Business Management

Revision Pack
Title: Finance and Accounts
Teachers Name: Aya Al Dajani

Student Name: ________________ DP year:

 Case study 1:

Fabi Lucchini will open the only café, selling hot and cold drinks only, in her small village. The
economy is weak so the local government will pay 50 % of the rent for the premises in which CL
will operate.

Fabi has forecasted the following figures for the first six months of operation, beginning on 1 July
2016:

Rent per month $2000

Government payment toward rent per
$1000
month
Salary per month $1600
Electricity (payable every second month
$200
starting in August)
Cleaning supplies per month $100
July $4000
August $4000
September $3500
Sales revenue per month
October $3500
November $4000
December $4500
Purchases per month 40% of sales

An option is to install cooking facilities and serve meals to increase CL’s sales revenue. Fabi
estimates that she could sell 40 meals per day at an average variable cost of $5 and at an average
sales price of $10. Serving meals would increase her fixed costs by $3000 per month.

(a)  Define the term fixed cost. [2]

(b) Calculate the break-even quantity of meals that CL must sell to pay for the increase in fixed costs
of $3000 to provide these meals (show all your working).
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Case study 2:

Phil Newman runs a business, Keysnap, providing souvenir photo keyrings for special occasions.
He has approached a theme park to provide souvenir photo keyrings for customers as a memory
of their day out. The minimum requirement of the contract is 1000 key rings per year.

In order to fulfil the contract, Phil will need to rent premises at the theme park costing $1700 per
year but he does not need to purchase any equipment to produce the keyrings. He needs to buy
plastic ring parts costing $0.16 per unit, clips costing $0.03 per unit and photo paper costing
$0.06 per unit. Phil intends to sell the keyrings at $3.65 each and estimates that he can
produce 2500 keyrings per year.

(a)Explain, with appropriate examples, the difference between fixed and variable costs [4 marks]
(b) Calculate the:
(i) Break-even point [4 marks]
(ii) Margin of safety at 1000 keyrings [1 mark]
(iii) Profit at 1000 keyrings [2 marks]
(iv) Profit at 2500 keyrings [2 marks]

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Case study 3:

Informatics manufactures computers and is based in Sri Lanka. Informatics uses a method of
batch production and manufactures batches of computers according to customer specifications
such as computer speed and screen size.

Production workers are paid by the hour but receive a lower-than-average wage for Sri Lanka.
To compensate they are offered long-term job security and other non-financial rewards.
Informatics does not sell locally in Sri Lanka, but exports 4000 computers a year to Pakistan
using local independent distributors who have knowledge of the local market as well as
experience in delivering and installing computers. 90% of Informatics’ sales are organized
through such distribution channels. Because using local independent distributors increases the
final price of the computer to the customer, senior managers have decided to offer customers
in Pakistan the opportunity to purchase computers directly from Informatics. Customers have
to telephone orders to Informatics in Sri Lanka from Pakistan because e-commerce sales are
not available.

Informatics’ Board of Directors is currently considering expansion into the Indian market using
the same type of distribution channel employed in Pakistan.
The following are Informatics’ expense and sales price figures:
• fixed costs of $100 000 per year
• variable costs of 80 % of the sales price
• sales price of $1000 per computer.

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a. (i) Define the term variable costs. [2 marks]
(ii) Identify two fixed costs for Informatics. [2 marks]
b. For Informatics:
(i) Calculate the break-even quantity in units (show all of your working). [3 marks]
(ii) Calculate the margin of safety in units (show all of your working). [2 marks]
(iii) Calculate the net profit if 4000 computers are sold (show all of your working). [3 marks]
(iv) Prepare a fully labelled break-even chart. [5 marks]

c. Calculate the new number of computers that would need to be manufactured and sold
at the current price for Informatics to make a profit of $2,000,000 from both the Pakistani and
Indian markets combined, if the Board of Directors decided to proceed with the expansion into
India. [3 marks]
d. Evaluate the usefulness of breakeven analysis to firms such as Informatics. [5 marks]

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Case study 4:

Papel manufactures and sells paper bags. It pays cash for 80 % of its raw materials but,
to remain competitive, it must sell on credit to all customers. Many debtors are not paying on time
and creditors (suppliers) are increasing. The board of directors is concerned about Papel’s liquidity
position.

