Weekly FMGT Webinar (#3)

Today’s webinar
• Recap of last week: any questions about the first assessment?
• Cost management
• Working capital management
• Exploring some activities
Cost Management
Why cost management? Better decision
making
Fixed
costs
Variable
costs
Total
costs
Total
revenue
Quantity
sold
Total
profit Zero
Break-even point
(BEP)
Accounting break-even point
Cash break-even point
Knowledge of cost behaviour Short-term financial planning
and budgets
Firm’s long-term strategic
objectives
Discussion:
What is the difference
between accounting &
cash break-even? Why
both are important?
Moodle Activity 3.1 (Part one)
The Marvel Manufacturing Company is considering whether or not to construct a new
robotic production facility. The cost of this new facility is $600 000 and it is expected to
have a six-year life with annual depreciation expense of $100 000 and no salvage value.
Annuals ales from the new facility are expected to be 2000 units with a price of $1000 per
unit. Variable production costs are $600 per unit, and cash fixed costs are $80 000 per
year.
a. Find the accounting and the cash break-even units of production.
Moodle Activity 3.1 (Part one)
The Marvel Manufacturing Company is considering whether or not to construct a new
robotic production facility. The cost of this new facility is $600 000 and it is expected to
have a six-year life with annual depreciation expense of $100 000 and no salvage value.
Annuals ales from the new facility are expected to be 2000 units with a price of $1000 per
unit. Variable production costs are $600 per unit, and cash fixed costs are $80 000 per
year.
b. Will the plant make a profit based on its current expected level of operations?
Yes, expected sales (2000) > accounting break-even
(450)
c. Will the plant contribute cash flow to the firm at the expected level of operations?
Yes, expected sales (2000) > cash break-even (200)
Working Capital Management
Short-Term Financial
Management
Decision on
current assets and
current liabilities
Net-working capital
(current assets – current liabilities)
Risk-return trade-off
Working capital policy
Self-liquidating
debt principle
Inventory
purchased
Inventory
sold
Receipt of
cash from
accounts
receivable
Operating cycle
Inventory
conversion period
Average collection
period
Cash paid for inventory
Accounts payable
deferral period
Cash conversion cycle
Moodle Activity 3.5
Network Solutions has introduced a new, fully automated manufacturing plant which
produces 2000 wireless routers per day with materials costs of $50 per router and no
other costs. The average number of days a router is held in inventory before being sold is
45 days. In addition, the company generally pays its suppliers in 30 days, while collecting
from its customers after 25 days.
a. What is the cash conversion cycle?
Moodle Activity 3.5
Network Solutions has introduced a new, fully automated manufacturing plant which
produces 2000 wireless routers per day with materials costs of $50 per router and no
other costs. The average number of days a router is held in inventory before being sold is
45 days. In addition, the company generally pays its suppliers in 30 days, while collecting
from its customers after 25 days.
b. What would happen to the cash conversion cycle if the company could stretch
its payments to suppliers from 30 days to 50 days?
*
*
c. By how much would working capital financing be reduced if the company
stretched its payments to suppliers from 30 days to 50 days?
Each day, the company has to pay material cost to its supplier: $50 × 2000 units/day =
100,000 $ (cost per unit times the number of units produced).
The amount of working capital that can be reduced is equal to 100,000 $ multiplied by
the number of days the payment to the supplier is deferred, or 100,000$ × (50 days – 30
days) = $2 million.
Thank You!
References
Titman, S, Martin, T, Keown, AJ & Martin, JD 2019, Financial
management: principles and applications, 8th edn, Pearson
Australia, Vic;