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You are allowed three hours to answer this question paper. You are allowed 20 minutes reading time before the examination begins during which you should read the question paper and, if you wish, make annotations on the question paper. However, you will not be allowed, under any circumstances, to open your answer book and start writing or to use your calculator during the reading time. This booklet contains the examination question and both the pre-seen and unseen elements of the case material. Answer the question on page 17, which is detachable for ease of reference. The Case Study Assessment Criteria, which your script will be marked against, is also included on page 17. Maths Tables and Formulae are provided on pages 24 to 27. Write your full examination number, paper number and the examination subject title in the spaces provided on the front of the examination answer book. Also write your contact ID and name in the space provided in the right hand margin and seal to close.
Page Contents of this booklet: Pre-seen material Jot - toy case Pre-Seen Appendices 1- 6 Question Requirement Case Study Assessment Criteria Unseen Material Maths Tables and Formulae 2 11 17 17 19 - 22 24 - 27
May 2012
Jot
The Jot brand was established in 1998 by husband and wife team Jon and Tani Grun. The company initially designed a small range of toys which were manufactured in their home European country. These toys proved to be very popular in their home country and Jon Grun then expanded the range of products. By 2003, within five years of starting Jot, the founders were encouraged to see Jots products ordered by many large toy retailers across Europe. By this stage the company had grown considerably, and had annual sales of almost 2 million. Commencing in 2004, Jot started outsourcing all of its manufacturing to a range of manufacturing companies in China in order to reduce its cost base and to enable the company to price its products more competitively. By the end of 2010 sales revenue exceeded 8 million and the company had achieved substantial sales revenue growth each year. Jot has seen its sales revenue grow by 16% in the year ended 31 December 2010 and by almost 18% in the year to 31 December 2011 (unaudited figures). A summary of Jots key personnel is shown in Appendix 1 on page 11.
Jots products for the 5 to 8 year old age group include: Toy cameras and video cameras. Dolls and action figures, some of which move and make sounds. Small hand-held games boxes for playing computer games and educational learning products to improve maths and readings skills. A range of games and educational learning products for the hand-held games boxes. 3 T4 Part B Case Study
May 2012
Jots products are sold to toy retailers for between 7 and 38. These are Jots selling prices to toy retailers. Most of the retailers will then sell these toys at a large mark-up, which can be as much as 50% to 100%, i.e. a toy procured from Jot at 10 could be retailed to the end customer at 20. In the year ended 31 December 2011 Jots actual sales volumes (unaudited) were over 706,000 units across Jots entire range of products. The total sales revenue for the year ended 31 December 2011 (unaudited) was 9,866,000, which resulted in an average selling price of just under 14 per unit. Over 80% of Jots product sales are sold to retailers for 20 or less.
Jots bank has been very responsive to the companys needs for cash in order to fund its growth but has indicated that at the present time it would not be able to provide any additional long-term finance. Jot has an overdraft facility of 1,500,000, which the bank has stated is the maximum limit. The current cost of its overdraft is at an interest rate of 12% per year. At 31 December 2011, Jots overdraft was 960,000. Jots business is highly seasonal with a significant proportion of sales occurring in quarters 3 and 4. As Jot builds up its inventory in preparation for higher levels of sales in quarters 3 and 4, cash flow is negative during the second half of the year. This is because outsourced manufacturing for the majority of all products occurs mainly from the end of quarter 2, during all of quarter 3 and the beginning of quarter 4. Jot is a private limited company and not listed on any stock exchange. It has 40,000 shares in issue, each of 1 par value. The company has an authorised share capital of 200,000 shares. To date, the Board of Jot has not declared any dividends. The shares are held as follows: Number of shares held at 31 December 2011 Jon Grun Tani Grun Alana Lotz Boris Hepp Michael Werner Total T4 Part B Case Study 12,000 12,000 8,000 4,000 4,000 40,000 4 Percentage shareholding % 30 30 20 10 10 100 May 2012
Production of toys
Jot has its own in-house team of designers who are involved in designing toys that are unique, innovative and fun to play with. The production of new toys is split into two stages. Firstly, the design stage involves the design team developing a new toy and after it has been approved, the second stage is where the operations team is responsible for contracting an outsourced manufacturer for the mass production of each product. The head of Jots design team is Alana Lotz, Product Development Director. She is responsible for researching the market trends in toys globally and establishing the availability of new innovative technology which could be incorporated into new toy designs. This is what helps to make Jots product range innovative and at the cutting edge of new technology, as the products incorporate new technology electronic chip components. Research and development work on new product development usually occurs between May and December each year so that the new products have been fully tested ready for the annual launch of Jots new range of toys each January. Jot currently launches 5 totally new products each year and the development costs are generally between 0.1 and 0.25 million for each new product. The total design and development costs are around 1.2 million each year. This is included in administration expenses in Jots statement of comprehensive income. Jot has just finalised its range of new products for 2012, so as to allow time to produce marketing literature and prepare prototypes ready for the global toy fairs being held in January to March 2012 in various locations around the world. The design team develops all new products through the following stages: Brainstorming for new ideas. Designing a new product using Jots CAD / CAM IT system. Production of first prototype. Market research and improvements through to production of second prototype. Sign off by design and management team. Application for intellectual property rights (IPRs) for each product design.
