MBI – 5 2007-2008. Final examination course financial management, part management
accounting. 11-06-2007.
Financial Management.
Sub-module Management Accounting.
FINAL EXAMINATION.
Time allowed: 3 hours.
November 6th. 2007, 10.00 – 13.00.
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The examination consists of 15 mainly qualitative questions and 7 open
computational problems on 17 pages. The maximum points obtainable are
indicated for each problem.
This is a closed-book examination. The use of a scientific/financial calculator and
an English/Dutch dictionary is allowed.
Answer the questions in the open space of the examination form. Prepare your
answers on scrap paper and present your outcomes in a systematic and clear-cut
way. Add core computations. The quality of the presentation is part of the
assessment!
You don’t need to answer the problems in the given order: just skim the exam
and make the easier first!
Passing on calculators or scrap paper is NOT allowed.
Please don’t detach the pages.
Standard solutions
The maximum result to obtain from this examination is 70 points.
1
MBI – 5 2007-2008. Final examination course financial management, part management
accounting. 11-06-2007.
Problem 1. On qualitative subjects. ( 15 points)
Below follow 15 statements. You are asked to encircle whether you agree ( CORRECT )
or disagree ( FALSE ) with that statement, based on the materials studied. A correct
indication generates ½ point. The answer has to be substantiated by an explanation of
25 words at the most, giving the reasons for that answer. A correct explanation gives a ½
point additionally.
1. The management team of a limited company is preparing the annual
public financial statement. There develops a discussion about the
depreciation of the IT equipment to be charged to the income statement.
The accountant proposes to apply the fiscal system, assuming a lifetime
of 3 years, but the CEO favours to use the actual expected lifetime of 5
years in order to improve the annual results. This issue is a matter of
management accounting.
false
The determination of an annual financial statement is a matter of financial accounting.
2. Citing from a company’s introduction leaflet on behalf of new
employees: “ We expect all our employees to treat our customers the
best they can …. Be always polite and friendly and never argue about
the right to complain. And: never tell lies! “ This is an example of a
beliefs system concerning the company’s ethics.
false
Here the rules of desirable behaviour are formulated in a boundary system.
3. A small car manufacturer saw its production and sales collapse from
60 units in May to 30 units in June. The decrease of the total costs was
not proportional: from € 1,100,000 in May to € 800,000 in June. A
further decline of activity to 20 units in July is expected. Assuming that
this year no changes in prices of resources nor changes in the capacity
will occur, the forecasted total costs of July will be € 700,000.
correct
The variable costs of a car are (1100000 – 800000)/(60-30) = 10000 €. So fixed costs are
500000 € and the forecasted costs of July are 500000 + 20*10000 = 700000 €
4. A company with a relatively low level of capacity-related ( fixed )
costs, but with relatively high flexible ( variable ) costs per unit, will
reach its break-even situation at a smaller sales volume compared with
a company with ( relatively ) high fixed and low variable costs,
assuming equal sales prices. However, the growth of its profits beyond
the break-even volume is smaller.
correct
The first firm shows a lower contribution margin per unit but that will generally be offset by a
relatively lower amount of fixed costs. Certainly the fluctuations around the break-even level
will be smaller than in the other case.
2
MBI – 5 2007-2008. Final examination course financial management, part management
accounting. 11-06-2007.
5. A company has idle capacity. When a potential customer asks for a
bid to manufacture special products, using that spare capacity, the
opportunity costs of the capacity’s usage will be zero.
correct
As no other production is sacrificed, there are no opportunity costs of that capacity.
6. The support costs originating from the processing of paperwork for
purchases is considered to be batch-related costs, but the capacityrelated ( fixed ) costs of a customers service department are unit-related
costs.
false
Actually the costs of paperwork in purchase is generally batch-related, but the costs of a
customer service department will be either customer-sustaining or company-sustaining.
