ACFI2208 Performance Measurement assignment 1
Section A
Plummer plc (Plummer) is engaged in the production of Household goods for retailers in the UK.
Plummer Plc
Income Statement for the Year Ended 30 September 2019 and the previous year ended 30 September 2018
| 2019
£000
|
2018
£000 |
|
| Revenue | 80,000 | 98,000 |
| Cost of Sales | (51,600) | (62,400) |
| Gross Profit | 28,400 | 35,600 |
| Administration Expenses | (12,100) | (15,150) |
| Trading Profit | 16,300 | 20,450 |
| Finance Costs | (1,600) | (2,200) |
| Profit on Ordinary Activities Before Taxation | 14,700 | 18,250 |
| Taxation on Profit on Ordinary Activities | (2,938) | (3,648) |
| Profit for the Year | 11,762 | 14,602 |
Plummer Plc
Balance Sheet as at 30 September 2019 and 30 September 2018
| 2019 | 2018 | ||
| Non-Current Assets | £000 | £000 | |
| Intangible Assets | 12,450 | 12,450 | |
| Property, Plant and Equipment | 77,200 | 81200 | |
| Other Investments | 7,800 | 7,800 | |
| 97,450 | 101,450 | ||
| Current Assets | |||
| Inventories | 8,700 | 7,500 | |
| Trade and Other Receivables | 17,530 | 15,500 | |
| Cash and Short Term Deposits | 3,400 | 4,650 | |
| 29,630 | 27,650 | ||
| Total Assets | 127,080 | 129,100 | |
| Current Liabilities | |||
| Bank Overdrafts | 7,600 | 4,440 | |
| Unsecured Bank Loans | 4,400 | 3,500 | |
| Trade and Other Payables | 8,200 | 6,300 | |
| Current Tax Liability | 5,320 | 4,360 | |
| 25,520 | 18,600 | ||
| Non-Current Liabilities | |||
| Medium Term Bank Loans | 12,000 | 12,000 | |
| Finance Leases | 4,600 | 5,400 | |
| Provisions | 3,000 | 3,000 | |
| 19,600 | 20,400 | ||
| Total Liabilities | 45,120 | 39,000 | |
| Net Assets | 81,960 | 90,100 | |
| Equity | |||
| Called Up Share Capital | 37,200 | 37,200 | |
| Share Premium | 21,200 | 21,200 | |
| Other Reserves | 9,400 | 9,400 | |
| Retained Earnings | 14,160 | 22,300 | |
| 81,960 | 90,100 | ||
a) Evaluate the Profitability and liquidity position of Plummer for two years.
Your answer should include calculation of ALL relevant ratios and appropriate analysis of these ratios, for each year.
(350 words) (20 marks)
b) If Plummer’s Market capitalisation is £170,000,000 in 2019 and £176,000,000 in 2018. Evaluate the risk of bankruptcy for Plummer Plc at present. Your answer should include an Altman (Z score) calculation for each year. Your analysis should also highlight three limitations of these results for assessing Plummer’s risk of failure.
(200 words) (18 marks)
c) International Dimension in Accounting – According to Nobes (1998), accounting practices may differ in different areas or regions. State and Explain four factors that might make Plummer Plc’s accounting practices, in the UK, differ from that of a similar company in another country.
(200 words) (12 marks)
(Total 750 words) (Total 50 marks)
Section B
For Section B answer EITHER Question 1 OR Question 2. DO NOT attempt both questions.
QUESTION 1: Divisional Performance Measurement and Project Appraisal
Question 1 (a) Divisional Performance Measurement
Zeta is a decentralised manufacturing entity, operating within the electronics industry. Zeta prides itself on giving its customers a well-made product, which reflects the latest trends and technologies in the marketplace. Zeta has two divisions, Alpha and Beta.
Return on Investment (ROI) is the primary measure of each division’s performance. Each divisional manager has their annual bonus linked to their division’s ROI. However, the head office is considering the use of Residual Income (RI) as the basis for measuring bonuses in the future.
Division Alpha has been consistently profitable, with gross profit margins remaining at a consistent level for the last three years. The divisional pre-tax operating profit has been steadily growing in the previous three years. However, the division has not undertaken any capital expenditure on new investments in recent years.
The manager of Alpha is now considering investing in a new machine to use in production to replace its old machinery.
Alpha financials
Currently, the net assets of the division are £20m and the division’s profit before tax is £3.8m. Included within Alpha’s profit is an apportionment of head office costs of £0.6m. The division’s cost of capital is 5%.
Proposed investment
The replacement machine will have a net cost of £3m and an expected useful life of ten years. This replacement machine is expected to increase the controllable profits of Alpha by 12%.
Zeta has correctly evaluated the investment using the Net Present Value (NPV) technique. The NPV of the proposed investment is expected to be a positive £1.1m.
YOU ARE REQUIRED TO:
- Calculate the ROI for Alpha before considering the proposed investment and after the proposed investment. (4 marks)
- Calculate the RI for Alpha before considering the proposed investment after the proposed investment (4 marks)
- Based on your calculations discuss the situation and discuss whether the head office should introduce RI for the calculation of divisional manager bonuses.
(250 words) (10 marks)
In recent years, performance measurement has moved towards a more comprehensive view of performance covering financial but also non-financial performance measures.