Jot uses a specialised company, based in Europe for the manufacture and testing of all prototype products and there are often two or three stages involved before the prototype product is produced to the satisfaction of the designers. Only when each product is signed off by the design and management team can Jots legal team apply for the IPRs for the product design. Then the approved new product designs go into production by outsourced manufacturers. The designs are then electronically transferred to Jots operations team headed up by Michael Werner, Operations Director, for the selection and appointment of outsourced manufacturers. The stages in the production process are as follows: Designs are sent electronically to outsourced manufacturers for tender. Outsourced manufacturer(s) selected and appointed and volumes and delivery deadlines for production agreed. Packaging designs and artwork are prepared and approved. Production samples are reviewed by Jots in-house Quality Assurance team located both in Europe and in Asia. Production is commenced to meet agreed volume and delivery deadlines.
Michael Werner is responsible for the selection, appointment and monitoring of Jots outsourced manufacturers and all aspects of the management of the outsourced manufacturing process for Jots products. Jots products are all manufactured by a small number of specialised outsourced manufacturing companies which are all based in China. Jot is responsible for shipments of all products from its outsourced manufacturers to its warehouses or sometimes directly to customers.
May 2012
Outsourced manufacturers
Currently Jot uses 20 off-shore outsourced manufacturing companies. Off-shore outsourced manufacturing is defined as shifting work to foreign, distant companies in order to reduce production costs. Some of the outsourced manufacturers are small companies each of which manufactures just one of Jots products. Some of the larger outsourced manufacturing companies make several of Jots products. All of these outsourced manufacturing companies do not work exclusively for Jot but manufacture toys, as well as other products, for a number of international companies. All of Jots outsourced manufacturers are based in China. When a product design has been approved and the IPR applied for, Michael Werner will send the product design with an indication of the number of products to be manufactured and the timescale for shipment, to a small range of outsourced manufacturers for them to tender for the manufacture of the product. Jot often asks the same outsourced manufacturing companies, which it has used previously, to tender for the manufacture of its new product designs each year. Therefore, there is a high level of repeat business and a good level of understanding and commitment established between Jot, based in Europe, and its outsourced manufacturers based in China. When the tenders have been received, Michael Werner and his team review the outsourced manufacturing companies submissions and then select the outsourced manufacturer to be appointed. Jots designers and sales team will have already decided on an indicative selling price, so the unit price to be charged to Jot by the outsourced manufacturing company is often the determining factor when making the decision of which outsourced manufacturing company to use. Whilst other factors are considered, such as quality and ability to deliver the required volume of products to the required timescale, it is the unit price which is important in order to achieve the planned level of gross margin. Gross margin is defined as sales revenue less the outsourced manufacturing cost of units sold and excludes all other costs. Jots design team already knows the cost of making each product, based on the list of components required, so it is the cost of manufacturing that will vary between the different tenders. Generally, in most tenders, the unit prices quoted by different outsourced manufacturers are quite close to each other. Most of Jots products are manufactured using basic raw materials, such as plastic and electronic components for the toys and plastic and paper products for their packaging. The majority of Jots products require a range of electronic components. These components are readily available from a variety of sources but are subject to price fluctuations. Each product design will specify which, and how many, of each component type is required. Some of the electronic components are specialised and contain application-specific integrated circuits (ASIC components) which are procured from specialist suppliers. Jot does not have any agreements with these specialised suppliers as all components, including ASIC components, are procured directly by the outsourced manufacturer appointed to manufacture each of Jots products. Some of Jots outsourced manufacturers, which manufacture a range of electronic products for Jot and other companies, have on-going supply contracts in place for several key components, which helps them to price their products competitively. The timescales each year for the production of Jots products is for tenders to be submitted and manufacturers appointed by the end of May. The major proportion of manufacturing occurs between June and early November each year. The last of the manufacturing occurs in early November to enable time for the products to be shipped to Jots warehouses in Europe and the USA, or sometimes directly to Jots customers, in time to meet the Christmas sales peak. All three of Jots warehouses are leased. Over the last 10 to 15 years many companies have outsourced their manufacturing to companies in China. However, with wage rates in China increasing, some companies have started to consider near-shoring. Near-shoring is defined as the transfer of business processes to companies in a nearby country. Therefore, if Jot were to consider near-shoring, this would result in having some outsourced manufacturers based in Europe.
