Calculate the break-even point and margin of safety

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Reference no: EM132177888 , Length: word count:3500

Part A -FridgeFreezePlc2

You are a financial analyst at FridgeFeeze Plc; a public limited company specialising in manufacturing and distributing refrigeration equipment. The Board of Directors have looked into the financial statements of the company for the last two years and have raised concernsregarding both the company's profitability and liquidity. The financial statements of FridgeFeeze for the last two years are given below:

Statement of Comprehensive Income for the year ended 31 December


2018


2017


£000

£000


£000

£000

Revenue


38,550



29,950

Less: Cost of sales:






     Opening Inventory

3,875



4,535


     Manufacturing costs

22,140



13,250



26,015



17,785


Less: Closing Inventory

(6,225)



(3,875)




(19,790)



(13,910)

Gross profit


18,760



16,040

Less: Expenses






Selling & distribution expenses

8,135



4,380


Administrative expenses

2,100



990


Bad debts written off

1,040



565




(11,275)



(5,935)

Operating profit


7,485



10,105

Less: Interest payable


(1,690)



(380)

Profit before tax


5,795



9,725

Less: Income tax


(900)



(1,920)

Profit after tax


4,895



7,805

Less: Dividends paid


(2,100)



(2,100)

Retained profit for the year


    2,795



5,705

Required:

1. Prepare a report for the Board of FridgeFeeze Plc. that evaluates the performance of FridgeFeeze in relation to profitability, liquidity, gearing, asset utilisation, and investor potential. Your report must be supported by the calculation of relevant ratios in the five evaluation areas mentioned above.

2. Calculate the Working Capital Cycle in days for FridgeFeeze Plc based on the information above, assuming 365 days, for the years 2015 and 2014AND briefly comment on the company's liquidity position in 2018 compared to 2017. (round to the nearest day)

3. Critically evaluate the limitations of using ratio analysis for both cross-sectional and time-series comparisons.

All calculations should be clearly shown including all appropriate workings, and should be made to the nearest £000 or two decimal places where required.

Total for Part A: 40%
Part B - WashbugLtd

Washbug Ltd is specialized in producing and selling domestic washing machines. In 2017, the manufacturing cost per unit included:

 

£

Direct material

125

Direct labor (20 minutes per unit)

15/hour

Variable manufacturing overhead

20

Variable selling expenses

15

Variable administrative expenses

10

Fixed costs for the year ended 31 December 2017 were:

 

£000

Fixed manufacturing

1,650

Fixed selling and distribution

2,850

Fixed administrative

   930

The company produced and sold 45,000 units at £300 per unit.

In 2018, management has decided to increase the selling price by 20% and to maintain the same contribution margin ratio as last year. This increase in price is to meet an increase of £1,450,000 in fixed costs in 2015. The company has produced and sold the same quantity in 2018 as last year.

Required:

1) Calculate the break-even point and margin of safety in both units and revenue for the two years, 2017 and 2018, and briefly analyse the results.

2) Critically evaluate the key assumptions that underpin the break-even model, assessing and analysing whether the model can be applied within the context of today's global business environment.

All calculations should be clearly shown including all appropriate workings, and should be made to the nearest £000 or two decimal places where required.

Part C

Required:

1. Financial managers can fund potential investments and expansion plans through accessing a range of differing sources of finance. Explain and critically evaluate a single source of bothinternal and external finance that could be used by companies to finance further investment programmes.

2. Critically evaluate the key benefits and limitations of each of the differing investment appraisal techniques, supporting the response with relevant academic research as to whether the differing techniques are applied in practice

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

Attachment:- Assessment Brief.rar

Reference no: EM132177888

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Reviews

len2177888

11/26/2018 11:00:56 PM

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 Students are required to submit their coursework through JIRA. Only assessments submitted through JIRA will be marked. Any other submission including submission to your study centre in hard copy will be treated as a non-submission.

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