The paper answers four questions in the case revealing the strategy that Holloway Ltd should employ to efficiently to produce bike at minimum costs. The paper also calculates the financial ratios of Jameson Plc for the 2009 and 2010 fiscal years. Comparative analysis of the company financial records revealed that Jameson Plc improved financially between 2009 and 2010.
Accounting and Finance
The budget profit statement for March 2011of Holloway Ltd. is as follows:
Output (Sales & Production)
Calculation
Sales revenue (5000 units)
£5 x 5000
Materials (2830 kg)
£3 x 2830
Labour (1300 hours)
£5x 1300
Fixed overheads
Actual Profit
The results of the budget profit statement for the March 2011 are difference from the actual results that the company recorded for March, 2011. Based on the difference between the budgeted profit statement and actual results for March, 2011, the paper provides the variance.
Variance explains the differences between the actual and budgeted results for March, 2011.
Budget
Actual
Variance (Favorable)
Output (Sales & Production)
5000 units
5400 units
400 units
Sales revenue
25,000
26,460
1,460
Materials (2830 kg)
8,490
8,770
Labour (1300 hours)
6,500
6,885
Fixed overheads
6,000
6,350
Actual Profit
£ 4,010
£4,455
£445
Based on the figure above, it is revealed that Holloway Ltd. recorded a favorable variance in March, 2011 because the company recorded the increase in the profits for March, 2011. Typically, the budgeted profits for March, 2011 was £4,010, however, the actual profits that the company made was £4, 455 revealing favorable variance for the company profits in March 2011. The company recorded favorable variance of £445 in profit.
The company was able to record a favorable variance for the profits because the budgeted sales was 5,000 units at £5 per unit while the actual sales were 5,400 units £5 per unit making the company to record a favorable variance of sales revenue of £1,460. There also a variance in material. The material budgeted was £8,490, however, the company recorded actual results of £8,770 revealing variance of £280. The variance in labor was also £385.
Answer to Question 2
I. Current Ratio
Current ratio provides the liquid assets that a company could be readily turn into cash. Formula to calculate current ratio is as follows:
Current Ratio= Current Assets / Current Liabilities
The Jameson plc current ratio is as follows:
2009= 65,121,000/24,716,000
2009=2.63
2010=70,169,000/24,045,000
2010= 2.92
Acid test
Acid test is similar to current ratio. However, acid test reveals a more stringent form of liquidity because it is generally being argued that inventory could not be easily converted into cash.
Formula:
Acid Test = "Current Assets (excluding inventories) / Current Liabilities"
2009= (65,121,000- 9,172,000) / 24,716,000
2009=2.2
2010= (70,169,000- 9,211,000) / 24,045,000
2010=2.53
III. Return on Capital Employed (ROCE)
Return on Capital Employed measures returns that a company generates from capital.
Formula to calculate ROCE is as follows:
ROCE = "Profit before Interest, Tax and Dividends / (Total assets - Current Liabilities) x 100"
2009= 15,629,000 / (108,036,000-24,716,000) x100
2009=18.76%
2010= 17,381,000 / (110,878,000 -24,045,000) x100
2010= 20.01%
Gross profit margin
Gross profit margin is calculated by dividing Gross Profit by Revenue.
Formula
Gross Profit Margin= Gross Profit / Revenue x 100
2009= 63,493,000 / 127,222,000 x 100
2009=49.9%
2010= 65,362,000/128,760,000 x100
2010= 50.7%
Operating Profit Margin
Operating profit margin is being calculated by dividing operating profits by revenue.
Formula: Operating Profit / Revenue
2009 = 15,629,000 / 127,222,000
2009= 12.28%
2010=16,407,000/128,760,000
2010= 12.74%
Inventory Holding Period
Formula for Inventory Holding Period is as follows:
Inventory Holding Period = (inventory x 365 days) / cost of sales.
2009= (9,172,000 x365) / 63,729,000
2009= 52.53
2010= (9,211,000 x 365) / 63,398,000
2010=53.03
Trade Receivables Collection Period
The ratio reveals how long a company is able to collect the funds from credit customers owed the business. However, the financial statements of Jameson plc for 2009 and 2010 revealed that the company does not generate revenue from credit sales. Thus, the company credit sales revenue for 2009 and 2010 fiscal years are £0 for the two years.
Formula:
Trade Receivables Collection Period: Trade Receivables/Credit Sales Revenue x 365
2009=18,580,000/0 x365
2009 =0
2010=20,243,000/0 x 365
2010=0
Trade payables payment period
The trade payables payment period measures how long a business takes to settle suppliers supplying goods and services on credit.
The formula to calculate trade payables payment period is as follows:
Trade payables payment period =Trade Payables / Credit Purchase x 365
There is no information in the balance sheet and the income statement of Jameson plc that the company made a credit purchase in 2009 and 2010 fiscal year.
Dividend yield
Dividend yield reveals the cash returns attributed to a share and to its current market value. The dividend yield assists investors to assess the cash return on investment.
Formula:
Dividend Yield: Annual Dividend per Share / Price per Share
2009 = 26.25/850
2009=3.09%
2010=29.25/958
2010=3.05%
Price/earnings ratio
P/E Ratio relates the market value of a share and relates to its earning per share. It is calculated as:
P/E Ratio= Market Value per Share / Earning per share
2009= 850/26.25
2009=32.38
2010=958/29.25
2010=32.75
Summary of Ratio of Jameson plc is revealed in Table 1.
Table 1: Ratio Analysis of Jameson Plc
Ratio
2009
2010
Current Ratio
2.63
2.92
Acid Test
2.2
2.53
ROCE
18.75%
20.01%
Gross Profit Margin
49.9%
50.7%
Operating Profit Margin
12.28%
12.74%
Inventory Holding Period
52.53
53.03
Trade receivables collection period
0
0
Trade payables payment period
Nil
Nil
Dividend Yield
3.09%
3.05%
Price/earnings ratio
32.38
32.75
Answer to Question 3
Portable bikes -- 2 - go
Costs
Fixed costs
£50,000 per annum
To produce between 1,000 and 3,000 bikes
Variable cost per portable bicycle
£40 per unit
a.
Sales
3,000 x £76.66
230,000
Fixed Costs
£50,000
Variable Costs
40 x 3,000
£120, 000
Total Costs
£170,000
Profit
230,000-170,00
£60,000
To make the profit of £60,000 from the demand of 3,000, the company will need to charge £67.66 as the selling price per portable bike.
B. To charge £80 per bike, the break even number will be 1250 units.
C.
Sales
2000 x £115
230,000
Fixed Costs
£50,000
Variable Costs
60 x 2,000
£120, 000
Total Costs
£170,000
Profit
230,000-170,00
£60,000
The minimum selling price will be £115 per regular bike. The company should charge £115 to maintain its £60,000 profits.
D.
Portable bikes -- 2 - go
Costs
Fixed costs
£40,000
Variable cost per portable bicycle
£35 x2,500
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