May 2012
Sales
Jots sales revenue for the year ended 31 December 2011 (unaudited) was 9,866,000. The geographical analysis of these sales is shown as follows:
USA 2,280 K
Europe: eurozone Europe: Non-eurozone countries USA South America Asia Rest of world
Jots customers are mainly: Retailers these include large toy retailers as well as supermarket chains and other retailers Distributors these distributors purchase Jots products and sell them on to a wide range of smaller retailers.
Jot currently has three warehouses, two in Europe and one in the USA. Usually all products are shipped from each of Jots outsourced manufacturers directly to one of Jots three warehouses. In some instances, products are shipped directly to customers. Jots terms of sale are for payment within 30 days of invoice. Invoices are produced automatically, on a daily basis, based on information transferred to the sales ledger from the inventory control IT system. However, Jot is very dependent on sales to large retailers, which often do not pay until at least 60 days after the invoice date. Jot has little influence over these retailers and does not want to jeopardise future sales by chasing them too aggressively. Sales of Jots toys are highly seasonal as shown in the quarterly analysis of sales in Appendix 4 on page 14.
May 2012
In the year ended 31 December 2011, sales in quarter 3 (July to September) were 25% of annual sales and sales in quarter 4 (October to December) were 51% of annual sales. Jots sales are highly dependent on seven large retailers. These seven large companies comprise toy retailers, large international supermarket retailers, department stores and one online retailer. Over 68% of Jots sales in the financial year ended 31 December 2011 were to these 7 customers based in Europe and the USA. These key customers place their main orders in May or June each year and sometimes earlier. If individual products are selling well or the retailers consider sales may be higher than they originally thought, then the retailers would place additional orders with Jot. This could happen at any time between June through to late October. The remaining 32% of sales are to distributors as well as small and medium sized retailers around the world. Jot currently has around 350 customers in total, including the 7 large customers. With the placement of orders from its large customers and the many smaller customers early in the year, Jot is able to place firm orders with its outsourced manufacturers with a reasonable degree of certainty of sales levels. However, there is always a balancing act between placing a large order to meet committed and expected sales and not holding enough inventory.
Licensed toys
Jot currently has 12 product lines which are licensed products from popular film and TV programmes for the manufacture and sale of toys. Licensed products are defined as toys which use a logo, design or character from a film or TV programme and the owner of the IPR will license each product under a strict licensing agreement, whereby a royalty is paid to the owner of the IPR for each unit manufactured. A licensed product is where the TV or film company owns the intellectual property rights (IPRs) for the characters and licenses the manufacture and sale of the products to another company in exchange for a license fee for each item produced (whether sold or not). A fixed license fee is paid to the licensor in accordance with the licensing contract, and the fee is usually paid at the time Jot places an order with its outsourced manufacturer. The fee is between 5% and 10% of Jots selling price to retailers. Anna Veld, Licensing Director, joined Jot in 2009 and has negotiated all of the licensed products that Jot currently sells. She is very experienced in this field and in liaison with both Sonja Rosik and Boris Hepp, she has identified products for Jot to develop and sell. Licensed products now account for almost 10% of Jots sales, in terms of the number of units sold.
Inventory control
Michael Werner is responsible for logistics and inventory control. There is always a difficult decision to be made when placing orders with outsourced manufacturers, between ordering too much inventory and not selling it and the opposite of losing sales because of lack of inventory. This is further exacerbated due to the seasonal nature of sales, which are predominantly made in quarters 3 and 4 of each calendar year. At the start of each calendar year, any unsold inventory for products that Boris Hepp, Sales Director, considers to be out of date, are offered to Jots customers at substantially reduced prices to clear them and the inventory value is written down. There are a few products which are sold on a regular basis throughout each year and their inventory value is not written down. Inventory counts at the end of the financial year are reconciled with Jots IT inventory control system and any discrepancies are written off. Jots inventory is valued at the lower of cost or realisable market value, based on a first-in, first-out basis. Inventory value is based only on outsourced manufacturing contracted charges, using the unit price from manufacturers invoices, unless the realisable value is lower.
May 2012
Inventory also includes a reserve for the write-down in value in respect of slow-moving and obsolete products. This valuation is based upon Jots management teams review of inventories taking into account for each product the estimated future sales demand, anticipated product selling prices, expected product lifecycle and products planned for discontinuation. The valuation for inventory write down is reviewed quarterly. At 31 December 2011 the write-down reserve was 0.124 million. This is netted off against the value of the current inventory of products held in Jots warehouses.