The finance manager has provided information from Papel’s accounts.

Table 1: Selected information from Papel’s accounts at 31 October 2018

000s $
Accumulated retained
14
profit
Cash 3
Cost of goods sold 2
Creditors 20
Debtors 12
Expenses 2
Long-term liabilities (debt) 20
Net fixed assets 60
Sales revenue 5
Share capital 26
Stock 5

(a)  Define the term debtors. [2]

(b)  Using information from Table 1:

(i) construct a fully labelled balance sheet for Papel for the end of October 2018; [5]

(ii) calculate the current ratio for Papel for the end of October 2018.

(c) Explain one possible strategy, other than elimination of credit sales, for Papel to improve
its liquidity position.

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 Case Study 5:

Evana Dox has recently set up her own business, called Calorie Count (CC). She has identified a
precise market segment: local middle-aged people struggling to have a healthy lifestyle because of
long working hours. Customers will order meals in the morning, and in the evening Evana will
deliver the meals.

Evana is converting the ground floor of her house into a professional kitchen complying with all
hygiene standards and food safety regulations. She will employ her niece Athena, a
graduate from a catering college. 60 % of the initial investment and start-up costs will come from
Evana’s personal savings; the other 40 % will be financed by external sources.

Evana has carried out secondary market research and found that the net profit margin in catering
businesses of the same size is 35 %. However, for her new business Evana knows that her net
profit margin will be much lower.

For her first year of operations, she aims for a net profit margin of 15 %. In the first year, she
hopes to sell an average of 50 meals per day, 5 days per week. She estimates that each meal
would be sold at an average price of $17. This price, Evana believes, will be competitive and will
generate an adequate contribution per meal for her business to be successful.

CC uses a cost-based pricing strategy, with the following estimated costs:

• variable cost per meal: 70 % of selling price

• fixed cost per annum: $42000.

(a) Identify two variable costs for CC. [2 marks]

(b) Define the term contribution. [2 marks]
(c) Calculate for CC:
(i)  the break-even level of output [2 marks]
(ii)  the margin of safety, if it sells 50 meals per day, 260 days per year [2 marks]
(iii)  the profit or loss, if it sells 50 meals per day, 260 days per year [2 marks]
(d) Construct a fully labelled break-even chart, to scale, for CC. [5 marks]

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Case study 6:

ReVolve Ltd (RV ) manufactures and sells high-quality, high-priced bicycles to high-income earners.
Operating in a niche market, its advertising slogan and unique selling point/proposition (USP) is
“hand made to order, in the USA, delivered within seven days”. Brand loyalty is strong, but brand
recognition outside of its customer base is weak. 98 % of its sales are to customers living within 50
miles of the business.

Prior to 2017, RV received an increasing number of customer complaints that phone lines were
often engaged and calls not returned. As such, it adopted e-commerce. Its website now allows
customers to:

• customize their choice of bicycle

• place orders
• pay for purchases
• have their questions answered.
• RV employs 20 highly paid, skilled employees using job production.
To retain these workers, RV has raised their wages significantly since 2016.

Increasing competition from imports of hand-made high-quality bikes has forced down prices in
this niche market. RV has been making increasingly larger losses since 2017. In 2020, its sales fell
by 15 %. Inflation is forecasted at between 2 % and 3 % for the next three years. As such, RV’s
directors are considering two options to enable it to lower the prices of its bicycles.

Option 1: Offshore production to China, where production costs are significantly lower. The
bicycles would be manufactured using batch production. RV would focus only on the design and
marketing of its bicycles.

Option 2: Invest in new job production techniques that enable parts to be glued rather than
welded, which only requires unskilled labour. Investment would cost $3 500 000 and the
forecasted annual net cash flow is $600 000.

a) Calculate the payback period if RV chooses Option 2 (show all your working).

b) Explain one disadvantage to RV of using the payback period method of investment

appraisal.

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 c) Recommend whether RV ’s directors should choose Option 1 or Option 2.

