ACCA Paper F9 Financial Performance Progress Test 1

Question Paper
Time: 1 hour

ALL THREE questions are compulsory and MUST be attempted

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Question 1 MUGWUMP LTD The following data relate to Mugwump Ltd, a manufacturing company. Turnover for year 1,500,000 Costs as percentage of sales Direct materials 30% Direct labour 25% Variable overheads 10% Fixed overheads 15% Selling and distribution 5% On average (a) debtors take 2 months before payment (b) raw materials are in stock for 3 months (c) work in progress represents 2 months half-produced goods (d) finished goods represent 1 months production (e) credit is taken as follows (i) materials 2 months (ii) direct labour 1 week (iii) variable overheads 1 month (iv) fixed overheads 1 month (v) selling and distribution month Work in progress and finished goods are valued at materials, labour and variable expense cost. Required: Compute the working capital requirement of Mugwump Ltd, assuming that the labour force is paid for 50 working weeks. (10 marks)

Question 2 WAGTAIL LTD Wagtail Ltd uses the economic order quantity formula to determine optimal levels of raw materials stock. Material B is consumed at a steady rate of 4,000 units per annum. The costs of ordering B are independent of order size; clerical costs of ordering have been calculated at 30 per order. Each order is checked by an employee who is engaged in using B in production and who earns 5 per hour irrespective of his output. The employee generates a contribution of 4 per hour when not involved in materials checks; the stock check takes five hours. Holding costs amount to 15 per unit per annum.

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The supplier of material B has very recently offered Wagtail Ltd a quantity discount of 24p a unit on the current price of 24 for all orders of 400 or more units. Required: (a) Calculate the optimal batch size for material B, ignoring the quantity discount. (b) Evaluate whether the quantity discount offered should be taken up by Wagtail Ltd. (10 marks)

Question 3 DIRE PLC At 31 December 2007 Dire plc has an overdraft of 1m. Interest at a rate of 10% per annum is being charged on the overdraft. The directors are concerned at the size of the overdraft and ask the finance manager to take steps to reduce the figure. Additionally, the directors suspect that improvements could be made within the working capital cycle. Sales during 2006 were 5m, with cost of sales at 3m. The following working capital ratios at 31 December 2006 had been calculated. Debtor collection period Stock holding period Creditor period 3 months 4 months 2 months

At present cash sales represent 10% of turnover, and 20% of all trade purchases were cash on delivery (COD). The finance manager feels that the working capital ratios could be improved to Debtor collection period 2 months Stock holding period 3 months Creditor period 2 months Additionally, no further COD purchases will be made. Cash sales will continue to represent 10% of sales. After negotiations with the bank it was agreed that 200,000 of the overdraft could be converted to a fixed loan on which 7% interest would be charged per year. The loan comes into effect on 1 January 2007. Required: Assuming that the 2006 levels of sales and cost of sales are repeated in 2007 and that any improvements in working capital will give rise to a whole year of interest charge saved, calculate the total amount of interest saved solely as a result of the financial managers proposed improvements. (10 marks)

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