+Solution to question 1.

Appendix 1.
1.1 Ratios for Kindra properties
Ratio Net operating profit 224,360 20.53 %

735,908 + 357.197

Return on Asset Net Operating 224,360 x 100 19.44 %

Profit 1,153,867 1

Total Asset

Asset Turnover Turnover 765101 x 100 66.31 %

Total asset 1,153,867 1

Gross profit Gross Profit x100 354,781 x100 46.37 %

Margin Turnover 1 765,101 1

Net Profit Net Profit x 100 224,366 x 100 29.32 %

Turnover 1 765, 101 1

Efficiency ratio :
Recievable Collection Period Trade receivable x 365d 40,345 x 365d 19.24 days
Turnover 765,101
Payables Payment Period Trade payable 365days 60,762 x 365da 54.05 days
Cost of sales 410,320
Cash cycle Recevable collection period, 19.25days -54.1days 34.85 days
payable collection period
Liquidity ratio

Current ratio Current asset 40,345 : 1 0.66 :1

Current liability 60,762
Financial risk/Gearing ratio 735,908 67.32 %
Non current liability 735,908 +357,197
Gearing ratio Total capital employed
Interest cover ratio Net operating profit : 1 224,360 : 1 4.76:1
Interest charges 47,098

1.2. Preparation of business report.

From : Chief Accountant

To : Seiko holdings plc Strategic business committee
Date : 1st April, 2023.
Subject : BUSINESS REPORT AND EVALUATION ON PROFITABILITY,
EFFICIENCY, LIQUIDITY ,AND SOLVENCY PERFORMANCE OF PURE
CARE SOLUTIONS AND KINDRA PROPERTIES AS AT 31ST DEC. 2022.

This report contains the calculation of profitability ratios, efficiency ratio, liquidity
level as well as financial risk of pure care solutions and Kindra properties which is
used as a yardstick to measure, assess and evaluate the financial performance of both
entity. This assessment also looks into the negative results arising from the analysis of
both entity and what could be the possible cause of this result. Conclusion drawn at
the end of this analysis and recommendation prescribed will determine which of these
two entities should Seiko Holdings invest. This report should be carefully examined
alongside the appendix attached.
As in 1.1 above. Summary of the accounting ratio of Purecare and Kindra
Ratio Pure care Solution Kindra
1 Profitability
I ROCE 9.17% 20.53%
ii. Return on Asset 9.00% 19.44%
iii. Asset turnover 95.64 66.31%
iv. Gross Profit Margin 37.62% 46.37%
v. Net Profit Margin 9.41% 29.32%

2. Efficiency Ratio
I Recievable collection period 145.4 days 19.24 days
Ii Payables payment period 11.34days 54.05 days
Iii Cash cycles 134.06days 34.85 days
3 Liquidity Ratio : current ratio 20.56:1 0.66:1
4. Finacial Risk/Gearing Ratio
I Gearing Ratio 9.85% 67.32 %
ii Interest cover ratio 11.49times 4.76 times
Evaluation of different ratio analysis calculated from the financial statement of
Kindra propetrties in comparison with Pure Care solutions.
The profitability ratio of the two companies are ; Gross Profit, Net Profit, ROCE, and
Return on Asset.
The gross profit of kindred properties is 46.37 % which is higher compared to that of
pure care solutions 37.62%. Kindra properties has effectively managed their cost of
sales and improvement on sales. Pure care solution has not done better in this case.
The net profit margin for pure care solution is low at 9.41%, this means that Pure Care
solution does not have control over operating expenses, while Kindra properties net
profit margin is 29.32%. Kindra has done three times better.
This ROCE is an analysis tools used to determine the efficiency or otherwise of
management in the employment and utilization of available resources. Kindra
properties need a maximum use of its resources generating 21.32% while pure care
solutions as 9.17%.
Asset turnover measures how many times revenue can turn the asset of the company.
The higher the times, the better. It is revalued through the analysis that pure care
solutions has been able to turn over its asset 0.9 times, better than Kendra properties
0.66 x. it is an indicator that the low profitability of pure care solutions is likely due to
under pricing of its products and services. All indicators with respect to profitability
are a clear evidence that the management of Kindra properties has been efficient with
respect to efficient utilization of its assets to generate economic benefit and enhanced
return.

