IntroductionSIDEC Furniture Companys managing director isnt satisfied with the forecast Cash Budget, so the director wants a new improved one. Its for May until August 2015. So along with the adjusted cash budget, a wooden sofa had been invented and the director asks for present pricing and marketing policies. The SIDEC Furniture Company will have 2 projects but intended to let the other to be the opportunity cost. Each director have different taught and the calculation need to be done to solve the problem.

Table of Contents

NumberContentPages

1Introduction 1

2Findings Task 1 : Analyse the budgets and make appropriate decisions1.0 : Analyse the problems1.1: Overcome problems1.2: Advices on improving the cash budget1.3: Adjusted cash budget Task 2 : Calculation of unit of costs and make pricing decisions using relevant information.a) Cost per unit by using marginal pricing approachb) Selling price per unit, total variable cost mark up 75%c) Most profitable marketing plana. Selling price increase 10%, demand increase 15%.b. Selling price decrease 7.5%, demand increase 12%d) 2 factors that need to be considered to set price of any furniture1. Product Life Cycle2. Market and CompetitionTask 3 : Asses the viability of a project using investment appraisal techniques.

345-67

8

8

9

10

11-1213-14

15-19

3Conclusion20

4References21

5Appendix22

Task 11. Analyse the problems.

The managing director is unhappy with the cash budget and wished an improved cash budget. During May 2015, the company suffers of little Net Cash flow amounted RM 400.00 only. Then, it leads to Shortage of amount in June and July amounted RM 3500 and RM 8631.00 and finally in December, it getting surplus of amount at RM 30883.00. The debtors pay late for a month and two. The debtor also pay only 30% of sales on the next month and the next 70% at the next 2 months. The purchases is at 60% of next months sales which is high for a small company. The cash purchases is fully lagged one month which bringing the paying to the next month. The other expenditure also increasing without limitation base on the amount of purchases. The other expenditure is increasing starting July from RM 500 to RM 1200. It increases again in August. Surplus of the Net Cash Flow show the company incurred profit for the month. The surplus amount happens when the Total Cash Receipt is more than the Total Cash Disbursement. If a business experiences a surplus of cash flow, it has to make a determination on the best way to use that surplus for the benefit of the business (Mack Mitzsheva, 2012).In the other hand, Shortage of Net Cash Flows happens when the Total Cash Disbursement is exceed or more than the Total Cash Receipt of the company. This will get the amount negative in the Forecasted Cash Flow Statements. in a cash flow short fall situation. When this happens its likely youll turn first to your expenditure to see what can be cut back on without jeopardising your future earnings (Guest, 2012).When the company suffers a shortage amount of Net Cash flow, a loan needed to be taken to cover the cash flow of the company. By August, the company will have Loan balance of RM11731. This put the company in great danger in future.

1.1. Overcome problemsTo overcome the shortage in the Forecast cash budget, there are various ways to help the company to obtain surplus rather than having shortage of cash in their company.Based on the Table 1-1 in the question paper, in month of Jun and July the company suffer on shortage that required the company need to ask for Financial Aid from other financial company to cover the company cash. This shows that bad decision has been made during both months.There are several ways to overcome the problems :

Figure 1.0 : 30+ Ways of Improving Net Cashflow. Sources : (PlanWare, 2001)From the list above, these ways of overcome shortage can be applied with the situation on SIDEC Furniture Company Forecast Cash Flow that shows shortage in the months of June and July.

1.2. Advices on improving the cash budgetLets assume several things for SIDEC Furniture Company for the new cash budget:I. Cash SalesBased on the forecasts cash sales, the debtors pay one month and two months late with 30% and 70% of sales. This shows that the company give credit payment to most of their customers that been made by cheque, credit card other type of credit payment that would not get the amount payment at that time. Every business owner who sells on credit might encounter late paying customers and some who will not pay at all. However, a well-designed credit policy can be a powerful selling tool attracting customers and boosting cash flow (Morris, 2013). By that the company should add cash sales which means the preventing some of the debtors to do purchase using credit payment and the debtors started to pay on the current month for 50% and 30 % for the next month and 20% for the next 2 months. This help to generate more cash for each month.