7. Many manufacturing companies have departments for product- and
process design and for production scheduling. These departments incur
costs, often regarded to be indirect ( overhead ) costs. When a company
uses a single manufacturing overhead rate on direct labour costs,
complex products produced on order will probably be subsidized by
more simple standardized products.
correct
Special complex products cause far more work in design and scheduling than standard mass
products. If the single manufacturing rate is applied, the mass production is overcharged and
the special products undercharged in view of the origin of the costs itself.
8. When a company is manufacturing a broad line of different products,
the best way to determine rather precise costs per unit is by the
application of the system of process costing.
false
Process costing is meant to be used for homogeneous single product processes.
9. When deciding on the question whether to buy components for its
own products from outside suppliers or make the components
themselves, the depreciation on available machines ( already used for
other purposes ) is relevant to that decision.
false
The depreciation will not be affected by the decision to outsource components and are
irrelevant ( sunk ) to that decision.
10. Introducing a system that approaches a just-in-time situation, thus
eliminating most of the inventories in a manufacturing process, and
reducing moving time, will result in a decrease of the process cycle
efficiency but creates cost savings in transportation costs and inventory
carrying costs.
The PCE increases.
3
false
MBI – 5 2007-2008. Final examination course financial management, part management
accounting. 11-06-2007.
11. Recently a large toy manufacturing and trading company had to
recall millions of toys because the lead content of the paints used was
considered to be too dangerous for children. In many countries
legislation do forbid dealers to sell these products to the public. Because
it was obviously a mistake made by the quality inspection department,
the costs caused by the recall are classified as internal failure costs.
false
Failures detected outside the firm ( here by dealers or foreign inspection authorities ) are
considered to be external failure costs.
12. A company, acting as a price-taker in the pork market, can produce
and sell his product at the total cost of € 1,60 per kg. of which € 0,90
are flexible ( variable ) costs. He is able to stop production at short
notice without additional cost occurring. Because of a threatening
animal disease the market price falls to € 1,20 per kg. This company
will show the best ( financial ) results by stopping production
immediately.
false
The company will minimize its losses by continuing production as long as the sales price
exceeds the variable cost of € 0.90 / kg.
13. An investigation into the feasibility of a new product reveals that
the expected market price is € 98 per unit. The company has to make a
profit of € 18 per unit to cover the cost of capital on the required
investments. A preliminary study shows that the total manufacturing
and commercial costs would be € 85. Applying the target costing
approach, this company should conclude not to introduce this new
product.
false
The application of target costing implies the request to the development department to redesign the product and processes allowing for costs not to exceed 98 – 18 = 80 €
14. A budget is a diagnostic control system that runs with a high degree
of routine. When there is a large degree of strategic uncertainty
however, an interactive control system might better support motivation.
correct
Interactive controls allow for larger decisional flexibility and possibilities to decide based on
expert knowledge, which is more needed in uncertain circumstances.
15. From a firm’s financial budget a Total Asset Turnover of 0,5 has
been derived. The firm’s target Return on Sales is 4 %. So the expected
Return on Assets is 8 %.
ROA = 0.5 * 0.04 = 0.02
4
false
MBI – 5 2007-2008. Final examination course financial management, part management
accounting. 11-06-2007.
Problem 2. On single and multiple rate allocation. ( 7 points )
Sheppard Company manufactures and sells receiver sets made to customer specifications. It
has two service departments, Power and Maintenance, and two production departments.
Information on 2006 operations are as follows:
Costs/departments
Direct labour costs
Direct material
Support costs
Direct labour hours
Machine hours
Power units used
Power
0
0
$ 45000
0
0
0
Maintenance
0
0
$ 75000
0
0
0
Parts production
$ 400000
$ 200000
$ 150000
100000
40000
200000
Assembly
$ 180000
$ 40000
$ 110000
60000
80000
160000
It takes – as an average – 50 labour hours in the parts production department and 30 machine
hours in the assembly department to produce one receiver set.
a. If Sheppard Company allocates all support costs by a single overhead rate on direct
labour hours, determine the cost of a receiver set requiring $ 150 direct materials, 60
labour hours and 5 machine hours in the Parts production and 20 labour hours and 20
machine hours in the Assembly department. Start with the computation of that
predetermined overhead rate per direct labour hour.
