Evaluate the Barton Companys loan application and the actions of the firms financial controller.

The material for this assessment is to evaluate threeseparate parts/questions.  You need to provide an answer to all three parts.    In you submission you should include as an appendix the group’s solution to the questions, showing your contributions to the group work.  In the main part of the submission you need to provide your own individual write-up, along with your conclusions and recommendations[1]:


The first two parts come from questions in the textbook (Birt et al. (2014)) and are:

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  1. Question 9.59 on Yummy Burgers R Us developing next year’s budget, and
  2. Question 10.58 on Nardeb Company considering an incentive scheme that changes its cost structure.

The third part is a bank loan proposal by the Barton Company which comes from another book on financial decision making (all the needed information given in this document):

  1. Evaluate the Barton Company’s loan application and the actions of the firm’s financial controller.


For your convenience, the questions are reproduced on the following pages with some modifications.


Marking Grid: See the course outline.

Please clearly show the members of the your group on your cover sheet.



Part a.

Question 9.59[2]– Yummy Burgers R Us operates a store in Melbourne City, and the following is its averagemonthly income statement:

Revenue $ $
Food 50,000  
Beverages 15,000 65,000
Cost of sales    
Food (50% of revenue) 25,000  
Beverages (20% of revenue) 3,000 28,000
Gross profit   37,000
Operating expenses    
Wages 15,000  
Operating supplies 5,000  
Administration 3,000  
Advertising 2,500  
Repairs and maintenance of equipment 1,500  
Utilities 2,500  
Depreciation 1,000  
Interest 1,000 31,500
Profit before tax   $5,500

The owner is currently preparing the budget for next year and is considering the followingalternatives:

  1. Reducing the cost of sales for food from 50 per cent to 45 per cent. This would be achieved byreducing portions and improved purchasing. There would be no other changes.
  2. Cutting the food cost from 50 per cent to 45 per cent and spending an additional $1500 onadvertising. The advertising should attract new customers and increase the volume of bothfood and beverage revenue by 20 per cent on present levels. The new customers would alsocause monthly other operating expenses to increase as follows:
Wages $2000   Repairs 150
Supplies 400   Utilities 400
Administration 200      

Required (group)

Prepare a budgeted average monthly income statement for both alternatives.

Required (your individual response)

Advise the ownerwhich alternative you consider best, with reasons.

 Part b.

Question 10.58[3]– Nardeb Company is a software producer and sales company. Currently, it pays all sales staffon a fixed base salary. Recently, management has been considering switching sales staff across toan incentive-based reward system. Nardeb’s chief accountant Polly Xu has prepared somesummarised numbers (see below) for senior management to consider.

Michael Day comments that he cannot see the difference, as the sales level and profit areunchanged. Xu argues that it is the difference in cost structure that matters. She argues that theentity is better off staying with the current structure, because the increase in profit is greaterwhen sales levels increase than it would be with the incentive rewards.

  With fixed rewards With incentive rewards
Sales $2,500,000 $2,500,000
Variable costs 1,500,000 2,000,000
Contribution margin 1,000,000 500,000
Fixed costs 750,000 250,000
Profit $250,000 $250,000


necessary (group)

Describe Polly Xu’s argument’s foundation.
Under each option, calculate the Contribution Margin Ratio.
Which option would result in the largest increase in profit if sales increased by 10%?
Create an income statement for each option (assuming the higher sales in option c. above).

Important (your unique response)

Make your recommendations regarding the incentive rewards plan after briefly evaluating Polly and Michael’s participation in the aforementioned scenario. Do any other factors need to be taken into account when making such management decisions?

Part c.

To purchase a sizable plot of land for potential development, Barton Company asked First Commonwealth Bank for a sizable loan. Barton reported $1,900,000 in current assets ($430,000 in cash), and $1,075,000 in current liabilities.

For a number of reasons, including the fact that the current ratio was under 2:1, the bank originally turned down the loan request.

The company’s finance controller promptly paid $420,000 that was due to many trade creditors when Barton was informed of the loan decision. The controller then requested that the bank review the loan request.

Important (your unique response)

Please respond to the following inquiries regarding the Barton Company.

Would you propose that the bank approve the loan request based on these condensed facts? Why?The controller’s actions: were they moral?




[1]The word count for this assessment is 1,000 (calculations, tables, group projects, and appendix material are not included), and it is worth 15% of the subject/course mark/grade.

[2]taken from Birt, J., Chalmers, K., Maloney, S., Brooks, A., and Oliver (2014). For this project, “Accounting: Business Reporting for Decision Making” (5th ed.) was updated.

[3]taken from Birt, J., Chalmers, K., Maloney, S., Brooks, A., and Oliver (2014). For this project, “Accounting: Business Reporting for Decision Making” (5th ed.) was updated.

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