FINANCE AND ACCOUNTING

held accountable for the effective achievement of organizational goals that maximizes shareholders interest in order ensures sustainability and prosperity. This can be done by changing the composition of the board who do not perform to expectation.
Appointment of board of director
The appointment of board of directors should be done in a transparent manner that ensures a balance mix of proficient members who have the capacity to add value and bring independent judgment in major decision-making processes. This will ensure the business only invests in the most profitable ventures that will maximize shareholders interest.
Leadership
Every company should have an effective board of directors who represent the interest of shareholders. The board should guide the firm to continuing prosperity by ensuring that the interest of shareholders is protect in a manner that is transparent, accountable and with integrity.
Strategy and values
It is the duty of a board of directors to determine the purpose and values of the company by establishing a strategy that will help achieve its objectives. These strategies must ensure that the corporation thrives and survives through the establishment of procedures that protect the reputation and asset of the firm.

Question 2

Opportunity cost refers to the cost forgone for taking an alternative decision.
Sunk costs refer to costs that have already been incurred and thus there are irrelevant in decision-making. It also means the profit foregone by taking one alternative over the other. For instance, research and development expenses incurred before a project is implemented are considered sunk because they have already been incurred hence irrelevant.

Question 3

A mission statement is essential to an organization because it defines the purpose of the firm. It establishes a mechanism through which the firm achieves its objectives. The mission statement is intended to guide shareholders, managers and employees on the strategies that will ensure a firm achieves its objectives. It helps employees to know the decisions that are aligned to the mission of the firm.

Question 4

Large firm enjoys from increased efficiency that allow them to gain from economies of scale. However, it is imperative to control the size of the business so that it does not become too large to suffer from diseconomies of scale. Economy of scale helps a firm to enjoy reduced production cost in the long run. When a manufacturing company increases it production level, (economics of scale) there is improved efficiency that increase the long-term sustainability. The higher the production level, the lower the long run average cost. This allows a firm to increase its profit margins that ultimately increases its long-term sustainability.

Question 5

Exiting a business can be considered one of the most difficult decisions every entrepreneur makes. However, making this decision might be very beneficial to an organisation. In most cases, it is rational to close a business if the revenues are no longer adequate to cover variable costs. The rational is that closing the business will allow the entrepreneur to loss less. This does not necessarily mean that the firm has run out of business, it is a temporary cessation of activities. Closing the business is the best decision for business that cares only about economic efficiency decision. For these firms, when marginal revenues equal variable costs, it is rational to close the business.

Reason why it is difficult to for Joe’s windows secure finances
The main reason why Joe’s windows cannot secure credit for the business is lack of creditworthiness. Although the business is making profits, the return cannot secure a bank loan. Banks are interested in businesses that will pay back their money effectively. Although small business makes profits, they are at a constant struggle to keep money in the bank. Bank want clients who can make enough money to make not only monthly loan payment, but also covering rent, inventory and other costs. The reason why they fail to keep enough money is because they often have to pay upfront to third parties before they get paid. In this case, most of the money is going out which implies that the business will not meet its obligations.
Most of this small business also lack collateral. Bank loans often require collateral before they agree to lend. Joe’s windows do not have enough collateral to secure a loan if the business fails to meet its obligation. The amount the bank lends to small businesses depends on the level of collateral. Homes and car are the most common type of collateral. However, most small business owners are unwilling to give their personal belongings such as a car as collateral.
Finally, most banks are risk averse; bank considers small businesses more risky than large firms do. Since the financial crisis, many banks have increased their lending rates to avoid small business risk. Consequently, few businesses can quality for bank loans after the post recession. In fact, many banks are now considered risk averse

Question 7

Breakeven is 48,0000

In order to calculate the breakeven point, we assume that variable cost is $2
Selling price =$6
Production $8000 units
Sales = 6*8000= 48000
Variable cost 2*8000= 1600

Contribution = 32,000
Fixed cost = 32,000
Therefore, the fixed cost = 32,000
Company A has a higher contribution to sales ratio, which allows it to breakeven fast. This can also be explained by the sharp total revenue line which indicates that company A has a higher contribution to sales ratio
The two companies will make similar profits at 490 units

The contribution to sales ratio of company A is 2/3 or 6-2 =4

Contribution/sales 4/6 =2/3
Break even = fixed cost/contribution sales margin
32,000/2/3 = 48,000
There are several assumptions of CVP. They include the following
CVP analysis assumes that all costs can be classified as either fixed or variable cost. The cost profit analysis including breakeven assumes costs can be classified to either fixed or variable costs. However, in reality it is difficult to classify costs as either fixed or variable. In some cases, some costs are display both characteristics of variable and fixed costs. The flexible policy of organizations makes it difficult to identify cost as either fixed or variable. Even in traditional set up, segregating cost a variable or fixed is difficult in practice. The assumption that cost behavior (fixed cost) will remain constant over the relevant range is not achievable. In most cases, it is assumed that total fixed cost do not change over the relevant range. However, in reality, fixed cost changes. Cost behavior usually changes. volume analysis assumes that the selling price will remain constant. However, this assumption does not take into account quantity discount, which is offered for different lot of purchases. These changes make it difficult to determine the contribution margin per unit and contribution margin ratio. Cost volume analysis also assumes that there are not significant changes in the size of inventory. It assumes that CVP can only take place only if a company is following variable costing for inventorial product cost. This assumption is false because any business that makes profit means that it has break even.

Direct material cost refers to expenses incurred on purchases of raw material used for production. They include direct material purchases costs and transport cost for the raw material. Direct labour cost refers to expense incurred as a result of human capital during production. These costs include managers and employee salaries.