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

Accounting

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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

Part i· 2 steps

Current ratio

  1. State the formula and substitute values.

    Current Ratio=Current AssetsCurrent Liabilities=N 150,000N 62,000\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} = \frac{\text{N }150,000}{\text{N }62,000}

  2. Calculate the ratio.

    Current Ratio≈2.42:1\text{Current Ratio} \approx \boxed{\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.

Part ii· 2 steps

Inventory turnover

  1. State the formula and substitute values (assuming closing inventory is average inventory).

    Inventory Turnover=Cost of Goods SoldAverage Inventory=N 240,000N 80,000\text{Inventory Turnover} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}} = \frac{\text{N }240,000}{\text{N }80,000}

  2. Calculate the turnover.

    Inventory Turnover=3 times\text{Inventory Turnover} = \boxed{\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.

Part iii· 2 steps

Proprietor's fund to Liabilities

  1. State the formula and substitute values.

    Proprietor’s Fund to Liabilities=Proprietor’s FundExternal Liabilities=N 258,000N 162,000\text{Proprietor's Fund to Liabilities} = \frac{\text{Proprietor's Fund}}{\text{External Liabilities}} = \frac{\text{N }258,000}{\text{N }162,000}

  2. Calculate the ratio.

    Proprietor’s Fund to Liabilities≈1.59:1\text{Proprietor's Fund to Liabilities} \approx \boxed{\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.

Part iv· 2 steps

Quick or liquid ratio

  1. State the formula and substitute values.

    Quick Ratio=Liquid AssetsCurrent Liabilities=N 70,000N 62,000\text{Quick Ratio} = \frac{\text{Liquid Assets}}{\text{Current Liabilities}} = \frac{\text{N }70,000}{\text{N }62,000}

  2. Calculate the ratio.

    Quick Ratio≈1.13:1\text{Quick Ratio} \approx \boxed{\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.

Part v· 2 steps

Average collection period

  1. State the formula and substitute values (assuming 365 days in a year).

    Average Collection Period=(Average DebtorsCredit Sales)×365 days=(N 45,000N 400,000)×365 days\text{Average Collection Period} = \left(\frac{\text{Average Debtors}}{\text{Credit Sales}}\right) \times 365 \text{ days} = \left(\frac{\text{N }45,000}{\text{N }400,000}\right) \times 365 \text{ days}

  2. Calculate the average collection period.

    Average Collection Period≈41.06 days\text{Average Collection Period} \approx \boxed{\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

Part a· 2 steps

Break-even point

  1. State the formula and substitute values.

    Break-even Point (in Sales Value)=Fixed CostP/V Ratio=N 30,0000.4\text{Break-even Point (in Sales Value)} = \frac{\text{Fixed Cost}}{\text{P/V Ratio}} = \frac{\text{N }30,000}{0.4}

  2. Calculate the break-even point.

    Break-even Point=N 75,000\text{Break-even Point} = \boxed{\text{N }75,000}

Part b· 2 steps

New Break-even point if selling price is reduced by 10%

  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×Original SP0.9 \times \text{Original SP}. The variable cost per unit remains the same.
    New P/V Ratio = (0.9×SP)−VC0.9×SP=0.9×SP−0.6×SP0.9×SP=0.3×SP0.9×SP=0.30.9=13\frac{(0.9 \times \text{SP}) - \text{VC}}{0.9 \times \text{SP}} = \frac{0.9 \times \text{SP} - 0.6 \times \text{SP}}{0.9 \times \text{SP}} = \frac{0.3 \times \text{SP}}{0.9 \times \text{SP}} = \frac{0.3}{0.9} = \frac{1}{3}

  2. Calculate the new break-even point.

    New Break-even Point=Fixed CostNew P/V Ratio=N 30,0001/3\text{New Break-even Point} = \frac{\text{Fixed Cost}}{\text{New P/V Ratio}} = \frac{\text{N }30,000}{1/3} New Break-even Point=N 90,000\text{New Break-even Point} = \boxed{\text{N }90,000}

Part c· 2 steps

New Break-even point if variable cost increases by 10%

  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

  2. Calculate the new break-even point.

    New Break-even Point=Fixed CostNew P/V Ratio=N 30,0000.34\text{New Break-even Point} = \frac{\text{Fixed Cost}}{\text{New P/V Ratio}} = \frac{\text{N }30,000}{0.34} New Break-even Point≈N 88,235.29\text{New Break-even Point} \approx \boxed{\text{N }88,235.29}

Part d· 2 steps

New Break-even point if fixed cost increases by 10%

  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.

  2. Calculate the new break-even point.

    New Break-even Point=New Fixed CostP/V Ratio=N 33,0000.4\text{New Break-even Point} = \frac{\text{New Fixed Cost}}{\text{P/V Ratio}} = \frac{\text{N }33,000}{0.4} New Break-even Point=N 82,500\text{New Break-even Point} = \boxed{\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

Part d(i)· 2 steps

P/V ratio

  1. State the formula and substitute values.

    P/V Ratio=Fixed ExpensesBreak-even Point (Sales Value)=N 4,000N 10,000\text{P/V Ratio} = \frac{\text{Fixed Expenses}}{\text{Break-even Point (Sales Value)}} = \frac{\text{N }4,000}{\text{N }10,000}

  2. Calculate the P/V Ratio.

    P/V Ratio=0.4 or 40%\text{P/V Ratio} = \boxed{\text{0.4 or 40\%}}

Part d(ii)· 2 steps

Profit when sales are N 20,000

  1. State the formula and substitute values.

    Profit=(Sales×P/V Ratio)−Fixed Expenses\text{Profit} = (\text{Sales} \times \text{P/V Ratio}) - \text{Fixed Expenses} Profit=(N 20,000×0.4)−N 4,000\text{Profit} = (\text{N }20,000 \times 0.4) - \text{N }4,000

  2. Calculate the profit.

    Profit=N 8,000−N 4,000=N 4,000\text{Profit} = \text{N }8,000 - \text{N }4,000 = \boxed{\text{N }4,000}

Part d(iii)· 2 steps

New break-even point if selling price is reduced by 20%

  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×SP0.8 \times \text{SP}. Variable cost per unit remains the same.

    New P/V Ratio=New SP−VCNew SP=0.8×SP−0.6×SP0.8×SP=0.2×SP0.8×SP=0.25\text{New P/V Ratio} = \frac{\text{New SP} - \text{VC}}{\text{New SP}} = \frac{0.8 \times \text{SP} - 0.6 \times \text{SP}}{0.8 \times \text{SP}} = \frac{0.2 \times \text{SP}}{0.8 \times \text{SP}} = 0.25

  2. Calculate the new break-even point.

    New Break-even Point=Fixed ExpensesNew P/V Ratio=N 4,0000.25\text{New Break-even Point} = \frac{\text{Fixed Expenses}}{\text{New P/V Ratio}} = \frac{\text{N }4,000}{0.25} New Break-even Point=N 16,000\text{New Break-even Point} = \boxed{\text{N }16,000}
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