Tutorial_ Activity 4

Question 4.1

The following financial highlights relate to a major company operating in the textiles industry

Financial Highlights
2007 2006 2005 2004
Turnover 6,545 5,162 4,729 4,021
Profit before taxation 465 413 390 295
Dividend paid 45 34 Nil Nil

Net cash flow from operations 485 201 466 249

Capital expenditure 299 272 150 114
Capital employed 3,331 2,897 2,421 2,012
Net borrowings 992 1,132 1,151 1,802
Interest expense 120 110 83 105

Liquidity and Gearing Ratios

Current Ratio 1.44 1.42 1.32 1.02
Quick Asset Ratio 0.81 0.69 0.59 0.53
Interest Cover 4.88 4.75 5.70 3.81

Profitability Ratios
Return on Capital Employed 17.6 18.1 19.5 19.9
Net Profit Margin 7.0 8.2 7.3 7.6

Required:

(a) Comment on the financial performance of the company, based on the above financial data
and ratios. You may also calculate some other ratios to help you in your analysis
(12 marks)
(b) Discuss on four limitations of ratios analysis (8 marks)

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Question 4.2

The following sample of costs and activity levels were recorded for the Ministrys In-
house training unit.
Participants
180 240
Rs Rs
Indirect Labour 9,000 11,400
Students pack 10,800 14,400
Food costs 12,600 16,800
Administration costs 6,000 6,000

Required:
a) Classify the costs into variable and fixed costs. (6 marks)
b) Calculate the expected cost for the forthcoming training programme if the number
of participants is 300. (4 marks)

Activity 4.3
The following information is available for two units in a Dispensary for a period:
Cost centre X Cost centre Y
Budgeted costs $28,556 $54,264
Budgeted LOA 1,210 machine hours 6,460 labour hours
Actual costs $29,609 $52,567
Actual LOA 1,235 machine hours 6,395 labour hours
Required:
(b) Calculate the over or under absorption of overhead for the period in each cost
centre. (3 marks)
(b) Analyse the over or under absorption for Cost Centre Y into an expenditure and a
volume factor. (2 marks)

Activity 4.4
Explain, with supporting reasons, whether or not you agree with the two
statements below:
"Past costs are, indeed relevant in most instances because they provide the point of
departure for the entire decision process." Do you agree? Why?

"Qualitative factors generally favour making over buying a component." Do you agree?
Explain

Explain the Balanced Score Card and how it could be used by the Educational
Institution to measure its performance.

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Activity 4.5

Painter Ltd, which manufactures and sells a single product, is currently producing and
selling 102,000 units per month, which represents 85% of its full capacity. Total monthly
costs are Rs619,000 but at full capacity these would be Rs700,000. Total fixed costs
would remain unchanged at all activity levels up to full capacity. The normal selling price
of the product results in a contribution to sales ratio of 40%.

A new customer has offered to take a monthly delivery of 15,000 units at a price per unit
20% below the normal selling price. If this new business is accepted, existing sales are
expected to fall by one unit for every six units sold to this new customer.
Required:
(a) For the current production and sales level, calculate:

(i) the variable cost per unit;

(ii) the total monthly fixed costs;
(iii) the selling price per unit;
(iv) the contribution per unit. (6 marks)

(b) Calculate the net increase or decrease in monthly profit which would result from
acceptance of the new business. (4 marks)

(c) In the context of decision making, explain the term opportunity cost and illustrate
your answer by reference to Painter Ltd. (2 marks)

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Activity 4.6

The Rosana Textiles Company manufactures and sells three types of outer-wear, a Basic, a
Standard and a Superior waxed jacket.
The forecasts for the forthcoming year are as follows:
Basic Standard Superior
Rs Rs Rs
Selling price 560 1200 2250
Direct materials 200 400 1000
Direct Wages 100 150 200
Variable overheads 160 300 400
Fixed overheads (apportioned) 80 120 160

Sales (units) 5000 3000 1500

The material price per metre varies according to each coat but the usage (4 metres per coat) is the
same. Employees are paid at a rate of Rs25 per labour hour. The fixed overheads for the period
are Rs200,000, absorbed on a direct labour hour basis.

At the same time as the forecasts were completed a competitor in the same industry increased the
wage rates to its employees and some Rosana Textiles employees secured jobs at the other
company. This resulted in the workforce falling by approximately 30 per cent. The total labour
hours now stands at 40,000 hours.

Required:
(a) Given the reduction in labour hours, which product(s) should the company concentrate on?
Calculate the net profit resulting from your suggestion. (8 marks)
(b) A comparable product could be imported. The buying-in prices for the three products are
Rs462, Rs870 and Rs1575 for the basic, Standard and Superior respectively. What would be
your advice, stating some non-financial considerations? (7 marks)

Activity 4.7
The following revenues and costs for the Grand Restaurant Ltd have been estimated for the
forthcoming year:
Selling price per unit Rs 120
Variable costs per unit Rs 40
Fixed costs Rs 1,600,000
The management of the restaurant wants to know the following:
a) How many meals are required to be sold to break even?
b) How many meals must be sold to make a profit of Rs 100,000?

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 c) Calculate the margin of safety and interpret the result briefly
d) If an advertising campaign were launched at a cost of Rs 140,000 and sales output could
be increased from 40 000 to 42 000 meals per annum, would this be a worthwhile policy
to pursue?
e) What should be the selling price per meal to achieve a profit of Rs 240,000 on sales, if
turnover were expected to be only 16 000 meal?
f) What are the problems associated with CVP analysis in a multi-product firm?

Activity 4.8

Renzo has configured a machine to order for a small firm, but the firm has since gone into
liquidation, and there is no prospect that any money will be obtained from the winding up of
the company.
Costs incurred to date in manufacturing the printer are Rs 60,000 and progress payments of Rs
20,000 had been received from the customer prior to the liquidation.
The sales department has found another client willing to buy the computer for Rs 40,000 once
it has been completed.
To complete the work, the following costs would be incurred:
i) Materials: these have been bought at a cost of Rs 10,000. They have no other use, and if
the machine is not finished, they would be sold for scrap for Rs 5,000.
ii) Further labour costs would be Rs 12,000. Labour is in short supply, and if the machine is
not finished, the work force would be switched to another job, which would earn Rs
5,000 in revenue, and incur direct costs of Rs 2,000 and absorbed fixed overhead of Rs
2,000.
iii) Consultancy fees Rs 7,000. If the work is not completed, the consultants contract would
be cancelled at a cost of Rs 3,500.
iv) Supervisors time costed at Rs 2,000 is charged to the job.
v) Specific overheads of Rs 8,000 would be added to the cost of the additional work.

Required:
a) Assess whether the new customers offer should be accepted, giving reasons for the
inclusion and exclusion of costs. (11 marks)
b) Explain the following pair of cost terms, giving one example of each.
Committed costs and Discretionary costs
Future costs and Sunk costs
Semi-variable costs and Semi-fixed costs (9 marks)