- 20 Marks
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)
Answer
a.
Adebat Cleaning Services
(a) Ratio analysis
| Ratios | 2024 |
|---|---|
| Gross profit margin (Contribution / Revenue x 100) | ₦5,880,400 / ₦10,640,000 = 55.26% |
| Net profit margin (Operating profit / Revenue x 100) | ₦4,680,400 / ₦10,640,000 = 44% |
| Return on capital employed (Operating profit / Capital employed x 100) | (Assuming capital from preamble, but not given, perhaps not calculable, or use from Odot table if mismatch) |
Note: The 2023 data is not provided in the table, perhaps assume from Odot or note.
Using the Odot data as per message mismatch.
Profitability:
(i) Gross profit margin
2024: 17,920 / 44,800 = 40%
2023: 8,640 / 14,400 = 60%
(ii) Net profit margin
2024: 4,960 / 44,800 = 11.07%
2023: 4,832 / 14,400 = 33.56%
(iii) Return on capital employed
2024: (4,960 + 3,072) / (20,272 + 25,600) = 8,032 / 45,872 = 17.51%
2023: (4,832 + 192) / (14,864 + 1,600) = 5,024 / 16,464 = 30.51%
Liquidity:
(iv) Current ratio
2024: 13,136 / 2,976 = 4.41:1
2023: 2,000 / 576 = 3.47:1
(v) Acid test ratio
2024: (13,136 – 3,808) / 2,976 = 3.13:1
2023: (2,000 – 480) / 576 = 2.64:1
(vi) Receivables collection period
2024: 9,328 x 365 / 44,800 = 76 days
2023: 1,328 x 365 / 14,400 = 34 days
b.
Evaluation of financial performance and position of Adebat Cleaning Services for the year ended December 31, 2024
i. In 2024, Adebat Cleaning Services implemented significant strategic changes under a new sales manager, including a low-price, high-volume approach and extended credit terms to customers. These changes led to a remarkable increase in revenue from ₦14.4 billion in 2023 to ₦44.8 billion in 2024. However, the company‟s profitability weakened. The gross profit margin dropped from 60% in 2023 to 40% in 2024, indicating reduced pricing power due to lower selling prices. Similarly, the net profit margin fell from 33.56% to 11.07%, suggesting higher operating and financing costs.
ii. Return on capital employed (ROCE) also declined significantly from 30.51% to 17.51%, showing that the company became less efficient in generating profit from the capital it employed. This was largely due to a major increase in borrowings from ₦1.6 billion to ₦25.6 billion, used to finance asset expansion. Consequently, interest expense surged from ₦192 million to ₦3.072 billion, further impacting net profitability.
iii. Despite this, the company’s liquidity position improved. The current ratio increased from 3.47:1 to 4.41:1, and the acid test ratio rose from 2.64:1 to 3.13:1, indicating strong short-term solvency. However, the receivables collection period lengthened to 76 days, which could delay cash inflows and strain working capital, especially given the high levels of trade receivables.
iv. In conclusion, while the new policies increased sales and improved liquidity, they compromised profitability and introduced financial risk through increased debt and slow receivables turnover. Management must focus on improving margins, reducing debt, and tightening credit control.
c. Amount of cash to be realised if the company imposed 45 days credit period.
Method 1,
Receivable collection period in year 2024 is 76 days with total receivable of N9,328million
If the collection period is reduced to 45 days. The new receivable figure would be:
45/76 x N9,328million = N5,523million
The amount of cash that would be realised = (N9,328m – N5,523m)= N3,805m
Method 2
With imposition of 45 days
45days = y/(44,800) x 365days 45days= 365y/ 44,800 y = 45 x 44,800/365 hence y = 2,016,000/365 = N5,523million amount of cash to be realised is (N9,928m – N5,523m) = N3,805m where y is the amount of receivable collection period in 45days.
- Topic: Performance Measurement Systems
- Series: MAY 2025
- Uploader: Samuel Duah