In the capacity of a business consultant, prepare a report for the board of Heyw

Question

In the capacity of a business consultant, prepare a report for the board of Heywood Bottles based on a review of the company's performance for the year to 31 March 2016 in comparison with the previous year. Particular emphasis should be given to the effects of the implementation of the actions referred to in points (a) to (d) above.

Below are the summarised financial statements for the year to 31 March 2015 and 2016 of Heywood Bottles, a company which manufactures bottles for many different drinks companies. Note. The statements for the year to 31 March 2016 have not been audited. Heywood Bottles Statements of comprehensive income for the years ended 31 March 2016 2015 Sm m m Sm 120 Revenue Manufacturing costs 261 Cost of sales Gross profit Other expenses Profit before interest and tax Finance costs Profit/(loss) before tax Income tax expense PROFIT/(LOSSYTOTAL COMPREHENSIVE INCOME FOR THE YEAR12 (27090 30 28) (10) 20 Dividends paid Heywood Bottles-Statements of financial position as at 31 March 2016 2015 Non-current assets Land and buildings Plant and equipment 38 63 Current assets Inventories 18 94 12 25 Deferred expenditure 118 181 Equity $1 ordinary shares Capital reserves Retained eamings 25 25 10 23 Non-current liabilities Finance lease liabilities

Explanation / Answer

ANSWER :-

The above financial clearly indicate a deteriorating financial position.

Gross profit ratio in 2015=30/120*100=25%

Gross profit ratio in 2016=30/300*100=10%

in the above situation the company clearly needs to increase the selling price of its products to increase the gross profit margin. And if possible manufacturing costs need to be reduced. Further a clear wrong policy was to extend the credit period for Receivables from two to three months. Rather there should be negotiations with the creditors so as to increase the credit period for payments to be made to them.

Also this appears to be a wrong strategy in signing contract with Kool a drinks for a substantial portion of company's output and that too at very competitive price. Rather it is not a prudent solution to be dependent on one party for major sales. Rather more customers be added and a reasonable selling price be charged to them

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