You are a financial analyst at Prospect Plc; a public limited company specialised in manufacturing and distributing office furniture. The Board of Directors have looked into the financial statements of the company for the last two years and have raised a concern about the company's profitability and liquidity. The financial statements of Prospect for the last two years are given below
Profit and loss account for the year ended 31 December
| |
2013
|
2012
|
| |
£000
|
£000
|
£000
|
£000
|
|
Sales
|
|
12,650
|
|
11,000
|
|
Less: Cost of sales:
|
|
|
|
|
|
Opening stock
|
250
|
|
200
|
|
|
Manufacturing costs
|
6,880
|
|
5,200
|
|
| |
7,130
|
|
5,400
|
|
|
Less: Closing stock
|
(350)
|
|
(250)
|
|
| |
|
(6,780)
|
|
(5,150)
|
|
Gross profit
|
|
5,870
|
|
5,850
|
| |
|
|
|
|
|
Less: Expenses
|
|
|
|
|
|
Selling and distribution expenses
|
2,100
|
|
1,150
|
|
|
Administrative expenses
|
1,250
|
|
1,200
|
|
|
Bad debts written off
|
350
|
|
150
|
|
| |
|
(3,700)
|
|
(2,500)
|
|
Operating profit before interest and tax
|
|
2,170
|
|
3,350
|
|
Less: Interest payable
|
|
(500)
|
|
(350)
|
|
Profit before tax
|
|
1,670
|
|
3,000
|
|
Less: Income tax
|
|
(590)
|
|
(1,100)
|
|
Profit after tax
|
|
1,080
|
|
1,900
|
|
Less: Dividends paid
|
|
(80)
|
|
(50)
|
|
Retained profit for the year
|
|
1,000
|
|
1,850
|
Balance sheet as at 31 December
| |
2013
|
|
2012
|
| |
£000
|
£000
|
|
£000
|
£000
|
|
Property, plant and equipment (net)
|
|
|
|
|
|
|
Land and building
|
|
3,200
|
|
|
3,000
|
|
Equipment
|
|
2,800
|
|
|
2,250
|
|
Motor vehicles
|
|
1,000
|
|
|
550
|
| |
|
7,000
|
|
|
5,800
|
|
Current assets
|
|
|
|
|
|
|
Cash
|
-
|
|
|
300
|
|
|
Stock
|
350
|
|
|
250
|
|
|
Trade debtors
|
4,500
|
|
|
2,500
|
|
| |
4,850
|
|
|
3,050
|
|
|
Current liabilities
|
|
|
|
|
|
|
Trade creditors
|
(2,400)
|
|
|
(2,000)
|
|
|
Other creditors (including taxation)
|
(500)
|
|
|
(400)
|
|
|
Bank overdraft
|
(100)
|
|
|
-
|
|
| |
|
|
|
|
|
|
Net current assets
|
|
1,850
|
|
|
650
|
| |
|
8,850
|
|
|
6,450
|
|
Non-current liabilities
|
|
|
|
|
|
|
Loan capital
|
|
(3,500)
|
|
|
(2,800)
|
| |
|
5,350
|
|
|
3,650
|
|
Equity
|
|
|
|
|
|
|
Ordinary shares of £1 each
|
|
3,700
|
|
|
3,000
|
|
Retained profit
|
|
1,650
|
|
|
650
|
| |
|
5,350
|
|
|
3,650
|
Required:
1) Prepare a report for the Board of Prospect plc which evaluates the performance of Prospect in relation to profitability, liquidity, gearing and asset utilisation. Your report must be supported by the calculation of relevant ratios in the four evaluation areas mentioned above (25%)
2) Discuss ratio analysis as a tool for interpretation so that the Board may better understand the value and limitations of ratio analysis (5%)
3) Calculate the Working Capital Cycle in days for Prospect Plc based on the information above, assuming 365 days, for the years 2013 and 2012 AND comment on the company's liquidity position in 2013 compared to 2012. (round to the nearest day) (10%)
All calculations should be clearly shown and should be made to the nearest £000.
The company produced and sold 275,000 units at £400 per unit.
In 2013, management has decided to increase the selling price by 15% and to maintain the same contribution margin ratio as last year. This increase in price is to meet an increase of £2,440,000 in fixed costs in 2013. The company has produced and sold the same quantity in 2013 as last year.
1) Calculate the break-even point in units for the two years 2012 and 2013 and comment on the results (10%)
2) Calculate the safety margin for both years and comment on the results (5%)
3) In the light of your answer to the previous two points, evaluate the company's policy in increasing the price by 15% in 2013 (5%).