Spread Sheet 1 : Adjusted Cash SalesII. PurchasesBased on the forecasts cash sales, purchase is on 60% on next months sales. So the company should limit the purchases to only half of the next months sales which are 50%. This is because higher purchases lead to the decrease of ending cash and higher cash disbursements.

Spread Sheet 2 : Adjusted PurchasesIII. Cash PurchasesBased on the forecasts cash sales, cash purchases is lagged one month with 100% of purchases. This isnt a good way to do purchases because it will give a higher cost to pay for the next month which the company might suffer loss or damage. The company should pay the 50% of the amount on the current month and another 50% on the next month to decrease the expenditure on the current and the next month.

Spread Sheet 3 : Adjusted Cash Purchases

IV. Other ExpenditureBased on the forecasts cash sales, the other expenditure also increasing without limitation base on the amount of purchases. The other expenditure is increasing starting July from RM 500 to RM 1200. The company should limit it by setting it to 3% on purchases. But, in case of emergency it can exceeds. By limiting the other expenditure, it can decrease the chances on taking a financial aid. Also can decrease the percentage of shortage. The other expenditure such as utilities, and etc.

Spread Sheet 4 : Adjusted Other Expenditure

1.3. Adjusted cash budget

Spread Sheet 5 : Adjusted Cash Budget for SIDEC Furniture CompanyBased on the adjusted Cash Budget, it was made according to the assumption that has been previously discussed been mark by colour red. The main objective of adjust the Cash Flow Forecast Statement is to show better decision towards the cash inflow and outflow of the company. It also wanted to eliminate the shortage that happens in previous forecast cash flow statement. With this final draft of Forecast Cash Budget Statement, the managing director may understand and make better decision for other future decision in matters of cash inflow.Task 2a) Cost per unit by using marginal pricing approach.Marginal cost pricingis the practice of setting the price of a product at or slightly above the variable cost to produce it (Accounting Tools, 2011).

To get the selling price by using marginal pricing approach, variable cost need to add with the percentage mark up. The variable cost here is direct materials, direct labour wages, variable production overheads and variable administration expenses which are RM 175000, RM 100000, RM 25000 and RM 60000. Because there is no mark up in the question, just proceed on dividing it with the total of productions, 25000 to get price per unit which is RM 14.40.The advantages of this approach to SIDEC Furniture Company are it will add profit, can help to gain entry into a market and accessories sales; customer buy accessories or use the services later. The disadvantages are long-term pricing, ignore market prices and customer loss.

b) Selling price per unit, total variable cost mark up 75%.

Based on the calculation above, the selling price of SIDEC Furniture Company can be calculated by price per unit plus with the percentage mark up. Here the price per unit is RM 14.40 plus with percentage mark up, (RM 14.40 x 0.75). So when the question said increase 75% so the answer would be RM 25.20 per unit.

c) Most profitable marketing plan19,000630,000025,000RMTRTCFCUnits

Figure 2.1 : Break-even Chart (original)

a. Selling price increase 10%, demand decrease 15%.

Based on the calculation above, the SIDEC Furniture Companys price that will be for per unit after the increase of 10% is RM 27.72 and the unit that will be produce after decrease 15% is 21250 units.

RMTR

21,250589,05019,000Units0FCTCFigure 2.1 : Break-even Chart (a)

b. Selling price decrease 7.5%, demand increase 12%.

Based on the calculation above, the SIDEC Furniture Companys price that will be for per unit after the decrease of 7.5% is RM 24.82 and the unit that will be produce after increase 12% is 28000 units.

RMTR

Units0FCTC

694,960

19,000

28,000

Figure 2.2 : Break-even Chart (b)

Based on the answer in a. and b. above clearly show that choice b. is better for SIDEC Furniture Company because it sells higher units, 28000 units and higher profits, RM 694960 with the difference RM105910.

d) 2 factors that need to be considered to set price of any furniture.The factors are Product Life Cycle, Market And Competition, Price Leadership, Market Penetration Pricing, Market Price Skimming and Differential Pricing. The factors that is going to explain is Product Life Cycle and Market and Competition.1. Product Life CycleA new product progresses through a sequence of stages from introduction to growth, maturity, and decline. This sequence is known as the product life cycle and is associated with changes in the marketing situation, thus impacting the marketing strategy and the marketing mix (Quick MBA, 2003).

