Question Tag: Profitability analysis

Search 500 + past questions and counting.
Professional Bodies Filter
Program Filters
Subject Filters
More
Tags Filter
More
Check Box – Levels
Series Filter
More
Topics Filter
More
  • 3 Marks

MA – April 2022 – L2 – Q2b – Advanced variance analysis

Calculate and comment on the Throughput Accounting Ratios of three products for Drogo.

Drogo uses the Throughput Accounting technique for efficient allocation of scarce resources. In the second quarter of 2021, the throughput per bottleneck resource for its three products were given as follows:

  • Product A: GH¢4
  • Product B: GH¢6
  • Product C: GH¢9

The total factory cost was GH¢67,500, and the bottleneck resource was 15,000 machine hours.

Required:

Calculate and comment on the Throughput Accounting Ratios of the three products. (3 marks)

Throughput Accounting Ratio (TPAR) is a relative measure that shows how many times the throughput per limited resource can cover the factory cost per limited resource. The formula for TPAR is:

TPAR=

Calculation:

  • Factory cost per bottleneck resource:
    Factory cost per bottleneck=
  • TPAR for Product A: TPAR=
  • TPAR for Product B: TPAR=
  • TPAR for Product C: TPAR=

Comment:

  • Product A: TPAR is less than 1 (0.89), indicating that Product A is not profitable as its throughput cannot cover the factory cost per bottleneck resource.
  • Product B: TPAR is greater than 1 (1.33), suggesting that Product B is profitable.
  • Product C: TPAR is the highest (2.00), indicating that Product C is the most profitable among the three products.
  • 13 Marks

FM – May 2020 – L2 – Q5b – Working Capital Management

Evaluate the impact of introducing credit sales on total profit before tax for a company and provide management advice.

Innovate Ghana Ltd is a dealer in household consumables in Ghana. It currently sells on a cash-only basis. The company’s current annual sales are GH¢10 million. The operating cost structure is as follows:

  • Cost of sales: 55% of sales
  • Staff cost: 10% of sales
  • Marketing and distribution cost: 15% of sales

Management in a meeting concluded that introducing credit sales will help boost sales in the light of the current tightness in liquidity in the market, the drive by other competitors, and pressure from the sales team.

It is projected that total sales will grow by 50% solely from the credit sales. The customers are offered 1-month credit, and a new credit department is set up to assess and monitor these credit sales. The monthly cost of running this credit department is GH¢20,000, and bad debts are expected to be 4% of the credit sales.

To finance this credit, Innovate Ghana Ltd will borrow at an interest rate of 25% per annum.

Required:

i) Calculate the total profit before tax before the introduction of the new policy.
(4 marks)

ii) Calculate the total profit before tax after the introduction of the new policy.
(6 marks)

iii) Advise management whether the initiative should be undertaken.
(3 marks)

i) Total Profit Before Tax Before the Introduction of the New Policy

Description Amount (GH¢)
Sales 10,000,000
Cost of Sales (55% of sales) (5,500,000)
Gross Profit 4,500,000
Staff Cost (10% of sales) (1,000,000)
Marketing & Distribution (1,500,000)
Net Profit Before Tax 2,000,000

(4 marks)

ii) Total Profit Before Tax After the Introduction of the New Policy

Description Amount (GH¢)
Sales (150% of 10 million) 15,000,000
Cost of Sales (55% of sales) (8,250,000)
Gross Profit 6,750,000
Staff Cost (10% of sales) (1,500,000)
Marketing & Distribution (2,250,000)
Credit Admin Cost (20,000 x 12) (240,000)
Bad Debts (4% of credit sales) (200,000)
Interest or Financing Cost (104,167)
Net Profit Before Tax 2,455,833

(6 marks)

iii) Management Advice

Profit before tax after the policy: GH¢2,455,833
Less: Profit before tax before the policy: GH¢2,000,000
Increase in Profit: GH¢455,833

The introduction of the credit sales policy has resulted in an incremental profit of GH¢455,833. Therefore, the initiative should be undertaken as it leads to higher profitability.

(3 marks)

Take control of your business data with insight and in-depth understanding by taking this course. 

Services

Contact Info

  • +233203701923
    +233543919232
  • info@noohrabusiness.com

Get In Touch

Follow us on our social media and get daily updates.

Facebook-f Twitter Linkedin-in Envelope