Assignment 2

QUESTION : 2 (b)

An incremental analysis (sell – or – process – further) for Loh Gear Bikes Company.

Sell Process further Net income

Increase (decrease)

Sales per unit $ 400 $ 440 $ 40

Cost per unit

Direct materials 150 160 (10)

Direct labor 70 80 (10)

Variable overhead (70% of direct labor) 49 56 (7)

Fixed overhead(30% of direct labor) 21 2 0

Manufacturing cost per unit 290 317 13

Net income per unit $ 110 $ 123 $ 13

(b)

Incremental revenue ($40) exceeds

Incremental processing cost ($ 27); income increase $ 13 per unit.

Decision: Loh Gear should process further.

QUESTION : 3 (a)

The analysis of the financial report for Landwehr Corporation is outlined below:

Ratio 2014 2015

1- Profit margin (%) o.o4 o.o6

2- Assets turnover( times) 1.14 1.12

3- Earnings per share ($) 0.95 1.40

4- Price – earnings( times) 5.25 5.70

5- Payout (%) 60 55

6- Debt to total assets (%) 0.28 0.25

1- Profit margin ratio = (net income)/(net sales )

Profit margin ratio (2014) = ($30,000)/($650,000) = 0.04 %

Profit margin ratio (2015) = ($45,000)/($700,000) = 0.06 %

2- Assets turnover ratio = (net sales)/(average assets )

Average assets = (tatal assets in curent+total assests previous year )/2

= ($600,000+$ 533,000)/2= $ 566,500 average assets 2014

= ($640,000+$ 600,000)/2=$ 620,000 average assets 2015

Assets turnover ratio 2014 = $650,000/$566,500 = 1.14 times

Assets turnover ratio 2015 = $700,000/$620,000 = 1.12 times

3- Earning per share ratio = (net income)/(weighted average common shares outstanding )

Earnings per share ratio =($ 30,000)/$31,000 = $0.95 per share (2014)

Earnings per share ratio ...

... middle of paper ...

... pay in the market for each dollar of earning, the high P/E ratio in 2015 lead to company growth and the fact that it is financially strong. The company "blue chip" has a good future prospect.

Payout ratio :

Give an investor an insight in to management's dividend policy with dividends expressed as a percentage of profits available to the ordinary shareholders. Thus the low ratio (2015) 55% indicates to the fact that the management is reinvesting earnings internally.

Debt ratio:

Measures the safety margin of creditors of the entity in the event of liquidation.

For both years, approximately 26.5% of the assets were financed by the company's creditors (long –term and current creditors). The fair value of the assets would have to decline to 26.5% below their carrying amount. The creditors would not be protected in liquidation.

(Hoggett, 2012, p: 1062-1069).