King’s College London

MSc International Management

7SSMM102 Accounting and Finance

Mock paper 2 answers

© King’s College London

1
 Section A
Answer two questions (and all their parts) from this section.

2
Question 1

Indicative Answer

a.

Product A B
Units Units
Sales 4,300 6,400
Add closing Inv. 300 700
Less opening Inv. (200) (500)
------- -------
Production 4,400 6,600

Material A B Total
Kg Kg Kg
X (prod. x 4 and x 5) 17,600 33,000 50,600
Y (prod. x 7 and x 9) 30,800 59,400 90,200

Material X Y
Kg Kg
Usage 50,600 90,200
Add closing stock 11,000 8,000
Less opening stock (9,000) (12,000)
Purchases (kg) 52,600 86,200
£/kg 7 11
Purchases (£) 368,200 948,200

Labour A B Total £/hr Total

hrs hrs hrs £
22,000 52,800 74,800 10 748,000

For Alpha = production x 5 = 4,400 x 5 = 22,000

For Beta = production x 8 = 6,600 x 8 = 52,800

3
b.
Detailed discussion on the following points should be provided:
• Cannot deal with the fast-changing environment
• Focuses on short-term financial goals
• Concentrates power in hands of senior managers
• Takes up too much management time
• Based around business functions rather than business processes
• Encourages incremental thinking
• Protects costs rather than lower costs
• Promotes sharp practices among managers

Topics 8 and 9 materials (slides, textbook, etc)

4
Question 2

Indicative Answer
a.
L M N Total
Maximum sales demand (units) 120 160 110
Material A required per unit (kg) 2 1 4
Total Material A required (kg) 240 160 440 840

Maximum sales demand (units) 120 160 110

Material B required per unit (kg) 5 3 7
Total material B required (kg) 600 480 770 1,850

Material A – there is enough supply.

Material B – there is shortage of 630 kg (1,850 – 1,220). Material B is the limiting
factor.

b.
L M N
Contribution per unit (selling price – VCPU) £15 £12 £17.50
Material B required (kg) 5 3 7
Contribution per kg of material B £3 £4 £2.50
Ranking 2 1 3

Product Recommended production (units) Material B utilised (kg)

M 160 (maximum demand) 480
L 120 (maximum demand) 600
N 20 (140/7) 140 (balancing figure)
====
1,220
Contribution:
Product Units CPU (£) Total contribution (£)
M 160 12 1,920
L 120 15 1,800
N 20 17.50 350
======
5
 4,070
c.
The recommended production plan in part (b) does not include sufficient product
N to satisfy the requirement of 50 units for the valued customer. The plan must
be recalculated, with minimum of 50 units of each product and considering the
ranking in part (a). The recommended production plan will now be as follows:
Product Recommended production (units) Material B utilized (kg)
N 50 (minimum units) 350
M 160 (maximum demand) 480
L 78 (390/5) 390 (balancing figure)
===
1,220
This recommendation makes the best use of the available material B within the
restriction of market requirements for each product.

Contribution:
Product Units CPU (£) Total contribution (£)
N 50 17.5 875
M 160 12 1,920
L 78 15 1,170
=====
3,965
d.
The contribution would go down by £105 (£4,070 - £3,965) if White Ltd changes
the production mix in order to meet the valued customer’s demand.

6
Question 3

Indicative Answer

a.

Year Cash Cash outflows (£) Net cash Discount Discounted

inflows flows (£) factor cash flows
(£) (10%) (£)

0 2,800,000 -2,800,000 1 -2,800,000

1 2,375,000 1,045,000 + (850,000 - 730,000 0.909 663,570

250,000) = 1,645,000

2 2,500,000 1,200,000 + (850,000 - 700,000 0.826 578,200

250,000) = 1,800,000

3 3,900,000 1,800,000 + (850,000 - 1,500,000 0.751 1,126,500

250,000) = 2,400,000

4 4,050,000 1,950,000 + (850,000 - 1,500,000 0.683 1,024,500

250,000) = 2,550,000

NPV = £592,770

year Net cash Discount Discounted

flows (£) factor cash flows
(20%) (£)

0 -2,800,000 1 -2,800,000

1 730,000 0.833 608,090

2 700,000 0.694 485,800

3 1,500,000 0.579 868,500

4 1,500,000 0.482 723,000

NPV at 20% = - £114,610

7
 IRR = 10% + 592,770 / (592,770 + 114,610) X (20% – 10%) = 0.1838 = 18.38%
The project has positive NPV and IRR greater than cost of capital. Therefore, the
project can be accepted.

b.

