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In this question, we have given two choices either to modify material X and use it instead of material Y or simply buy the material Y from the market.
UU company has been asked to quote for a special contract. The following information about the material needed has been given:
The contract requires 10 kgs of material X. There are 250 kgs of this material in inventory which was purchased in error over two years ago. If material X is modified at a cost of $2 per kg then it could be used as a substitute for material Y which is in regular use and currently cost $6 per kg.
This is how our calculation goes like:
Purchase cost of material Y = 10 kgs x $6 = $60
modified cost of material X = 10 kgs x $2 = $20
Net cost saved————————————–$40Could you please tell me whether the net incremental cash flow is the net benefit or net cost? According to me it is a net cost saving of $40 (in other words it is a net benefit actually) but how it is relevant cost then? Please explain.
Sir, you have deducted the conversion cost from the selling price instead of material cost to get the throughput return for W. It should be this way 350 – 120 = $230
The company produced 200 units for W, therefore the throughput return is 200 x $230 = $46,000. (which I correctly calculated in my answer above)
Since the machine is used for 5 hours a day, we need to calculate the total hours taken by W as 200 x 5 hrs = 1000
Therefore, the throughput return per hour for W is calculated as ($46000 / 1000 hrs) = $46
The same goes for the other products. (Is that correct?)
To be honest that was obscure to me!
I read somewhere in a book that opportunity cost is relevant to the lifecycle costing calculations.
And depreciation is included but I wanted to know that whether all non-cash flow is relevant or not?
Sunk cost which is the past cost is not relevant because it is a historical cost that is not relevant to the lifecycle costing.
So I wanted to make sure whether they all are true or not.
Thanks for your time although. May you have a good life 🙂
Opportunity costs / any non-cash flow / sunk cost / would also be included in the lifecycle calculations (true?)
Material Yield is calculated as the difference between the total actual output produced in standard mix with the total standard output produced in standard mix valued at standard cost.
Is it correct now?
Thanks for your support 🙂
Sir, I am not looking for the formula but I have no problem with the actual qty with standard mix but I have a problem with standard qty with standard mix in material yield variance.
Could you please tell me how to calculate standard qty with standard mix?
This is what I understand please correct me whether it is correct or not?
Standard mix is (Individual Kg / Total Std Kg) and standard qty is Total Actual unitsSQSM = Standard mix * Total Actual units
Thanks for clearing that 🙂 that was really helpful….
In the technical article, the examiner states that the calculation of imperfect information is rather complex but I don’t know whether it will be tested in paper PM or not?
Sorry, but could you please state how to calculate EV with imperfect information because I am unable to understand that?
There is a past question Mylo Co (Sept 2016) question (Q19) where we are told to calculate the maximum amount which Mylo would be willing to pay for this information.
I assume that expected value without perfect information is actually imperfect information which is calculated like this:
$191.25 = $1,839·50 – $1,648·25
Imperfect Information = EV with Perfect information – normal EVIs it correct now?
Thanks for the answer by the way 🙂
Sorry I didn’t mean to say that the interest rate is changing but rather what is causing the more interest to remove in more years such as if the discount rate is 10% then the discount factor in Year 1 is 0.909 and in Year 2 it is 0.826 and 0.751 and so on.
If the discount factor in Year 1 is 0.909 from the interest of 10% (or 0.1) then it means that 0.091 x 100 9.1% is the interest that the company is to be paid so we are discount cash flows after removing the interest os 9.1%?
Is it correct that interest is discounting more as there are more years but what is causing the interest to be increasing?
I asked this question from the perspective of the usual NPV questions, not from Lease & Buy point of view.
Is it true that Net Operating Cash Flows & Machine is bought usually on the first day of an accounting period and tax is calculated at the year-end.
For Example:
If Net Operating Cash Flows occur on the first day (1.1.2017) then tax is calculated at the year-end (31.12.2017) but the tax is paid on Time 1 (1.1.2018) because one day doesn’t make any difference; And if tax is in arrears then it is paid one year later at Time 2 (31.12.2018).BUT if Net Operating Cash Flows occur at the last day (31.12.2017) then tax is calculated immediately at this very last day (31.12.2017) but the tax is paid on Time 0 (31.12.2017); And if tax is in arrears then it is paid one-year later at Time 1 (31.12.2018).
