FINANCIAL MANAGEMENT& CONTROL

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.