ACC701 – Task 2 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 2 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 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 (8 marks) 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. (17 Marks) 3 Question 2. (25 marks total) 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 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. (7 marks) b. Use the above ratios to explain the strengths and weaknesses of the financial performance of Corollary Ltd over the last four years. (10 marks) 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. (8 marks). 4 Question 3. (25 marks total) 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 costs 50,000 35,000 35,000 Shared fixed costs 30,000 30,000 30,000 a. Analyse the above data and comment on the profitability of Unfocused Books' three departments. (10 marks) 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. (15 marks) 5 Question 4. (25 marks total) 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 $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. (7 marks) b. 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. 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. (4 marks) d. Explain other pricing approaches Greentown Industries could consider and why you think they would or would not be applicable. (9 marks)