Principles of Accounting II Final Paper Scott Khy ACC206: Principles of Accounting II (BAH1603A) Instructor: Dawayne Rowell February 15th, 2016 RISK PROFILE OF THE COMPANY Review of ABC Company and the directions it is targeting. The strategy of the company is to lift the expected sales in an aggressive fashion, with the expected end target being to triple the current levels. The plan is to push sales into the targeted range of $3 million within 3 years versus the current amount which sits at $1.2 million. We will identify the perceived risk factors that may impact this aggressive strategy and its successful execution. The following will be those risk factors: i. Risk of product not meeting customer …show more content…
In debt financing the interest expense is allowable expense resulting in low tax expense, where as in case of equity finance the cost of equity is dividend, and no advantage can be availed in tax. The company position is strong enough so its better that company should use debt financing instead of equity financing. NEW PRODUCT COST PRODUCT COST FOR THE EXPANSION The product cost per unit under absorption costing is $15.00 and under variable costing are 10.60. | ABSORPTION COSTING | VARIABLE COSTING | Direct Materials | $ 5.60 | $ 5.60 | Direct labor dollars needed per product | $ 4.00 | $ 4.00 | Variable Factory Overhead | $ 1.00 | $ 1.00 | Fixed Factory Overhead | $ 4.40 | S - | Product Cost Per Unit | $ 15.00 | $ 10.60 | IMPACT OF EXPANSION ON PRODUCT COST One of the major benefits of expansion is the reduction of fixed cost (fixed and selling). The cost is absorbed by 85,000 units instead of 80,000 units resulting in saving of $0.42 per unit. | | AFTER EXPANSION | | Fixed Factory Overhead before expansion | $ 2.48 | $ 2.20 | | Fixed Selling Expense | $ 2.39 | $ 2.25 | |
The holding period of the partnership interest includes the partner’s holding period for the 1232 assets contributed. The
Unit Break-even Volume = Total Fixed Costs/Contribution per unit = $525,000 - $6.40 = 82,031.25units
Answer: a) When the sales force is having relation with the target cost and able to estimate the sale cost then depending on the situation they can make an increment in the sales cost to sell the product.
There are several factors that guide the choice among debt financing and equity financing such as potential profitability, financial risk and voting control. Equity financing is a method used to obtain capital in order to finance operations, growth or expansion. Sources of equity financing are extremely important. Major sources of equity financial are Retained Earnings, sale of stock, and funds provided by venture capital firms. Profits that are kept and reinvested are called Retained earnings, which is a very attractive source fund due to the savings it provides to the entity by not paying the interests, dividends or underwriting fees related to issuing securities. This source of financing does not dilute ownership, but it
Absorption Costing Versus Variable Costing 5 bsorption Costing Versus Variable Costing Absorption Method q1 q2 Year Year Period End Mar 31,'12 Jun 30,'12 2012 2011 Production Budget 25,000 50,000 125,000 100,000 Sales 2,500,000 2,500,000 10,000,000 10,000,000 Cost of Goods Sold 1,625,000 1,625,000 6,500,000 6,500,000 Gross Profit 875,000 875,000 3,500,000 3,500,000 Selling & Admin Exp 500,000 500,000 2,000,000 2,000,000 Net Income 375,000 375,000 1,500,000 1,500,000 Cost of Goods Sold Beg Inventory 650,000 650,000 650,000 650,000 Product Cost 1,625,000 3,250,000 8,125,000 6,500,000 Total 2,275,000 3,900,000 8,775,000 7,150,000 End Inventory 650,000 2,275,000 2,275,000 650,000 Cost of Goods Sold 1,625,000 1,625,000 6,500,000 6,500,000
A method used to separate mixed costs into fixed and variable components is called the high-low method.
