# Managerial Accounting Assignment : Financial Decision Making

#### Introduction:

Financial Decision Making is the most important aspect to selects a project from two or more projects. There are lots of Financial Decision Making tools and techniques this helps to make a decision. In the present assignment,  preparing the budgeted income statement for two options, one is for pay 20% commission to the sales agent and another is hiring own agents. The Company makes the decision as per the budgeted income statement whichever is lower. The accountant also finds the break even point of the two options. The company also launches a new product name BPM-201 instead of BPM-100, through cost cost calculation of both products the accountant has found the launch the new product in the market (Albrecht 2009). The company gets offer from the local government to supply Instruline, the accountant calculates the cost of Instrulite and finds the profit of the company.

#### A. Budgeted income statement:

Budgeted income statement on 20% commission rate for the agent (First project)

 Particulars Amount (\$) Amount (\$) Sales 30000000 Less: Cost of goods sold Variable cost 17400000 Fixed cost 2800000 20200000 Gross profit 9800000 Less: Selling and administrative expenses Commission @20% on sales 6000000 Fixed advertising expenses 800000 Fixed administrative expenses 3200000 10000000 Net operating income (200000)

Budgeted income on hiring own sales people (Second project)

 Particulars Amount (\$) Amount (\$) Sales 30000000 Less: Cost of goods sold Variable cost 17400000 Fixed cost 2800000 20200000 Gross profit 9800000 Less: Selling and administrative expenses Commission @10% on sales 3000000 Fixed advertising expenses 1300000 Fixed administrative expenses 3200000 Salaries 700000 Travelling and entertainment expenses 400000 Salaries of sales managers 200000 8800000 Net operating income 1000000

#### B. Break even points of both projects:

Project by 20% commission rate for the agents (First project):

Unit price = sales/profit

= \$[30000000/-200000]

= \$150

Variable cost per unit= variable cost/ profit

= [17400000/-200000]

= -\$87

Break even Point = Fixed cost/(Unit price- Variable unit cost)

= \$[2800000/ {150- (-87)}]

= \$10256

At this point that is 10256 the company neither gain profit and neither faces any losses.

Project by hiring own sales people (Second project):

Unit price = sales/profit

= \$[30000000/1000000]

= \$30

Variable cost per unit= variable cost/ profit

= [17400000/1000000]

= \$17

Break even Point = Fixed cost/(Unit price- Variable unit cost)

= \$[2800000/ {30- (17)}]

= \$215385

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At this point that is \$215385 the company neither gain profit and neither faces any losses.

#### C. Indifference between two projects:

The accountant has calculated the budgeted income statement of both projects. If the company pays 20% commission to the agents then the company will suffer loss. On the other hand, if the company hiring own sales team then the company will gain \$1000000. In case of providing 20% commission to the agents, the company will suffer loss of \$200000. The reason behind the difference between the two projects is cost commission and other expenses. As the company assumes the sales amount will be same in both projects so their differences only has seen in the areas of selling and administrative expenses (Wang et al.2013).

The advertisement cost increased \$1300000 in project by hiring own sales people. The company fixed salaries of the sales people and provides additional 10% commission on sales. In that project the company also provides the travelling and entertainment expenses to sales employees (Ahmed and Henry 2012). The sales manager will recruit for managing monitor the sales people with remuneration of \$200000. Although, summarized of all these cost is not excess another project’s total commission cost.

However, the accountant has calculated budgeted income statement and commission reduce to 10% in second project where the company hiring own sales people.  In this project many cost such as travelling and entertainment cost, fixed advertisement cost has included. However the total expenses cost not excess of the first project where the company pays  20% commission on sales to the agents.

Break even point is that point where the company’s profit is zero (Muniandy and Ali 2012). In case of the first project break even point will be \$10256 on the hand in case of 2nd project company’s break even point will be \$21538. This two break even point shows that the company will start to earn profit from after that stage. In first project where the company will pay commission to the agents, start earning from \$10256 point. On the other hand, in second project the company will start to earn profit from \$21538 point.

#### D. Recommendation for choosing the project:

The accounting management has created a budgeted income statement and break even point for both projects. It has seen that company’s first project the company’s net profit will be negative, whereas second project earns profit, but on the other hand the first project will start to earn profit in \$10256 point, but second project will start to earn profit in \$21538 point.

