- 20 Marks
PM – May 2025 – Q2 – Performance Measurement Systems
Calculate profitability and liquidity ratios, analyze performance improvement, and cash from reduced debt collection for Adebat Cleaning Services.
Question
Adebat Cleaning Services is a company that operates a car wash service in Ikeja, Lagos
State. The economic condition in Nigeria in recent times has affected all households
and businesses. Due to deregulation, petroleum products prices have gone up
astronomically and food inflation has also reached an all-time high of over 200%. Costs
of vehicles have gone up beyond the reach of an average citizen, having increased by
over 300% due to the depreciation on the naira exchange rate to other international
currencies. The economic situation has further reduced the disposable income of
citizens by over 50%. As a result of this harsh economic environment, car owners find it
difficult to replace their cars and now result to constant maintenance, including
regular car wash.
Adebat Cleaning Services operates two types of car wash, Complete-wash and Mini-
wash. The Complete wash entails cleaning of both the inside and outside of the cars,
while Mini wash is the washing of the outside of the cars only. Adebat charges ₦1,000
and ₦500 for the Complete and Mini wash respectively.
The company’s budget and actual figures for 2024 were as follows:
| Budget | Actual | ||
|---|---|---|---|
| Number of cars: | |||
| Complete – wash | 6,000 | 6,800 | |
| Mini – wash | 4,000 | 7,000 | |
| ₦ | ₦ | ||
| Revenue | 8,000,000 | 10,640,000 | |
| Variable costs: | |||
| Staff wages | (3,840,000) | (4,018,800) | |
| Cleaning materials | (200,000) | (400,000) | |
| Energy costs | (240,000) | (340,800) | |
| (4,280,000) | (4,759,600) | ||
| Contribution | 3,720,000 | 5,880,400 | |
| Fixed costs: | |||
| Rent, rates and depreciation | (1,200,000) | (1,200,000) | |
| Operating profit | 2,520,00 | 4,680,400 |
The budgeted contribution to sales ratios for the two types of car wash are 45% for
complete-wash and 56% for mini-wash.
Required:
a.
Calculate the following profitability and liquidity ratios for years 2023 and
2024.
Profitability:
(i) Gross profit margin
(ii) Net profit margin
(iii) Return on capital employed where capital employed is equal to equity and borrowings.
Liquidity:
(iv) Current ratio
(v) Acid test ratio
(vi) Receivables collection period (days).
(6 Marks)
b.
Explain whether the financial performance and position of the company has
improved for the year ended December 31, 2024 as a result of the new policies
adopted by the company. (7 Marks)
c.
Calculate the amount of cash which would be realised if the company could
impose a debt collection period of 45 days. (7 Marks)
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