Case study 7:
The Pie Store (TPS) bakes pies and sells them in its three retail stores. When developing its
brand, TPS used the mathematical symbol pi (ππ). In 2020, each store made a profit.
Table 1: Financial information for TPS’ three retail stores for 2020 (all figures in $)

At the end of 2020, the balance sheet for TPS (the three stores combined) showed $200 000 in
assets and $120 000 in liabilities. $50 000 of the liabilities was long-term debt.

a) Calculate which store made the highest net profit before interest and tax (no working required).
b) Calculate which store had the highest profitability (show all your working).
c) Calculate TPS’ equity.
d) Calculate TPS’ return on capital employed (ROCE) (show all your working).
e) Explain one effect that the $50 000 long-term debt may have on TPS’ profit and loss account.

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Case study 8:

Scale Airplane Modeller is a magazine produced by Small-Scale Hobbies (SSH). The company sells
the magazine through independent retail outlets in the US.
The finance director produced a summary of 2018’s financial information. Last year’s break-even
chart showed that SSH had a margin of safety of 20 000 units.
Table 1: Selected financial data for SSH for 2018:

This year, to reduce costs and to increase sales, the company will introduce new production
methods, which will reduce:
 unit variable costs by 10 %

 fixed costs by $5000 per year.

a) Define the term margin of safety.

b) Using the financial data in Table 1, calculate the break-even level of output (show all your
working).
c) Using the financial data in Table 1, calculate the percentage of total costs that were fixed costs
for last year (show all your working).
d) Using the financial data in Table 1, calculate the level of profit for SSH at 2018’s level of
production (show all your working).
e) Explain how the introduction of new production methods will affect the total cost line in SSH’s
break-even chart.

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Case study 9:

Mutombo Window Fans (MWF) manufactures and sells window fans to wholesalers across eastern
Africa. Although the business began small, it experienced rapid internal growth through
aggressive, commission-based sales.
Currently, MWF sells 300 window fans per month. Each fan sells at an average price of $100.
 
Table 1: Forecasted fixed costs for 2020 (all figures in $)

Table 2: Variable costs per fan for 2020 (all figures in $)

a) Calculate, for MWF, the break-even level of output for 2020.

b) Construct a fully labelled, to scale, break-even chart for MWF for 2020.
c) Calculate the profit if MWF sells 3600 window fans in 2020.

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Case Study 10:

DuffJD provides a laundry service for towels and sheets to three hotel chains in a major city,
Hoyluk. It provides each hotel chain with trade credit.

Competition in this market is increasing, as two rivals are planning to offer laundry services to
hotel chains in Hoyluk.

Table 1: Selected financial data for DuffJD for 2018

[Source: © International Baccalaureate Organization 2019]

a) Define the term trade credit.

b) Using the financial data for DuffJD for 2018, calculate the contribution per unit per item
laundered (no working required).
c) Using the financial data for DuffJD for 2018, calculate the margin of safety (no working
required).

d) Draw a fully labelled break-even chart for DuffJD for 2018 using the data provided.

e) Explain how an increase in competition may affect DuffJD’s margin of safety.

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 Case Study 11:
Enjuice produces canned juices. The market for canned juices is very competitive. Each can is
sold at $8. Enjuice’s profit margins are falling. The marketing manager has conducted primary
market research and suggested increasing advertising to increase sales. In 2018 Enjuice sold
360 000 cans.
Table 1: Selected financial information for 2018 (all figures in $000s)

[Source: © International Baccalaureate Organization 2019]

a) Using the information provided and in Table 1, calculating X and Y, construct a profit and loss
account for Enjuice.
b) Using the information provided and in Table 1, calculate the gross profit margin (no working
required).
c) Explain one strategy that Enjuice could use to increase its gross profit margin.

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Case study 12:

Piper Industrial (PI) manufactures pipe. The company is highly profitable and its corporate tax rate is
20 %. PI is forecasting major capital expenditure for 2019.
Table 1: Selected forecast financial information for the year ending 31 December 2019

Table 2: Annual cash flow forecast for the year ending 31 December 2019

(a)Define the term capital expenditure.

(b)Using Table 1, calculate for PI:
(i)gross profit (X);
(ii)tax (Y).
 
