SCHOOL OF HOSPITALITY, TOURISM AND CULINARY ARTS
BACHELOR OF INTERNATIONAL HOSPITALITY MANAGEMENT (HONS)
HTM 2453 – MANAGEMENT ACCOUNTING
BH 6
CASE STUDIES 4 (30%)
GROUP MEMBERS
NAME
STUDENT ID NUMBER
GROUPING
Jesica Silviani
0310857
3
Silvia Chandra
0311317
3
Tong Xiu Lyn
0307613
3
Vinny Priscillia Lim
0307829
3
Zhang Kuo
0306181
3
Li Xiang Christina
2
CASE STUDY 4
Each autumn, as a hobby, Anne Magnuson weaves cotton place mats to sell through a local
creaft shop. The mats sell for $20 per set of four. The shop charges a 10% commission and
remits the net proceeds to Magnuson at the end of December. Magnuson has woven and sold
25 sets each of the last two years. She has enough cotton in inventory to make another 25
sets. She paid $7 per set for the cotton. Magnuson uses a four-harness loom that she
purchased for cash exactly two years ago. It is depreciated at the rate of $10 per month. The
accounts payable relate to the cotton inventory and are payable by September 30.
Magnuson is considering buying an eight-harness loom so that she can weave more intricate
patterns in linen. The new loom costs $1,000; it would be depreciated at $20 per month. Her
bank has agreed to lend her $1,000 at 18% interest, with $200 principal plus accrued interest
payable each December 31. Magnuson believes she can weave 15 linen place mat sets in
time for the Christmas rush if she does not weave any cotton mats. She predicts that each
linen set will sell for $50. Linen costs $18 per set. Magnuson’s suppliers will sell her linen
on credit, payable on December 31.
Magnuson plans to keep her old loom whether or not she buys the new loom. The balance
sheet for her weaving business at August 31, 2011, is as follows:
ANNE MAGNUSON, WEAVER
Balance Sheet
August 31,2011
Current assets:
Cash
Inventory of cotton
Fixed assets:
Loom
Acumulated
depreciation
$
25
175
200
500
Current liabilities:
Accounts
payable
$
74
Stockholders' equity
386
-240
260
$460
$460
Requirements:
1. Prepare a cash budget for four months ending December 31, 2011, for two alternatives:
weaving the place mats in cotton using the existing loom, and weaving the place mats in
linen using the new loom. For each alternative, prepare a budgeted income statement for
the four months ending December 31, 2011, and a budgeted balance sheet at December
31, 2011.
2. On the basis of financial considerations only, what should Magnuson do? Give your
reason.
3. What nonfinancial factors might Magnuson consider in her decision?
ANSWERS
1.1 Cash Budget
Anne Manuson,Weaver
Cash Budget for Cotton
4 months until 31st December 2011
$
Beginning Cash Balance
$
25
Cash receipts:
Cotton Sales (25 x (0.9x$20))
450
Cash available
475
Cash disbursement
-
Account Payable
74
Total Cash Disbursement
(74)
Budgeted Cash Income
$401
Anne Manuson,Weaver
Cash Budget for Linen
4 months until 31st December 2011
$
Beginning cash balance
$
25
Cash receipts:
Linen sales (15 x (0.90 x $50))
675
Cash available
700
Cash disbursements:
Account payable
Cost of linen ($15 x 18)
74
270
Purchase of new loom
1,000
Total cash disbursements
(1,344)
Cash balance before financing
(644)
Financing of cash deficiency:
Borrowing
1,000
Principal payment
(200)
Interest payment ($1,000 × 0.18 × 4/12)
(60)
Total effect of financing
740
Budgeted Cash Income
$
1.2 Budgeted Income Statement
Anne Magnuson, Weaver
Budgeted Income Statement for Cotton
4 months until 31st December 2011
$
Sales ($20 x 25)
$
500
Less: COGS ($7 x 25)
(175)
Gross Profit
325
Less: Operating Expenses
Sales Commission ($20 × 10% x 25)
50
Depreciation (Old loom: $10 x 4 months)
40
Net Income
(90)
$ 235
96
Anne Magnuson, Weaver
Budgeted Income Statement for Linen
4 months until 31st December 2011
$
Sales ($50 x 15)
$
750
Less: COGS ($18 x 15)
(270)
Gross Profit
480
Less: Operating Expenses
Sales Commission ($50 × 10% x 15)