IT systems
Tani Grun appointed an external IT consultancy company some years ago to provide the IT systems required for Jots growing business. However, some of the systems are not ideal and do not provide Jots management team with all of the data that it requires. There is also some replication of data between different IT systems. The Finance Department operates a multi-currency nominal ledger and integrated sales and purchase ledgers. However, these IT systems do not accept data directly from any of Jots other IT systems. The Finance Department also operates a fixed assets register. Jot outsources the logistics of its products, both the movement of manufactured products and the sales to customers, to a global logistics company. This company operates a fast efficient service and with the increase in sales volumes over the last few years, a reduction on the unit costs has recently been negotiated. The outsourced logistics company provides Jot with access to all tracking and logistics data for products moving into Jots three warehouses and prepares reports on products which have been shipped directly to customers. The data concerning goods delivered to Jots three warehouses is transferred electronically to Jots inventory control system. This database system generates despatch notes for all orders that are fulfilled from each warehouse. The majority of customer deliveries are fulfilled from Jots warehouses and not directly from the manufacturer. The despatch note data is transferred electronically to the Finance Department in order to raise invoices to customers for goods despatched. Information on customer orders which are delivered directly from the manufacturer is transferred by the outsourced logistics company to the Finance Department, in order to raise invoices.
May 2012
All product designs and product drawings, which include a detailed listing of all parts and components, are prepared using a standard CAD / CAM IT system. This allows direct interface with Jots outsourced manufacturers. This ensures that each new product design can be transferred to the appointed outsourced manufacturers IT systems when the product is ready for manufacture, thereby eliminating any delays and confusion over the exact product specification and design.
10
May 2012
May 2012
11
Appendix 2 Extract from Jots Statement of Comprehensive Income, Statement of Financial Position and Statement of Changes in Equity
Statement of Comprehensive Income Year ended 31 December 2011 (Unaudited) 000 9,866 6,719 3,147 552 2,044 551 13 213 351 105 246 As at 31 December 2011 (Unaudited) 000 000 750 Year ended 31 December 2010 000 8,371 5,615 2,756 478 1,825 453 12 201 264 79 185 As at 31 December 2010 000 000 721
Revenue Cost of sales Gross profit Distribution costs Administrative expenses Operating profit Finance income Finance expense Profit before tax Tax expense (effective tax rate is 30%) Profit for the period
Non-current assets (net) Current assets Inventory Trade receivables Cash and cash equivalents Total current assets Total assets Equity and liabilities Equity Issued share capital Share premium Retained earnings Total Equity Non-current liabilities Long term loans Current liabilities Bank overdraft Trade payables Tax payables Total current liabilities Total equity and liabilities
40 90 802 932
40 90 556 686
1,600
1,600
Note: Paid in share capital represents 40,000 shares of 1.00 each at 31 December 2011 Statement of Changes in Equity For the year ended 31 December 2011 (Unaudited) Share capital 000 40 40 Share premium 000 90 90 Retained earnings 000 556 246 802 Total 000 686 246 932
12
May 2012
Cash generated from operating activities Cash flows from investing activities: Purchase of non-current assets (net) Cash used in investing activities Cash flows from financing activities: Increase in bank overdraft Dividends paid Cash flows from financing activities Net (decrease) in cash and cash equivalents Cash and cash equivalents at 31 December 2010
91
(269) (269)
21
May 2012
13
2010 Actual
Sales 000 %
730 9%
1,250 15%
2,360 28%
4,031 48%
8,371 100%
2009 Actual
Sales 000 %
548 8%
1,010 14%
2,025 28%
3,622 50%
7,205 100%
14
May 2012
Number of countries products to be sold in Number of new products to be launched each year
22
23
25
28
32
36
10
'000
2011
2012
2013
2014
2015
2016
1000 500
16
May 2012
Additional (unseen) information relating to the case is given on pages 19 to 22. Read all of the additional material before you answer the question.
ANSWER THE FOLLOWING QUESTION You are the Management Accountant of Jot. Jon Grun, Managing Director, has asked you to provide advice and recommendations on the issues facing Jot. Question 1 part (a) Prepare a report that prioritises, analyses and evaluates the issues facing Jot and makes appropriate recommendations. (Total marks for Question 1 part (a) = 90 Marks) Question 1 part (b) In addition to your analysis in your report for part (a), Tani Grun, Finance and IT Director, has asked you to draft an email to Jon Grun, Managing Director. Your email should explain the differences between cash flow and profit. Your email should also explain ways that Jot could use to manage its cash flow more effectively, together with your recommendation. Your email should contain no more than 10 short sentences. (Total marks for Question 1 part (b) = 10 Marks)
Your script will be marked against the T4 Part B Case Study Assessment Criteria shown below.
