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:

  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:

Cost of sales
Food (50% of revenue)25,000
Beverages (20% of revenue)3,00028,000
Gross profit37,000
Operating expenses
Operating supplies5,000
Repairs and maintenance of equipment1,500
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:

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 rewardsWith incentive rewards
Variable costs1,500,0002,000,000
Contribution margin1,000,000500,000
Fixed costs750,000250,000


Required (group)

  1. Explain the basis of Polly Xu’s argument.
  2. Calculate the Contribution Margin Ratio under each alternative.
  3. If sales were to increase by 10 per cent, which alternative would produce the highest increasein profit?
  4. Prepare an income statement for each alternative (under the assumption of the increased sales in c. above).

Required (your individual response)

  1. Briefly evaluate the contributions of Polly and Michael in the above situation, and then make your recommendations on the incentive rewards proposal. Are there any other factors that need to be considered in making such a management decision?




Part c.

Barton Company requested a sizeable loan from First Commonwealth Bank to acquire a large parcel of land for future expansion. Barton reported current assets of $1,900,000 ($430,000 in cash) and current liabilities of $1,075,000.

The bank initially denied the loan request for a number of reasons, including the fact that the current ratio was below 2:1.

When Barton was informed of the loan denial, the financial controller of the company immediately paid $420,000 that was owed to several trade creditors. The controller then asked the bank to reconsider the loan application.

Required (your individual response)

Please answer the following questions about Barton Company.

Based on these abbreviated facts, would you recommend that the bank approve the loan request? Why?       Were the controller’s actions ethical?



[1] This assessment is set at 1,000 words (this excludes calculations, tables, group work and appendix material), and is worth 15% of the subject/course mark/grade.

[2]from Birt, J., Chalmers, K., Maloney, S., Brooks, A. & Oliver, J. (2014). “Accounting: Business Reporting for Decision Making” (5th ed.), modified for this assignment.

[3]from Birt, J., Chalmers, K., Maloney, S., Brooks, A. & Oliver, J. (2014). “Accounting: Business Reporting for Decision Making” (5th ed.), modified for this assignment.

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