----------------------------------------------------------------------------------------------------------------total support costs : 45 + 75 + 150 + 110 = 380 thousand
total direct labour hours : 100 + 60 = 160 thousand
overhead rate: 380/160 = $ 2.375 / DLH
(1)
1 DLH in PP costs 400/100 + 2.375 = 6.375
1 DLH in Ass costs 180/60 + 2.375 = 5.375
costs of a receiver set:
direct material
costs PP 60 *6.375
costs Ass 20 *5.375
total
150
382.50
107.50
640.--
5
(1.5)
MBI – 5 2007-2008. Final examination course financial management, part management
accounting. 11-06-2007.
b.
In contrast to question a), the support costs will now be allocated to labour hours in the
Parts production department and to machine hours in the Assembly department. The
support costs of the service departments will be allocated to the production
departments as follows: proportional to the usage of power units for the power
department’s cost and proportional to machine hours for the maintenance department’s
cost.
Compute the rate per direct labour hour in the Parts production department and the
rate per machine hour in the Assembly department.
---------------------------------------------------------------------------------------------------------------Allocation of support costs: ( all in 1,000)
To:
PP
ASS
direct departmental
150
110
power
(20/36) 25 (16/36) 20
Maintenance
(40/120) 25 (80/120) 50
total
200
180
Number of DLH
Number of MH
Overhead rate
TOT
260
45
75
380
100
80
200/100= 2 / DLH 180/80= 2.25/MH
(1.5)
-----------------------------------------------------------------------------------------------------------c. Using the results from question b), determine the cost of a receiver set requiring $ 150
direct materials, 60 labour hours and 5 machine hours in the Parts production and 20
labour hours and 20 machine hours in the Assembly department.
-------------------------------------------------------------------------------------------------------Direct material
Labour PP
60 * 4
Overhead PP 60 * 2
Labour ASS 20 * 3
Overhead ASS 20 * 2.25
Total
150
240
120
60
45
615
(2)
----------------------------------------------------------------------------------------------------------------d. What explains the difference between the answers a) and c) ?
----------------------------------------------------------------------------------------------------------------the product requires relatively small number of expensive machine hours in assembly. (1)
-----------------------------------------------------------------------------------------------------------------
6
MBI – 5 2007-2008. Final examination course financial management, part management
accounting. 11-06-2007.
Problem 3. On multi-product break-even analysis , sales mix. (10 points).
Alama Flooring Inc. offers three types of flooring products: tile, carpet and parquet. Cost
analysis reveals the following costs and revenues ( expressed on a per square yard basis )
expected for the coming year:
product
Tile
Carpet
Parquet
Sales price
per square yard, $
16,50
6,55
25,00
Direct material cost
,,
5,20
3,25
8,55
Direct labour costs
,,
1,60
0,80
6,40
Unit-related overhead
,,
1,70
0,50
4,05
Manufact. Capacity costs Total per year , $
206000
Selling & General cap.cost
,,
124000
Expected sales
Square yards, year
18000
90000
12000
A direct labour hour costs $ 3,20. Current capacity is 60,000 labour hours, the number of
which cannot be expanded this year. Employees can work on either type of flooring. All
capacity related costs are fixed.
1.
Determine the expected net income for the coming year. Use direct-costing technique.
-------------------------------------------------------------------------------------------------------CM tiles
18000 * ( 16.50 – 5.20 – 1.60 – 1.70 ) =
144,000
CM carpet 90000 * ( 6.55 – 3.25 – 0.80 – 0.50 ) =
180,000
CM parquet 12000 * ( 25 – 8.55 – 6.40 – 4.05 ) =
72,000
Total CM
396,000
Capacity costs
330,000
Net income
66,000
(2)
-------------------------------------------------------------------------------------------------------2. Assume for this question that sales always will be in proportions of the expected
volumes. Determine the break-even sales mix expressed in square yards in total and for
each of the products separately.