When appraising an investment project, it is essential that only those cash flows
relevant to the project to be taken into account, otherwise an incorrect investment
decision could be made. A relevant cash flow is a cash flow that arises or changes
as a direct result of the investment being made. Some costs will be sunk (past costs)
before an investment decision is made. An example would be research and
development or market research costs into the viability of a new project. Once
incurred, such costs become irrelevant to the decision as to whether or not to
proceed, and so should be excluded from the analysis. Cash flows that would be
relevant include, among others, an increase in production overheads, material costs
or labour costs and new purchases that are necessary.

Examples from part (a):

Feasibility study – irrelevant

Investment on equipment - relevant

Sales - relevant

Variable costs – relevant

Fixed costs – additional fixed costs directly related to the project relevant but fair
share of business overhead irrelevant

Students are expected to provide detailed explanation and discussion.

8
 Section B
Answer question 4. This question is compulsory.

9
Question 4

Indicative Answer

a.

20X7 20X8
Gross profit margin 31.25% 30%
Operating profit margin 17.5% 16%
ROCE 27.67% 27.59%
Current ratio 1.04:1 1.05:1
Quick ratio 0.63:1 0.73:1
Inventories turnover 39.82 days 36.5 days
Settlement Receivables 41.06 days 58.4 days
Settlement Payables 37.83 days 31.29 days

Students are expected to provide detailed workings for both years.

Working for 20X8:

Gross profit margin = 300,000/1,000,000 x 100 = 30%

Operating profit margin = 160,000 /1,000,000 x 100 = 16%

ROCE = 160,000 / (480,000+100,000) x 100 = 27.59%

Current ratio = 230,000/220,000 = 1.05

Quick ratio = (230,000 – 70,000)/220,000 = 0.73

Average inventories turnover period = 70,000/700,000 x 365 = 36.5 days

Average settlement period for receivables = 160,000/1,000,000 x 365 = 58.4 days

Average settlement period for payables = 60,000/700,000 x 365 = 31.29 days

b.

Report to the board of directors on Catalona’s performance and position

This report compares the performance and position of Catalona Ltd for this year
(20X8) and last year (20X7).

Profitability

Revenue has increased by 25% ((1,000,000 – 800,000) / 800,000) on last year a

sign that the business may be expanding (this can also be seen from the increase
in non-current assets). However, profitability has worsened with gross and
10
operating profit percentages being slightly lower than the previous year (30%
down from 31.25% last year and 16% down from 17.5% last year, respectively).
This indicates that the increase in sales has led to a slight erosion of profit
margins, although not significant. The directors should look at improving controls
over costs going forwards. For example, maybe with the higher sales they might
be able to negotiate better bulk discounts from their suppliers.

The ROCE is similar in both years (27.59% this year compared to 27.67% last year).

Liquidity

The results show a stable position with the current ratio increasing from 1.04 to
1.05. The quick ratio excluding inventory has improved slightly. A ratio of around
1 may allow the business to pay its liabilities as they become due, but they may
be running a liquidity risk, particularly as the quick ratio is less than 1. A closer
look at the statement of financial position shows that the business is running an
overdraft rather than holding cash. The liquidity of the business would be
improved if they moved from an overdraft position to having a cash balance
(maybe by increasing their long-term loans).

Efficiency

Settlement for receivables has increased from 41.06 days to 58.4 days. This may
have been a deliberate plan to help increase the sales (i.e., by offering customers
more generous credit terms). However, if this is not the case then the business
needs to review its credit control processes and work towards reducing the
settlement period.

Despite taking longer to collect cash, the business has been taking less time to
pay its suppliers, going from 37.83 days to 31.29 days. The 31.29 days should be
compared to industry standards to see if the business is aligned to normal
practice. This will have a worsening impact on cash flow.

Inventory holding days have decreased from 39.82 days to 36.5 days. This is not
an immediate area of concern.

These movements will go some way to explaining why by the end of the year the
business is operating a significant overdraft.

Conclusion

11
Sales have increased but the impact on profit has been diminished by reducing
margins. The directors should concentrate on generating additional income and
controlling costs.

The company has significant cash flow issues and is operating a significant
overdraft. Managing cash better and improving collection of cash from
receivables is a clear priority.

12