(c) Using Table 1 and your calculations in (i) and (ii), construct a profit and loss account for PI.
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 Using Table 2, calculate the net cash flow (Z) for PI for 2019 (show all your working).
d.Explain the difference between profit and cash flow. 

Case study 13:

Fishers manufactures baseball caps. In 2017, it sold 75 000 caps. The variable cost per cap was $6. 70
% of Fishers’s annual sales occur from April to September. Starting in March, Fishers experiences a
significant increase in current assets and current liabilities, which start to decrease in October.
Table 1: Selected data for Fishers for 2017 (figures in $000s)

Table 2: Selected forecasted financial information for Fishers for 2018

Sales price per cap will remain the same as in 2017.

 
a) Define the term current assets.
b) Using Table 1, calculate Fishers’s net profit before interest and tax for 2017 (show all your working).
c) Using Table 2, calculate the following forecasted figures for 2018:
(i) sales revenue
Using Table 2, calculate the following forecasted figures for 2018:
(ii)total variable costs
Using Table 2, calculate the following forecasted figures for 2018:
(iii)income tax
Using Table 2, calculate the following forecasted figures for 2018:
(iv)net profit after interest and tax.
d) Explain why Fishers experiences a significant increase in current assets and current liabilities from
March to October.
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Case study 14:

Designer Dolls (DD) is a start-up business that will create hand-crafted unique dolls using a
job/customized production method. As part of their business plan DD undertook a breakeven
analysis.
Table 1: Forecasted figures for DD for the first year of operation

a) Describe one limitation of a break-even analysis.

b) Calculate the number of dolls that DD needs to sell to achieve a profit of $4000 (show all
your working).
c) Calculate the capacity utilization rate at the break-even quantity for DD for the first year of
operation (show all your working).
d) Calculate the profit or loss in the first year if DD sells 400 dolls (show all your working).
e) Assuming that the quantity of dolls to be sold in the second year is 550 and costs remain
unchanged, calculate the price per doll that DD would need to charge to make a $6500 profit.

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Case study 15:

Visionary Toys (VT) produces highly innovative toys for children. VT began operation in January 2017
and its unique selling point/proposition (USP) is producing toy parts with a 3D printer. The financial
director presented financial information for VT at the end of 2017. He was concerned about VT’s
liquidity.
Table 1: Revenue and expense information for the year 2017 and balance sheet items at 31
December 2017

[Source: © International Baccalaureate Organization 2018]

a) Construct a fully labelled balance sheet for VT for the end of 2017.
b) Calculate the acid test (quick) ratio for VT for 2018.
c) Explain one way VT could improve its liquidity.

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Case study 16:
Pelican Pies (PP) produces high-quality pies that have limited brand loyalty outside of their local
market. The prices of the pies are higher than those of PP’s competitors.
Table 1: Selected financial information for PP for the year ending 30 April 2017.

For 2018, PP’s owner, Austin, is looking to increase sales beyond the local market by lowering prices
and spending a greater proportion of PP’s promotional budget on above-the-line methods such as
regional newspaper advertisements. To finance this type of promotion, Austin will have to increase
his loan amount by $10 000.
Table 2: Selected financial information for the year ending 30 April 2018.

a) Construct a profit and loss account for PP for the year ending 30 April 2017 based on the
figures in Table 1 (show all your working).
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b) Construct a forecasted profit and loss account for PP for the year ending 30 April
2018 based on the figures in Table 2 (show all your working).

Case study 17:

Grunsburg Textiles (GT ) is a textile company founded by the paternalistic leader Henrik Steiner. As
the company grew, it became very committed to corporate social responsibility (CSR). “Our
aims,” GT says on its website, “include making profits, providing safe and secure employment,
contributing to society through investment in environmentally friendly production practices and
supporting ethical causes”. Many people believe that GT’s success is tied to its reputation for taking
care of its employees and for its commitment to CSR.
In 2015, GT purchased €44 million in new environmentally friendly equipment. It financed the
purchase with a bank loan. GT originally forecasted that the new equipment would generate €8
million in annual net cash flow. Instead, the actual increase in GT’s annual net cash flow from
the new equipment was only €6 million. The Chief Financial Officer (CFO), Elaine, warned Henrik
that unless net cash flow increased significantly, the average rate of return (ARR) would be
significantly lower than originally forecasted.
GT is struggling to make the loan payments and to have sufficient working capital. Elaine
determined that one way to shorten the working capital cycle is debt factoring. However, when
she approached several (debt) factors, she was discouraged by their proposed discount rates.
Elaine knows that the situation is worse than she had warned. If the economy were to weaken
and revenue to decline, she believes that the company could go out of business. Proposals for a
solution include cutting back on GT’s commitment to its employees and CSR practices.

