MAN7040 Managing Financial Performance Assignment Sample
Answer to Question 1
1.1 Preparation of the analysis
The purpose of the report is to present a business review of the two respective companies that Alphabet Holdings Plc is planning to acquire. However, the Alphabet Holdings Plc can acquire only one out of the two companies namely ABS Care Services and XYZ Vehicle Services. The report will highlight the comparison between the financial positions of both the companies using ratio analysis.
Introduction
Alphabet Holdings Plc is the owner of the heavily hauled vehicles chains known as the heavy good vehicles (HGV) which are associated with six fast-food restaurants and most of them are suffering from losses. In order to accomplish sustainability, Alphabet Holdings Plc must acquire some subsidiaries. As a result, the investments of the company can be utilized appropriately (Li et al., 2020).
Discussion
In the given context, ABC Care Services presents a weaker financial position as compared to XYZ Vehicles Services. Moving forward to the financial ratios of the companies, the overall profitability of XYZ Vehicle services seems more robust than ABC services. The gross profit and net profit margin of XYZ is at 60% and 29% while ABC services’ net profit and gross profit margins are 18% and 36.5%. Similarly, moving on to the liquidity ratios, the Current Asset Ratio of XYZ is 4.2 while the CR of ABC services are at 1.6. The efficiency ratios of the XYZ seem more adequate than that of ABC Care Services (Kim et al., 2020).
Conclusion
It can be concluded that the XYZ Vehicle Services stands at a better financial position as compared to ABC Care services. According to the ratio analysis and evaluation, the profitability, liquidity and Management Efficiency, and Gearing Ratios of XYZ Vehicle Services are better than ABC Care services. Thus, Alphabet Holdings Plc must focus on acquiring Vehicle Services, as the company is comparatively at a better financial condition than the other company is. Acquiring the XYZ Vehicle, company will prove to be beneficial for Alphabet Holdings Plc.
Recommendations
Based on the evaluation of the ratios for both the companies, as Alphabet Holdings Plc has decided to acquire the XYZ vehicle services as its subsidiaries, it is hence recommended that Alphabet Holdings Plc have to focus on reducing the debt ratio in the capital structure of the newly acquired subsidiary. As the researchers suggest, that more investors are attracted to a company that has a higher equity ratio than the debt ratio in its capital structure. Thus, it is recommended to maintain a balance of debt and equity in the capital structure of XYZ vehicle services.
1.2 Evaluation of WCM
In the context of the given evaluation of the financial position of the two alleged subsidiaries, the net assets and shareholders’ fund and liabilities of XYZ vehicle services are more than that of ABC care services.
Discussion
The higher the working capital, the lesser is the risk of default on the company’s end. And on the other hand, if the working capital of a company remains low, there remains a risk of default and distress from the company’s end (Velte et al., 2020).
Coming to the working capital comparison of the two comparisons, the working capitals of XYZ vehicle services and ABC care services are:
ABC: Working Capital = Total Assets – Total Liabilities = £ (83406 – 51806) = £ 31600
XYZ: Working Capital = Total Assets – Total Liabilities = £ (57055 – 30736) = £ 26319
Here, it can be witnessed that the XYZ vehicle services has a working capital worth £ 26319 while the working capital of ABC care services is £ 31600.
Conclusion
It is evident that the XYZ vehicle services possesses a working capital which is lower than the working capital held by ABC care services. Hence, remains a risk of default from the company’s side to pay off the money for regular operations. It can turn out as a matter of distress for Alphabet Holdings Plc is planning to acquire XYZ vehicle services.
1.3 Source of Finance
In the given scenario, Alphabet Holdings Plc is supposedly moving forward to acquire XYZ vehicle services, thus the Alphabet Holdings Plc has to look for sources of finance to invest in the newly acquired subsidiary.
Discussion
It is very important to maintain an efficient working capital in the newly acquired subsidiary namely XYZ vehicle services. The sources of finance can be small-term, medium-term and long-term finances. Some of the small-term sources of finances can be trade credit or factoring service. Further, Alphabet Holdings Plc can opt for certain small-term finances such as issue debenture and bonds, or loans from financial & commercial banks (Pham, 2020). Lastly, Alphabet Holdings Plc can opt for long-term finances such as issuing share capital or asset securitization.