Assessment Criteria
Criterion Analysis of issues (25 marks) Technical Application Diversity Strategic choices (35 marks) Focus Prioritisation Judgement Ethics Recommendations (40 marks) Logic Integration Ethics Total 30 5 5 100 5 5 20 5 5 15 5 Maximum marks available
May 2012
17
18
May 2012
Jot - toy case - Unseen material provided on examination day Read this information before you answer the question Higher sales
At the global toy fairs held during January to March 2012, Jon Grun, Managing Director was very pleased to have a large amount of interest shown by Jots customers in one of its new products, which had been launched in January 2012. Following the toy fairs at the start of 2012, and subsequent meetings between Boris Hepp, Sales Director, and Jots seven large customers, confirmed sales orders for this new product have now been placed. The confirmed orders from Jots seven large customers are much higher than the original planned sales volumes for this product. Jot has still to receive confirmed orders from some of its smaller customers. These are included in the latest planned sales volumes below. This new product is a toy lookalike version of the tablet technology, such as the Apple iPad. The product, called BEEP, is aimed at the 5 to 8 year age group. This new product is not able to connect to the Internet but it has a range of built-in functions such as stories that can be read out loud, games and educational features such as maths teaching, language teaching and tests. Additional software packages and protective covers for this product are also available which Jot is selling as separate product lines. Due to the higher sales orders received, Michael Werner, Operations Director, met with Jots outsourced manufacturer J (J), in order to negotiate a new contract for the additional volumes required. Manufacturing has already commenced for the original planned level of sales volumes at the contracted manufacturing costs shown in the table below. J has offered the following three options for the new contract for the additional volumes only: Option 1 - a cost reduction of 10% per unit from the current contracted cost on only the additional volumes required to meet the latest planned sales volumes. Option 2 - a cost reduction of 20% per unit from the current contracted cost, but only if the additional volumes required to meet the latest planned sales volumes are further increased by 30%. That is to say, the volumes between the original planned sales and the latest planned sales volumes will be reduced in cost by 20%, provided they increase the volume by another 30%, for example, an extra 6,000 units of BEEP. Option 3 - a cost reduction of 30% per unit from the current contracted manufacturing cost provided Jot accepts a one-off charge which would allow J to set up a more automated production line. If Option 3 is selected, the one-off charge of 150,000 would need to be paid immediately. The contract would be based on additional volumes required to meet the latest planned sales volumes.
J is confident that it can manufacturer the additional volumes to meet the agreed delivery schedule but only if a new contract is agreed in the next 2 weeks. Relevant data is as follows:
Product Original planned sales volumes Units BEEP Additional software packages Protective covers 40,000 10,000 30,000 Latest planned sales volumes Selling price Current contracted manufacturing cost (based on original planned sales volumes) per unit 21.50 4.50 4.50
Selling prices cannot be increased in the current year. May 2012 19 T4 Part B Case Study
IT system problems
Tani Grun, Finance and IT Director, is concerned that Jots different IT systems are not integrated and there is much repetition of data and conflict of data in different IT systems. Boris Hepp was aware that a recent sales order for 5,000 units of a particular product could not be fulfilled, despite the inventory IT system showing inventory levels for this as 5,240 units. When the order was being prepared only 4,980 units of this product could be found in Jots three warehouses. Furthermore, some customers have queried and not settled their sales invoices as the volumes of products invoiced do not agree with the volume of products they have received. This is causing some conflict between Jots Finance Department, which is chasing overdue trade debtors, and Boris Hepps Sales Department which is trying to keep customers satisfied. Apparently, one of the problems is that Jot appears to have invoiced customers for some quantities of products which are actually replacement products due to faults or damage. This can arise where a product is faulty and additional replacement products are despatched to the customer and the faulty products are returned to either the manufacturer or to one of Jots warehouses for testing. Whilst the movement of these products is fully updated on Jots inventory system, the despatch notes of the replacement products generate additional invoices by the Finance Department. Tani Grun has asked you to explain what actions could be taken to reduce the level of invoicing errors and to discuss the impact the invoicing errors and inventory discrepancies could have on Jots profitability and cash flow.