Figure 2.0 : The Product Life Cycle Stages. Sources: (Quick MBA, 2003).Introduction StageAt the introduction stage, the company tends to build product awareness and grow a market for the product. The effect on SIDEC Furniture Company is as follows: Product branding and quality level is recognised and the right on the property such as patents and trademarks are obtained. Pricing may be low entry pricing to build market share quickly, or high entry pricing to recover development costs. Here the furniture can either be build by using low quality with low prices to build quickly in the market structure or use high quality with hig prices to recover back the development cost. Distribution is careful until consumers show approval of the product. Promotion is aimed at the early users. Marketing communications tends to build product awareness and to teach potential consumers about the product.

Growth StageAt the growth stage, the firm, seeks to build brands name and increase market share. The effect on SIDEC Furniture Company is as follows: Product quality is maintained. Additional features and services may be added. Pricing with little competition is maintained as the firm enjoys increasing demand. Here, the furniture can be survived as here in Seri Iskandar there is less competition and the demand might be increasing and the price can either maintain or increase. Distribution places are increasing as demand increases and customers is accepting the product. Promotion is aimed at wider and broader audience.Maturity StageAt maturity stage, the sales is weakens. Competitions may occur. The objectives that is stress out is to defend market share while maximizing profit. The effect on SIDEC Furniture Company is as follows: Product features may be improved to differentiate the product from the competitors. Pricing may be lower as to compete with the competitor. Here, the furniture price might be lower because the competition might be high. Distribution becomes more vary to offer and promote own company than the compettors. Promotion stresses product differentiation with the competitors. Decline StageAs sales is declining, the firm, SIDEC Furniture Company, has several options: Maintain the product, possibly renewing it by adding new features and finding new uses. Reduce price and remain offering it, possibly to a loyal niche segment. Here, the furniture price will be reduce because the company is now at the edge of stage. It will keep offering but the customers mostly comes from loyal niche segment. Stop the product, settling remaining inventory or selling it to another firm that is willing to carry on the product.In the decline phase, all will depend on the selected strategy. For example, the product may be changed if it is being rejuvenated, or left unchanged if it is being harvested or liquidated. The price may be maintained if the product is harvested, or reduced drastically if liquidated (Quick MBA, 2003).

2. Market and Competition

Figure 2.1 : Market Structure. Sources: (Management Guru, 2014)Classifications of market structure as below:i. Perfect CompetitionA market in which there are a large number of buyers and sellers. Also buying and selling identical products, without any restriction on entry and exit and having perfect knowledge of the market at the same time. Examples of products in a perfect competition market are agricultural goods such as vegetables, fruits and others. The characteristics are large number of buyers and sellers, identical product and free entry and exit in the market. For SIDEC Furniture Company to enter this kind of market structure, they can sell the furniture without any government intervention. But they sells furniture that have not many sellers.ii. OligopolyIn the oligopoly market structure there are only a few firms in the industry. These few firms produce either identical or differentiated products and entry of any new sellers is difficult or impossible. In this market, the goods produced and sold are homogenous or differentiated (Vengedasalam & Madhavan, 2011, p. 219). Examples of this market include the market for cigarettes, automobiles, television, cement and petroleum. The characteristics are few in numbers but large in sellers, homogeneous or differentiated product and barriers to entry. For SIDEC Furniture Company to enter this kind of market structure, they need to have differentiated product which they dont because they sell furniture that lots of other company sells.iii. MonopolyMonopoly means existence of a single seller in the market producing a product that has no substitutes (Vengedasalam & Madhavan, 2011, p. 195). In this market structure, the entry of other firms is restricted. Examples of monopoly in Malaysia are Tenaga Nasional Berhad (TNB), Telekom Malaysia and Jabatan Bekalan Air (JBA). The characteristics are one seller and a large number of buyers, product has no close substitutes and restriction on the entry of new markets. For SIDEC Furniture Company to enter this kind of market structure, they need to be special in terms of product but they only sells the furniture which is have lots of buyers already.iv. Monopolistic CompetitionMonopolistic competition is a market structure in which a large number of small sellers sell close substitute product (Vengedasalam M. , 2011, p. 213). In this market, the goods produced and sold are different, but they are close substitutes for each other. Monopolistic competition is a combination of perfect competition and monopoly. There are many examples of this type of market and some of these are the markets for goods such as shoes, books, watches, toothpaste, soaps, ice creams, chocolates and others. The characteristics are large number of sellers, differentiated products and free entry and market. For SIDEC Furniture Company to enter this kind of market structure, they need to sell at the products at places that doesnt have lots of competitors. Which is why SIDEC Furniture Company is a Monopolistic Competition, because the company sells at Bandar Universiti in Seri Iskandar, Perak which have fewer competitors on that type of product. When price of the furniture increase but the competitors product maintain or decrease, the demand of the furniture will decrease. But if the price of furniture decrease but the competitors increase the price or maintain, the demand will increase. In this market, to set the price of the furniture, the company needs to look at other furniture price. So if competitor set the price low, the company need to set the price low also, but if the company wants to sell high price, they can add more advertising or do services after sale.

