(a) Discuss the importance of ratio analysis for inter-firm and intra-firm comparisons including circumstances responsible for its limitations .If any
(b) Why do you understand by the term ‘pay-out ratio’? What factors are taken into consideration while determining pay-out ratio? Should a company follow a fixed pay-out ratio policy? Discuss fully.
ACCOUNTING FOR MANAGERS
2 . A company manufactures a single product in its factory utilizing 600% of its capacity. The selling price and cost details are given below:
Sales (6,000 units)
Fixed overheads : Factory
Selling and Distribution
12.5% of factory overheads and 20% of selling and distribution overheads are variable with production and sales. Administrative overheads are wholly fixed. Since the existing product could not achieve budgeted level for two consecutive years, the Company decides to introduce a new product with marginal investment but largely using the existing plant and machinery. The cost estimates of the new product are as follows: Cost elements
Rs. per unit
Variable factory overheads
Variable selling and distribution overheads
It is expected that 2,000 units of the new product can be sold at a price of Rs. 60 per unit. The fixed factory overheads are expected to increase by 10%, while fixed selling and distribution expenses will go up by Rs. 12,500 annually. Administrative overheads remain unchanged.
However, there will be an increase of working capital to the extent of Rs. 75,000, which would take the total cost of the project to Rs. 8.75 lakh.
The company considers that 20o/o pre-tax and interest return on investment
is the minimum