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Posted: March 17th, 2023
Part A– GP ElectricalsPlc2
You are a financial analyst at GP Electricals Plc; a public limited company specialising in manufacturing and distributing electrical generators. 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 GP Electricals for the last two years are given below:
Statement of Comprehensive Income for the year ended 31 December
2020
2019
£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
2020
2019
£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 GP Electrical Plc. that evaluates the performance of GP Electrical 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. (25%)
2. Calculate the Working Capital Cycle in days for GP ElectricalPlc based on the information above, assuming 365 days, for the years 2020 and 2019AND briefly comment on the company’s liquidity position in 2020 compared to 2019. (round to the nearest day) (5%)
3. Critically evaluate the limitations of using ratio analysis for both cross-sectional and time-series comparisons. (10%)
All calculations should be clearly shown including all appropriate workings, and should be made to the nearest £000 or two decimal places where required.
Total for Part A: 40%
Part B – VenmacLtd
Vnemac Ltd is specialized in producing and selling ventilator machines. In 2019, 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 2019 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 2020, 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 2020. The company has produced and sold the same quantity in 2020 as last year.
Required:
1) Calculate the break-even point and margin of safety in both units and revenue for the two years, 2019 and 2020, and briefly analyse the results. (10%)
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. (15%)
All calculations should be clearly shown including all appropriate workings, and should be made to the nearest £000 or two decimal places where required.
Total for Part B: 25%
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. (15%)
2. “Most companies allocate the same resources to the same business units year after year. That makes it difficult to realize strategic goals and undermines performance”.
(Hall, Lovallo and Musters, 2012)
Required:
Critically evaluate the use of zero-based budgeting as a means of addressing the above problem in a challenging business environment. You are encouraged to use illustrative examples, to support your discussion.
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