a) State any two stages of the working capital cycle.

b) Calculate for GT:
i. the payback period for the €44 million investment in new equipment based on the
forecasted increase in net cash flow (show all your working).
Calculate for GT:

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 ii. the average rate of return (ARR) based on an annual increase in net cash flow of
€6000 and assuming an asset life of the new equipment of eight years (show all
your working).
c) With reference to GT, explain one advantage and one disadvantage of debt
factoring

Case study 18:

Luis and José have set up a partnership, baking and selling cupcakes directly to consumers and
supermarkets. They called the business Tasty Cupcake (TC). They used their savings of $3000 as
starting capital. The partners need an overdraft agreement from the local bank. The bank manager
asked for a cash-flow forecast.
Luis has forecasted the following sales and cost figures for the first six months of operation,
beginning in January.
Sales
 Average selling price of one cupcake: $5.
 Sales of cupcakes: 1300 cupcakes in January and 1700 cupcakes per month from February
 70 % of customers who purchase cupcakes will pay in cash. The supermarkets will buy the
remaining 30 % of cupcakes on credit and pay one month later.
Costs
 Rent: $6500, payable at the start of each quarter.
 Labour costs: $750 per month.
 Raw materials: 50 % of sales revenue per month, paid in cash.
 Overheads: $400 per month, paid in cash.

a) Prepare a monthly cash-flow forecast for TC for the first six months of operation.
b) Calculate TC’s forecasted net profit at the end of June (show all your working).

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Case study 19:

Valley Gardens (VG) is a large garden retailer that sells flowers, plants, trees and other garden
supplies. In 2016, in an attempt to gain market share and increase sales, VG introduced a loss leader
pricing strategy for several varieties of trees. The strategy had an impact on both sales and
profitability.
Selected financial information for VG, all figures in $000s:

a) Using information from the table, calculate the missing figures V, W, X and Y (no working
required).

b) Using information from the table, calculate the gross profit margin for 2015 and 2016 (no
working required).

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Case study 20:
Rio Mobiliário (RM) is a Brazilian furniture manufacturer. It generates sales in South America,
North America and Europe. It has successfully outsourced production and distribution facilities to
North America.
Selected financial data for the year ended and as of 31 December 2015. All figures in millions of
Brazilian reals.

a) Calculate the gross profit X for RM (no working required).

b) Calculate Y and hence, calculate the net profit margin for RM (no working required).
c) Using relevant information from the table, construct a fully labelled balance sheet for RM.

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Profit and Loss Accounts:

Profit and Loss Account

Sales revenue Trading Account
COGS
Gross Profit
Expenses Profit and Loss Account
Net Profit before tax and interest
Interest
Net profit before tax
Tax
Net profit after tax and interest
Dividends Appropriation Account
Retained Profit

Balance Sheet:
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 Balance Sheet
Fixed Assets
Fixed assets
Accumulated depreciation
Net Fixed Assets
Current Assets
Cash
Debtors
Stocks
Total current assets
Current Liabilities
Overdrafts
Short term loans
Creditors
Total current liabilities
Net current assets (working capital)
(total current assets-total current liabilities)
Total assets less current liabilities
(fixed assets + working capital)
Long term liabilities (debts)
Net assets
Retained profit
Share capital
Equity

Cashflow forecast:
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 All figures in $ January February March April

Opening Balance

Cash inflow

Sales revenue

Debtors

Rental income

Total cash inflow

Cash outflow

Interest

Wages

Rent

Raw materials

Telephones

Loan repayments

Total outflows

Net flow

Closing balance

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