Please correct my first sentence and the two examples that I ask you!
Thank you for your answer, Sir Moffat. May GOD bless you 🙂
1) In the exam question, we simply have to look at the factors by comparing with similar companies in the industry to identify whether we have adopted conservative investment policy by investing too much in our WC or we have adopted aggressive investment policy by investing too low funds in our WC. [correct?]
2) Is it true that all the ratios that I mentioned in my earlier post will indicate an increase in the Working Capital of a company if those ratios increase as compared to another company in the sector? [correct?]
3) We can look for these ratios to see whether we have higher working capital (i.e. overcapitalization) such as:
i) Increase in Net Working Capital
ii) Increase in Long-term Borrowings
iii) Increase in Levels of Receivables, Inventory & Payables
iv) Increase in Receivable days, Inventory days & Payable days (i.e. Operating Cash Cycle) AND
v) Increase in Net Operating Cycle
vi) Current ratio or Quick ratio (if they increase we have conservative policy and if they decrease we have aggressive policy);
vii) Increase in CA & NCA
viii) Increase in Sales to Net Working Capital ratio
ix) Increase in Cash availableIf the ratios mentioned above result in increasing as compared to another company in the sector then it is indicating that the company has invested too much funds in its WC (and therefore it is a conservative policy or we can say company has overcapitalization). [correct?]
These statements are regarding the above points:
1) Is it correct that SOFP is showing that Bar co has $125m long-term liability which means that the company has currently in debt of $125m and they are paying 8% interest p.a. Therefore, Bar Co is having 1.25m of units that they have bought of bond $100 nominal value which would be equal to the value of bond $125m (1.25m units x $100)
2) I don’t understand that you said excess over nominal value reduces retained earnings; Isn’t that correct that if we have raised $90m from rights issue that we will use to repay bondholders of $80m therefore, the difference will be $10m which is the excess money that we have raised from shareholders so where this $10m would go?
4) We are paying 8% interest annually which is $10m interest p.a. and if we cancel the bond (i.e. repaying the bondholders) that means we will save $6.4m interest every year and this would reduce our interest to $3.6m. So my question is that what is this $3.6m interest that we are paying now since we already repaid bondholders?
5) Is that also correct that if we buy back bond on market price of $112.50 this means that every unit that the company is ready to borrow would be calculated (let’s say if we have 1.25m units we are ready to borrow just like in the question) it would be 1.25m units x $112.5 = $140.625m in SOFP?
Sorry to ask again maybe it seems a bit silly questions. BUT I couldn’t understand these things & to know them better I need your help. Thanks again 🙂
There is little question in the Kaplan text where the example of finance cost is given in the example:
[Question]
Monthly demand is 10,000 for a product. The purchase price is $10/unit and the company’s cost of finance is 15% pa. Warehouse storage cost is $2/unit. This supplier charges $200 per order for delivery.Calculate the EOQ.
[Answer]
Squareroot 2 x 200 x 10,000 / (10 x 15%) + 2
EOQ = 3703Can you please tell me the reason for finance cost being included with the holding cost in EOQ calculations (in the denominator)? I haven’t seen any other costs to be included with the holding cost in the EOQ formula!
Secondly, let suppose if we have to calculate finance cost on average inventory then it should be like this (I know that this question doesn’t ask me that but let suppose!)
My problem is that if the finance cost is charged on average inventory then it should be applied on like this:
Average Inventory = 10,000 / 2 = 5000
Purchase cost = 5000 x 10 = 50,000
Interest charge = 50,000 x 15% = 7500Did I calculate the interest on overdraft correctly?
Yes, I have watched your lecture 🙂
Can you please give me an example of a Net benefit from alternative use? (I hope you would not mind)
Secondly, I have confused whether the opportunity cost is the lost contribution (or they simply two different things?) please explain!