Conclusion and Recommendation
To maintain a robust and efficient working capital management, Alphabet Holdings Plc must invest in the newly acquired subsidiary. Thus, the recommended sources of finance in the given context is that Alphabet Holdings Plc must opt for the medium-term sources and finances and then invest the funds to the XYZ vehicle services’ smooth working capital management.
Answer to Question 2
- i) The computation of the contribution of accounting and managerial marginal costing can be represented as:
Contribution = Sales – Variable Cost (marginal values)
Or, contribution = Fixed Costs + Net Income
Here,
| Particulars | Axor (£m) | Bozon (£m) | Carbon (£m) | Total (£m) |
| Sales | 7920 | 5280 | 3780 | 16980 |
| Less: Variable Costs | ||||
| Raw Material | 2520 | 1680 | 1680 | 5880 |
| Labour | 2520 | 2520 | 2520 | 7560 |
| Overheads | 1260 | 1260 | 1260 | 3780 |
| Contribution | 1620 | -180 | -1680 | -240 |
Note : The question does not specify the proportion of fixed cost included in the expenses, hence it is assumed that the item of expenses consists of all variable costs.
- ii) In the given context, the DEF products Ltd. must stop manufacturing and producing Bozon as the product Bozon generates a negative contribution at the same labour cost and overhead which is for Axor, the only product that has positive contribution. Tostopgap the losses and saving of expenditure production of Bozon shall stop.
iii) DEF products Ltd. must stop the production of Carbon immediately. We can see from the calculation that Carbon has a decent share in the total contribution of Alphabet Holdings plc. Which is more than the only positive contribution earning product. Due to the highest contribution proportion amongst all the three products that is negative it brings down the contribution for the whole entity. In order to stop earning losses and diversify or reinvest the outflows towards expenses to produce Carbon the manufacturing must stop (Karami et al., 2020).
- iv) The purpose of computation of the fixed cost in marginal costing is done to recover the fixed costs of the accounting system. Further, the computation of contribution in marginal costing is important because it helps the company to compare the fixed costs and variables costs, with respect to the total sales. In marginal costing and accounts, the excess of the contribution over the fixed costs of the company is termed as profits for the company. Marginal costing provides a basis for pricing the products of the firm which can be used to determine the related profitability and profit margin of products. Determination of marginal costs is useful for contract tendering as well for case to case basis when business is dull. (INDONESIA, 2020).
- v) By stopping the production of Bozon and carbon products, the DEF products Ltd. will be able to earn more profit as it will stop the company to bring in negative contribution. Currently the contribution for the only positive contribution earning product Axor is 1620 only whereas the negative contribution of the other two is collectively is more than the positive contribution which nullifies the positive contribution and leaves an overall negative contribution. Thus by stopping the manufacturing of Bozon and Carbon Alphabet will earn positive contribution only and stop spending on variable costs of Bozon and Carbon. By doing this company will be able to sustain in future and be able to diversify or reinvest the funds that will be saved from the shutting of manufacturing. Thus, on a contrary, stopping the production of the Carbon and Bozon products will help the DEF products Ltd. to mitigate its marginal costs, and hence, the company can attain profitability in the long run. In that scenario, the company can increase the excess of its contribution to the fixed costs and can achieve higher profits (Javed et al., 2020).
Answer to Question 3
Given,
Cost of capital = 12%
Internal Rate of Return (IRR) = 5% (required)
Total investments on Fixed Assets = £ (158,000 + 100,000 + 36600) = £ 294600
| Statement of cash flow | Amount (£) |
| Revenue from sales | 600600 |
| Cost of Axor | -165900 |
| Cost of Bozon | -118860 |
| Staff cost | -24780 |
| Light and heat | -35196 |
| Other overheads | -134904 |
| Cash flow / Net income | 120960 |
| Cash flow of year1 = | £ 120960 | |
| Cash flow of year 2 = | (120960 x 102%) = | 123379 |
| Cash flow of year 3 = | (123379.20 x 102%) = | 125847 |
- i) Net Present Value (NPV) = PV of cash inflows – PV of cash Outflows
| Statement of NPV | |||
| Year | Cash Flows | PVF @12% | PV of cash flows (Cash flows x PVF) |
| 0 | -2,94,600 | 1 | -2,94,600 |
| 1 | 1,20,960 | 0.8929 | 1,08,000 |
| 2 | 1,23,379 | 0.7972 | 98,357 |
| 3 | 1,25,847 | 0.7118 | 89,575 |
| NPV | 1,332 | ||
The forecast shows a positive NPV during a time horizon of 3 years, which means that in the near future the firm has a chance for earning profit.