Task 3Payback Method

TABLE 1-2YearProject #1Project #2

Cash InflowCumulative Cash InflowCash InflowCumulative Cash Inflow

0-20000-20000-60000-60000

110000-1000030000-30000

26000-400016000-14000

380004000180004000

47200112002200026000

Project #1

Project #2

Using payback method, it will get the years of the money that the company invested back. The length of time required to recover the cost of an investment. The payback period of a given investment or project is an important determinant of whether to undertake the position or project, as longer payback periods are typically not desirable for investment positions (Investopedia, 2002). For Project #1 using the payback formula, which is accumulated cash flow before minus the current net cash flow, the duration is 2 years and 6 months. For Project #2 the duration is 2 years and 9.3 months. Clearly shown that project #1 is better from this method as the amount that had been invested is earlier by 3.3 months.

Accounting Rate of Return (ARR)

Project #1Project #2TABLE 1-3TABLE 1-4YearProfits(RM)

110000

26000

38000

47200

Total Profits31200

() Number Of Years4

Average Profit7800

YearProfits(RM)

130000

216000

318000

422000

Total Profits86000

() Number Of Years4

Average Profit21500

ARR is the percentage profit from the investment. Based on above calculation, Project #1 is higher which is 39% profit than Project #2 which is 35.83% profit. The differences is 3.17%. the calculation is made by total up the profits, then divide it with the years to get the average profit, then divide with the initial capital and times 100 to get the percentage.

Net Present Value (NPV)Project #1TABLE 1-5YearsProfitDiscount Factors (10%)Net Present Value

1100000.9099090

260000.8264956

380000.7516008

472000.6834917.60

Total Present Value24971.60

(-)Initial Cost20000

Net Present Value4971.60

Project #2TABLE 1-6YearsProfitDiscount Factors (10%)Net Present Value

1300000.90927270

2160000.82613216

3180000.75113518

4220000.68315026

Total Present Value69030

(-)Initial Cost60000

Net Present Value9030

NPV is the forecasting profit that the company will get. Based on above calculations, to get the NPV is by multiple the profit with the discount factors, which in this case is 10%, then add all the NPV for each year minus with the initial cost to get the overall NPV. As stated above, NPV for Project #2 is higher, RM9030, than Project #1, RM4971.60 with the difference RM4658.40. Both NPV is positive so it is worth, so the company should choose the highest.