Outsourced manufacturers
Michael Werner is concerned that the growth in Jots sales volumes may exceed the realistic manufacturing capacity of some of Jots outsourced manufacturers. Whilst its outsourced manufacturers have always managed to meet Jots orders for products in the past, the growth in the volume of products forecast to be manufactured, and sold in 2012, has risen to almost 950,000 units. The actual volume of units sold in 2011 was 706,300 units, which is a volume increase of almost 35% from 2010. Jot currently has 20 outsourced manufacturers for its product range of 34 products. Michael Werner knows that some of Jots outsourced manufacturers are compromising on some safety aspects within their factories. Michael Werner has met with all of Jots outsourced manufacturers and written to them and his team have also conducted factory visits and audits. A few of these manufacturers have been told, on more than one occasion, that Jot will cancel its contracts unless factory conditions improve. However, due to the growth in demand for Jots products, Jot has never cancelled any contracts with any of its outsourced manufacturers, despite repeated requests for improvements on safety aspects within their factories. Outsourced manufacturer Z (Z) is contracted to manufacture 40,000 units of product DD for Jot and it also manufactures products for several other companies. Last Friday, Zs factory suffered a fire due to poor ventilation and inadequate maintenance of machinery. There were 10 fatalities. Due to the extent of the fire damage at Zs factory, it will not be operational until November 2012. Michael Werner is currently reviewing Jots outsourced manufacturers and has asked you to advise on: The key criteria for the selection of new manufacturers. The key performance measures for existing and new manufacturers.
20
May 2012
All of the data shown in the table above includes a mix of confirmed sales as well as planned level of sales and the respective manufacturing costs, based on current contract prices. These figures include the latest forecast for higher sales volumes for BEEP and its accessories. It does not include any cost savings as a result of Michael Werners current negotiations with the outsourced manufacturer in respect of the product called BEEP and its accessories. Data for May 2012 and June 2012 is as follows: Invoiced sales revenue was 570,000 in May 2012 and 600,000 in June 2012. Manufacturing costs invoiced to Jot were 500,000 in May 2012 and 600,000 in June 2012.
Jots current overdraft limit is 1,500,000. The current cost of Jots overdraft is 12.0% per year. Jots bank has stated that a higher overdraft limit or additional loans will not be available at all due to lending restrictions, as a result of the current economic conditions. Tani Grun, Finance and IT director, is considering ways to speed up cash collection which she wants to implement from 1 September 2012. She is considering three alternatives: (A) Offering customers a discount of 2% if payment is made within 30 days. It is forecast that 25% of sales revenue would be paid within 30 days. Offering customers a discount of 10% if they make a part payment when they place their orders for Jots products. Factoring. Factoring is defined as a financial transaction where a company sells its accounts receivable to a third party (called a factor) in exchange for immediate cash. You should assume that the immediate cash advance equals the total invoice value less the cost of factoring. The cost of factoring is forecast to be 3% of invoice value. The factor is responsible for collecting the trade receivables from Jots customers. Jot would remain responsible for any bad debts. This is forecast to achieve some savings in Jots administration costs each year.
(B)
(C)
You have been asked by Tani Grun to calculate the cash flow forecast (before finance costs) for the remainder of 2012 and to advise on how Jot could manage its cash flow more effectively.
May 2012
21
Faults on Product QQ
In April 2012, a consumer group met with Jon Grun, Managing Director, to discuss some minor faults identified in a small number (fewer than 100) of just one toy, product QQ. Jot had outsourced the manufacture of 40,000 units of product QQ to a single outsourced manufacturer, P (P) in July 2011. This is the only product P has made for Jot but it manufactures products for many other companies. Sales volumes of product QQ has been 28,000 units to date. Jot has now tested its entire inventory for this product (12,000 units) and found minor faults on 120 units. This product testing cost Jot 0.1 million. P has not been told about this product testing. Jot has now received confirmed sales orders for 50,000 units for delivery later in 2012 and is planning to place a new manufacturing contract for 40,000 units. Jon Grun and Michael Werner have not yet decided whether, or not, to appoint P for this new contract. Boris Hepp considers that this minor fault should not affect the choice of outsourced manufacturer and that no action is necessary as the product is selling well.