- ii) Here in this case we have a series of uneven cash flows. For calculating Payback period for uneven cash flows the formula will be.
| Payback period / Discounted Payback Period = | A + | B |
| C |
Where,
A is the last period number with a negative cumulative cash flow;
B is the absolute value (i.e. value without negative sign) of cumulative net cash flow at the end of the period A; and
C is the total cash inflow during the period following period A.
Payback Period
| Staemnt of payback period | ||
| Year | Cash Flows | Cumulative cash flow |
| 0 | -2,94,600 | -2,94,600 |
| 1 | 1,20,960 | -1,73,640 |
| 2 | 1,23,379 | -50,261 |
| 3 | 1,25,847 | 75,586 |
| Payback Period = | 2 + (50,261 / 1,25,847) = 2.40 years |
Discounted Payback Period
| Staemnt of discounted payback period | ||||
| Year | Cash Flows | PVF @12% | PV of cash flows (Cash flows x PVF) | Cumulative cash flow |
| 0 | -2,94,600 | 1 | -2,94,600 | -2,94,600 |
| 1 | 1,20,960 | 0.8929 | 1,08,000 | -1,86,600 |
| 2 | 1,23,379 | 0.7972 | 98,357 | -88,243 |
| 3 | 1,25,847 | 0.7118 | 89,575 | 1,332 |
Payback Period = 2 + (88,243 / 89,575) = 2.99 or 3 years (approx.)
iii) IRR
IRR is the minimum rate of return that we must achieve to cover the cash outflow in relation to a project or acquisition if not the cash inflow over and above the cash outflow. Bot the inflow and outflow will be computed at present value then compared. It is a concept which is related to NPV. Without understanding NPV we cannot understand IRR.
Internal Rate of Return (IRR) =
Lower rate + [(upper rate – lower rate) / (upper value – lower value)] x (upper value – base amount)
And here,
t = time period
C = Cash Flow for the given time period t
| Statement of IRR | |||||
| Year | Cash Flows | PVF @12% | PV of cash flows (Cash flows x PVF) | PVF @13% | PV of cash flows (Cash flows x PVF) |
| 0 | -2,94,600 | 1 | -2,94,600 | 1 | -2,94,600 |
| 1 | 1,20,960 | 0.8929 | 1,08,000 | 0.88 | 1,07,044.25 |
| 2 | 1,23,379 | 0.7972 | 98,357 | 0.78 | 96,623.85 |
| 3 | 1,25,847 | 0.7118 | 89,575 | 0.69 | 87,218.28 |
| NPV | 1,332 | -3,714 | |||
Cash flow total,
At 12% = (108000+98357+89575) = 2,95,932
At 13% = (107044.25 +96623.85 +87218.28) = 2,90,886.39
| Particulars | Amount | Amount | % |
| Upper value / rate | 295932 | 290886.39 | 13 |
| Base vale / Lower value / rate | 294600 | 295932 | 12 |
| Figures | 1332 | 5045.61 | 1 |
IRR = 12 + [(1 / 5045.61) x 1332]
= 12 + 0.26 (approx.)
= 12.26%
- iv) In the given context, it can be determined that the DEF products Ltd. may invest in the new outlet as the said investment will enable the company to earn high profits as the returns from the investment will be higher. Thus, the profitability margins of DEF products Ltd. will also become higher. Hence, definitely, Alphabet Holdings Plc must expand its outlets to DEF products Ltd. for experiencing greater profitability margins. Besides, Alphabet requires a payback period of lesst than 3 years which this investment fullfils, also the investment has appositive NPV which means that Alphabet plc shall accept the project. (Aleshkova et al., 2020).
- v) The investment scenario seems quite favourable for the parent company, and Alphabet Holdings Plc has not left out any context of lagging in the operations. The company has covered all the following aspects:
- Consideration of the payback period and the returns after the payback period
- The company has taken into consideration the project profitability aspect.