--------------------------------------------------------------------------------------------------------average CM per yard in total : 396,000 / 120,000 = 3.30
BE volume in total:
tiles
carpet
parquet
330,000 / 3.30 = 100,000 yards of which:
18/120 * 100,000 = 15,000 yards
90/120 * 100,000 = 75,000 yards
12/120 * 100,000 = 10,000 yards
(3)
-------------------------------------------------------------------------------------------------------
7
MBI – 5 2007-2008. Final examination course financial management, part management
accounting. 11-06-2007.
3. Suddenly, a special order for 4000 square yard of parquet can be obtained at a price of
$23,00 per square yard. However, because of shortage of labour, by accepting this order
3500 labour hours will not be available for the jobs already planned. Will Alama accept
the special order when trying to maximize annual net income? Why?
--------------------------------------------------------------------------------------------------------determine CM per hour per product:
hours used:
tile
8/0.5 = 16
18,000 * 0.5 = 9,000
carpet
2/0.25 = 8
90,000 * 0.25 = 22,500
parquet
6/2
= 3
12,000 * 2
= 24,000
total
55.500
available
60,000
idle capacity
4,500
additional contribution margin special order : 4000*(23 – 19) =
opportunity costs ( other parquet orders , see below ) 3500 * 3 =
increase of contribution margin
16,000
10,500
5,500
(2)
-----------------------------------------------------------------------------------------------------------4. If accepting this special order, what type of flooring work will be dropped: tiles, or
carpets, or other parquet jobs ? Support your answer with a ( brief ) computation.
------------------------------------------------------------------------------------------------------------normal parquet orders, having the lowest CM per hour.
3,500 * 3 + 4,500 * 0 < 4000 * 4
(1)
------------------------------------------------------------------------------------------------------------5. What is the minimum price per square yard required from this special order, when Alama
would apply the opportunity-cost principle in determining the cost of this job.
-------------------------------------------------------------------------------------------------------------
flexible costs per yard
opportunity costs 10,500/4000
minimum price to break even
19
2.625
21,625 per yard
(2)
-------------------------------------------------------------------------------------------------------------
8
MBI – 5 2007-2008. Final examination course financial management, part management
accounting. 11-06-2007.
Problem 4. On the allocation of service departmental costs. ( 8 points )
Recently the government of Oberland ( that’s a country close to Nederland ) decided to
establish a centralized ITC organization aiming at the support of three agencies: Taxation,
Social and Medical Care and Education. The ITC Centre has two separate departments:
Computer Services and Communications.
The total annual costs of the Computer Services Department are estimated to be € 360 million
and those of the Communications Department as € 240 million.
The following table offers an overview ( in percentages of the total workload of each
Department ) of the contribution of each department to its customer-organizations:
From/to
Computer serv.
Communications
Comp.
Serv.
5%
0%
Communications
10 %
5%
Taxation
20 %
10 %
Social &
Education
Medical care
40 %
25 %
55 %
30 %
Total
100 %
100 %
The support provided is measured in computer contact hours in the Computer Services
Department and in direct labour hours in the Communications Department.
a. Using the direct allocation method , compute what the Computer Services
Department would charge to the three final customer organizations: Taxation, Social
& Medical Care and Education.
-----------------------------------------------------------------------------------------------------------To:
Taxation
S&M care
Education
Total
20/85 * 360,000 = 84,706
40/85 * 360,000 = 169,412
25/85 * 360,000 = 105,882
360,000
(2)
-------------------------------------------------------------------------------------------------------------
9
MBI – 5 2007-2008. Final examination course financial management, part management
accounting. 11-06-2007.
b. Using the sequential allocation method, answer the same question as sub a). Allocate
the cost of the computer services department firstly.
-------------------------------------------------------------------------------------------------------To:
Communications
Taxation
S&M care
Education
Total
10/95 * 360,000 =
20/95 * 360,000 =
40/95 * 360,000 =
25/95 * 360,000 =
37,895
75,789
151,579
94,737
360,000
(3)
----------------------------------------------------------------------------------------------------------c. What would the costs of each of the support departments ( Computer services and
Communications ) be if the reciprocal allocation method would be used. Develop
firstly the cost formulae needed for that purpose.
