You are required to calculate the following Ratios for the company and advise the company appropriately on their investment decision.

Here are the calculations for the requested ratios and break-even points.

Part 1: Ratio Analysis

First, let's identify the necessary components from the Balance Sheet and additional information.

• Current Assets: Stock (N 80,000) + Debtor (N 45,000) + Cash (N 17,000) + Misc. current assets (N 8,000) = N 150,000
• Current Liabilities: Creditor (N 40,000) + Bills payable (N 20,000) + Other current liabilities (N 2,000) = N 62,000
• Liquid Assets (Quick Assets): Current Assets - Stock = N 150,000 - N 80,000 = N 70,000
• Proprietor's Fund (Equity): Share capital (N 200,000 - assuming this to match total liabilities) + Reserves and surplus (N 58,000) = N 258,000
• External Liabilities: Debentures (N 100,000) + Current Liabilities (N 62,000) = N 162,000
• Cost of Goods Sold (COGS): Sales (N 400,000) - Gross Profit (N 160,000) = N 240,000

i. Current ratio Step 1: State the formula and substitute values. $Current Ratio = \frac{Current Assets}{Current Liabilities} = \frac{N 150,000}{N 62,000}$ Step 2: Calculate the ratio. $Current Ratio \approx \text{*2.42:1*}$ Advice: A current ratio of 2.42:1 indicates strong short-term liquidity, suggesting the company can comfortably meet its short-term obligations.

ii. Inventory turnover Step 1: State the formula and substitute values (assuming closing inventory is average inventory). $Inventory Turnover = \frac{Cost of Goods Sold}{Average Inventory} = \frac{N 240,000}{N 80,000}$ Step 2: Calculate the turnover. $Inventory Turnover = \text{*3 times*}$ Advice: An inventory turnover of 3 times suggests that the company sells and replaces its inventory three times a year, which needs to be compared to industry benchmarks for a full assessment.

iii. Proprietor's fund to Liabilities Step 1: State the formula and substitute values. $Proprietor's Fund to Liabilities = \frac{Proprietor's Fund}{External Liabilities} = \frac{N 258,000}{N 162,000}$ Step 2: Calculate the ratio. $Proprietor's Fund to Liabilities \approx \text{*1.59:1*}$ Advice: This ratio indicates that the owners' equity is significantly higher than external debt, suggesting a strong financial structure and lower financial risk for investors.

iv. Quick or liquid ratio Step 1: State the formula and substitute values. $Quick Ratio = \frac{Liquid Assets}{Current Liabilities} = \frac{N 70,000}{N 62,000}$ Step 2: Calculate the ratio. $Quick Ratio \approx \text{*1.13:1*}$ Advice: A quick ratio of 1.13:1 shows good immediate liquidity, meaning the company can cover its current liabilities without relying on inventory sales.

v. Average collection period Step 1: State the formula and substitute values (assuming 365 days in a year). $Average Collection Period = \left(\frac{Average Debtors}{Credit Sales}\right) \times 365 days = \left(\frac{N 45,000}{N 400,000}\right) \times 365 days$ Step 2: Calculate the average collection period. $Average Collection Period \approx \text{*41.06 days*}$ Advice: An average collection period of approximately 41 days indicates how long it takes to collect receivables, which should be evaluated against the company's credit terms.

QUESTION THREE (3)

3a. Break-even analysis for a company that sales toy guns in Jos city

Given: Sales = N 200,000 Variable cost = N 120,000 Fixed cost = N 30,000

First, calculate the Contribution Margin (CM) and P/V Ratio: CM = Sales - Variable Cost = N 200,000 - N 120,000 = N 80,000 P/V Ratio = CM / Sales = N 80,000 / N 200,000 = 0.4

a) Break-even point Step 1: State the formula and substitute values. $Break-even Point (in Sales Value) = \frac{Fixed Cost}{P/V Ratio} = \frac{N 30,000}{0.4}$ Step 2: Calculate the break-even point. $Break-even Point = \text{*N 75,000*}$

b) New Break-even point if selling price is reduced by 10% Step 1: Calculate the new P/V Ratio. Original Variable Cost Ratio = Variable Cost / Sales = N 120,000 / N 200,000 = 0.6. If selling price is reduced by 10%, the new selling price per unit is $0.9 \times \text{Original SP}$. The variable cost per unit remains the same. New P/V Ratio = $\frac{(0.9 \times SP) - VC}{0.9 \times SP} = \frac{0.9 \times SP - 0.6 \times SP}{0.9 \times SP} = \frac{0.3 \times SP}{0.9 \times SP} = \frac{0.3}{0.9} = \frac{1}{3}$ Step 2: Calculate the new break-even point. $New Break-even Point = \frac{Fixed Cost}{New P/V Ratio} = \frac{N 30,000}{1/3}$ $New Break-even Point = \text{*N 90,000*}$

c) New Break-even point if variable cost increases by 10% Step 1: Calculate the new variable cost and new P/V Ratio. New Variable Cost = N 120,000 \times (1 + 0.10) = N 132,000 New Contribution Margin = N 200,000 - N 132,000 = N 68,000 New P/V Ratio = N 68,000 / N 200,000 = 0.34 Step 2: Calculate the new break-even point. $New Break-even Point = \frac{Fixed Cost}{New P/V Ratio} = \frac{N 30,000}{0.34}$ $New Break-even Point \approx \text{*N 88,235.29*}$

d) New Break-even point if fixed cost increases by 10% Step 1: Calculate the new fixed cost. New Fixed Cost = N 30,000 \times (1 + 0.10) = N 33,000 The P/V Ratio remains 0.4. Step 2: Calculate the new break-even point. $New Break-even Point = \frac{New Fixed Cost}{P/V Ratio} = \frac{N 33,000}{0.4}$ $New Break-even Point = \text{*N 82,500*}$

3b. Profitability data for a management consultant

Given: Fixed expenses = N 4,000 Break-even point (Sales Value) = N 10,000

i. P/V ratio Step 1: State the formula and substitute values. $P/V Ratio = \frac{Fixed Expenses}{Break-even Point (Sales Value)} = \frac{N 4,000}{N 10,000}$ Step 2: Calculate the P/V Ratio. $P/V Ratio = \text{*0.4 or 40\%*}$

ii. Profit when sales are N 20,000 Step 1: State the formula and substitute values. $Profit = (Sales \times P/V Ratio) - Fixed Expenses$ $Profit = (N 20,000 \times 0.4) - N 4,000$ Step 2: Calculate the profit. $Profit = N 8,000 - N 4,000 = \text{*N 4,000*}$

iii. New break-even point if selling price is reduced by 20% Step 1: Calculate the new P/V Ratio. Original P/V Ratio = 0.4, which means Variable Cost is 60% of Sales (1 - 0.4). Let original Selling Price per unit be SP and Variable Cost per unit be VC. So, VC = 0.6 \times SP. If selling price is reduced by 20%, New SP = $0.8 \times \text{SP}$. Variable cost per unit remains the same. $New P/V Ratio = \frac{New SP - VC}{New SP} = \frac{0.8 \times SP - 0.6 \times SP}{0.8 \times SP} = \frac{0.2 \times SP}{0.8 \times SP} = 0.25$ Step 2: Calculate the new break-even point. $New Break-even Point = \frac{Fixed Expenses}{New P/V Ratio} = \frac{N 4,000}{0.25}$ $New Break-even Point = \text{*N 16,000*}$