Datuk Kasim Publishing

29 Aug 2010

MANAGERIAL ACCOUNTING
(ACC 720)

PROBLEM2 – Datuk Kassim

By:
MOHD NOOR SATAPA 2010610062
AZAMIAH JAMALUDDIN 2010425354
MIMI SADINA ABU SAMAH 2010840986
NURHIDAYAH ISMAIL 2010408618

1.0 Issues & Assumptions

2.0 Analysis

3.0 Management Action & Solutions

4.0 Future Strategy and Recommendations

5.0 Conclusion


Case background:

 Datuk Kassim has a small publishing company.
 He kept it simple with minimum investment.
 He managed to earn profit in its early stage.
 Company suddenly gain publicity thus increase sales by 25%
 To fulfil demand, he began to invest heavily in machinery and
equipments.
 Result in high investment, he only earn 16¢ profit from every RM1 sold.
 Situation getting worse, his sales drop 25% from previous peak level.


Underlying issues found in Datuk Kassim case are:

 Datuk Kassim has no detail planning and budgeting
for his business.

 Due to above, Datuk Kassim is struggling to meet
the load of monthly expenses to keep his business
afloat.


Assumptions made before analyze the case:

Datuk Kassim’s business publishes books and in average each
RM100
book is published and sells at

Datuk Kassim sold books monthly on average of 1000 units

Monthly expenses on factory rent, machinery equipment,
RM40,000
employee salary is estimated at

Printing & royalty fees to writers per book is at RM84

His knowledge on budgetary planning None

2.0 Analysis

Datuk Kasim need to understand his business cost behavior:

Variable Cost

COST BEHAVIOUR
Fixed Cost

Mixed Cost

2.0 Analysis

Datuk Kasim also need to understand his Cost-Volume Profit analysis:

COST
PROFIT

VOLUME

But first he needs to adhere with CVP analysis assumptions:
 The behavior of both costs and revenues is linear throughout the publishing activity.
 Costs are either fixed or variable.
 Number of books published is the only factor affecting costs.
 All units published are sold.
 When more than one book published, the sales mix will remain constant.

2.0 Analysis

CONTRIBUTION MARGIN (CM):

CM per unit = Unit Selling Price - Unit Variable Cost

= RM100 - RM84

= RM16

CONTRIBUTION MARGIN RATIO (CM Ratio):

CM Ratio = CM per Unit
Unit Selling Price

= RM16/RM100

= 0.16 or 16%

2.0 Analysis

CVP Income statement for Datuk Kassim business:

st
CVP Income Statement for Month Ended 31 Aug 2010
Total (RM) Per Unit (RM)

Sales (1,000 books) 100,000 100

Variable Cost 84,000 84

Contribution Margin 16,000 16

Fixed Cost 40,000

Net Income -24,000

2.0 Analysis
BREAK EVEN POINT (BEP):
Break Even Point = Fixed Cost
CM per Unit

= RM40,000 / RM16

= 2,500 unit of books sold

MARGIN OF SAFETY RATIO (MoS Ratio):

Margin of Safety Ratio = (Actual Sales - Break Even Sales)
Actual Sales

= (RM100,000 - RM250,000) / RM100,000

= -1.5

3.0 Management Action (Way Forward)

Reason of understanding and applying of CVP analysis concept:

1. Determine product mix

2. Maximizing use of production facilities

3. Setting selling prices

Elements to be analyzed :

variable costs Sales Volume

CVP
fixed costs
Mix of product sold

Selling price


3.1 VARIABLE COST PER UNIT

Contribution = Unit Selling - Unit Variable
Margin Price Cost

Break-Even = Fixed Cost Variable Cost
Point Contribution Margin
Dir/Mat
reducing variables cost will give a direct impact Dir/Machine hrs
to get a higher CM and as well a lower break-
even Dir/ Labor
Dir/energy

CONTRIBUTION
MARGIN


3.2 TOTAL FIXED COST

Break-Even = Fixed Cost
Point Contribution Margin

FIXED COST Net = Contribution - Fixed
Profit Margin Cost
M/C deprec.

insurance reducing the total fixed cost will help
the business to achieve low BEP per
Loan interest unit book – meaning a higher net
income per unit book will gained.
Factory rental

Admin staff
wages


3.3 EFFECT OF SALES VOLUME ON PROFIT

able to assess early prediction and determine how
accurate the gross sales volume level, and monitor the
sales volume whether it is actually on track to make the
profits or otherwise.

SALES = VARIABLE + FIXED + TARGET
COST COST NET INCOME

Therefore, at a given selling price (e.g. RM100/unit),
target net income, fixed cost and variables - sales
volume can be determined required to achieve desired
profit.

3.4 UNIT SELLING PRICE

PRODUCT TARGET MARKET
FEATURE SELECTION

UNIT SELLING PRODUCT
CHANNEL DECISION POSITIONING
PRICE

MARKETING
PROMOTION
STRATEGY


3.4 UNIT SELLING PRICE

Contribution = Unit Selling - Unit Variable
Margin Price Cost

TARGET NET = CONTRIBUTION - FIXED
INCOME MARGIN COST


3.5 SALES MIXED

SALES MIX = SALES OF INDIVIDUAL PRODUCT
TOTAL SALES OF THE COMPANY

WEIGHTED-AVERAGE = (UNIT CM X SALES MIX %) + (UNIT CM X SALES MIX %)
UNIT CM

BEP = FIXED COST
WEIGHTED-AVERAGE UNIT CM

4.0 Future Strategy & Recommendations

RECOMENDATIONS

 To have a business plan
BUSINESS PLAN

 Conduct market research on new product & innovative
MARKET RESEARCH  Widen product range covering high-end to low-end

PARTNETSHIP & VENDORS
 Sub-contracting the printing process & binderies
 Hire freelance to do editing, proof-reading & layout.

 To venture into new technology
NEW TECHNOLOGY
 e-books, print on demand, accessible publishing


RECOMENDATIONS

 Have a proper financial planning.
 Ensure his business is liquid & ultimately profitable
FINANCIAL PLAN
 Apply for financial facility like Revolving Credit or Overdraft

 Use to determine company long term investment
CAPITAL BUDGETING  To implement Cash Payback Technique

 To prepare for budgetary planning for control & evaluation
BUDGETARY PLANNING  To ensure business run on pre-allocated budget
 To use master budget

5.0 Conclusion

By now Datuk Kassim should :
Understand & know the importance of having basic business knowledge.

Know it is important to know the impact of changes in market condition &
customer demand to his business.

Gain better understanding of his business structure, competitive advantage
and capital requirements.

Restructure, have new business plan, have a strategic plan and make a
proper budget

With our future recommendations & a master budget:

Datuk Kassim can have ideas on how to manage his
business effectively thus allow him to project future cash
flow.


Cost Of Capital  Annual Cash = Cash Payback
Investment Inflow Period

 Assume RM12K spent on a machine with useful lifetime of 8 years.
 Annual Saving of 6K in cash outflows are expected from operations.

Cash Income per year = Net Income + Depreciation Expense

Thus, P = RM12K / RM6K = 2 YEARS

Datuk Kasim Publishing

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