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Finance and Business Appreciation assignment

Question 1
Analysis of Delta Corporation Limited Annual Report 2013
i. Net Sales rose by 13.7% from 2012 to 2013 while the Cost of Goods Sold (COGS)
increased by 5.8%. The COGS as a fraction Net Sales decreased 42% to 39%.
ii. Gross Profit Margin rose to 61% from 58% as a fraction of net sales. This was an
increase of 19.5% from 2012 figures. Net operating costs surged by 8.7% between the
two years. They, however, decreased to 91% of the net sales from 95%.
iii. Interest and tax rose by 58.2% and 36% respectively. Profit for the year (distributable
earnings) increased by 38.5%. In 2012, Net Profit after Tax was 16% of Net Sales but
jumped to 19% in 2013.
iv. Even though plant and equipment increased by 19.9%, they still remained stagnant at
57% as a fraction of Total Assets (TA). Total Non-Current Assets decreased slightly to
62% of TA from 63% in the previous year.
v. Inventories remained stagnant at 17% of TA. Overall, Current Assets (CA) rose by
24.4% from 2012 levels. The Current Ratio remained at 2:1 while the Acid Test Ratio
also remained at 1:1 in both years.
vi. Return on Assets(ROA) rose to 18.5% from 16.1% and Return on Equity(ROE)
increased from 28% to 30%
vii. The Average Collection Period from debtors decreased to 20 days from 21 days while
the Average Creditor Payment days fell from 57 to 45 days.
viii.
Asset Turnover declined to 97.1% from102%. Inventory turnover rose to 157
days from 141 days. Consequently, working capital cycle increased to 134 from 105.
Question 2
a) C/S Ratio (%) is found by dividing the Contribution per Unit (CPU) of a product by its
Selling Price (SP).
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Contributionmargin ratio=

CPU
100
SP

The CPU is found by subtracting the variable costs per unit (VC) from the SP of a
product.
CPU =SPVC

The C/S ratio of Product X is calculated below

Contributionmargin ratio=

5
100
28

Per Unit
X
$
Selling price
Direct material
Direct wages
Variable
overheads
Contribution
C/S Ratio

Y
$

Z
$

28
8
10

60
15
20

125
20
50

5
5
18%

10
15
25%

25
30
24%

The CPU shows the income available to cover Fixed Costs (FC) after variable costs have
been paid. C/S ratios are useful to determine how the contribution will be affected by a
change in sales. For product X above with a C/S ratio of 18%, this means that for each
dollar increase in sales, total contribution margin will increase by 18 cents ($1 sales CM
ratio of 18%). Net operating income will also increase by 18 cents, assuming that fixed
costs do not change.
b) CD Ltd Income Statement for the Year ended 31 December 2013
2

X($)
Turnover

Y($)

Z($)
($)
137,50

($)

14,000

30,000

181,500

4,000

7,500

22,000

33,500
148,00

Cost of goods
Less

sold
Direct materials

Gross Profit
Operating

Less

Expenses
Direct wages
5,000 10,000 55,000 70,000
Variable overheads
2,500
5,000 27,500 35,000 105,000
Contribution
43,000
Less
Fixed Costs
25,000
EBIT
18,000
Less
Interest
0
EBT
18,000
Less
Tax
0
Distributable Earnings
18,000
18 cents of every dollar in turnover covers cost of goods sold leaving a gross profit of 82
cents in every dollar of sales. Operating expenses consumed 58 cents for every dollar of
turnover resulting in a contribution of 24 cents in every dollar of sales. Fixed costs further
demanded 14 cents in that dollar of sales reducing the distributable earnings to 10 cents in
every dollar of turnover. The middle line is the most significant consumer of turnover.
c) CD Ltd Income Statement for the Year ended 31 December 2013
X($)
Turnover
Cost of goods
sold
Direct materials
Gross Profit

Y($)
Z($)
120,00

($)

($)

14,000

62,500

196,500

4,000

30,000

10,000

44,000
152,50

Less

0
Operating
Less

Expenses
Direct wages
Variable overheads
Contribution
Less
Fixed Costs
EBIT
Less
Interest
EBT
Less
Tax
Distributable Earnings
d) Break Even Point($)
Break Even Point=