The efficiency ratio shows how many days it will take to recoup the funds with the
debtors and vice versa with the creditor. The analysis shows that it will take from 45.4
days for Pure care solutions and 19.26 days for Kinda properties. This indicate that it
will be faster to get all the debts Kindra compared to Pure Care solution. The payment
period in Pure care solution is lower at 11.30 days and 54.05 days for Kendra
properties. Kindra properties is experiencing high number of days, this is due to the
high finance charge as a result of the high debt portfolio.

This liquidity ratio ratio measures the liquidity of an entity by measuring the relative
amount of cash and other liquid assets available to meet current liabilities. It is
therefore a strong indicator of liquidity. It is measured against a universal law of 1.
Pure care solution has a good ratio of 20.5 :1, this indicates the current asset is
capable of settling the current liability 20 times. Pure care has a strong liquidity. This
performance is owing to the fact that her high receivable and low payable. Kindra on
the other hand as 0.66 : 1, this is not a good performance as it is lower to the risk-free
universal standard of 1. The solvency in Pure care is better compared to that of
Kindra.

The gearing ratio is used to measure the percentage of debt in the capital employed of
the company, the lower the gearing, the better. The gearing ratio in Kindra properties
is 67.32%. This indicates that Kendra property is highly geared, it is evidenced by the
finance charge in the financial statement and also evidenced by the interest cover
ratio. Pure care solution is low geared because it has a Gearing ratio of 9.85%.

Conclusion and Recommendation. : Based on the evaluation above, conclusion can

be drawn by saying that Kendra properties is better in all manner and in the
investment will be done, the shareholders off Seiko holdings PLC must be ready to
inject funds to reduce the liabilities of Kindra properties.

Recommendation
1. Seiko holdings should invest in kindred properties
2. Funds should be injected to settle at least half of the liabilities of Kendrick
properties
3. Strategies for improvement must be activated as soon as possible
4. Funds should be generated by share offer to the general public.

Signed : Management Accountant.

1.3. Evaluation of working capital Management.

Kindra properties
the analysis of performance the working capital efficiency revealed it will take 54
days for Kendra properties to set it payable which is relatively fair and the time it will
take to receive its payment from debtors is 19 days. There is still a good performance
but there is room for improvement.

Pure care solutions.

Based on the analysis above, it is evaluated that the performance of pure care solution
on the debtors collection period is woeful as it will take 145 days (5 months) to
recoup its payment from debors and its payable is better with a payment period of 11
days.

Conclusion
Conclusion cannot be drawn until the cash circle is evaluated, it represents the net of
receivable collection period and payable payment period. Cash conversion cycle
shows the number of days it will take a company to turn its inventory into cash by
selling his product. The shorter the days, the shorter the time capital is tied down by
inventory. It also indicates operational efficiency. From the ratio calculated above,
Kindra property has a shorter period of 35 days compared to 134.06 days. It is
therefore concluded that the working capital Management of Kindra PLC is stronger.
1.4 Possible Source of finance circle holdings should consider.
a. Share offering
b. Bank loan
c. Bond
d. Utilization of Retained Earnings
e. Government assistance

Solution to question 2a

From: Your name

To: Mobility Global Directors

Date: 1st of April , 2023.

Subject:
 Detail analysis on the viability and proposal to cease the production of Hoists

and Mobile Beds using marginal costing techniques.

(i) Marginal costing statement for each product and total for the month of December 2021.

wheel chair Hoist Mobile Total

Unit sold 60 75 120
£
Turnover £ 33,600 47,250.00 £ 56,400.00 £ 137,250.00
Cost: Direct material (7,728) (25,042.5) (2,7636) (60,406.5)
Direct labour (5,712) (14,647.5) (14,1000 (34,459)
Other variable
expenses (3,024) (9450) (5,640) (18,114)
contribution 17136 (1,890) 9024 24270.5
fixed overheads (68,000)
Net Profit/loss (43,730)

(ii) Advise whether to stop making Hoist

Based on contribution calculated above, it is advisable for mobility global to stop the

production of Hoist due to the fact that it resulted to a loss in contribution of 1,890.

