Candidates must answer at least one question from this section

Question 1

Clothing plc. is a multinational company operating in a garment sector. Below are its comparative financial statements for the years ended December 2010 and 2011.

Clothing Plc Income statementsfor the year ended 31st December		2,010
Sales	£ 535,290	£ 408,876
Cost of sales	-305,732	-230,878
Gross profit	229,558	177,998
Distribution costs	-76,024	-64,008
Administrative expenses	-86,748	-68,420
Operating profit	66,786	45,570
Finance cost	-7,108	-5,352
Investment income	2,556	1,780
Profit before tax	62,234	41,998
Tax expense	-12,974	-11,092
Profit for period attributable to equity holders of the parent	49,260	30,906
Dividends paid and proposed for the year	20,278	14,656

Clothing plc Balance sheets as at 31st December	2,011	2,011	2,010	2,010
Non current assets	£	£	£	£
Goodwill		134,710		124,826
Property plant & equip		39,618		33,122
Investments		7,152		1,276
Deferred tax assets		16,742		12,210
		198,222		171,434
Current assets
Inventories	71,496		57,120
Trade & other receivables	177,758		147,658
Cash & equiv	47,470		41,472
		296,724		246,250
Total assets		494,946		417,684
Current liabilities
Bank overdrafts and other loans	25,210		10,676
Trade and other payables	165,786		144,556
Tax payable	18,490		29,694
Provisions	6,566		8,320
	216,052		193,246
Non current liabilities
Other loans	63,276		72,720
Post employment benefits	13,972		12,738
Deferred tax liabilities	4,038		4,494
Provisions	8,552		6,282
	89,838		96,234
Total Liabilites		305,890		289,480
Net assets		189,056		128,204
Equity
Issued capital		128,768		126,180
Share premium		11,004		7,764
Retained earnings and other reserves		49,284		-5,740
		189,056		128,204

Required:

a) Calculate the following ratios for Clothing plc. for 2011 and 2010:

i. Return on total capital employed

ii. Return on equity capital employed

iii. Gross profit margin

iv. Net profit margin

v. Gearing ratio

vi. Dividend cover [60 marks]

b)Using the information calculated at a), and anything else you consider relevant, discuss the financial performance and gearing in the two years ended 31^st December 2010/2011.

[40 marks]

Question 2:

(a) There are typically three costing models carried out by companies, namely absorption costing, marginal costing and activity-based costing. Compare and contrast these three models and their usefulness to managers of organizations. [36 marks]

(b) The Zagg Wholesale Clothing Company (UK) specialises in importing fine shawls from India. The company operates three departments, and their overhead costs for the current year are as follows:

Import overheads	£ 250,000
Administrative overheads	£ 10,000
Selling overheads	£ 40,000
Total overheads cost	£ 300,000

The company has taken on an intern this summer who has recommended that the company should implement an ABC system. You have identified the following activity cost pools and activity measures for the current year:

Activity cost pool	Activity measures
Volume related	Number of units
Order related	Number of orders
Customer support	Number of customers

You have distributed the costs of import, selling and administrative overheads to the activity cost pools based on data obtained from interviews with staff. Relevant data are as follows:

Overhead resource consumption across activities:

	Volume	Order	Customer	Total
	Related	Related	Support
Import overhead	45%	35%	20%	100%
Administrative overheads	15%	40%	45%	100%
Selling overheads	20%	10%	70%	100%
Total activity	20,000 units	1000 orders	50 customers

Mrs. Best runs the ‘Perfect fit’ shop in the city of Bath. For the current year, Mrs. Best placed four orders for a total of 50 shawls

Required:

(i) Calculate the total overhead costs of the 50 shawls ordered by Mrs. Best. [44 Marks]

(ii) Using your answer to (i) above, comment whether you agree with the Intern that the Zagg Wholesale Clothing Company should implement an ABC approach. [20 marks]

SECTION B