- 20 Marks
MA – L2 – Q71 – Divisional performance
Question
Trading in Primeland in Year 1, and in Year 3 it opened a similar operation in a neighboring country, Scanland. The divisional managers in Primeland and Scanland have the authority to make most operational decisions, but decisions relating to acquisitions and financing are reserved for the board of directors of GSO.
Financial data is shown below for both divisions, for the years ending 31st December Year 4 and Year 5.
| Actual results | Year 4 | Year 5 | ||||
|---|---|---|---|---|---|---|
| Primeland GH₵000 | Seconland GH₵000 | Total GH₵000 | Primeland GH₵000 | Seconland GH₵000 | Total GH₵000 | |
| Revenues | 4,300 | 950 | 5,250 | 4,500 | 1,200 | 5,700 |
| Salaries and fees | 1,400 | 580 | 1,980 | 1,500 | 600 | 2,100 |
| Other direct costs | 1,450 | 430 | 1,880 | 1,480 | 430 | 1,910 |
| 2,850 | 1,010 | 3,860 | 2,980 | 1,030 | 4,010 | |
| Marketing | 240 | 70 | 310 | 290 | 95 | 385 |
| Depreciation/amortization | 330 | 45 | 380 | 330 | 95 | 425 |
| Interest cost | 110 | 95 | ||||
| 570 | 115 | 800 | 620 | 190 | 905 | |
| Total costs | 3,420 | 1,125 | 4,660 | 3,600 | 1,220 | 4,915 |
| Profit/(loss) | 880 | (175) | 590 | 900 | (20) | 785 |
Summary statements of financial position
Year 4
| Primeland GH₵000 | Scanland GH₵000 | Total GH₵000 | |
|---|---|---|---|
| Non-current assets | 2,610 | 240 | 2,850 |
| Net current assets | 710 | 140 | 850 |
| 3,320 | 380 | 3,700 | |
| Loan stock | 1,400 | ||
| 2,300 | |||
| Capital and reserves | 2,300 |
Year 5
| Primeland GH₵000 | Scanland GH₵000 | Total GH₵000 | |
|---|---|---|---|
| Non-current assets | 2,600 | 480 | 3,080 |
| Net current assets | 1,250 | 190 | 1,440 |
| 3,850 | 670 | 4,520 | |
| Loan stock | 1,200 | ||
| 3,320 | |||
| Capital and reserves | 3,320 |
Required:
(a) Assess the financial performance of GSO in Year 4 and Year 5, and the contribution of the operations in Primeland and Scanland to the overall performance.
(b) Suggest, with reasons, four additional items of information that you would require in order to provide a more comprehensive financial analysis of performance.
(c) Suggest, with reasons, four factors that should be taken into consideration when comparing performance in Primeland and Seconland.
Answer
(A) Workings Table:
|
Year 4 |
Year 5 |
|||
|---|---|---|---|---|
|
Primeland |
Total |
Primeland |
Total |
|
|
Gross profit (GH₵000) |
1,450 | 1,390 | 1,520 | 1,690 |
|
Gross profit/sales (%) |
33.72 | 26.48 | 33.78 | 29.65 |
|
Net profit/sales (%) |
20.47 | 11.24 | 20.00 | 13.77 |
|
Sales growth (%) |
– | – | 4.65 | 8.57 |
|
Sales/non-current assets (times) |
1.65 | 1.84 | 1.73 | 1.85 |
|
ROCE (%) |
– | 18.92 | – | 19.47 |
|
Gearing (%) |
– | 37.84 | – | 26.55 |
|
EBITDA (GH₵000) |
– | 1,080 | – | 1,305 |
Notes:
-
ROCE = profit before interest / (capital + reserves + loan stock).
-
EBITDA = earnings before interest, depreciation and amortisation.
-
Primeland values for ROCE, Gearing, and EBITDA are not calculated separately, as the narrative focuses on total GSO figures for these metrics.
-
Sales growth for Year 4 is not applicable (no prior year data provided).
Analysis Table:
|
Metric/Analysis Point |
Description |
|---|---|
|
Sales Growth |
Total growth in sales revenue was 8.6% in Year 5. Sales growth was 4.7% in Primeland, but 26.3% – much stronger – in Seconland. |
|
Gross Profit Margin |
Increased from 26.5% to 29.6% for GSO. Little change in Primeland; improvement due to Seconland, where a gross loss became a gross profit. |
|
Net Profit Margin |
Increased from 11.2% to 13.8% for GSO. Improvement driven by Seconland, where the net loss was reduced. |
|
Return on Capital Employed (ROCE) |
Improved from 18.9% to 19.5% for GSO as a whole. |
|
EBITDA |
Increased from GH₵1.08 million to GH₵1.30 million, |
(B)
The following additional information would be useful:
1. Financial results for Years 1 to 3. This would make it possible to analyse the trends in performance in Primeland, and make a comparison of the early years of operations in Primeland with the initial years of operating in Seconland.
2. It would also be useful to have the financial targets or budgets for Years 4 and 5, so that actual performance can be compared with planned performance.
3. Information about cash flows would also be useful, particularly for GSO as a whole. This would provide data for the analysis of cash management.
4. It would also be helpful to have some information about the market as a whole for scientific conferences in Primeland and Seconland, and in particular the estimated size of the total market and the relative size of major competitors. This would make it possible to carry out some analysis of market share and some competitor analysis.
(c) Tutorial note: Five suggestions are given here, but other ideas might be equally acceptable.
1 It is difficult to compare the results in Primeland and Seconland because operations in Primeland have been established for five years, and in Seconland they have been established for only three years.
2 The relative size of the total market in each country should also be considered, and the market share that GSO has in each country.
3 The number and size of competitors in each country will affect the relative performance of GSO in Primeland and Seconland. Performance should be better in the country where competition is weaker, provided that the overall size of the market in each country is about the same.
4 Data about the average number of delegates at conferences in Primeland and Seconland would also be useful. Profit margins should be higher in the country where average numbers are higher.
5 The availability and cost of conference speakers in each country should be compared. This may affect the gross profit margins in each country
- Topic: Divisional performance
- Uploader: Salamat Hamid