Out of all the 4 products only Hoist resulted in negative contribution.

Marginal costing statement without the production of Hoist.

Mobile
Wheel chair beds Total
Unit sold 60 120 -
£ £ £
Turnover 33,600 56,400 90,000
Cost: Direct material (7728) (27,630) (35,363)
Direct labour (5712) (14,100) (19,812)
Other variable (3,024) (5,640) (8,664)
Contribution 17,136 9,024 26,160
fixed overhead (42,160)
Net Profit/(loss) (16,000)

(iii) Advice whether to stop making mobile beds

Based on the calculation (i) above it is financially advisable for Mobility Global to

continue to produce mobile beds. It produces a contribution (positive) of 9,024.

However, Mobile beds did not produce a positive net profit. Economics of scale can

be employed to increase profitability that will swallow up the fixed cost.

Marginal costing statement without the production of mobile beds

Wheelchair Hoist Total

Unit sold 60 75 -
£ £ £
Turnover 33600.00 47,250.00 80,850.00
Cost: Direct material (7,728) (25,042.5) (32,770.5)
Direct labour (5712) (14,647.5) 20,359.5)
other valuable (3,024) (9,450) (12,474)
Contribution 17,136 (1,890) 15,246)
fixed overhead (37,400)
Net profit/(loss) (22,154)

(iv). Recommendation

It has been recommended above that based on marginal costing techniques, MG

should stop the production of Hoist but continue the production of mobile beds. Based

on marginal costing techniques, the real profit of the business is the contribution as
does not absorb fixed overhead cost into cost of production.

Qualitative issues

a. Cost of Production: The cost of production comprises of cost that are directly

traceable to production. Such as direct material, direct labor and variable

expenses. The production cost of both Hoist and mobile beds are too high as it

is more than the turnover of Hoist and a little but below turnover for mobile

beds, these might have been as a result of the increase in inflation rate, brexit

and other economic factor militating against the thriving of business in the

United Kingdom (UK).

(b) Fixed Overhead Cost: Fixed Cost are cost that do not change in relevance to

the unit produced, the fixed cost is a major reason for the decline in the

general profitability of MG in the recent financial years. Fixed overhead cost

in Hoist is as high as above 50% of turnover, while in Mobile beds above 50%

of turnover,

(c) Marginal Cost calculate contributions by valuing product and services by their

variable cost only, other cost are treated as periodic cost and charged against

contribution in the period which they relate.

(v.) Reasons why Marginal Costing technique is useful

1. It is an approach based on actual cashflow.

2. Fixed cost do not relate to activity level, it is therefore ideal to write them off

in the period which they relate.

3. Marginal costing shows a constant net profit where sales are constant but
 production flunctuates.

4. Over-absorption or under absorption are completely eliminated.

5. It is also simple to operate.

6. It ignores the appointment of fixed cost

2B. Using Net Present Value

a. Calculation of investment

Total Investment Land £ 100,000

Building £ 158,000
Fittings/Equipment £ 36,600
£ 294,600

Calculation for Net Cash Flow

Year 1 Year 2 Year 3

Sales £ 600,600.00 £ 621,612 £ 624,864.00
Cost of Alpha (165,900) (169,218) (172,602)
Cost of Beta (118,860) 121,237) (123,661)
Staff Cost (24,780) (25,276) (25,781)
Light and heat (35,196) (36,000) (36,720)
Other overheads (134,904) (137,602) (140,354)
Net cash flow 120960 123,279 125,746

(i) NPV

Cashflow DCF
Year Net 12% PV
£ £
0 Outlay (294,600) 1 (294600)
1 Inflow 120,960 0.89 107,654
 2 Inflow 123,279 0.8 98,623
3 Inflow 125,746 0.71 89,280
Net present value (Positive) 957

(ii) Payback period

Year £
0 outlay/investment (294,600)
1 Inflow 120,960
(176,640)
2 Inflow 123,279
(50,361)
3 Inflow 125,746
75,385

2 years plus :
Year 3: 50,361 x 12months
125,746 = 5 months

Conclusion: based on (ii) above, This simply means that it will take 2years and

5months to payback the cost of the Investment.