75
Depreciation
(New loom: $20 x 4) +(Old loom: $10 x 4)
Interests ($1,000 × 18% x 4/12)
120
60
Net Income
(255)
$ 225
1.3 Budgeted Balance Sheet
Anne Magnuson,Weaver
Budgeted Balance Sheet for Cotton
4 months until December 31, 2011
ASSETS
Current Assets
Cash
Inventory of cotton
Total Current Assets
Fixed Assets
Looms
Accumulated depreciation:
($240 + $40)
Total Fixed Assets
Total Assets
$
LIABILITIES
Current Liabilities
$
-
401
0
401
Long term Liabilities
-
500
Owners’ Equity
Stockholders’ Equity b/f
Net Income
386
235
Total Owners’ Equity
Total Liabilities
621
$621
(280)
220
$ 621
Anne Magnuson, Weaver
Budgeted Balance Sheet for Linen
4 months until December 31, 2011
$
ASSETS
Current Assets
Cash
Inventory of cotton
Total Current Assets
LIABILITIES
Current Liabilities
96
175
271
Fixed Assets
Looms
Accumulated depreciation:
($240 + $40 + $80)
Total Fixed Assets
Total Assets
1,500
(360)
1,140
$1,411
$
Bank loan payable
Total Current Liabilities
Long term Liabilities
800
800
-
Owners’ Equity
Stockholders’ Equity b/f
Net Income
386
225
Total Owners’ Equity
Total Liabilities
611
$1,411
2. Advice for Magnuson Based on Financial Considerations
Cash Flow (Yearly)
2011
2012
2013
2014
2015
Total 5 years
Cotton
$275
$275
$275
$275
$275
$ 1375
Linen
$25
$61
$97
$133
$169
$485
Cash Flow = Cash Revenue - Material Cost - Payments (Principal + Interest)
Based on the rough calculation above, it is visible that if Magnuson change the
production line from cotton into the linen, she will get lesser cash flow for quite long period. The
income statement also shows that if Magnuson produce cotton placemats, in the end of the year
2011 she will have $401 in her cash. On the other side, if Magnuson decide to proceed with the
bank loan and new loom for linen, even though it will achieve higher sales, it will only bring
cash with amount of $96.
What is more crucial is Magnuson need to choose to produce either cotton or linen due to
her time limitation/constraint. According to the prepared plan, she also might not be able to earn
higher income from her linen mats. In the end, it will look wrong to go into debt just for
introducing new creation with costly machine and lesser cash flow until she pays her debt in 5
years time.
Still, everything is relative based on which side a person looks into the matter. Even
though it was time consuming, but after all the bank loan payments are finished by her, the new
machine could bring her significant income compared to the cotton mats. But, will it be worth it
to wait until the bank loan payments are finished?
3. Non-Financial Factors Magnuson Might Consider
Money might be not so important to Magnuson. Having less cash flow for a quite long
term compared to the initial cotton production could be not a big deal for her. Let’s say that she
is a very passionate artist who is willing to sacrifice cash in order to try something new & create
innovation by weaving more intricate patterns with the new loom. She might desire to do her
craft with linen rather than with cotton. She may think that she may get more inspiration and
manage to weave more artistic patterns with the new loom. On the other point of view, she may
want to teach her new craft to her families or friends. Maybe the new loom can ignite the
creativity and interest within her so she can be inspired to continuously develop her creation into
whole new level.
In short, everyone has their own preferences and money can’t guarantee happiness.
Sometimes, what we have planned or budgeted in detail will just messed up in future. Even
though there seems no chance in new opportunities, when someone is able to show perseverance,
hard work and focus, life wheel just can turn up well and great fortunes will come. So we will
suggest Magnuson to just trust her gut and stick on it because hard work pays.