- Explain why non-financial performance indicators are useful in measuring performance. Your answer should suggest examples of non-financial performance indicators Zeta may use.
(125 words) (7 marks)
(Total 375 words) (Total 25 marks)
Question 1(b) Project Appraisal
WayAway is a small regional airport. The management is deciding how to best utilise surplus land they hold. They have a choice of either project A or B; they cannot do both. Project A involves extending the existing passenger terminal to boost the capacity of the airport. This is expected improve passenger numbers, increasing the net revenue of the airport. Project B involves using the land to construct a storage facility which will lead to large cost savings. The cash flows for the initial capital expenditure and the cash flows from savings and returns over the three years life of the projects are as follows:
| Year | A
Cash flows £m |
B
Cash flows £m |
| 0 | (130) | (13) |
| 1 | 90 | 3 |
| 2 | 40 | 10 |
| 3 | 40 | 13 |
WayAway has a cost of capital of 10%.
YOU ARE REQUIRED TO:
- Calculate the NPV, IRR and Payback Period for both projects A and B. (15 marks)
- Discuss which of the projects the company should proceed with. Your discussion should include an explanation of each of the methods used and the advantages and disadvantages of each. (10 marks)
(375 words) (Total 25 marks)
TOTAL QUESTION 1 750 WORDS 50 MARKS
OR
QUESTION 2 Risk and Uncertainty and Transfer Pricing
Question 2 (a) Risk and Uncertainty
Jessie Ltd sells waterproof ponchos, and the level of demand depends upon the weather conditions at a festival they will be trading at in the next few weeks. Jessie Ltd must order the waterproof ponchos before the festival and is considering how many to take to the festival that is running for a week.
The demand for ponchos can vary depending on the weather at the festival as follows:
Good weather conditions (low demand) 35% 200 units
Average weather conditions (average demand) 25% 300 units
Bad weather conditions (high demand) 40% 400 units
Due to supplier issues, Jessie Ltd must choose whether to purchase 200, 300 or 400 units of ponchos for the festival.
The price charged per poncho is £25, and the variable cost is £10 per poncho.
If the demand for ponchos exceeds the number of ponchos taken to the festival, then customers will have to be turned away. Jessie Ltd estimates that in this case, it would cost the company £300 in loss of goodwill, irrespective of the number of customers turned away. Any ponchos not sold at the end of the week will be given to charity at the end of the festival.
YOU ARE REQUIRED TO:
- Prepare a payoff table showing clearly the profits that would be possible at all combinations of the number of ponchos ordered and the expected demand.
- Using your payoff table, calculate the number of ponchos Jessie Ltd should take to the festival using the following decision criteria:
- Maximax
- Maximin
- Minimax regret
- Expected value
(13 marks)
- Explain the concept of each of the four decision criteria in part (II) above. Your answer should link the three attitudes to risk to each decision criteria.
(375 words) (12 marks)
(Total 25 marks)
Question 2(b) Transfer Pricing
EvePaw is a producer of canned carbonated drinks. It has several divisions which supply materials to each other. Division M has offered to supply the Division P with aluminium cans at the transfer price of £0.13 per can. Division M calculates the transfer price based on full cost plus a 30% mark upon cost. Division M can also sell the cans to external customers for £0.14 per can. The full cost has been estimated as £0.10 per can, 80% of this cost is variable, and the other 20% is fixed. If Division M transferred the materials internally to Division P they would make savings of £0.01 per can of variable packing cost. Division P uses the cans to produce the carbonated drinks, which it can then sell to external customers.
YOU ARE REQUIRED TO:
- Evaluate the transfer prices at which Division M should charge division P if the group’s objective is to maximise profit across the whole group for the following three scenarios:
- Division M has an external market for all of the cans it produces at £0.14 per can. (2 marks)
- Division M has the capacity to produce 25 million cans and has an external market for 13 million cans. (5 marks)
- Division P has found an external supplier that will supply as many cans as they require for £0.11 per can. Division M is still charging Division P £0.13 per can. Discuss whether Division P should buy externally and show the range of transfer prices that Division M could sell to Division P at. (6 marks)
The company is considering adopting a policy of allowing the managers of each division to negotiate with each other concerning transfer prices.
- Discuss the benefits and drawbacks of negotiated transfer prices.
(I and II 250 words)
(6 marks)
- Examine the international transfer pricing issues that could arise from transfer pricing decisions between international divisions.
(125 words) (6 marks)
(Total 375 words)
(Total 25 marks) TOTAL QUESTION 2 750 WORDS 50 MARKS
Solution
Question A. Profitability and Liquidity of Plummer
In the last two years, the gross margin of Plummer was constant at 36% due to the slight decrease in revenue accompanied by an equal decrease in gross profit. As the revenue of Plummer decreased in 2019, its cost of sales also decreased. A decrease in revenue and gross profit are not good for the future profit sustainability of Plummer. The net margin was also constant in the two years at 15%, as shown in Appendix 1. The constant ratio was a result of decrease in net income and decrease in revenue. The return on assets (ROA) of Plummer decreased from 11% in 2018 to 9% in 2019. The trend which is similar to margin ratios was due to decrease in net income accompanied by slight decrease in total assets. A similar trend was experienced with the return on equity (ROE) which decreased to 14% from 16% in 2019 compared to 2018, as shown in Appendix 1………………………………To access the rest of the solution for $10, please click on the purchase button.