Comparison between Payback and NPV NPV (Net Present Value) is calculated in terms of currency while Payback method refers to the period of time required for the return on an investment to repay the total initial investment (Wilkinson, 2013).Based on above calculation on Payback at page 12, its good to choose payback method as the best one and Project #1. Under the payback period method, a company estimates how much it will cost to launch the project and how much money the project will generate once it's up and running. It then calculates how long it will take the project to "break even," or generate enough money to cover the startup costs (Cam Merritt, 2013). The least duration is for the Project #1 with 2 years 6 months rather than project #2 with 2 years of 9.3 months. With the support of Accounting Rate of Return (ARR), which is percentage profit from the investment, solidify the answer to choose payback method as the best method. On page 13, the calculation of ARR also shows that Project #1 is the best because of the percentage is higher at 39 % than Project #2 at 35.83%.But, the best method for SIDEC Furniture Company is actually the NVP and Project #2. Net present value method calculates the present value of the cash flows based on the opportunity cost of capital and derives the value which will be added to wealth of the shareholders if that project is undertaken (Borad, 2012). The reason why this is the best method is because NPV method considers time value and it gives a direct measure of the dollar benefit on a present value basis of the project to the firms shareholders. NPV is the best single measure of profitability (Wilkinson, 2013). The NPV shows the values of the profit. Project #2 is better because the profit is RM9030, whereas the Project #1 is only RM4971.60. This shows large different and also the reason to choose it. Even we combine with the payback method for the Project #2 with the duration of 2 years 9.3 months, it doesnt have much differences which is only 3.3 months. It might be a lack in terms of ARR because of Project #2 is only 35.83% whereas 39% for Project #1. Payback method doesn't take into account price increases or decreases and the cost of capital. It does not account for the time value of money,inflation, risk, financing or other important considerations. It calculates RM1 today with RM1 in the future. While NPV method considers time value and it gives a direct measure of the dollar benefit on a present value basis of the project to the firms shareholders. NPV is the best single measure of profitability.Payback also ignores any benefits that occur after the payback period, also does not measure total incomes. An implicit assumption in the use of payback period is that returns to the investment continue after payback period. Payback method does not specify any required comparison to other investments or investment decision making. It indicates the maximum acceptable period for the investment (Wilkinson, 2013).Many businesses use a combination of methods when making capital budgeting decisions. A company could use the payback period method to narrow down its options, then apply the NPV method to identify the best of the remaining projects. Or it could use the NPV method to separate the "winners" from the "losers" among possible projects, then look at payback periods to see which projects return their costs more quickly (Cam Merritt, 2013). Thus, the best method to be used is NPV and best project that should be considered by SIDEC Furniture Company is Project #2. The reason is already stated above.

Conclusion

For Task 1, the cash budget had been analysed and already adjusted from Table 1-1 to Spread Sheet 1. Adjusted on cash sales, purchases, cash purchases and other expenditure. Its not an giving an explosive result but its getting improved.For task 2, calculating the marginal pricing approach is already been done, also with the break-even calculation and chart. Two factors also already been included that needs to be considered to set price for any furniture. For task 3, the best decisions for method and which product has been made. The calculation involves on Payback, ARR and NPV.

References

Accounting Tools. (2011, 9 10). Marginal Cost Pricing. Retrieved 4 18, 2015, from Accounting Tools: http://www.accountingtools.com/marginal-cost-pricingBorad, S. (2012, 3 11). Why Net Present Value is the Best Measure for Investment Appraisal? Retrieved 4 19, 2015, from eFinanceManagement: http://www.efinancemanagement.com/investment-decisions/why-net-present-value-is-the-best-measure-for-investment-appraisalCam Merritt. (2013, 2 8). Net Present Value Method Vs. Payback Period Method. Retrieved 4 18, 2015, from Investopedia: http://smallbusiness.chron.com/net-present-value-method-vs-payback-period-method-61578.htmlGuest, D. (2012, 1 16). How to Deal with a Cash Flow Shortage in Your Business. Retrieved 4 18, 2015, from David Guest: http://davidguest.com.au/buildingbusinesses/cash-flow/how-to-deal-with-a-cash-flow-shortage-in-your-business/Investopedia. (2002, 7 1). Payback Period. Retrieved 4 18, 2015, from Investopedia: http://www.investopedia.com/terms/p/paybackperiod.aspMack Mitzsheva. (2012, 8 1). What Is Surplus Cash Flow? Retrieved 4 18, 2015, from Investopedia: http://smallbusiness.chron.com/surplus-cash-flow-52477.htmlManagement Guru. (2014, 3 4). Market Structure. Retrieved 4 18, 2015, from Management Guru: http://www.managementguru.net/market-structure/Morris, J. (2013, 10 4). Accounting & Finance Update. Retrieved 4 18, 2015, from Pioneer: http://www.pioneer.co.nz/assets/events/contractorsconference/workshops/accounting_and_finance_update_more_tools_to_help_you_jason_morris.pdfPlanWare. (2001, 2 1). Business Planning Papers : Making Cash Flow Forecasts. Retrieved 4 18, 2015, from PlanWare: http://www.planware.org/cashflowforecast.htmQuick MBA. (2003, 3 1). The Product Life Cycle. Retrieved 4 18, 2015, from Quick MBA: http://www.quickmba.com/marketing/product/lifecycle/Vengedasalam, D., & Madhavan, K. (2011). Economics. Shah Alam, Selangor Darul Ehsan: Oxford Fajar.Vengedasalam, M. (2011). Economics. Oxford Fajar.Wilkinson, J. (2013, 7 24). NPV vs Payback Method. Retrieved 4 18, 2015, from Strategic CFO: http://strategiccfo.com/wikicfo/npv-vs-payback-metho/

