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Question 1

The scenario

Mars Holdings Plc has a portfolio of investments in subsidiary companies and is seeking another acquisition that complements the others.

The subsidiary companies already in the group include: machinery and commercial vehicle dealership; finance company; equipment leasing company; haulage company with a fleet of 200 heavy goods vehicles (HGV), and a chain of value hotels across the UK, one of which is making a loss.

Two possible acquisition targets have been identified:

Wyre Child Ltd is based in leased converted hotels and provides care services for young people unable to be cared for in the foster system. Mars Holdings Plc are looking into the possibility of converting their failing hotel into a provider of care services and Wyre Child Ltd is looking for another property to continue expanding around the UK;

Border Commercials Ltd has a large unit and caters for the storage and repair of up to 60 commercial vehicles at one time, and has the potential for more space as it is based in a large empty industrial area. Border Commercials is looking for a contract with a fleet operator to stabilise their income and growth.

Extracts from the financial statements of both target companies are shown below:

Statements of Profit or Loss (SoPL)
		WYRE CHILD SERVICES Ltd		BORDER COMMERCIALS Ltd
			vertical analysis		£	vertical analysis
Turnover		1,542,280	100%		1,258,950	100%
Cost of sales		(783,796)	50.82%		(375,852)	29.85%
		__________			__________
Gross profit		758,484	49.18%		883,098	70.15%
Administrative expenses		(367,548)	23.83%		(419,765)	33.34%
Other operating income		9,015	0.58%		0	0.00%
		__________			__________
Operating profit		399,951	25.93%		463,333	36.80%
Other interest receivable and similar income	1,204	0.08%		1,508	0.12%
Interest payable and similar charges		0	0.00%		(38,505)	3.06%
		__________			__________
Profit on ordinary activities before taxation	401,155	26.01%		426,336	33.86%
Tax on profit on ordinary activities		(39,405)	2.55%		(63,223)	5.02%
		__________			__________
Profit for the year		361,750	23.46%		363,114	28.84%
		__________			__________

Statements of Financial Position (SoFP)
		WYRE CHILD SERVICES Ltd		BORDER COMMERCIALS Ltd
		£	vertical analysis		£	vertical analysis
Fixed assets
Tangible assets		4,656	1.1%		291,546	30.9%
Total Non Current Assets		4,656	1.1%		291,546	30.9%
Current assets
Trade receivables		78,175	18.5%		285,275	30.3%
Cash at bank and in hand		338,855	80.4%		366,160	38.8%
Total Current Assets		417,030	98.9%		651,435	69.1%
Total Assets		421,686	100.0%		942,981	100.0%
Liabilities
Current liability: Trade payables		207,224	49.1%		122,944	13.0%
Non current liability: Bank borrowing		0	0.0%		371,335	39.4%
Total Liabilities		207,224	49.1%		494,279	52.4%
Equity and reserves
Called up share capital		2	0.0%		2	0.0%
Profit and loss account		214,460	50.9%		448,700	47.6%
Total Equity		214,462	50.9%		448,702	47.6%
Total Equity and Liabilities		421,686	100.0%		942,981	100.0%

The ratio analysis below is in 4 categories (Profitability, Management Efficiency, Liquidity and Gearing), and needs completing:

Ratios	Formulae		WYRE CHILD SERVICES Ltd	BORDER COMMERCIALS Ltd
Profitability Ratios
ROCE	PBIT	%	95%
	Cap Employed
Return on Assets	PBIT	%	95%
	Total Assets
Asset Turnover	Revenue	x	3.7
	Total Assets
Gross Profit Margin	Gross profit	%	49.2%
	Revenue
Net Profit Margin	PBIT	%	26%
	Revenue
Efficiency Ratios
Receivables Collection period (R)	Trade receivables x 365	days	19
	Sales
Payables payment period (P)	Trade payables x 365	days	97
	Cost of sales
Cash Cycle	R - P	days	-78
Liquidity Ratios
Current Ratio	Current Assets	x:1	2.0
	Current liabilities
Financial Risk or GEARING Ratios
Gearing	Fixed int capital	%	0.0%
	Total capital employed
Interest cover ratio	PBIT	x	0.0
	Interest charges

Requirements

0. Prepare a business report, maximum 2 pages long (approximately 800 words) with an appendix for your ratio analysis.

It is to be addressed to the board of directors of Mars Holdings Plc.

You must evaluate the financial statements, interpret the ratio analysis and make a convincing argument for investment in one of the two target companies.

Your report should be supported with academic references throughout, and your ratio analysis should be put in an appendix to the report.

(800 words, 30 marks)

0. Critically evaluate the working capital management (WCM) of both companies using academic references and draw conclusions on which is stronger. (200 words, 5 marks)

0. Create a table that lists the advantages and disadvantages of all the finance options available to Mars Holdings Plc. Explain, with references, the source of finance you recommend as most suitable way to finance the investment in either Wyre Chid services Ltd or Border Commercial Ltd.

