Incremental Profit on Managerial Accounting Order Instructions: you don’t need to write the questions.
just answer by numbers 1 to 4.
Incremental Profit on Managerial Accounting Sample Answer
Question 1
| 1a) | 1b) | ||
| 2013 | 2014 | 2014 | |
| Growth rate | 8% | ||
| 2013 Dividend ($m) | 2.6 | 3.343 | 2.808 |
| Net Income | 9.8 | 12.6 | 10.584 |
| Retention ratio | 73.47% | 73.47% | 73.47% |
Question 2a
| Company’s Debt Financing | 2.555 |
| Equity Financing (65%*7.3m) | 4.745 |
| Net Income | 12.60 |
| Net Income Available for Div | 7.855 |
| Retention (Rate 73.47% | 5.771 |
| Dividend 2014 ($m) | 2.084 |
(Rocca, 2016)
Question 2b
| Company’s Debt Financing | 2.555 |
| Equity Financing (65%*7.3m) | 4.745 |
| Net Income | 10.58 |
| Net Income Available for Div | 5.839 |
| Retention (Rate 73.47% | 4.290 |
| Dividend 2014 ($m) | 1.549 |
Question 3
Incremental profits are largely referred to as differentials as they differ from a given alternative. The incremental analysis involves the identification and comparison of different alternatives which may result in incremental revenues or losses and also costs (Ross, Westerfield & Jaffe, 2013).
| Selling price per unit ($) | 100,000 |
| Fixed Costs | 2,000,000 |
| Units sold per year | 50 |
| Profits | 500,000 |
| Increase Investments | 4,000,000 |
| Add Fixed Costs | 500,000 |
| Reduce variable costs per unit | 10,000 |
| Increase outputs (units) | 20 |
| Decrease price to | 95,000 |
| Cost of Equity is % | 16% |
| Cost of Equity | 640000 |
| Total sales | $100,000x 50 | $ 5,000,000.00 |
| Fixed Costs | $ 2,000,000.00 | |
| Variable Costs | (5m -2m-0.5m)/50 | $ 2,500,000.00 |
| Variable costs 50,000 per unit) | 500,000 | |
| Total Sales | $95,000 x 70 | 6650000 |
| Fixed Costs | 2m + 0.5m | 2,500,000 |
| Variable Costs | (50,000-10,000)per unit | 2800000 |
| Cost of Equity | 16% of 4m | 640,000 |
| Profit | 710,000 | |
| Incremental Profit | 210,000 | |
| Expected Return | Incremental Profit/investment | 5.25% |
(Garrison, Noreen & Brewer, 2009)
Yes, the Project should be undertaken as it has registered an incremental profit of $210,000 compared with the previous investment.
| Incremental Analysis | |
| Increase in revenue | $ 1,650,000.00 |
| Increase in Costs | $1440000 |
| $ 210,000.00 | |
Question 4
| Breakeven Calculations | ||
| Total sales | $100,000x 50 | $ 5,000,000.00 |
| Fixed Costs | $ 2,000,000.00 | |
| Variable Costs | (5m -2m-0.5m)/50 | $ 2,500,000.00 |
| Variable costs 50,000 per unit) | 500,000 | |
| Contribution units | Selling Price – Variable Costs | 50000 |
| Breakeven units | FC/(Selling Price – VC) (units) | 40 |
| Total Sales | $95,000 x 70 | 6650000 |
| Fixed Costs | 2m + 0.5m | 2500000 |
| Variable Costs | (50,000-10,000)per unit | 2800000 |
| Contribution units | Selling Price – Variable Costs | 55000 |
| Breakeven units | FC/(Selling Price – VC) (units) | 45.5 |
The units to breakeven increased from 40 units to 45.5 units.
References
Garrison, R., Noreen, W., & Brewer, P. (2009) Managerial Accounting, New York, NY: McGraw-Hill Irwin. 65 -70
Ross, S. A., Westerfield, R. W., & Jaffe, J. (2013) Corporate finance (10th ed.) New York, NY: McGraw-Hill Irwin.
Rocca, G. (2016) How to Calculate Residual Dividend policy, retrieved June 9, 2016from http://www.ehow.com/how_8650170_calculate-residual-dividend-policy.html