5,000
2,500

40,000
20,000

25,000
12,500

70,000
35,000 105,000
47,500
25,000
22,500
0
22,500
0
22,500

Costs
Contribution per unit

The Break Even Point is where 500 units of each (X, Y, and Z) are produced as shown on
the table and graph below.
Table: Costs and Selling price for different production levels
Production
of Zero
units of
X,Y,Z
Variable
overheads
Fixed Costs
Total Costs
Selling price
Profit

0
25000
25000
0
-25000

Production at
100 units of
X,Y,Z
16300
25000
41300
21300
-20000

Production
at 500 units
of X,Y,Z
81500
25000
106500
106500
0

Production at 500 units


of X,Y,Z +Additional
1500 units of Y
149000
25000
174000
196500
22500

Break Even Chart

$250,000.00

$200,000.00

196500

$150,000.00
Amount($)
$100,000.00

$50,000.00
25000

$0.00
0.5

1.5

2.5

3.5

4.5

Production level

Question 3
Break Even Chart

$450,000.00
$400,000.00
$350,000.00
$300,000.00
$250,000.00
Amount($)

Selling price
Variable Cost
Contribution
Fixed Costs
Total Costs

$200,000.00
$150,000.00
$100,000.00
$50,000.00
$0.00
0

100000 200000 300000 400000 500000


Fuel Capacity(Litres)

The Break Even Point is where the line for Fixed costs intersects with the contribution or
where Total Costs equal Total Revenue (at a sales level of 200 000 Litres). The total
contribution is $150 000.00 when 300 000 litres are sold. This brings the net income to $50
000.00 at this point.

The Profit/Loss Chart

Net Profit
$12.00
$10.00
$8.00
Profit($)

$6.00

Net Profit

$4.00
$2.00
$0.00
0

100000 200000 300000 400000 500000


Fuel Capacity(Litres)

The diagram shows that profit is increasing proportionately to an increase in production


according to the equation Y (Profit) =0.5X + 200 000 where X is the amount of fuel capacity.
Margin of Safety (MS)

MS=

Turnover ( $ )BEP ( $ )
100
Turnover ($)

At 300 000 Litres, the margin of safety is 33%.

MS=

300 000200 000


100
300 000

At full capacity, the margin of safety is 50%.

MS=

400 000200 000


100
400 000

The high Fixed Costs lead to the relatively low margin of safety and a high break-even point.

Question 4
Added Value is a financial term referring to the difference between a products final selling
price and the cost of producing it. This added value refers to costs incurred by the company to
employ labour, borrow capital and assets will depreciate. Tax, profit and retained earnings are
also paid out of the added value.
Chams Ltd.s value statement for three years

Sales Revenue
Bought in goods and services
Added Value

2010
2011
2012
$000
$000
$000
6500
7350
8332
4250
5218
5249
2250
2132
3083

Applied as follows
Employees
Dividends to shareholders
Interest on loans
Government taxes
Depreciation
Retained profits
Added Value
Capital employed
Labour productivity
Capital employed productivity

1750
140
75
50
100
155
2250
4410
1.29
0.51

1599
133
71
47
95
187
2132
5116
1.33
0.42

2436
127
103
68
137
212
3083
7183
1.27
0.43

Labour Productivity
1.34
1.33
1.32
1.31
1.3

Labour productivity(Units)

Labour Productivity

1.29
1.28
1.27
1.26
1.25
1.24
Year 2010

Year 2011

Year 2012

The labour productivity rose from 1.29 in 2010 to 1.33 in 2011 then fell down to 1.27 the
following year.

Capital employed productivity


0.6
0.5
0.4
Units

Capital employed
productivity

0.3
0.2
0.1
0
Year 2010 Year 2011 Year 2012

The productivity of capital employed dipped from 0.51 in 2010 to 0.42 in 2011 then increased
slightly to 0.43 in 2012.
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Consolidated graph for labour and capital employed productivity


1.4
1.2
1
0.8
Units

0.6
0.4
0.2
0
Year 2010

Year 2011

Year 2012

The above diagram shows that opposing trends in the productivity of labour and capital
employed. When Labour productivity was rising, the productivity of capital employed was
falling and vice versa.

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