Thomson Greenhouse
...alue of investment over life. Average value = Beginning value (date 1) + end value (0) = $12000 = $6,000 2 2 4 Estimate average annual profit over depreciable life(net of depreciation)= $2,270 5.Return rate = Average profit =$ 2,270 = 37.8% Average value $ 6,000 The 37.8% of return in this case represents an attractive investment. Payback Method Estimates the number of years required for the capital investment to pay for itself. 1. Calculate total cost of investment. = $12,000 2. Estimate depreciable life of investment. = 10 years 3. Calculate annual depreciation charge. = $1,200 4. Estimate average annual profit over depreciable life. = $2,270 5. Cost of investment divided by cash inflow(profit+depreciation) =12000/ (1200+2270) =3.5 years The payback period for the capital investment would be 3.5 years. At this is considerably less than the depreciable life of the asset, it appears to be an attractive investment. Break-Even Analysis Old: CM% = (R-VC)/R = CM/R= 26605/37000=72% Fixed costs = Building repairs + truck costs + office expenses + property taxes + selling labour = 130 + 2300 + 1105 +1560 + 3150 = $8245 New: CM% = CM/R = 19605/30000=65% Fixed costs = Truck costs + property taxes + selling labour = $8160 1. BEP = Fixed cost/Contribution as % of sales = 8160/65% = $12,554 The break-even point of dollars is $12,554.If the Revenue more than $12,554 will be get profit so new greenhouse revenue is $30,000, that is better. 2. BEP = Fixed costs/new contribution as percent of sales-Fixed cost/old contribution as percent of sales = 8160/65% ƒ{8245/72% = $1,102 Dollars = Additional sales dollars needed to cover additional variable costs. The break-even point of dollars is $12,554.If the Revenue more than $12,554 will be get profit so new greenhouse revenue is $30,000, that is better. Thomson Greenhouse could gain more profits. They can develop new Greenhouse.If they expand their Greenhouse, they can share some of expense costs to decrease expense. They can produce more types of products to attract more customers to increase revenue. So From 3 method we can know that they will earn more money money. To increase the cash position, suppose the business was able to increase the accounts payable and decrease the turnover and receivable day totals for each component by 30 days. The result of these actions is show in the below. 1.Time taken to pay accounts = accounts payable/ COGS = 1500/10395*365= 52.7 days This means that, on average, it takes 52.7 days to pay for inventory purchased. Increase account payable = 1500/52.7*30 = $854, increase in cash of $854(2354--1500) This month increase might have been accomplished by obtaining extensions from suppliers or simply not paying accounts payable until absolutely required. 2. Time to sell inventory = Inventory/COGS *365 = 3000/10395*365 = 105.3 days This means that, on average, it takes 105.3 days to sell the inventory. Decrease inventory = 3000/105.3*30=$ 855(2145--3000) this month decrease might be as a result of increase advertising, more careful purchasing, or greater incentive to salespeople. 3. Time to receive payment =Accounts receivable/sales*365=1500/30000*365=18.25days This means that, on average, it takes 18.25 days to receive payment for inventory Decrease receivable = 1500/18.25*30=$2466(1500-(-966)), it is increase in cash of 2466.Such as decrease might be accomplished by increasing the intensity of collection procedures and/or submitting charge card receipts more often. sold.The Business cycle for this company is :18.25+105.3-52.7=70.85 days The total effect of these measures on the cash position of the company would be 854+855+(-2466)=-757 decrease, The owner-manager ,would have to balance this decrease in cash against the cost of accomplishing the 30 days increase or decrease. Financial ratios can also help in isolating and analyzing weaknesses within the business. Liquidity Ratios: Current ratio = Current assets: Current liabilities = $5,500: $1,500 = 4: 1 is very higher than 1: 1. Acid test or quick ratio = (Current assets ¡V Inventories): Current liabilities = ($5,500-$3,000): $1,500 = 1.7: 1 it is approximate 2:1. The quick ratio is healthy and more suitable for businesses because have a high level of inventories. The liquidity ratio are lower than they should be , the business may have difficulty meeting obligations within the year and will have a hard time raising further debt capital. Productivity Ratios measure the efficiency of internal management operations. Inventory turnover = Cost of goods sold: Average inventory at cost = $10,395: $30,000 = 34.65%. Greenhouse inventory turnover that is too low may reflect poor inventory buying in terms. The buying low demand inventory . Profitability Ratios measure the effectiveness of operations in generating of profit. Cross margin = Sales ¡V Cost of goods sold = $30,000 -$10,395 = $19,605 Profit on sales = Net profit (before tax): Sales = $2,270: $30,000 =7.6%. The average percentages fall within 1 to 5 percent. This ratio sh...