The scenario
Seiko Holdings Plc is based in Birmingham, United Kingdom serving UK and Europe. Seiko Holdings Plc is headed by Clara Chou a seasoned Psychologist who has a strong love for great living spaces believing this improves mental health and longevity. It operates from a rented Head Office premises in central Birmingham with a Shared Services Centre serving the group. Seiko Holdings Plc has investments and interests in Healthcare Industry (Adult Care) and Hospitality Industry (offering packaged holiday services).
The Health & Social Care business operating under the name Seiko Care Solutions (SCS) rents properties which SCS tailor to cater for the needs of the service users and maintains per Care Quality Commission (CQC) standards and personal care plans. SCS lost two paralysed service user contracts following a complaint for a delayed completion of disabled toilets renovation project. Under Sheila Roberts as Managing Director (a qualified Mental Health Nurse), SCS had enjoyed year-on-year growth, however profitability has (since January 2020) been heavily impacted by various macro factors in the UK affecting such costs as food costs, energy costs and property costs etc.
Seiko Holdings Plc operates in the hospitality sector under the name Seiko Spaces (SS) where it owns and operate a Bed and Breakfast (B&B) chain with strategic business relationships with a prominent UK and Regional Europe passenger aeroplane business based in London. SS owns the B&Bs it runs and plans to expand its chain. SS is run by Parndeep Singh (Managing Director) a travel enthusiast with a knack for spotting profitable destinations and routes. Under Parndeep Singh’s eight year leadership, SS has maintained strong year-on-year growth and profitability until 2020 when profitability and growth declined despite the demise of Thomas Cook in September 2019 and due to COVID-19, Brexit and many other macro factors in the UK. On reviewing the unpleasant profitability position, Clara Chou demanded for the position to improve citing Thomas Cook’s demise in September 2019 as an opportunity for growth and improved profitability for SS.
Following deliberations, Seiko Holdings Plc Strategic Business Committee recommended that Seiko Group should acquire a good fit for strategic synergistical benefits to Seiko Holdings Plc for improved growth and profitability. The identified two possible acquisition targets and would want you to perform some ratio analysis, evaluate the findings and advise the committee on which one they should acquire and why. The target companies are below:
PureCare Solutions Ltd: A prominent profitable Health and Social Care business offering Supported Living services to past offenders on path roto community rehabilitation and mental health patients. PureCare Solutions Ltd has a strong network of support teams and has maintained an Outstanding Rating from Care Quality Commission for the past 7 years under the leadership of the current Managing Director who has been in charge for the past 10 years.
Kindra Properties Ltd: Led by founder Kindra Peters a seasoned Property Developer and Architecture, Kindra Properties Ltd has delivered various property development projects, renovations and has a successful Buy, Revamp, Rent, Refinance and Repeat (BRRRR) portfolio and strategy. Three of its BRRR properties are leased to Supported Living Services and have state of the art tailored bathrooms and play areas. The other properties are leased to a company operating them as Bed and Breakfast properties.