The accountant has recommended to select the second project where the company will appoint own sales people. The company will earn profit of \$1000000 from first project where the company hires own sales people (Henrich et al. 2010). It will help the company to sustain their business management through building an own sales team. The company can force the team as per requirement and production of the company. On the other hand the company will not select the first project where the agents demand 20% commission. Agents tree times increased the commission rate upon sales within five years, but not ensures whether sales will increase or not. If the company selects the first project where the sales agent demand 20% commission rate upon sales, the company will not earn profits as per the budgeted income statement.

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There have no surety that the agents will not increase the commission rate in future. If the agents will increase the commission rate then the company will face more loss. However, if the company selects the second project, then the company will earn a profit (Krajbich et al. 2010). On the other hand, the company will start earning late as per break even point with compared to the first project. Therefore the company may think to select the first project, but the sustainability of the second project is more viable than first project. The second project helps the company to increase the company to promote their brand in more effectively as the company increases the fixed advertisement cost by \$500000. That can help the company to increase the sales of the company (Matthias et al. 2014)

#### E. Estimate time of introducing BPM-201 based on financial consideration:

Operating cost of BPM-100

 Particulars Amount \$ Amount \$ Sales 160 Less: Variable cost 25 Less: Development cost 70 Less: Marketing and administrative cost 35 Total cost 130 Operating income 30

Development cost = Total cost/ The Anticipated life of sales of the product

The Anticipated Unit sales over the life of the product = Total cost/ Development cost

= 130/ 70

= 1.85 per day

Operating income for three months = 1.85*90*30

= 4995

Operating cost of BPM-201

 Particulars Amount \$ Amount \$ Sales 195 Less: Variable cost 30 Less: Development cost 100 Less: Marketing and administrative cost 40 Total cost 170 Operating income 25

Development cost = Total cost/ The Anticipated life of sales of the product

The Anticipated Unit sales over the life of the product = Total cost/ Development cost

= 100/ 170

= 0.58

Operating income for three months = 0.58*90*25

= 1305

In the above calculation the anticipated unit sales over the life of the product. In case of product BPM-100 anticipated unit sales over the life of the product is 1.85 on the other hand, anticipated unit sales over the life of the product is 058. As per the calculation, the product cost of BPM-100 is \$130 whereas the product cost of BPM-201 is \$170. The production cost of BPM-201 is higher than BPM-100. On the other hand, operating income from the product BPM-100 is \$30 and operating income from BPM-201 is \$25. These represent the company could earn more profit from BPM-100. If the product run for three months, then the operating income will be \$4995 per unit (Woelfel 2009). On the other hand, if the company will launch the new product BPM-201, then company’s operating income will be \$1305 per unit.

As per the financial calculation, the company will not earn the much more profit if the company introduces the product BPM-201 in 1st September. Within the three months the company will not gain the profit from the new product because its production cost is higher and on the other hand, operating profit from the product is less than the product BPM-100. The company should introduce the product after the three months as per the calculation. In this financial statement, the company has not informed about the sales unit of the company. If sales unit increases of the product BPM-201 then the company’s profit will increase. Hence, the accountant recommended the to launch the product on 1st December 2014 (Wicks et al. 2014).

#### F. Factors of consideration apart from the financial consideration:

In this case study, the researcher has discussed the financial consideration of the launch date of the product BPM-201. There are some other factors apart from financial factors that affects helps the company to determine whether the product BPM-100 will be run for three months or not. One of the factor is the new product BPM-201 not fully developed. The company does not yet develop the product software to effectively run the and monitor the product (Park and Reuter-Lorenz 2009). On the other hand the company not yet produce its manuals that help the company to promote the product. As the stock of BPM-100 is in stockpile so the company has to pay for store the product. If the company launches the new product BPM-201 in 1st September, then sales of the old product BPM-100 will fall.  Therefore the company not even  sales the old machines those are stored in the stockpile.

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The company can sales its old product BPM-100 within three months. So the company can earn profit from old product. If the company introduces the product on 1st September, then demand of the product will fall. Within the period of time if another company introduces the same types of product then also the company’s sales of old products will decrease (O’Bryan 2010). case study help, the company must introduce the new product to avoid loss from the uncertainty. Hence, the accountant recommended to sales of the old product as soon as possible. After the stock end the company could introduce the new product BPM-201. As the new one is more developed than the ole one so the company can earn more profit from the sales of new product by increase the sales.

#### Conclusion:

The Managerial Accounting Assignment considers all of the factors financial and apart from Financial Decision Making factors that affect the sales of the company. As per the recommendation, the company should focus on the operating income and sales units of the project. If the company sales the cost of the product if the sales unit increases, then operating income also increases. In this research study, the accountant has recommended selecting the project where the company will supply the product to their regular customer and local government. On the other hand, the company should select the project where the company hiring own sales people.