Appendix

22 | Page

Sheet1MARCHAPRILMAYJUNEJULYAUGUSTRMRMRMRMRMRMSALES62,00050,00060,00080,00085,00070,000CASH RECEIPTSCollection from debtors:Collections: Cash Sales (50% of sales) 30,00040,00042,50035,000 Lagged one month (30% of sales)15,00018,00024,00025,500 Lagged two months (20% of sales)12,40010,00012,00016,000TOTAL CASH RECEIPTS57,40068,00078,50076,500

Sheet1MARCHAPRILMAYJUNEJULYAUGUSTRMRMRMRMRMRMSALES62,00050,00060,00080,00085,00070,000

PURCHASES (50% on next month's sales)25,00030,00040,00042,50035,00032,500

Sheet1MARCHAPRILMAYJUNEJULYAUGUSTRMRMRMRMRMRMPURCHASES (50% on next month's sales)25,00030,00040,00042,50035,00032,500CASH DISBURSEMENTSPayments: Cash Purchases (50% of purchases)20,00021,25017,50016,250 Lagged one month (50% of purchases)15,00020,00021,25017,500

Sheet1MARCHAPRILMAYJUNEJULYAUGUSTRMRMRMRMRMRMPURCHASES (50% on next month's sales)25,00030,00040,00042,50035,00032,500Other Expendture (maximum 3% of purchases)1,0005001,050975

Sheet1SIDEC FURNITURE COMPANYCASH BUDGET (ADJUSTED) FOR FOUR MONTHS ENDING AUGUST 2015MARCHAPRILMAYJUNEJULYAUGUSTRMRMRMRMRMRMSALES62,00050,00060,00080,00085,00070,000CASH RECEIPTSCollection from debtors:Collections: Cash Sales (50% of sales) 30,00040,00042,50035,000 Lagged one month (30% of sales)15,00018,00024,00025,500 Lagged two months (20% of sales)12,40010,00012,00016,000TOTAL CASH RECEIPTS57,40068,00078,50076,500

PURCHASES (50% on next month's sales)25,00030,00040,00042,50035,00032,500CASH DISBURSEMENTSPayments: Cash Purchases (50% of purchases)20,00021,25017,50016,250 Lagged one month (50% of purchases)15,00020,00021,25017,500Wages & Salaries4,0005,0006,0004,000Rent3,0003,0003,0003,000Other Expendture (maximum 3% of purchases)1,0005001,050975Tax Prepayments--5,200-Purchases Of Equipment10,000---Interest on Long-term Debt4,000---Interest on Short-term note--200-Long-term Debt Repayment--8,000-Interest On Short-term Borrowing--31117TOTAL CASH DISBURSEMENTS37,00028,50044,73125,592FINANCIAL TRANSACTIONS SECTION:NET CASH FLOW20,40039,50033,76950,908Add Beginning Cash Balance10,00016,40010,00010,000Ending Cash Balance30,40055,90043,76960,908Minus Minimum Cash Balance10,00010,00010,00010,000Required Total Financing0.00.00.00.0Excess Balance20,40039,50033,76950,908Borrowing Needed This Month0.00.00.00.0Repayments On Loans This Month0.00.00.00.0Total Loan Balance0.00.00.00.0Ending Cash After Borrowing/Repayment30,40055,90043,76960,908