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Financial Analysis and Decision Making

Question:

a. Calculate EIGHT accounting ratios for both 2019 and 2018 to enable the assessment of the profitability, liquidity and working capital management of Trendy PLC over the two year period.

b. Prepare a report analysing the performance of Trendy PLC with reference to the ratios calculated in (a), and the financial statements.

Part A

Foamy Ltd. plans to produce a coffee-based drink called Alert. It is anticipated that variable costs will amount to 40p per drink. The company will produce Alert in a processing facility with a capacity to produce 200,000 drinks a year. Fixed costs are anticipated to be £100,000 per year. The company plans to supply to retailers at a price of 95p per drink. Required:

a. Calculate the break-even volume, at the expected price, to retailers.

b. Calculate the break-even sales price to retailers if the factory is used at full capacity.

Part B

Market research carried out by Foamy Ltd has demonstrated that for sales at a price of £1.90

per drink demand from retailers would be zero, and that demand will increase, on a straightline basis, by 20,000 drinks for every 10p (£0.10) fall in price.

c. Calculate the sales price at which the company’s profit will be maximised, and the profit the company will make at that sales price.

Part C

A major health food chain has approached Foamy Ltd to ask if the company would be willing to provide 100,000 drinks in the forthcoming year at a price of 80p per drink. The company will only accept 100,000 drinks. Assume that the company has finalised production and sales plans for the year at a price of £1.10 and a volume of 130,000 drinks.

d. Assess whether Foamy Ltd should accept this special order and calculate the company’s profit or loss if the order is accepted. (12 marks)

e. Discuss other factors Foamy Ltd should consider before accepting the order.

Materials cost £5 per kg. Skilled labour costs £10 per hour. For the month of May 2020 maximum expected demand is for 10,000 units of Largo and 10,000 units of Preema. In May 2020 there is expected to be a restriction on the availability of both material and skilled labour. There are 120,000 kgs. of Material available and 40,000 hours of skilled labour. Fixed costs have been identified as £200,000 per month.

Required:

a. Calculate the optimal production plan for May 2020, and the profit made using that production plan.

An outside supplier has offered to sell Real Company similar caskets for £32.00 each. If the caskets are purchased from the outside supplier, £1,000 of annual fixed overhead could be avoided and the facilities now being used could be rented to another company for £1,500 per year.

a. Compute how much it costs Real Company to produce a casket.

c. Briefly describe other factors the company should before making the decision to buy.

a) Calculate the accounting rate of return on each project.

b) Calculate the payback period for each project.

c) Calculate the net present value for each project

d) Calculate the internal rate of return for each project.

e) Explain with reasons which, if either, project should be undertaken by the company. Your answer should include a discussion of the advantages and disadvantages of each of the investment appraisal methods used in parts (a) to (d) above.

Truest plc manufactures metal frames. The variance analysis shown below has been produced for the production department for the last accounting period.

Material price variance 5,000 F

material usage variance 6,000 A

labour rate variance 4,000 A

labour efficiency variance 5,000 F

variable overhead expenditure variance 12,000 A

variable overhead efficiency variance 4,000 A

fixed overhead expenditure variance 5,000 F

F = favourable variance, A = adverse variance

In response to the variance analysis the production manager has made the following comments

1. We were experiencing poor staff morale and a high staff turnover, so I increased wage rates during the period. I believe that this has improved staff morale and produced a positive benefit to the company.

2. I was able to source an alternative supplier for materials. I negotiated a very good price which I believe will save the company a considerable amount of money.

3. We had an additional vehicle for deliveries which was only used when demand was particularly high. I sold this vehicle and hired an additional vehicle only when we needed one

Comment on the performance of the production department based upon the variance analysis and the comments from the production manager provided.

A division with total assets of £400,000 currently earns a ROI of 20%. It can make an additional investment of £50,000 for a 5 year life with nil residual value. The average operating income per annum from this investment would be £7,500. The division’s cost of capital is 14%.

c. Compute the Return on Investment and the Residual Income, with and without the additional investment, and advise the company whether it should make the additional investment.

d. Critique the relative advantages of ROI and RI for measuring divisional performance.