ACC701 – Task 2

ACC701 – Task 2


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Instructions
  • This task consists of four questions.

  • The questions have multiple parts.

  • You must answer the questions in a word document, ensuring that you


clearly number each question and part thereof that you are answering.
  • Ensure that your name is on your answer paper.

  • You are not required to answer the questions in business report format.

  • Your total word count should not exceed 2,500 words (approximately


500 words per total answer is expected).
  • Referencing must be used where applicable using the Harvard


referencing system.
  • It is expected that you will research answers beyond simply the


prescribed text and reference correctly.
  • Each of the four questions is worth same total marks.

  • You must submit you answers via Safeassign.


Hints:

ð              This task requires you to demonstrate the you can calculate,

analyse and interpret financial data.

ð              Please read each question carefully and ensure you answer all

parts.

Due Date: Monday, 03 October 2016 (11.59pm)

Question 1.      (25 marks total)

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 Cost of sales                                                                              -58.9               -54.9  Gross profit                                                                                          82.2                  83.5 Selling & administrative costs                                                 -55.0               -54.0  Operating profit                                                                                 27.2                  29.5 Interest payable                                                                         -6.1                 -7.5  Profit before tax                                                                                 21.1                  22.0 Tax on profit                                                                                -7.3                 -5.7  Profit after tax                                                                                    13.8                  16.3 Dividends                                                                                    -8.0                 -8.0  Retained profit                                                                                         5.8                     8.3

 

 

 

 

 
































































































































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

 
 131.5 126.6
  1. 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]:

  2. i. Return on investment (ROI)

  3. ii. Return on capital employed (ROCE)


iii.   Operating margin
  1. iv. Gross margin

  2. v. Sales growth

  3. Working capital to sales


vii. Gearing

viii.       Asset turnover

(8 marks)

 
  1. 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. (17 Marks)

 

 

 

 

 

 

 

 

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:

 

                                                                                  2008        2007        2006        2005

Sales growth                                                       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

 

 

 
  1. Explain how ratio analysis can be used to interpret business performance, with an emphasis on the different types of ratios that can be used. (7 marks)


 

 
  1. Use the above ratios to explain the strengths and weaknesses of the


financial performance of Corollary Ltd over the last four years. (10 marks)

 
  1. Outline the limitations of ratio analysis and explain what, if any, additional information should be sought in order to improve the interpretation of ratios. (8 marks).


 

 

 

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
Sales250,000100,00075,000
Cost of sales45%50%55%
Departmental

costs
50,00035,00035,000
Shared fixed

costs
30,00030,00030,000

 
  1. Analyse the above data and comment on the profitability of Unfocused Books’ three departments.  (10 marks)


 
  1. 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.  (15 marks)


 

 

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

group
Selling price Quantity
Multinational$1913,000
Corporate$2012,500
Small business$2112,000
Government$2211,000
Private$2310,000

 
  1. 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. (7 marks)

  2. Ignoring any market demand or capacity limitations, calculate the optimum selling price for Greentown Industries and identify which customer group is most profitable. (5 marks)


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.
  1. 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.  (4 marks)

  2. Explain other pricing approaches Greentown Industries could consider and why you think they would or would not be applicable.  (9 marks)

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