- The timing o the cash flows and discounted payback period has also been taken into consideration (Alsaifi et al., 2020)
- All the above indications are definitive signals for moving forward with investments.
Answer to Question 4
4.1 Working Notes:
variable cost per unit using identified high and low activity levels
Variable Cost = (TCHA−Total Cost of Low Activity) / (HAU−Lowest Activity Unit)
Total Fixed Cost = Total Cost – (VC × Units Produced)
Where,
TCHA = Total cost of high activity
HAU = Highest Activity Unit
Here, we are given data for two halves of a year. So, we will proceed with the two halves for application of high low method.
4.1.1 For Silver,
Variable cost = (160500 – 144000) / (9000 – 8000) = 16.50
Fixed cost = (160500 + 144000) – [16.50 x (9000 + 8000) units] = 24000
For Gold,
Variable cost = (142500 – 128000) / (4500 – 4000) = 29
Fixed cost = (142500 + 128000) – [29 x (4500 + 4000) units] = 24000
For Platinum,
Variable cost = (546800 – 394000) / (7000 – 5000) = 76.40
Fixed cost = (546800 + 394000) – [76.40 x (7000 + 5000) units] = 24000
4.1.2
| Marginal Cost card | |||
| Particular | Amount | ||
| Silver | Gold | Platinum | |
| Total sales (for one half) | 180000 | 150000 | 500000 |
| Units sold (for one half) | 8000 | 4000 | 5000 |
| Sale price per unit | 22.5 | 37.5 | 100 |
| Less: Variable cost per unit | 16.5 | 29 | 76.40 |
| Contribution per unit | 6 | 8.5 | 23.6 |
4.1.3 Platinum has the highest contribution rate, hence, the reduction or mitigation in the cost of production of the platinum products can help the organisation in accomplishing higher profitability and fill the deficit and scarcity of resources for the given segment of the product.
4.2 marginal cost income statement of the organization is as follows for honouring gold contract in the first half of 2021:
| Statement of Marginal cost income | |
| Particulars | Amount |
| Sales [ 830000 + (5000 x 37.50)] | 1017500 |
| Less: Variable cost [ 666000 + (5000 x 29)] | 811000 |
| Contribution | 206500 |
| Less: Fixed Cost (24000 + 24000 + 24000) | 72000 |
| Marginal cost income | 134500 |
4.3 marginal cost income statement of the organization is as follows for not honouring gold contract in the second half:
| Statement of Marginal cost income | |
| Particulars | Amount |
| Sales | 830000 |
| Less: Total Variable cost | 666000 |
| Contribution | 164000 |
| Less: Total Fixed Cost (24000 + 24000 + 24000) | 72000 |
| Less: Penal charges (for rejecting contract) | 10000 |
| Marginal cost income | 82000 |
4.4 Based on the analysis of the company and the cost of production incurred by the company so far, some of the recommendations for the company are to focus on the mitigation of the cost of production. The company must aim at establishing certain cost control measures that will increase the revenues of the company and provide sustainability and growth in the end. Further, the implementation of the cost control measures will also reduce the quantity and amount of resource wastages and scarcity in the production unit of the company. The variable costs of production can be mitigated by the application of cost control measures.
References
Aleshkova, D.V., Shepelev, A.V. and Salikhov, K.M., 2020, May. Innovative Methods of Managing the Company’s Financial Results. In International Scientific and Practical Conference (pp. 649-658). Springer, Cham.
Alieva, B., Saparbayev, A., Zhanibekova, G., Noiyanov, M. and Kim, V., 2020. Methodology for managing financial risks of Kazakhstan enterprises. In E3S Web of Conferences (Vol. 159, p. 04018). EDP Sciences.
Alsaifi, K., Elnahass, M. and Salama, A., 2020. Carbon disclosure and financial performance: UK environmental policy. Business Strategy and the Environment, 29(2), pp.711-726.
INDONESIA, B.I.I., 2020. 1 PUBLISHER, EDITOR IN CHIEF, MANAGING EDITOR AND EDITORIAL BOARD 2 THE IMPACT OF ACCOUNTING INFORMATION SYSTEMS ON FINANCIAL PERFORMANCE AND DECISION MAKING: CASE STUDY FROM SOME SELECTED LOCAL AUTHORITIES IN ZIMBABWE. International Journal of Information, Business and Management, 12(4).
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