Below are the target companies’ extracts from their financial statements:
| Statements of Profit or Loss (SoPL) for the year ended 31 December 2022 | |||||
| PURECARE SOLUTIONS | KINDRA PROPERTIES | ||||
| £ | Vertical Analysis | £ | Vertical Analysis | ||
| Turnover | 756,345 | 100% | 765,101 | 100% | |
| Cost of sales | (471,783) | 62.38% | (410,320) | 53.63% | |
| __________ | __________ | ||||
| Gross profit | 284,562 | 37.62% | 354,781 | 46.37% | |
| Administrative and other operating expenses | (213,420) | 28.22% | (130,421) | 17.05% | |
| __________ | __________ | ||||
| Net Operating Profit | 71,142 | 9.41% | 224,360 | 29.32% | |
| Finance charges | (6,193) | 0.82% | (47,098) | 6.16% | |
| __________ | __________ | ||||
| Profit on ordinary activities before taxation | 64,949 | 8.59% | 177,262 | 23.17% | |
| Tax on profit on ordinary activities | (12,340) | 1.63% | (33,680) | 4.40% | |
| __________ | __________ | ||||
| Profit for the year | 52,609 | 6.96% | 143,582 | 18.77% | |
| __________ | __________ | ||||
| Statements of Financial Position (SoFP) as at 31 December 2022 | ||||||
| PURECARE SOLUTIONS | KINDRA PROPERTIES | |||||
| £ | Vertical Analysis | £ | Vertical Analysis | |||
| Fixed assets | ||||||
| Tangible assets | 465,734 | 58.89% | 1,045,980 | 90.65% | ||
| Total Non Current Assets | 465,734 | 58.89% | 1,045,980 | 90.65% | ||
| Current assets | ||||||
| Trade receivables | 301,298 | 38.10% | 40,345 | 3.50% | ||
| Cash at bank and in hand | 23,765 | 3.01% | 67,542 | 5.85% | ||
| Total Current Assets | 325,063 | 41.11% | 107,887 | 9.35% | ||
| Total Assets | 790,797 | 100.00% | 1,153,867 | 100.00% | ||
| Liabilities | ||||||
| Current Liabilities: Trade payables | 14,654 | 1.85% | 60,762 | 5.27% | ||
| Non-Current Liabilities: Bank Loans | 76,459 | 9.67% | 735,908 | 63.78% | ||
| Total Liabilities | 91,113 | 11.52% | 796,670 | 69.04% | ||
| Equity and reserves | ||||||
| Called up share capital | 1 | 0.00% | 3 | 0.00% | ||
| Retained Profit | 699,683 | 88.48% | 357,194 | 30.96% | ||
| Total Equity | 699,684 | 88.48% | 357,197 | 30.96% | ||
| Total Equity and Liabilities | 790,797 | 100.00% | 1,153,867 | 100.00% | ||
The ratio analysis below is in 4 categories (Profitability, Liquidity, Management Efficiency, and Gearing), but is incomplete.
Requirements
1.1 You are required to calculate ratios for Kindra Properties.
1.2 Prepare a business report (using a proper report format), maximum 2 pages long (+/- 10%), to Seiko Holdings Plc Strategic Business Committee based on ratio analysis and relevant qualitative issues to be considered. Your 800-word report must evaluate the financial statements and ratio analysis and make a convincing argument for investment in one of the two target companies. Your analysis, conclusions and recommendations should be supported by credible academic references (in Harvard Referencing format per Birmingham City University policy) using proper academic/ business English.
1.3 Critically evaluate the working capital management (WCM) of both companies including some qualitative aspects and draw conclusions on which is stronger.
1.4 Prepare a table with possible sources of finance Seiko Holdings Plc should consider to finance the investment in either PureCare Solutions Ltd or Kindra Properties Ltd. Critically evaluate the options you have identified and make a well-reasoned, and well-referenced, conclusion and recommendation(s).
Question 2a
Overview
You are employed by Mobility Global (MG) as a Senior Management Accountant. Like other businesses, MG has been exposed to challenges facing the UK including Brexit, COVID-19, The Russo-Ukranian War, UK Political Dynamic, Interest Rates and Inflation to name but a few. MG produces and sells three types of special personal mobility equipment directly to National Health Service (NHS) and Care Homes across the United Kingdom.
MG’s profitability has been on a decline over the past years. Below is MG’s overall performance for the month of December 2022. In view of the huge capital investment made, MG’s directors are considering ways to improve this mediocre performance.
Upon considering the data below in the Executive Committee Meeting, Clara Zoul the Operations Director and five other directors share the same understanding and view that production of Hoists and Mobile Beds must be stopped if profitability is to improve in 2023.
Fixed overheads were apportioned based on the floor area occupied. You spot that marginal costing would show the results differently and may affect the directors’ decision.
