assaignment 2

QUESTION NO 2 (b):

(A). Prepare an incremental analysis for the sell-or-process further decision:

Sell: Process Further: Net income (increase ÷ decrease):

Sales per unit $ 400 $ 440 $ (40)

Cost per unit:

Direct materials $ 150 $ 160 $ (10)

Direct labour $ 70 $ 80 $ (10)

Variable overhead (70% of direct labour) $ 49 $ 56 $ (7)

Fixed overhead (30% of direct labour) $ 21 $ 21 $ (0)

Manufacturing cost per unit $ 290 $ 317 $ (27)

Net income per unit $ 110 $ 123 $ (13)

(B) Should Loh Gear sell or process further? Why or why not?

The decision here will be; process further, in account to the incremental revenue (increase of sales per unit), which is equal to ($ 40) and that exceeds the incremental processing costs (increase of manufacturing costs per unit) that equal to ($ 27) and the net income per unit raised (from $ 110 to $ 123) by ($ 13 per unit).

QUESTION NO 3:

A). Compute the following ratios for 2014 and 2015:

1). Profit margin:

To obtain the profit margin for each year, the following equation must be used:

Profit margin = net income ÷ net sales

Here the net income for each year is already given, along with the net sales. So the question now can be solved.

* For year 2014:

Profit margin = net income ÷ net sales = $ 30.000 ÷ $ 650.000 = 0.046 = 4.6 %

* For year 2015:

Profit margin = net income ÷ net sales = $ 45.000 ÷ $ 700.000 = 0.064 = 6.4 %

2). Asset turnover:

To answer this question, firstly the equation must be mentioned as follow:

Asset turnover = net sales ÷ average assets

But the problem here is the average assets, which is not given in the data. So it need to be obtained using the next formula:

Average assets = (total liabilities and stockholders for previous year + current year) ÷ 2

Now the question can be sol...

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... 32.000 in 2015).

- The price earnings ratio had increased from (5.2 times in 2014) to (5.7 times in 2015) and that due to raise in market price per share of stock from ($ 5 in 2014) to ($ 8 in 2015) with the increment that take place in the earnings per share from ($ 0.96 in 2014) to ($ 1.4 in 2015).

- The pay-out ratio had diminished from (60 % in 2014) to (55 % in 2015), in account to the retained earnings that hadn’t increased in the same amount between (2013, 2014 & 2015). The increased amount is ($ 12.000 between 2013 and 2014) while (between the year 2014 and 2015 is $ 20.000).

- The debt to total asset ratio declined from (27.5 % in 2014) to (24.2 % in 2015), that because the total liabilities had decreased from ($ 165.000 in 2014) to ($ 155.000 in 2015), in despite to the raise that occur with the total assets from ($ 600.000 in 2014) to ($ 640.000 in 2015).