(iii) Internal Rate of Return.

Formula for IRR

= A% + NPVA
NPVA - NPVB

. A% = Discounting Factor perentage of the positive NPV

B% = Discounting Factor Perentage of the Negative NPV
NPVA = Net Present Value of the A%
NPVB = Net Present Value of the B%

Find negative NPV (trial and error). Using 12.5%.

Cashflow DCF
Year (Net) 12.5% PV
£ £
0 Outlay (294,600) 1 (294,600)
1 Inflow 120,960 0.89 107,654
2 Inflow 123,279 0.79 97,390
3 Inflow 125,746 0.7 88,022
Negative NPV (1,534)

(iii) Internal Rate of Return

= A% + NPVA (B% - A%)

NPVA - NPVB

= 12% + 957 = 12.5% - 12%

957 – (-1534)
= 12% +957 = 0.5%
2491
12% + 1.92% = 13.92%
= Add 5% provision for inflation
13.92% + 5%
= 18.92%

(iv). Recommendations
Based on the calculation above, Neptune shooting Plc should make the investment an
and also build the new outlet.

(v.). Limitations of the appraisal techniques.

Npv
a. This approach ignores risk management.
b. It relies on accurate estimation of market cost of capital.
c. NPV does not represent a return associated with project.

Payback period.
 a. It ignores time value of money.
b. It ignores cash flow after the payback.
c. It may lead to excessive investment in short-term project.
d. It ignores the effect of inflation.

IRR
a. It is too complex to practice.
b. It ignores market-determined cost of capital.
c. It ignores the effect of inflation.

Signed : Your name

Solution to question 3

Appendix to 3.1
a. separation of fixed and variable cost from semi-variable cost, using high and low
method.

Appendix to 3.1
2022 Unit Cost
High Metal 7,500 67,200
Low Zinc 4,300 90,000
Difference 3,200 22,800

Variable cost per unit = Cost difference = £ 22800

Unit Difference 3200 =£ 7.13

b. Separation

Metal Pink Zinc

£
Semi-variable £ 67,200.00 48,000.00 £ 90,000.00
Unit cost 7,500 5,000 4,300
Variable cost per Unit 7.13 7.13 7.13
7.13 x
Variable cost 7.13 x 7500 unit 5,000 7.13 x 4,300
variable cost 53,475 35,650 30,659
Semi-variable (67,200) (48,000) (90,000)
13,725 12,350 59,341

c. Sales price per unit.

Price = Sales Revenue

Sales unit

Product Working Price/out

Metal 190,000/7500 £ 25.33
Pink 160,000/5,000 £ 32.00
Zinc 450,000/4300 £ 104.65

3.1 Applying marginal costing techniques, Rank the product?

Euro engineering limited marginal costing for August 2022.

Metal Pink Zink Total
Sales (Units) 7,500 5,000 4,300
£ £ £ £
Revenue 190,000 160,000 450,000 800,000
Raw materials (66,000) (76,000) (134,000) (276,000)
Direct labour (26,000) (29,000) (110,000) (165,000)
Semi: variable (53,475) (35,650) (30,659) (119,820)
Contribution 44,125 19,350 175,341 238,816
Ranking 2nd 3rd 1st -
Semi fixed cost (13,725) (12,350) (59,341) (85,416)
Profit 30,400 7,000 116,000 153,400

Appendix to 3.2
a.
 Appendix to 3.2
Ranking 1 2 3
Zinc Metal Pink
Unit 9,000 8,000 8,000
Material per unit 4kg 3kg 5kg
Total unit of material
needed 36,000kg 24,000 kg 40,000 kg

The limiting factor in this scenario is material, the material is limited 80,000kg. Total
material needed to produce the maximum unit is 100,000kg, therefore material should
be allocated according to the rank.

