Reference no: EM131204223 , Length: word count:2500

Task - This task consists of four questions.

Question 1: The financial statements of Voyager Productions Ltd are shown below:

Income Statement
for the year ended 31st December
In $Mill	2008	2007
Turnover	141.1	138.4
Gross profit	-58.9	-54.9
Cost of sales
Operating profit	82.2	83.5
	-55.0	-54.0
Selling & administrative costs
Profit before tax	27.2	29.5
	-6.1	-7.5
Interest payable
Profit after tax	21.1	22.0
	-7.3	-5.7
Tax on profit
Dividends	13.8	16.3
	-8.0	-8.0
Retained profit	5.8	8.3

 

Balance Sheet
as at 31st December
In $Mill	2008	2007
Non-current assets	266.7	265.3
Tangible assets
Current assets	5.3	5.8
Inventory
Trade Receivables	15.7	20.9
Other Receivables & Prepayments	2.4	2.0
Bank	4.9	6.3
Total Assets	28.3	35.0
Non-current liabilities	295.0	300.3
Current liabilities	96.7	146.1
Loans falling due after one year
Total liabilities	66.8	27.6
Trade payables
	163.5	173.7
Net assets	131.5	126.6
Equity
Capital and reserves	81.9	82.8
Share capital
Shareholders' funds	49.6	43.8
Retained profits
	131.5	126.6

a. Calculate the following ratios for both years and comment on what the results say about the company's financial performance and position. [ENSURE YOU SHOW YOUR CALCULATIONS]:

i. Return on investment (ROI)

ii. Return on capital employed (ROCE)

iii. Operating margin

iv. Gross margin

v. Sales growth

vi. Working capital to sales

vii. Gearing

viii. Asset turnover

b. Explain the purpose of each measure, who would be the most likely users of each measure and what decisions that would likely make using each measure.

Question 2: Corollary Ltd is a stock exchange listed company that manufactures and sells office furniture to business customers. A ratio analysis of its Income Statement and Balance Sheet over the last four years has identified the following trends:

Sales growth	2008	2007	2006	2005
	10.0%	8.5%	8.0%	7.0%
Return on shareholders' investment (ROI)	5.0%	4.8%	4.5%	4.1%
Return on capital employed (ROCE)	4.0%	4.5%	5.0%	5.3%
Operating profit/sales	6.0%	6.3%	6.5%	6.7%
Gross profit/sales	28.0%	27.0%	26.5%	25.0%
Working capital	104.0%	108.0%	111.0%	112.0%
Acid test (quick ratio)	68.0%	72.0%	73.0%	77.0%
Gearing	65.0%	62.0%	60.0%	56.0%
Interest cover	1.7	1.9	2.1	2.3
Asset turnover	108.0%	105.0%	99.0%	94.0%
Days' sales outstanding	61.0	58.0	55.0	57.0
Stock turn	15.0	13.0	13.0	12.0
Days' purchases outstanding	72.0	68.0	64.0	61.0
Dividend per share	10p	10p	10p	10p
Dividend payout ratio	65.0%	60.0%	58.0%	58.0%
Dividend yield	4.0%	3.8%	3.5%	3.2%
Price/earnings ratio	9.6	8.5	8.2	7.7

a. Explain how ratio analysis can be used to interpret business performance, with an emphasis on the different types of ratios that can be used.

b. Use the above ratios to explain the strengths and weaknesses of the financial performance of Corollary Ltd over the last four years.

c. Outline the limitations of ratio analysis and explain what, if any, additional information should be sought in order to improve the interpretation of ratios.

Question 3: Unfocused Books is a discount retail bookshop that has three departments: fiction, non-fiction and children's books. Sales and cost of sales for each department are shown below. In addition, each department has its own fixed costs for staffing and takes a one-third share of rental and management costs for the Bookshop as a whole.

	Fiction	Non-Fiction	Children's
Sales	250,000	100,000	75,000
Cost of sales	45%	50%	55%
Departmental	50,000	35,000	35,000
costs
Shared fixed	30,000	30,000	30,000
costs

a. Analyse the above data and comment on the profitability of Unfocused Books' three departments.

b. What recommendations would you make to the owners for improving profitability of the departments? Ensure you consider and discuss all options available and recommend your preferred option.

Question 4: Greentown Industries sells its transport services at a range of prices to five different customer groups. The company has fixed costs of $150,000 per year. The average variable costs for each transport service, irrespective of customer group, is $7. The Table below shows the prices charged to each customer group and the quantity of transport services that are currently sold at that price.

Customer	Selling price	Quantity
group
Multinational	$19	13,000
Corporate	$20	12,500
Small business	$21	12,000
Government	$22	11,000
Private	$23	10,000

a. If the average selling price is $21, calculate the breakeven point in quantity and money terms and draw a rough sketch of a cost-volume-profit (CVP) graph that shows the relationships between the elements of CVP.

b. Ignoring any market demand or capacity limitations, calculate the optimum selling price for Greentown Industries and identify which customer group is most profitable.

Use the following information to answer part (c)

Assume that the maximum market demand for each customer group is 20,000 transport services at the same price as currently charged (see Table above). Also assume that Greentown's capacity limitation is 60,000 transport services.

c. Based on the calculation of optimum selling prices in (b) above but with the capacity and demand assumptions taken into consideration, calculate the maximum profits that Greentown can earn and the customer mix and quantity by which that profit can be achieved.

d. Explain other pricing approaches Greentown Industries could consider and why you think they would or would not be applicable.

Words:- 2500.

References:- Harvard 4.