-------------------------------------------------------------------------------------------------------Cost COMP = 0.05 Cost COMP + 360,000
Cost COMM = 0.1 cost COMP + 0.05 cost COMM + 240,000
(2)
Solve by substitution:
Cost COMM = 292,521
Cost COMP = 378,947
(1)
--------------------------------------------------------------------------------------------------------
10
MBI – 5 2007-2008. Final examination course financial management, part management
accounting. 11-06-2007.
Problem 5. On ABC and ABM. ( 7,5 points ).
The Brooklyn Company manufactures two models of compact disc players: a Deluxe model
( DLM ) and a Regular model ( RM ). The company has manufactured the RM for years; the
DLM was introduced recently to tap a new segment of the market. Since the introduction of
the DLM, the company’s profits have steadily declined and management has become
increasingly concerned about the accuracy of its costing system. Sales of the DLM have been
growing rapidly.
The company has estimated that this year it will incur $ 1 million in manufacturing support
costs and will produce 5.000 units of the DLM and 40.000 units of the RM. The DLM
requires 2 hours of direct labour and the RM requires 1 hour.
Material and labour costs per unit and the selling prices are as follows:
Item
DLM
RM
Direct materials cost
$ 45
$ 30
Direct labour cost
$ 20
$ 10
Sales price
$ 140
$ 80
The company has decided to trace manufacturing support costs to four activities and introduce
an ABC costing system. Following are the amounts of manufacturing support costs traceable
to the four activities this year:
Activity
Purchasing
Quality control
Product set-ups
Maintenance
Total support costs
Cost driver
Number of orders
Number of inspections
Number of set-ups
Machine hours
Support
Costs in $
180.000
250.000
220.000
350.000
1.000.000
Cost driver units required for
DLM
RM
Total
200
400
600
1.000
1.000
2.000
100
100
200
20.000 15.000
35.000
a. Determine the cost driver rates that will be used to determine the product costs.
--------------------------------------------------------------------------------------------------------------Purchasing:
180,000/600 = 300 per order
Quality control:
250,000/2,000 = 125 per inspection
Product set-up:
220,000/200 = 1,100 per set up
Maintenance:
350,000/35,000 = 10 per machine hour
(3)
----------------------------------------------------------------------------------------------------------------11
MBI – 5 2007-2008. Final examination course financial management, part management
accounting. 11-06-2007.
b. Compute the total cost to manufacture one unit of each model according to the
ABC-system.
----------------------------------------------------------------------------------------------------------------DLM
RM
direct material costs
45
30
direct labour costs
20
10
purch.
200*300/5000
12 400*300/40000 3
Q.C.
1000*125/5000
25 1000*125/40000 3.125
Set up
100*1100/5000
22 100*1100/40000 2.75
Maint.
20000*10/5000
40 15000*10/40000 3.75
costs per unit
164
52.625
(3.5) Other approaches, allocating the total support costs and dividing by total production
is accepted if final outcomes are as above.
----------------------------------------------------------------------------------------------------------------c. Explain the possible reason(s) behind the decrease of profitability since the introduction of
the DLM as far as detectable in the information, and suggest measures to improve that
situation.
----------------------------------------------------------------------------------------------------------------DLM is requiring relatively more overhead activities compared to RM. When using a single
overhead rate, RM is overcharged and if prices are accordingly, will loose market, while
DLM is undercharged, doesn’t cover the real costs but is priced attractively and thus
increases losses. Measures:
increase price DLM and lower price RM
redesign process of DLM for less machine hours, number of inspections, larger batch sizes
purchase larger quantities.
(1)
---------------------------------------------------------------------------------------------------------------
12
MBI – 5 2007-2008. Final examination course financial management, part management
accounting. 11-06-2007.
