Rose-Jewel sells jewellery through retail stores throughout the country. Over the last two years it has experienced declining profitability and is wondering if this is related to the sector as a whole. It has recently subscribed to an agency that produces average ratios across many businesses. Below are the ratios that have been provided by the agency for Rose-Jewel's business sector based on a year end of 30 September 2019. Return on year-end capital employed (ROCE) 16·8% Net asset (total assets less current liabilities) turnover 1-4 times Gross profit margin 35% Operating profit margin 12% Current ratio 1·25:1 Average inventory turnover 3 times Trade payables' payment period 64 days Debt to equity 38% The financial statements of Rose-Jewel for the year ended 30 September 2019 are: Income Statement RM'000 RM'000 Revenue 56 ,000 Opening inventory 8,300 Purchases 43,900 52,200 Closing inventory (10,200) (42,000) Gross profit 14,000 Operating costs (9,800) Finance costs (800) Profit before tax 3,400 Income tax expense (1,000) Profit for the year 2,400 Statement of financial position RM'000 RM'000 Assets Non-current assets Property and shop fittings 25,600 Deferred development expenditure 5,000 30,600 Current assets Inventory 10,200 Bank 1,000 11,200 Total assets 41,800 Equity and liabilities Equity Equity shares of RM1 each 15,000 Property revaluation reserve 3,000 Retained earnings 8,600 26,600 Non-current liabilities 10% loan notes 8,000 Current liabilities Trade payables 5,400 Current tax payables 1,800 7,200 Total equity and liabilities 41,800 Prepare the equivalent ratios that have been provided by the agency for Rose-Jewel.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Rose-Jewel sells jewellery through retail stores throughout the country. Over the last two years it has experienced declining profitability and is wondering if this is related to the sector as a whole. It has recently subscribed to an agency that produces average ratios across many businesses. Below are the ratios that have been provided by the agency for Rose-Jewel's business sector based on a year end of 30 September 2019.
|
Return on year-end capital employed (ROCE) |
16·8% |
|
Net asset (total assets less current liabilities) turnover |
1-4 times |
|
Gross profit margin |
35% |
|
Operating profit margin |
12% |
|
|
1·25:1 |
|
Average inventory turnover |
3 times |
|
Trade payables' payment period |
64 days |
|
Debt to equity |
38% |
The financial statements of Rose-Jewel for the year ended 30 September 2019 are:
|
Income Statement |
RM'000 |
RM'000 |
|
Revenue |
|
56 ,000 |
|
Opening inventory |
8,300 |
|
|
Purchases |
43,900 |
|
|
|
52,200 |
|
|
Closing inventory |
(10,200) |
(42,000) |
|
Gross profit |
|
14,000 |
|
Operating costs |
|
(9,800) |
|
Finance costs |
|
(800) |
|
Profit before tax |
|
3,400 |
|
Income tax expense |
|
(1,000) |
|
Profit for the year |
|
2,400 |
|
|
RM'000 |
RM'000 |
|
Assets |
|
|
|
Non-current assets |
|
|
|
Property and shop fittings |
|
25,600 |
|
Deferred development expenditure |
|
5,000 |
|
|
|
30,600 |
|
Current assets |
|
|
|
Inventory |
10,200 |
|
|
Bank |
1,000 |
11,200 |
|
Total assets |
|
41,800 |
|
Equity and liabilities |
|
|
|
Equity Equity shares of RM1 each |
|
15,000 |
|
Property revaluation reserve |
|
3,000 |
|
|
|
8,600 |
|
|
|
26,600 |
|
Non-current liabilities |
|
|
|
10% loan notes |
|
8,000 |
|
Current liabilities |
|
|
|
Trade payables |
5,400 |
|
|
Current tax payables |
1,800 |
7,200 |
|
Total equity and liabilities |
|
41,800 |
- Prepare the equivalent ratios that have been provided by the agency for Rose-Jewel.
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