,085	F
Total expenses	60,814	74,932	65,573	-9,359	F	1,16,688	1,43,776	1,22,117	-21,659	F

Note: The budgeted and actual sales for the year to date have been assumed to be the same for each quarter and hence the sales units for the quarter have been multiplied by 4 to arrive at year to date sales.

For flexible budgets, the expense per unit was calculated and the same was multiplied by actual sales units i.e. 3450 to arrive at the flexible budgeted expenses items.

c) Yes, for expenses variance having a favourable variance is good because it means the actual expenses are less than the budgeted expenses. Like the electricity expense is unfavourable because the actual cost of advertising is $5131 whereas the budgeted cost was $5563, so it is favourable and it is always better to have low expenses to increase profits.
d) Yes, we recommend Flexible budget to David Trading. As we can see the most of the expenses variance was unfavourable in case of un-flexed budget because the budgeted expenses were on the basis of budgeted sales of 2800 units. However, the actual units sold was more than budgeted at 3450 units, so it is more logical that with more sale units, the budgeted expenses should also increase according to the increased sales. Then the flexible budgeted expenses should be compared to the actual expenses which are at 3450 units’ level of sales. Under flexible budget, all the expenses variances have become positive or favourable.

Cash Budget

i) Schedule of cash receipts from Accounts Receivables for the three months to June 2017

Particulars	April	May	June
Opening balance	$1,53,000	$1,73,700	$1,86,000
Less:1st month sale receipts	$75,600	$88,200	$92,400
Less:2nd month sale receipts	$15,300	$16,200	$18,900
Less:3rd month sale receipts	$9,600	$10,200	$10,800
Less: Bad debts	$4,800	$5,100	$5,400
Add: Sales	$126,000	$132,000	$132,000
Closing balance	$1,73,700	$1,86,000	$1,90,500

ii) Schedule of cash payments of Accounts Payables for the three months to June 2017

	April	May	June
Opening balance	$23,400	$27,300	$28,600
Less: Cash paid	$21,060	$24,570	$25,740
Less: Discount	$2,340	$2,730	$2,860
Add: Purchases	$27,300	$28,600	$28,600
Closing balance	$27,300	$28,600	$28,600

iii) Cash Budget for the three months to June 2017

	April	May	June
Opening balance	$36,000	$43,340	$48,370
Add: Cash receipts	$1,00,500	$1,14,600	$1,22,100
Total cash available	$1,36,500	$1,57,940	$1,70,470
Purchases	$21,060	$24,570	$25,740
Wages	$49,500	$51,500	$51,500
Other expenses	$22,600	$23,500	$23,500
Total cash disbursements	$2,43,160	$1,09,570	$1,00,740
Cash surplus/deficit	-$1,06,660	$48,370	$69,730
Loan	$1,50,000	$0	$0
Closing cash balance	$43,340	$48,370	$69,730

iv) Yes, the company should go ahead with the purchase of equipment costing $150,000 by taking a loan of $150000 as the cash balance is positive in all the months from April to June. In case the loan is not taken, then the company will not have sufficient cash balance to finance the equipment and hence should not consider purchasing it.

Capital Investment Decision

i) Annual net cash flows for Project X

Year	1	2	3	4	5
Cash inflow	$50,000	$60,000	$70,000	$80,000	$90,000
Less: Variable cost	$5,000	$6,000	$7,000	$8,000	$9,000
Less: Fixed cost	$5,000	$5,000	$5,000	$5,000	$5,000
Operating income	$25,000	$49,000	$58,000	$67,000	$76,000
Annual net cash flows	$25,000	$49,000	$58,000	$67,000	$76,000

ii) Payback period, NPV, Discounted payback period for Project X

Year	0	1	2	3	4	5
Annual net cash flows	-$1,20,000	$25,000	$49,000	$58,000	$67,000	$76,000
Multiply: Cost of capital	$1	$0.909	$0.826	$0.751	$0.683	$0.621
Present value of cash flows	-$1,20,000	$22,727.27	$40,495.87	$43,576.26	$45,761.90	$47,190.02

NPV = Present value of cash inflows – cash outflow

= $199,751.32 – $120,000

= $79751.32

Payback period

Year	Net Cash flows	Cumulative cash flows
0	-$1,20,000	-$1,20,000
1	$25,000	-$95,000
2	$49,000	-$46,000
3	$58,000	$12,000
4	$67,000	$79,000
5	$76,000	$1,55,000

Payback period = 2 + (46000/58000)

= 2.79 years

Discounted payback period

Year	Present value of cash flows	Cumulative cash flows
0	-120000	-120000
1	$22,727.27	-$97,272.73
2	$40,495.87	-$56,776.86
3	$43,576.26	-$13,200.60
4	$45,761.90	$32,561.30
5	$47,190.02	$79,751.32

Discounted payback period = 3+ (13200.6 / 45761.9)

= 3.2 years

iii) Annual net cash flows for Project Y

Year	1	2	3
Cash inflow	$50,000	$80,000	$1,00,000
Less: Variable cost	$5,000	$8,000	$10,000
Less: Fixed cost	$5,000	$5,000	$5,000
Operating income	$30,000	$67,000	$85,000
Annual net cash flows	$30,000	$67,000	$85,000

iv) Payback period, NPV, Discounted payback period for Project Y

Year	0	1	2	3
Annual net cash flows	-$1,20,000	$30,000	$67,000	$85,000
Multiply: Cost of capital	$1	$0.909	$0.826	$0.751
Present value of cash flows	-$1,20,000	$27,272.73	$55,371.90	$63,861.76

NPV = Present value of cash inflows – cash outflow

= $146506.39 – $120,000

= $26,506.39

Payback period

Year	Net Cash flows	Cumulative cash flows
0	-$1,20,000	-$1,20,000
1	$30,000	-$90,000
2	$67,000	-$23,000
3	$85,000	$62,000

Payback period = 2+ (23000/85000)

= 2.2 years

Discounted payback period

Year	Present value of cash flows	Cumulative cash flows
0	-$1,20,000	-$1,20,000
1	$27,272.73	-$92,727.27
2	$55,371.90	-$37,355.37
3	$63,861.76	$26,506.39

Discounted payback period = 2+ (37355.37 / 63861.76)

= 2.58 years

v) For a project to be accepted in capital budgeting it is necessary for the project to have a positive NPV, the payback and discounted payback should be within the life time of the project. The capital budgeting techniques results for projects X and Y is as below:

Techniques	Project X	Project Y
NPV	$79751.32	$26,506.39
Payback period	2.8 years	2.2 years
Discounted payback period	3.2 years	2.58 years

From the above table we see that both projects have positive NPV and payback periods are within the lifetime of the projects. However both the projects are mutually exclusive. For mutually exclusive projects, the project with the highest NPV is selected. Mutually exclusive projects means only project can be selected from the given options. Since Project X has a higher NPV, hence Umang Trading Ltd should accept Project X.

IRD. (n.d.). Income Tax Rates. Retrieved September 18, 2017, from Inland Revenue: https://www.ird.govt.nz/how-to/taxrates-codes/rates/itaxsalaryandwage-incometaxrates.html

Tradingeconomics. (n.d.). New Zealand Corporate Tax Rate. Retrieved September 18, 2017, from Trading Economics: https://tradingeconomics.com/new-zealand/corporate-tax-rate.

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