Problem 6. On make-or-buy decisions. ( 7.5 points )
Webber Inc. is considering outsourcing a key component for its final products. A reliable
supplier has quoted a price of € 62,50 per unit. At practical capacity the company will use
48,000 units per year. The following costs of the component when manufactured in-house are
expressed on a per unit base:
Direct materials
Direct labour
Unit-related support
Batch-related support
Product-sustaining support
Facility-sustaining support
Total costs per unit of the component
23,40
16,10
14,70
9,80
2,20
6,90
73,10
Direct materials, direct labour and unit-related costs are all considered to be fully variable
( flexible ). The batch-related support costs will be eliminated as well except for the quality
control costs amounting to 40 % of the original level of this item. The other costs are
capacity-related ( fixed ). However, the purchase department is expected to spend € 12000
annually additionally in order to handle this new supplier relationship.
a. Should Webber outsource the component from a financial point of view? Compute
the expected gain or loss from outsourcing.
-----------------------------------------------------------------------------------------------------------Avoidable costs:
DM, DL, unit-related support
and 60 % of batch-related support
Relation handling costs 12,000/48,000 =
Potential cost savings
Outside purchase price
Result of outsourcing
-
-
60.08
0.25
59.83
62.50
2.67
Decision: no outsourcing because result would be 48,000* - 2.67 = - 128,160
( 4 ) Other methods to come to this conclusion are available. If the outcome is similar these
are accepted.
-----------------------------------------------------------------------------------------------------------Now somebody remembers, that the supplier promised a JIT-based delivery schedule. The
current average inventory when produced in-house is sufficient for 2 months of production
and the inventory value is at full costs per unit. Moreover, because no space and equipment to
store the components is needed, half of the allocated facility-sustaining support costs can be
eliminated.
continued next page.
13
MBI – 5 2007-2008. Final examination course financial management, part management
accounting. 11-06-2007.
b. Does this additional information change your decision on outsourcing? Support your
opinion with a computation.
-------------------------------------------------------------------------------------------------------------original deficit
eliminate facility sustaining support cost
net benefit
-
2.67
3.45
0.78
plus all interest savings ( percentage unknown ) on investment of
48,000 / 6 * 73.10 = 584,800
( this computation is not required ! )
Yes, the outsourcing is now beneficial.
(2)
---------------------------------------------------------------------------------------------------------------c. What other factors are relevant for this decision besides the possible financial benefits?
Mention at least three of these.
----------------------------------------------------------------------------------------------------------------Will in future the supplier:
- Maintain his price?
- Guarantee the required quality?
- Deliver in time?
And other sensible requirements.
(1.5)
--------------------------------------------------------------------------------------------------------------
14
MBI – 5 2007-2008. Final examination course financial management, part management
accounting. 11-06-2007.
Problem 7. On optimising quality control. ( 7,5 points )
You just entered ( as a badly paid volunteer, just complying with your working-experience
study assignment ) Emerald Ltd. They have to find a job for you, and as you followed a
course in Management Accounting, here your first task is presented:
For a new manufacturing line, the management is in doubt how many quality inspections will
be scheduled in the production process. It is definitely known, that each inspection will cost
€ 5 per unit inspected.
The production is organized in batches of 1,000 items. Then each product will undergo two
different machining and assembly operations, called stage 1 and stage 2. All materials of € 30
per unit are used at the beginning of the process. The added conversion cost ( labour, machine
time and support costs ) of each stage are:
Stage 1
€ 20 direct conversion costs
Stage 2
€ 70 direct conversion costs
The total costs of a unit of finished product will thus cost ( excluding inspection costs ) € 120
Full testing runs showed, that after stage 1 15 % of the products will show serious defects,
and that stage 2 inflicts defects on 10 % of the production. Products with defects have to be
scrapped without any revenue: That means, that if you only inspect one time, after stage 2,
235 units out of a batch of 1000 embody one or two defects and will be thrown away.
The question is: how many inspections will you recommend? One or two?