22
May 2012
May 2012
23
1% 0.990 0.980 0.971 0.961 0.951 0.942 0.933 0.923 0.914 0.905 0.896 0.887 0.879 0.870 0.861 0.853 0.844 0.836 0.828 0.820
2% 0.980 0.961 0.942 0.924 0.906 0.888 0.871 0.853 0.837 0.820 0.804 0.788 0.773 0.758 0.743 0.728 0.714 0.700 0.686 0.673
3% 0.971 0.943 0.915 0.888 0.863 0.837 0.813 0.789 0.766 0.744 0.722 0.701 0.681 0.661 0.642 0.623 0.605 0.587 0.570 0.554
4% 0.962 0.925 0.889 0.855 0.822 0.790 0.760 0.731 0.703 0.676 0.650 0.625 0.601 0.577 0.555 0.534 0.513 0.494 0.475 0.456
7% 0.935 0.873 0.816 0.763 0.713 0.666 0.623 0.582 0.544 0.508 0.475 0.444 0.415 0.388 0.362 0.339 0.317 0.296 0.277 0.258
8% 0.926 0.857 0.794 0.735 0.681 0.630 0.583 0.540 0.500 0.463 0.429 0.397 0.368 0.340 0.315 0.292 0.270 0.250 0.232 0.215
9% 0.917 0.842 0.772 0.708 0.650 0.596 0.547 0.502 0.460 0.422 0.388 0.356 0.326 0.299 0.275 0.252 0.231 0.212 0.194 0.178
10% 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386 0.350 0.319 0.290 0.263 0.239 0.218 0.198 0.180 0.164 0.149
Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
11% 0.901 0.812 0.731 0.659 0.593 0.535 0.482 0.434 0.391 0.352 0.317 0.286 0.258 0.232 0.209 0.188 0.170 0.153 0.138 0.124
12% 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 0.361 0.322 0.287 0.257 0.229 0.205 0.183 0.163 0.146 0.130 0.116 0.104
13% 0.885 0.783 0.693 0.613 0.543 0.480 0.425 0.376 0.333 0.295 0.261 0.231 0.204 0.181 0.160 0.141 0.125 0.111 0.098 0.087
14% 0.877 0.769 0.675 0.592 0.519 0.456 0.400 0.351 0.308 0.270 0.237 0.208 0.182 0.160 0.140 0.123 0.108 0.095 0.083 0.073
Interest rates (r) 15% 16% 0.870 0.862 0.756 0.743 0.658 0.641 0.572 0.552 0.497 0.476 0.432 0.410 0.376 0.354 0.327 0.305 0.284 0.263 0.247 0.227 0.215 0.195 0.187 0.168 0.163 0.145 0.141 0.125 0.123 0.108 0.107 0.093 0.093 0.080 0.081 0.069 0.070 0.060 0.061 0.051
17% 0.855 0.731 0.624 0.534 0.456 0.390 0.333 0.285 0.243 0.208 0.178 0.152 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.043
18% 0.847 0.718 0.609 0.516 0.437 0.370 0.314 0.266 0.225 0.191 0.162 0.137 0.116 0.099 0.084 0.071 0.060 0.051 0.043 0.037
19% 0.840 0.706 0.593 0.499 0.419 0.352 0.296 0.249 0.209 0.176 0.148 0.124 0.104 0.088 0.079 0.062 0.052 0.044 0.037 0.031
20% 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162 0.135 0.112 0.093 0.078 0.065 0.054 0.045 0.038 0.031 0.026
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May 2012
Cumulative present value of 1.00 unit of currency per annum, Receivable or Payable at the end of n each year for n years 1(1+ r ) r
Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Interest rates (r) 5% 6% 0.952 0.943 1.859 1.833 2.723 2.673 3.546 3.465 4.329 4.212 5.076 5.786 6.463 7.108 7.722 8.306 8.863 9.394 9.899 10.380 10.838 11.274 11.690 12.085 12.462 4.917 5.582 6.210 6.802 7.360 7.887 8.384 8.853 9.295 9.712 10.106 10.477 10.828 11.158 11.470
1% 0.990 1.970 2.941 3.902 4.853 5.795 6.728 7.652 8.566 9.471 10.368 11.255 12.134 13.004 13.865 14.718 15.562 16.398 17.226 18.046
2% 0.980 1.942 2.884 3.808 4.713 5.601 6.472 7.325 8.162 8.983 9.787 10.575 11.348 12.106 12.849 13.578 14.292 14.992 15.679 16.351
3% 0.971 1.913 2.829 3.717 4.580 5.417 6.230 7.020 7.786 8.530 9.253 9.954 10.635 11.296 11.938 12.561 13.166 13.754 14.324 14.878
4% 0.962 1.886 2.775 3.630 4.452 5.242 6.002 6.733 7.435 8.111 8.760 9.385 9.986 10.563 11.118 11.652 12.166 12.659 13.134 13.590
7% 0.935 1.808 2.624 3.387 4.100 4.767 5.389 5.971 6.515 7.024 7.499 7.943 8.358 8.745 9.108 9.447 9.763 10.059 10.336 10.594
