ACC00724 S2 2019: Financial Analysis Case Study Assignment

This case study analyzes the financial performance of Morgan Ltd. using data from its income statement and statement of financial position. The analysis includes a comprehensive examination of profitability ratios (gross margin, net profit, return on equity), efficiency ratios (inventory turnover, total assets turnover, accounts receivable turnover), and liquidity ratios (current ratio, quick ratio, and debt to assets ratio). It further explores break-even analysis, including calculations for break-even points in units and dollars, and examines the impact of changes in fixed costs and selling prices. The assignment also delves into overhead allocation, including the determination of predetermined overhead rates and the application of overhead costs to different departments (A and B) based on machine hours and direct labor costs. The study concludes with a discussion of the factors considered in overhead absorption and recovery rates.

Accounting

FINANCE
1
Question 1:
A.
1. Earning power of the company has been evaluated with the help of Profitability Ratio.
2. Debt to Assets Ratio helps the organization to measure the financial acquisition of assets.
3. Account Receivable Ratio states the ability of the firm to collect the amount from debtors in
short or long period.
4. Interest coverage ratio defines the competence of the company to recover the amount of
interest.
5. Inventory Turnover Ratio states the time that is taken by the company to sell its inventories in
the market.
B.
Ratio's 2018
Profitability Ratio
Gross Margin Gross Profit 157500
Net Sales 850500 18.52%
Net Profit Net Profit 94500
Net Sales 850500 11.11%
Return on Equity Net Income 94,500

FINANCE
2
Average Shareholders’ Equity 401310 0.24
Efficiency Ratio
Inventory Turnover
ratio Cost of goods sold 56700
Average inventory 236250 0.24
Total Assets Turnover Net sales 850500
Average Total Assets 782775 1.09
Account Receivables Sales 850500
Average Account Receivable 284500 2.99
Interest Coverage
Ratio EBIT 157500
Interest Expenses 6300 25
Liquidity Position
Current Ratio Current Assets 570150
Current Liabilities 312480 1.82
Quick Ratio
Current Assets (Account Receivables
+cash) 318150
Current Liabilities 312480 1.02
Debt to Assets Total Debts 63,000
Total Assets 809,55 0.08

FINANCE
3
0
As per the above evaluation, it has been seen that the company operates the business smoothly in
the coming future. It has been measured that the financial position of the company is strong.
Liquidity, profitability and Efficiency Ratio of the company defines the strong ability of the firm
to survive for long time in the market.
C.
As per the analysis, it has been observed that the profitability situation of the firm is not that
good because the sales volume is high but the net profit is low as compare to its net sales.
Effective position of profitability should states the high net profit instead of net sales. It depicts
that the company is not able to generate the high revenue from its sales volume (Robinson,
Henry, Pirie, and Broihahn, 2015). According to the liquidity ratio of the company, it has been
evaluated that the current assets of the business is high as compare to its current liabilities. The
current ratio and quick ratio of the company represent the strong liquidity position as the
organization has the capacity to pay its all short term obligations. The main reason is that the
company invests in current assets rather than the fixed assets to improve the liquidity position
(Williams, and Dobelman, 2017).
Question 2:
A.
Break Even Point in
Unit Fixed cost 5,600

FINANCE
4
Contribution per unit 400 14
Break Even Point in
dollars Fixed cost 5,600
Contribution
percentage 66.67%
$
8,400.00
Contribution percentage Contribution per unit 400
Selling Price Per Unit 600 66.67%
B.
Number of Children
Fixed Cost + Desired
Profit 16,000
Contribution per unit 400 40
C.
Revised Fixed Cost

FINANCE
5
Calculation:
Existing Fixed Cost 5600
Add: Increase in rent 3000
Add: Increase in field trip cost 1000 9600
Revised Contribution per unit 20,000
40 500
New Selling Price Per Unit 700
Less: Variable cost per unit 200
Revised Contribution per unit 500
Net increase in fees per child 100
D.
Multiple Products refers that the company sells the two or more products in the market. The
method of computing the break-even point of a multi-product firm is little bit difficult rather than
the single product firm. A multi-product manufacturing corporation can calculated its break-even
point by using the following formula:
Break Even Point= Total Fixed Expenses
Weighted Average Selling Price-Weighted Average Variable Expenses
It is observed that the company should have two or more product information for computing the
break-even point. It is required to evaluate the sales percentage of single products in the total

FINANCE
6
sales mix. The information of sales of product helps to evaluate the weighted average selling
price and weighted average variable expenses. In the multi-product break even analysis states the
all years of weighted average variable expenses per unit which is subtracted from the weighted
average selling price per unit (Business Plan Hut, 2018) After all the calculation, we get
weighted average contribution margin per unit. The company can use the above formula to
evaluate the multi-product break even analysis for the effective calculation.
Question 3:
A. The formula of predetermined overhead rate
Predetermined Overhead Rates Total manufacturing overhead
Number of machine hours
Dept A 162500 Dept B
21500
0
50000
17200
0
Overhead rate per machine
hour 3.25
Overhead per dollar of labor
cost 1.25
B.

FINANCE
7
Dept. A Dept B
Applied
overhead =
Overhead recovery Rate * Actual
Machine hours consumed
Applied
overhead =
Overhead recovery Rate *
Direct Labor Cost Per Unit
3.25*80 1.25*180
260 225
C.
Total Cost of Job 145 Dept. A Dept. B
Direct Material 450 250
Direct Labor 120 180
Manufacturing
Overhead 260 225
Cost per unit 830 655
If 10 units are produced 8300 6550
D.
The two factors are considered while computing the overhead absorption or recovery rates such
as machine hours and labor cost. It relies on manual work as if the product is manufactured with

FINANCE
8
the more machines and less with the help of labors then it is evaluated on the base of machine
hours. But if the work has been done with the help of more labor work instead of machine work
then the evaluation is based on direct labor cost (Collis, and Hussey, 2017). According to the
case, there are two departments such as A and B. In the department A, the evaluation of overhead
is based on machine hours as the more work is depending on the machines. In the department B,
the measurement of overhead rate or recovery is established on the direct labor cost as the whole
or most of work is relied on labor.

FINANCE
9
References
Business Plan Hut. (2018) Break-even Point for Businesses Selling Multiple Products. [online]
Available From: https://www.businessplanhut.com/break-even-point-when-selling-multiple-
products [Accessed 13/09/19].
Collis, J. and Hussey, R. (2017) Cost and management accounting. Macmillan International
Higher Education.
Robinson, T.R., Henry, E., Pirie, W.L. and Broihahn, M.A. (2015) International financial
statement analysis. John Wiley & Sons.
Williams, E.E. and Dobelman, J.A. (2017) Financial statement analysis. World Scientific Book
Chapters, pp.109-169.