To help you, some intermediate questions:
a. How many units per batch will develop defects in each of the stages?
in stage 1: 0.15*1,000 = 150
in stage 2: 0.1 * 850 = 85
(1)
b. What is the value of one unit (excluding inspection costs ), right or wrong, after each of the
stages?
after stage 1: 30 + 20 = 50
after stage 2: 50 + 70 = 120
(1)
c. How much value per batch do you throw away when inspecting:
after stage 2 only: 235*120 = 28,200
after stage 1 and 2: 150* 50 = 7,500
85*120 = 10,200
17,700
(1.5)
d. How many inspections per batch will take place when you organize the quality control by
one or by two inspections? And what are the total cost of inspection? Remember you will
always conduct the final inspection!
Case 1: one inspection after stage 2
Number of inspections:
1000
total costs: 5000
Case 2: an inspection after each stage
Number of inspections: 1000 + 850
total costs: 9250
(1.5)
e. What will you recommend and why?
Organise 2 inspections because 28200 + 5000 > 17700 + 9250
(2.5)
15
MBI – 5 2007-2008. Final examination course financial management, part management
accounting. 11-06-2007.
Problem 8. On financial control. ( 7,5 points)
The balance sheet by the end of 2006 of Xylon Ltd. shows following items ( in millions of € ):
Cash
Other current assets
Total current assets
Net fixed assets
Other assets
Total assets
10
390
400
1200
Accounts payable
Other short term debt
Total current liabilities
Long term debt
Equity capital paid-in
200 Retained earnings
1800 Total capital
100
500
600
1000
50
150
1800
The income statement of 2006 reports a loss, already deducted from the retained earnings in
the balance sheet above:
Sales
6000
Cost of goods sold
4500
Selling & administrative expenses
1400
EBIT
100
Interest expenses on total debt
150
EBT
- 50
Taxes 30 %
+15
Net income
-35
Answer following questions briefly, and support that with numerical indications:
a. What is your opinion regarding the operating result, e.g. measured by the Return on Sales,
of this company?
----------------------------------------------------------------------------------------------------------------ROS = 100 / 6000 = 1.67 %, low but positive anyway.
(1)
----------------------------------------------------------------------------------------------------------------b. What is obviously the cause of the negative Return on Equity of this company?
----------------------------------------------------------------------------------------------------------------ROA = 100/1800 = 5.5 % but the cost of debt are 150/1600 = 9.375, so they loose heavily on
each € debt invested and there is a lot of these! (1.5)
----------------------------------------------------------------------------------------------------------------c. How do you assess the solvency ( debt burden ) of this company? Does this have any
positive influence on the results?
----------------------------------------------------------------------------------------------------------------D/E = 1600/200 = 8 which is generally considered to be critical. (1)
-----------------------------------------------------------------------------------------------------------------
16
MBI – 5 2007-2008. Final examination course financial management, part management
accounting. 11-06-2007.
d. Could you say something about the liquidity position of this firm. If you say: nothing,
explain why, otherwise support your judgement numerically.
----------------------------------------------------------------------------------------------------------------Actually nothing can be forecasted about liquidity by a balance sheet, but financial rules of
thumb prefer a current ratio > 1, here being 400/600 = 0.67 only. (1)
----------------------------------------------------------------------------------------------------------------e. The total capital invested at the beginning of 2006 amounted to € 1600 ( million ). The
management believes that the cost of capital of the kind of activities of Xylon is 12 % per
year. Determine the Economic Value Added ( or Residual Income ) of this company in
2006.
----------------------------------------------------------------------------------------------------------------100 * ( 1 – 0.3 ) – 1600 * 0.12 = - 122, so a large negative result.
(2)
acceptable option: you may take (110 + 15) in stead of 100
----------------------------------------------------------------------------------------------------------------------------- -----------
f. Do you regard the EVA to be a good basis to determine any bonus payment to the
management, anyway when it is positive? Why?
----------------------------------------------------------------------------------------------------------------Yes, it is an indication of value adding performance of the firm, and financial theory
considers this the main objective of top management. (1)
----------------------------------------------------------------------------------------------------------------------------- -----------
end of examination
17