Reference no: EM13903996

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 December

	2013		2012
	£000	£000	£000	£000
Sales		12,650		11,000
Less: Cost of sales:
Opening stock	250		200
Manufacturing costs	6,880		5,200
	7,130		5,400
Less: Closing stock	(350)		(250)
		(6,780)		(5,150)
Gross profit		5,870		5,850
Less: Expenses
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		2,170		3,350
Less: Interest payable		(500)		(350)
Profit before tax		1,670		3,000
Less: Income tax		(590)		(1,100)
Profit after tax		1,080		1,900
Less: Dividends paid		(80)		(50)
Retained profit for the year		1,000		1,850

 

Balance sheet as at 31 December

 

	2013			2012
	£000	£000		£000	£000
Property, plant and equipment (net)
Land and building		3,200			3,000
Equipment		2,800			2,250
Motor vehicles		1,000			550
		7,000			5,800
Current assets
Cash	-			300
Stock	350			250
Trade debtors	4,500			2,500
	4,850			3,050
Current liabilities
Trade creditors	(2,400)			(2,000)
Other creditors (including taxation)	(500)			(400)
Bank overdraft	(100)			-
Net current assets		1,850			650
		8,850			6,450
Non-current liabilities
Loan capital		(3,500)			(2,800)
		5,350			3,650
Equity
Ordinary shares of £1 each		3,700			3,000
Retained profit		1,650			650
		5,350			3,650

 

Required:

1)    Prepare a report for the Board of Prospect plc which evaluates the performance of Prospect in relation to profitability, liquidity, gearing and asset utilisation. Your report must be supported by the calculation of relevant ratios in the four 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 2013 and 2012 AND comment on the company's liquidity position in 2013 compared to 2012. (round to the nearest day) (10%)  
All calculations should be clearly shown and should be made to the nearest £000.

The company produced and sold 275,000 units at £400 per unit.
In 2013, 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 2013. The company has produced and sold the same quantity in 2013 as last year.

1)    Calculate the break-even point in units for the two years 2012 and 2013 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 2013 (5%).