Sir, Please tell me that whether two things are happening here:
1) We save overdraft interest because we have reduced receivables
2) We save overdraft interest on Advance Finance made by Factor of 80%[Therefore, there are two savings being done by the company?]
Thanks for your reply!
Could you please correct me here if we take Lagrag Co (example) as a depositing case (rather than borrowing!). Let’s say that company has deposited $10m in the bank for 4 months on FRA.
I doing this because I couldn’t find any question of interest risk rate on depositing. Hope you wouldn’t mind helping me on this one too 🙂
[My Answer]
Since we have locked the FRA to (3v7) but the current interest rate on deposit is 7.76% and we will receive interest on this rate.[Calculations]:
Since the actual rate of interest is 7.76% so that we will receive interest based on this rate such as:Interest received on actual interest rate : $10m x 7.76% = $0.776m
However, the company will return the extra interest that we receive on 7.76% because we had locked the FRA rate at 7.43%. [Therefore, the difference between 7.76% & 7.43% will be compensation paid to the Bank]
Interest received on FRA interest rate : $10m x 7.43% = $0.743m
Since the actual interest received by the company is $0.776m but they should be receiving $0.743m, the difference would be what the company has to pay back to the bank of (0.776 – 0.743) = $0.033m
Sir, I still have some doubts:
1) Derivatives get their value from something else BUT what exactly (underlying asset)?
2) Is it true that currency futures, currency options & currency swaps are all derivatives because they all get their value from something else and they all are used to hedge foreign currency risk?
3) Is it also true that [Invoicing in home currency, Leading & lagging, Netting and Matching] are all hedging techniques used to hedge foreign currency risk (but not interest rate risk) because Foreign Currency deals with exchange rate risk BUT in interest rate risk it deals with interest rates movements?
4) Sir could you please briefly point out the currency futures, currency options & currency swaps. I watched ur lecture BUT I couldn’t get the whole reason for using them!
I understood your last response Sir. But I want to be correct in these 3 statements whether these are true or not?
1) It can also be said that in a conservative policy approach, the working capital (current assets – current liabilities) will be higher because there will be more current assets because of long-term investment in the non-current assets, but lesser current liabilities because we used long-term liabilities to finance our current assets
However, aggressive approach will be where working capital is lower because we have used short-term financing policy to finance its current assets. So, current assets will be lower, but higher current liabilities since we have used short-term liabilities such as Bank Overdraft or Short-term loans etc
2) In other words if there is a higher Current ratio (current assets / current liabilities) will indicate that the company has used long-term policy to finance its current assets. Therefore, it is a conservative policy that company has adopted.
BUT if we have a lower Current ratio then it clearly indicate that company is utilizing short-term policy to finance in its current assets. Therefore, it is aggressive policy that is adopted by company.
3) Is it true that we can use CURRENT RATIO [without any other ratio] to identify whether the company has used conservative or aggressive approach?
Thanks for your time though 🙂
I meant ‘two types’ refering to call & put options.
I have a problem understanding the difference between these two contracts such as forward contracts & futures contracts. All I am aware of these two is that they both are contracts to buy or sell specified asset at a specific price at a future date.
It is March/June 2019 question no. Q32 Pink Co here is the link https://www.accaglobal.com/content/dam/acca/global/PDF-students/acca/f9/exampapers/fm-2019-marjun-sample-a%20updated.pdf
I’m sorry about the heading it says Plot co although it is Pink Co.
Thanks for the answer.
Please confirm that the after-tax borrowing rate is calculated by deduction tax rate from the borrowing rate such as: before-tax borrowing rate x (1 – tax)??
and where the tax rate is not available we will take the before-tax cost of borrowing?
Thanks again, I really appreciate your help 🙂
Thanks for the reply.
Please tell me this since the NCA of $500,000 was found in 2009 that was a previous year error included in the records of 2008, therefore the $500,000 needs to be added back in 2008 cost of sales but why the $500,000 was not deducted from the 2009 cost of sales as it was from the error that happened in 2008 and was already in the 2009 cost of sales.
This is confusing me!
Hope that you’ll clear this up!Thank you @Kim Smith 🙂 thats such a relief getting to know your side!
