Reference no: EM132188227
Part A - Fridge Freeze
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
|
Statement of Financial Position as at 31 December
|
2018
|
|
2017
|
|
£000
|
£000
|
|
£000
|
£000
|
|
Non-current assets (net)
|
|
|
|
|
|
|
Land and building
|
|
24,590
|
|
|
19,280
|
|
Equipment
|
|
4,380
|
|
|
3,200
|
|
Motor vehicles
|
|
1,900
|
|
|
1,650
|
|
|
30,870
|
|
|
24,130
|
|
Current assets
|
|
|
|
|
|
|
Inventory
|
6,225
|
|
|
3,875
|
|
|
Trade Receivables
|
5,900
|
|
|
4,500
|
|
|
Cash
|
0
|
|
|
560
|
|
|
12,125
|
|
|
8,935
|
|
|
Current liabilities
|
|
|
|
|
|
|
Trade Payables
|
(5,100)
|
|
|
(4,885)
|
|
|
Taxation
|
(1200)
|
|
|
(1,490)
|
|
|
Bank overdraft
|
(2,180)
|
|
|
0
|
|
|
Net current assets
|
|
3,645
|
|
|
2,560
|
|
|
34,515
|
|
|
26,690
|
|
Non-current liabilities
|
|
|
|
|
|
|
Loan stock
|
|
(4,575)
|
|
|
(1,250)
|
|
|
29,940
|
|
|
25,440
|
|
Equity
|
|
|
|
|
|
|
Ordinary shares of £1 each
|
|
26,035
|
|
|
24,330
|
|
Accumulated profit
|
|
3,905
|
|
|
1,110
|
|
|
29,940
|
|
|
25,440
|
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.
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.