Part A
Prospect Ltd2
You are a financial analyst at Prospect Plc; a public limited company specialised in manufacturing and distributing office furniture. The Board of Directors have looked into the financial statements of the company for the last two years and have raised a concern about the company's profitability and liquidity. The financial statements of Prospect for the last two years are given below
Profit and loss account for the year ended 31 January
2011 2010
£000 £000 £000 £000
Sales 126,500 110,000
Cost of sales:
Opening stock 2,500 2,000
Manufacturing costs 18,800 17,500
Closing stock 3,500 2,500
17,800 17,000
Gross profit 108,700 93,000
Selling and distribution expenses 2,100 1,150
Administrative expenses 1,250 1,200
Bad debts written off 350 150
3,700 2,500
Operating profit before interest and tax 105,000 90,500
Interest payable 500 100
Profit before tax 104,500 90,400
Income tax 4,500 2,800
Profit after tax 100,000 87,600
Dividends paid 40,000 15,600
Retained profit for the year 60,000 72,000
Balance sheet as at 31 December
2011 2010
£000 £000 £000 £000
Property, plant and equipment (net)
Land and building 3,200 3,000
Equipment 300 250
Motor vehicles 350 300
3,850 3,550
Current assets
Cash -0- 300
Stock 3,500 2,500
Trade debtors 4,500 2,500
Current liabilities
Trade creditors 2,400 2,000
Other creditors (including taxation) 500 400
Bank overdraft 100 -0-
3,000 2,400
Net current assets 5000 2,900
8,850 6,450
Non-current liabilities
Loan capital 3,500 2,800
5,350 3,650
Equity
Ordinary shares of £1 each 4,000 3,000
Retained profit 1,350 650
5,350 3,650
Required:
1) Prepare a report for the Board of Prospect plc which evaluates the performance of Prospect in relation of profitability, liquidity and asset utilisation. Your report must be supported by the calculation of relevant ratios in the three evaluation areas mentioned above (25%)
2) Discuss ratio analysis as a tool for interpretation so that the Board may better understand the value and limitations of ratio analysis (5%)
3) Calculate the Working Capital Cycle in days for Prospect Plc based on the information above, assuming 365 days, for the years 2011 and 2012 AND comment on the company's liquidity position in 2012 compared to 2011. (round to the nearest day) (10%)
All calculations should be clearly shown and should be made to the nearest £000.
Total for part A: 40%
Part B
Norfolk Ltd is specialized in producing and selling air conditions. In 2010, the manufacturing cost per unit included:
£
Direct material 200
Direct labor (20 minutes per unit) 90/hour
Variable manufacturing overhead 30
Variable selling expenses 50
Variable administrative expenses 10
Fixed costs for the year ended 31 December 2010 were:
£000
Fixed manufacturing 1,500
Fixed selling and distribution 1,700
Fixed administrative 800
The company produced and sold 275,000 units at £400 per unit.
In 2011, management has decided to increase the selling price by 15% and to maintain the same contribution margin ratio as last year. This increase in price is to meet an increase of £2,440,000 in fixed costs in 2011. The company has produced and sold the same quantity in 2011 as last year.
1) Calculate the break-even point in units for the two years 2010 and 2011 and comment on the results (10%)
2) Calculate the safety margin for both years and comment on the results (5%)
3) In the light of your answer to the previous two points, evaluate the company's policy in increasing the price by 15% in 2011 (5%).
Total for part B: 20%
Part C
Nere is currently making investment appraisals of two potential long-term supermarket projects, A and B. Both projects require the same initial investment of £20m. The following ratios have been calculated for the projects.
Ratios Project A Project B
Payback period (years) 5 6
Accounting Rate of Return (ARR %) 15 18
Net Present Value (NPV £m in 15 years) 120 145
Internal Rate of Return (IRR %) 16 14
You are required to provide recommendations to the directors for a choice of either project A or project B. Nere is not able to undertake the above two projects at the same time or a mixed project of A and B.
Total for part C: 20%
Part D
Explain and critically evaluate
A) The relevance of committed fixed costs in deciding the optimal mix of products to maximise a company's profit and the importance of relevant information for decision making purposes (10%)
B) The use of budgets as a means of planning and controlling the various business activities (10%)
Total for part D: 20%
Notes:
1. To obtain a high mark, you should:
A) Make your report concise, precise and well presented and structured;
B) Draw logical conclusions from accounting information;
C) Synthesise information in a coherent and useful way;
D) Show evidence of key text and background reading;
E) Incorporate your knowledge into an integrated piece of work;
F) Demonstrate critical understanding of financial management.
2. A Harvard standard referencing is required for the report