(200 words, 5 marks)

Question 1 total 1200 words, 40 marks

Marking guide

Carefully examine the marking guide below to ensure that you structure your answer to include every element:

Mark allocation	RATIO CALCs	INTERPRETATION	OTHER	TOTAL
Q1.1
Profitability	4	3		7
Management efficiency	4	3		7
Liquidity	2	3		5
Gearing	2	3		5
Conclusion & recommendation			2	2
Credible academic citations			2	2
Layout, structure and grammar			2	2
Q1.2 Working Capital Management			5	5
Q1.3 Sources of finance			5	5
Total	12	12	16	40

Question 2

Question 2

You work for a consulting firm that has been approached by a client who is concerned about the future of their business. The board of directors of AJ Supplies Ltd are considering halting the production of 2 of their products that appear to be making no profit.

As you can see from the table below the directors are considering closing products Bass and Clarinet in an effort to improve overall profitability.

You spot that management accounting would show the results differently and may affect the directors’ decision.

			Acoustic	Bass	Clarinet	Total
			(£m)	(£m)	(£m)	(£m)
	Sales	360	240	180	780
	Cost of sales
		Materials	(120)	(80)	(80)	(280)
		Labour	(120)	(120)	(120)	(360)
		Overheads	(60)	(60)	(60)	(180)
	Profit/(loss)	60	(20)	(80)	(40)

Requirements for Question 2 part (a)

1. Use your knowledge of management accounting to calculate the contribution of each product 5 marks

1. Use your findings from part (a) and appropriate academic references to explain whether the company should stop making product Bass. 1 mark

1. Use your findings from part (a) and appropriate academic references to explain whether the company should stop making product Clarinet. 1 mark

1. Discuss how and why marginal costing calculates contribution to pay overheads and why this is useful in evaluating product value to a firm? 1 mark

1. Do you agree that profitability will improve by ceasing to make Products Bass and Clarinet? What do you suggest the company does to increase profitability? 2 marks

Question 2 (a) total 10 marks

Question 2 (continued)

The board have approached you to get your opinion of their expansion plan, which includes a chain of factory outlet stores. Below are the figures for the first one that is planned for a central Birmingham location next year.

Company policy dictates that any decision should be based on the results of calculating Net Present Value (NPV) of 3 years cash flows using a cost of capital of 12%, Payback Period (PBP) must be less than 3 years, and the Internal Rate of Return (IRR) of the project should provide a 5% cushion in case of increases in inflation or interest rates.

The investment consists of £4,000 for the land, building costs of £7,900, and £1,830 for fittings and equipment.

The cash flows in year 1 are expected to be: total sales revenue £28,600; the cost of Acoustic products sold £7,900; Bass stock sold £5,660; staff costs £1,180; light & heat £1,676; other overheads £6,424. The cash flows for the following years are the same, but are expected to increase by 2% inflation each year.

Requirements for Question 2 part (b)

Using the information above and in accord with the above stated company policy you are required to calculate:

1. Net Present Value (NPV) 5 marks

1. Payback period (PBP) and Discounted Payback Period (DPBP) 5 marks

1. Internal Rate of Return 1 marks

1. Based on your calculations do you recommend the investment is made and the new outlet store is built? 4 marks

1. Critically discuss the limitations of the above project appraisal techniques used and any other recommendations to the board. 5 marks

Question 2 (b) total 20 marks

Question 2 Total 30 marks

Question 2 total 600 words/equivalent, 30 marks

Question 3

The budgeted statement of Comprehensive Income and Net Assets for GFX Industries are given below:

Budgeted Statement of Comprehensive Income

For the year ended 31st December 2021

	£	£
Sales (25,000 boxes containing standard packets)		900,000
Direct Materials	(350,000)
Direct Labour	(160,000)
Variable Overhead	(120,000)
Fixed Overhead	(140,000)
		(777,000)
Profit		130,000

Budgeted Net Assets as at 31st December 2021

	£	£
Non-Current Assets at net book value		375,000
Working Capital
Receivables	80,000
Inventory	110,000
Payables	(50,000)
		140,000
Net Assets Employed		515,000

The current manufacturing facility is under-utilised and there is a proposal to extend sales to a supermarket chain with nationwide stores. However, the supermarket will sell the product under its own brand name.

Estimated effects of the proposal are;

1. Additional annual supermarket sales of 10,000 boxes at £30 per box.

1. Cost of direct materials would be reduced as a result of 8% quantity discount on all purchases and variable costs are expected to increase by 2%.

1. Extra supervisory and administrative staff will be required at a cost of £20,000 per annum

1. Market research has indicated that sales to existing retail outlets would fall by 10%. There will be no change in selling price to these customers.

1. Inventory and payables would increase by £40,000 and £25,000 respectively and the credit period extended to supermarket will be twice that allowed to existing customers.

Required:

Prepare the revised budgets to evaluate this proposal. Specifically you should:

1.	Prepare a revised budgeted statement of comprehensive income and a statement of net assets employed incorporating the results of the proposal i.e. Revised Sales Budget, Raw Material, Direct Labour, Variable Costs and workings. 16 Marks
1.	Calculate the effect on profit of the changes resulting from the proposal. Specifically calculate the Per Unit and Total Contribution for the old budget and the new budget. 6 Marks
1.	Advise management on the suitability of the proposal making any further calculations you consider necessary and adding any comments or reservations you think relevant. 8 Marks

Total Question 3 (30 marks)

Question 3 total 600 words/equivalent, 30 marks

COURSEWORK TOTAL MARKS: 100

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