8% 0.926 1.783 2.577 3.312 3.993 4.623 5.206 5.747 6.247 6.710 7.139 7.536 7.904 8.244 8.559 8.851 9.122 9.372 9.604 9.818
9% 0.917 1.759 2.531 3.240 3.890 4.486 5.033 5.535 5.995 6.418 6.805 7.161 7.487 7.786 8.061 8.313 8.544 8.756 8.950 9.129
10% 0.909 1.736 2.487 3.170 3.791 4.355 4.868 5.335 5.759 6.145 6.495 6.814 7.103 7.367 7.606 7.824 8.022 8.201 8.365 8.514
11% 0.901 1.713 2.444 3.102 3.696 4.231 4.712 5.146 5.537 5.889 6.207 6.492 6.750 6.982 7.191 7.379 7.549 7.702 7.839 7.963
12% 0.893 1.690 2.402 3.037 3.605 4.111 4.564 4.968 5.328 5.650 5.938 6.194 6.424 6.628 6.811 6.974 7.120 7.250 7.366 7.469
13% 0.885 1.668 2.361 2.974 3.517 3.998 4.423 4.799 5.132 5.426 5.687 5.918 6.122 6.302 6.462 6.604 6.729 6.840 6.938 7.025
14% 0.877 1.647 2.322 2.914 3.433 3.889 4.288 4.639 4.946 5.216 5.453 5.660 5.842 6.002 6.142 6.265 6.373 6.467 6.550 6.623
Interest rates (r) 15% 16% 0.870 0.862 1.626 1.605 2.283 2.246 2.855 2.798 3.352 3.274 3.784 4.160 4.487 4.772 5.019 5.234 5.421 5.583 5.724 5.847 5.954 6.047 6.128 6.198 6.259 3.685 4.039 4.344 4.607 4.833 5.029 5.197 5.342 5.468 5.575 5.668 5.749 5.818 5.877 5.929
17% 0.855 1.585 2.210 2.743 3.199 3.589 3.922 4.207 4.451 4.659 4.836 4.988 5.118 5.229 5.324 5.405 5.475 5.534 5.584 5.628
18% 0.847 1.566 2.174 2.690 3.127 3.498 3.812 4.078 4.303 4.494 4.656 7.793 4.910 5.008 5.092 5.162 5.222 5.273 5.316 5.353
19% 0.840 1.547 2.140 2.639 3.058 3.410 3.706 3.954 4.163 4.339 4.486 4.611 4.715 4.802 4.876 4.938 4.990 5.033 5.070 5.101
20% 0.833 1.528 2.106 2.589 2.991 3.326 3.605 3.837 4.031 4.192 4.327 4.439 4.533 4.611 4.675 4.730 4.775 4.812 4.843 4.870
May 2012
25
d
P0 =
k pref
(ii) Ordinary (Equity) share, paying a constant annual dividend, d, in perpetuity, where P0 is the ex-div value:
d
P0 =
ke
(iii)
Ordinary (Equity) share, paying an annual dividend, d, growing in perpetuity at a constant rate, g, where P0 is the ex-div value:
d1
P0 = or P0 =
d 0 [1 + g ] ke g
ke - g
(iv)
Irredeemable (Undated) debt, paying annual after tax interest, i (1-t), in perpetuity, where P0 is the ex-interest value:
i [1 t ]
P0 =
k dnet
or, without tax:
i
P0 =
kd
(v) Future value of S, of a sum X, invested for n periods, compounded at r% interest: S = X[1 + r] (vi)
n
1
PV =
[1 + r ]
(vii)
Present value of an annuity of 1 per annum, receivable or payable for n years, commencing in one year, discounted at r% per annum:
1
PV =
1 1 [1 + r ] n r
1
(viii)
Present value of 1 per annum, payable or receivable in perpetuity, commencing in one year, discounted at r% per annum: PV =
r
26
May 2012
(ix)
Present value of 1 per annum, receivable or payable, commencing in one year, growing in perpetuity at a constant rate of g% per annum, discounted at r% per annum: PV
1 r g
Cost of Capital
(i) Cost of irredeemable preference capital, paying an annual dividend, d, in perpetuity, and having a current ex-div price P0: kpref = (ii)
d P0
Cost of irredeemable debt capital, paying annual net interest, i (1 t), and having a current ex-interest price P0:
i [1 t ]
kdnet = (iii)
P0 Cost of ordinary (equity) share capital, paying an annual dividend, d, in perpetuity, and having a current ex-div price P0:
ke = (iv)
P0 Cost of ordinary (equity) share capital, having a current ex-div price, P0, having just paid a dividend, d0, with the dividend growing in perpetuity by a constant g% per annum:
+ g P0 P0 Cost of ordinary (equity) share capital, using the CAPM:
ke =
d1
+ g or ke =
d 0[1 + g ]
(v)
k0 = ke
VE VD + kd V + V V + V E D E D
May 2012
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May 2012
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May 2012