Although it makes up a portion of a company's total available capital, mezzanine financing is critical to growing companies and in succession planning in recent years. The gap in funding between senior debt and equity is common for the following reasons: 1) accounts receivable, inventories and fixed assets are being discounted at greater rates than in the past for fear that their values will not be realized in the future; 2) many balance sheets now contain significant intangible assets, and, 3) as a result of defaults and regulatory pressure, banks have placed ceilings on the amount of total debt a company can obtain. While additional liquidity can be obtained from equity investors, equity is the most expensive source of capital. Further, equity capital, by its nature, dilutes existing shareholders. As a result, mezzanine debt can be an attractive alternative way to obtain much needed capital.
The action plan developed for Company ABC includes the steps to be taken next in our marketing plan. As time and staffing permits, we will reevaluate our current strategies and their effectiveness. Which will allow us to adapt and enhance our marketing strategies in order to achieve the best results.
Before the type of finance is selected, sources of finance must be assessed after considering the following specifics relates to the business itself and the source: exactly how much money is needed and in what time, what exactly is the charges for the source (rates of interest, dividends etc.), the risk involved, the timespan of the contract (between company and supplier of finance), the control of the business over the source or over the ability to pay back finance received so the gearing ratio of the business (the relationship between what is owns and what is owes). Eg, long term loans and ordinary shares can produce greater amount of capital compared to personal savings or the sale of assets. But although the company must repay in time the amount borrowed from a bank it can have as continuing capital the money invested by shareholders. Also, while the rate of interest is fixed and included in every payment, dividends are paid only when the company generates profit. Therefore, the company has more control over finance if is source are investments rather than bank loans
Now I will discuss the pros and cons of the alternative decision, which is a combination of the debt and equity methods. A positive of this method is that the instrument is split between debt and equity. The company could just split it up 50/50 between the two methods. Also if they had too much debt, they could account for the instrument with 20% as debt and 80% as equity. This would make it look as if they do not have too much debt or too much equity. This method would be an advantage, if the company were looking to get more financing in the future.
The way the business is funded for its operation and business plans is a crucial factor for the long-term performance of the business. Two most fundamental financing methods include debt and equity financing which will be discussed and evaluated. Equity financing is a method of raising fund from investors with the promise of a share in business ownership. Debt financing is obtaining a loan from external party separate from the business for example the bank and usually involves incurring an interest payment. Advantages of debt financing include protection of ownership and tax reduction. Lenders have no claim on business ownership and debt financing ensure retained ownership. Another benefit includes tax reduction, the repayment of debt is considered as an expense for the business leading to a reduction in tax. Disadvantages include the repayment and lender claim on business asset. For debt financing there is a fixed repayment date, while equity financing does not require repayment. Even when the company is making a loss, the business needs to make debt repayment regularly for example in a monthly basis to lender such as bank. Usually when business default its debt, the lender can claim its assets as collateral. Interest rate is an integral part of debt financing. Due to inflation, the value of the same amount of money diminish overtime as a result, there is an interest rate for all loan. Long-term loan is comparatively more costly than
According to that approach a best possible mix of debt and equity will maximize the value of the firm. Because cost of debt is less than cost of equity so the entity should debt finance to a point where WACC is lowest. A point came where more debt financing will not reduce the WACC. But will increase the business risk which will increase the cost of equity and ultimately WACC increases and value of firm decreases.
Actually, it could be an issue for a company to decide on an optimal debt to equity mix, and there are a few different theories that explain that. Here, it is important to say that an optimal debt to equity mix could be different for companies in different sectors, and there are advantages and disadvantages of using debt and equity. Therefore, each company needs to decide on what proportion of debt and equity to use in order to maximise its
The essay is divided into five main parts. First, the purposes of calculating full absorption product costs will be explained. Second, a comparison between traditional method and ABC system will be drawn to find out that the ABC system is considered more useful than the traditional method.
It is important for a company to decide between debt and equity because it can maximize the firm value and beneficial to the firm’s stockholders too. As per the Appendix 1, Air New Zealand used to have a higher equity than debt from 2011 to 2014 but the ratio has a