PEV June 2006 Section 2

Hi

I sat my PEV paper on Monday, and would like to share my answers with you within two threads, one for each section

Section 2 Questions:


Task 2.1:

Brake Ltd considers to acquire First Disc Ltd for £3 million. Brake Ltd supplies products to motor manufacturers while First Disc Ltd deals directly with motor repairng business. First Disc Ltd offers delivery to customers in the next day of ordering, while Brake Ltd offers two-week delivery service to customers.

Administration expenses of First Disc Ltd falls by £400000 if it is acquired by Brake Ltd.

Here are the Profit & Loss Accounts of Brake Ltd and First Disc Ltd respectively:

Turnover 5150 3500
Cost of sales (3090) (1575)
Gross profit 2060 1925
Sales & Distribution cost (850) (875)
Administration Expenses (750) (875)
Operating Profit 460 175

Other relevant information:

Net Assets 4000 2500
Stock 500 388

Units sold 82400 42000
Units produced 80000 43500
Budgeted production 82000 40000
Budgeted labour hours 41000 20000
Standard labour hours 40000 21750
Actual labour hours 37500 22000


a) Calculate the following performance indicators for BOTH:

i) Gross profit margin.
ii) Sales and distribution cost percentage to turnover.
iii) Administration expenses.
iv) Operating profit margin.
v) Return on capital employed.
vi) Stock turnover.
vii) Capacity ratio.
viii) Efficiency ratio.


b) Draft a report to Managing Director, and suggest ONE reason for the difference in the following four performance indicators:

i) Gross profit margin.
ii) Operating profit margin.
iii) Return on capital employed.
iv) Stock turnover.


c) Recalculate the return on capital employed when Brake Ltd acquires First Disc Ltd share capital £3000000. Take in your mind the following:

 Administration expenses of First Disc Ltd falls by £400000 after acquisition.
 Goodwill arised to be capitalized and not amortised.


Task 2.2:

a) Explain briefly what is meant by target costing.
b) Given sales price of an item to be £1000 and having profit margin of 55%, calculate the target cost of this item.


End of Section 2.

My answers:

2.1)

a)

i) 40% - 55%
ii) 16.5% - 25%
iii) 14.6% - 25%
iv) 8.9% - 5%
v) 11.5% -7%
vi) 1.94 months – 2.96 months
vii) 91.5% - 110%
viii) 106.7% - 98.9%

c) 1035/7000 = 14.8%

Task 2.2

b) £450


Good luck all, i'll post section 1 questions and answers very soon, just wish me good luck for PCR tomorrow