Mobility Global’s Product Financial Performance Report for the month of December 2022
| Wheelchairs | Hoists | Mobile Beds | Total | ||
| Units sold | 60 | 75 | 120 | ||
| Turnover | 33,600.00 | 47,250.00 | 56,400.00 | 137,250.00 | |
| Costs | |||||
| Direct Material | (7,728.00) | (25,042.50) | (27,636.00) | (60,406.50) | |
| Direct Labour | (5,712.00) | (14,647.50) | (14,100.00) | (34,459.50) | |
| Other Variable Expenses | (3,024.00) | (9,450.00) | (5,640.00) | (18,114.00) | |
| Fixed Overheads | (11,560.00) | (25,840.00) | (30,600.00) | (68,000.00) | |
| Profit /(Loss) | 5,576.00 | (27,730.00) | (21,576.00) | (43,730.00) |
Task 1
Parndeep Kaur, the Finance Director is busy on some strategic forecasts and has requested you to prepare a report to MG’s directors concerning the proposal to cease Hoists and Mobile Beds production.
Using your knowledge of Management Accounting and Marginal Costing, clearly showing calculations and using appropriate, credible references, critically analyse Mobility Global’s product viability and the proposal to cease the production of Hoists and Mobile Beds. You are to:
1. Prepare a Marginal Costing Statement for each product and total for the month of December 2021.
2. Based on the contribution you calculated in part (a) above, advise if MG should stop the production of Hoists. Prepare a Marginal Costing Statement showing the results if MG stops making Hoists.
3. Based on the contribution you calculated in part (a) above, advise if MG should stop the production of Mobile Beds. Prepare a Marginal Costing Statement showing the results if MG stops making Mobile Beds.
4. In addition to the calculations and your recommendations above (whether to cease production of Hoists and Mobile Beds), critically discuss the qualitative issues to be considered by Mobility Global’s board in making the decision.
5. Discuss how and why marginal costing calculates contribution to pay overheads and why this is useful in evaluating product value to a firm comparing it to Absorption Costing technique.
Question 2b
As a Neptune Holdings Plc junior management accountant, the Finance Director wants your calculations and recommendation regarding an expansion plan the Board is considering, which includes a chain of factory outlet stores.
Below are the figures for the first one that is planned for a central Manchester location next year.
Company policy dictates that any decision should be based on the results of calculating Net Present Value (NPV) of 3 years of cash flows using a cost of capital of 12%, Payback Period (PBP) must be less than 3 years, and the Internal Rate of Return (IRR) of the project should provide a 5% cushion in case of increases in inflation or interest rates.
The initial investment investment consists of £100,000 for the land, building costs of £158,000, and £36,600 for fittings and equipment.
The cash flows in year 1 are expected to be: total sales revenue £600,600; the cost of Alpha products sold £165,900; Beta stock sold £118,860; staff costs £24,780; light & heat £35,196; other overheads £134,904. The cash flows for years 2 and 3 are the same as those in the first year, however expected increase by 2% inflation each year.
Requirements for Question 2 part (b)
Using the information above and in accord with the above stated company policy you are required to calculate:
- Net Present Value (NPV)
- Payback period (PBP) and Discounted Payback Period (DPBP)
- Internal Rate of Return
- Based on your calculations do you recommend the investment is made and the new outlet store is built?
- Critically discuss the limitations of the above project appraisal techniques used and any other recommendations on issues the board that must be considered before making final investment decision.
Question 3
Euro Engineering Ltd manufactures three types of ceramic coffee percolator; the Metal, pink and the Zinc models. The maximum market demand and resource requirements of each of these products are shown below.
The percolators are made from an advanced heat-resistant material that gives the firm a competitive advantage. An email from the purchasing manager has informed you that, because of a problem with the supplier, it should be assumed that the half year’s supply of this special material is limited to 80,000kg.
Euro Engineering Ltd operates on a just-in-time production (JIT) method so that opening and closing inventory levels are zero.
The sales director has already accepted an order for 5,000 Metal percolators that, if not fulfilled, would incur a financial penalty of £12,000. This order is included in the Metal’s maximum market demand figure.
Continental’s directors need to know whether they should go ahead and satisfy the contract and then prioritise production in the normal way or whether it should consider breaching the contract and incurring the penalty.