Opening Unit Unit

Rank Products materia require produce Closing
1 Zinc 80,000 36,000 9,000 44,000
2 Metal 44,000 24,000 8,000 20,000
3 Pink 20,000 20,000 4,000 -
80,000

b. Labour per unit

Metal Pink Zinc

Direct labour £ 26,400.00 £ 29,000.00 £ 110,000.00
 Unit 7,500 5,000 4,300

Labour cost/unit £ 3.52 £ 5.80 £ 25.58

Unit budget £ 28,160.00 £ 23,200.00 £ 230,220.00

c. Raw material per unit

Metal pink Zinc
Unit produced 7,500 5,000 4,300
kg per unit 3kg 5kg 4kg
Total kg used 22,500kg 25,000kg 17,200kg
total cost £ 26,400.00 £ 29,000.00 £ 110,000.00
Cost per kg £ 1.17 £ 1.16 £ 6.40
unit budget 8,000 4,000 9,000
Raw material cost 9,360 x 3 4,640x5 57,600 x 4

(d). Semi variable cost per unit.

Metal Pink Zink
Semi Variable cost £ 53,475.00 £ 35,650.00 £ 30,659.00
unit 7,500 5,000 4,300
Semi Variable
cost/unit £ 7.13 £ 7.13 £ 7.13
8,000 4,000 9,000
Semi variable cost £ 57,040.00 £ 28,520.00 £ 64,170.00

(3.2a) Production Budget

Production Budget
Metals Pink Zink
Units 8,000 4,000 9,000
Price £ 25.33 £ 32.00 £ 104.65
Total revenue £ 202,640.00 £ 128,000 £ 941,850.00
(3.2b) Marginal cost income IF metal contract is honoured….
Metal Pink Zinc
Units 8,000 4,000 9,000
Price £ 25.33 £ 32.00 £ 104.65
Total revenue 202,640 128,000 941,850
Raw material cost (28000) (23200) (230400)
Labour cost (28,160) (23.200) (230,220)
Semi-variable cost (57,040) (28,520) (64,170)
Contribution 89,360 53,080 417,060
Fixed cost (13,725) (12,350) (59,341)
Profit/(loss) £ 75,635.00 £ 40,730.00 £ 357,719.00
Total Profit £ 474,084.00

Appendix to 3.3
(a) Cost of Raw materials

Metal Pink Zinc

Unit budgeted 3,000 8,000 9,000
Cost/kg £ 1.17 £ 1.16 £ 6.40
3,510 9,280 57,600
kg/unit 3kg 5kg/unit 4kg/unit
£ 10,530.00 £ 46,400.00 £ 230,400.00

(b) Cost of Labour

Metal Pink Zinc
Unit 3,000 8,000 9,000
Labour cost/unit £ 3.52 £ 5.80 £ 25.58
£ 10,560.00 £ 46,400.00 £ 230,220.00

(c) Semi variable cost

 Metal Pink Zinc
Unit 3,000 8,000 9,000
Variable cost/unit 7.13 7.13 7.13
£ 21,390.00 £ 57,040.00 £ 64,170.00

3.3a Budget production schedule if metal contact is NOT honoured

Metal Pink Zinc
Units required 3,000 8,000 9,000
Sales £ 25.33 £ 32.00 £ 104.65
£ 75,990.00 £ 256,000 £ 941,850.00
3.3b. Marginal cost income statement (if metals contact is not honoured)
Metal Pink Zinc Total
£
Sales 75,990 £ 256,000 £ 941,850 £ 1,273,840
Raw
materials (10530) (46,400) (230,400) (287,330)
Labour (10,560) (46,400) (230,220) (287,180)
Semi
variable (21,390) (57,040) (64,170) (142,600)
Contribution 33,510 106,160 417,060 556,730
Fixed cost (13,725) (12,350) (59,341) (85,416)
Profit 19,785 93,818 357,719 471,314
Fine for not producing (12000)
459,314

3.4. Considering the marginal cost statement of the two options ( Honor and
Dishonor)
Options Contribution Net profit
Honored £ 559500 £ 474084
Dishonored £ 556730 £ 459314

Recommendation : With the estimation above, I recommend that metal percolator

contract be honored as it will result in a higher contribution and net profit of £
559,500 and £ 474,084 respectfully.