The Stock Turnover Ratio of Pharmasol Ltd - Assignment Example

Assignment CASE STUDY Pharmasol Ltd is a medium-sized pharmaceutical company manufacturing medicines and remedies for supply to the retail trade. Itssales are subject to seasonal fluctuations, with its cold remedies being most popular in the autumn and winter months and its allergy products being most in demand during spring and summer. Pharmasol Ltd is concerned about the amount of stock it has to hold and also that it does not have the capacity to produce sufficient supplies to meet demand during its busiest periods. Pharmasol Ltd’s financial statements for the two years ending 30 June 2009 and 2010 are provided in Appendix 1. In the year to 30 June 2011 the company will be purchasing a new multi-function machine costing £100,000 that will be used to boost output of all its products. It is believed that revenue and cost of sales will increase by 10% and 8% respectively in the year ending 30 June 2011 compared to the year to 30 June 2010, with no change in operating expenses other than for depreciation. There were no purchases or disposals of non-current assets in the year ending 30 June 2010, and none are planned in the year ending 30 June 2011 other than the purchase of the multifunction machine. Required: (a) Calculate the stock turnover days for each of the years ending 30 June 2009 and 2010. 2009 Average Stock = Opening stock + Closing stock 2 = 814,000 + 870,000 2 = 842000 Cost of Goods Sold = 8894,000 Stock turnover = 365 / (Cost of goods sold) Average stock = 365 / (8894,000) 842,000 = 34.55 days. 2010 Average Stock = 915 + 870 2 = 892500 Cost of Goods Sold = 9145000 Stock turnover = 365 / (Cost of goods sold) Average stock = 365 / (9145,000) 892500 = 35.62 days. ( EHow, How to calculate stock turnover ratio) Explain: (i) What the figures indicate about the management of stock by the company; Stock turnover basically is the number of days it takes a company to sell its complete stock before restocking. To maintain your business profitably a business must find the right inventory balance. This is where the stock turnover ratio comes in. It compares the cost of goods sold with the cost of inventory and serves as one of the most efficient measures in inventory management. It took Pharmasol Ltd almost 35 days to sell its stock in 2009 and 36 days in 2010. As you can see the difference over the year is only of one day which shows that the sales from last year to this one have been approximately the same and steady. It also shows that the demand for the company’s products has been relatively stable over the year. ( EHow, How to calculate stock turnover ratio) (ii) Why stock turnover might not be a good indicator of Pharmasol Ltds management of its stock position. Stock turnover might not be a good indicator of Pharmasol Ltd’s management of its stock position because its sales are subject to seasonal fluctuations( as stated in the case), like cold remedies being most popular in the winter and autumn months and its allergy products being most in demand during spring and summer. Hence and sudden increase in demand might be due to variable reasons, say perhaps due to a breakout of allergies. (b) Calculate Pharmasol Ltd’s projected revenue, cost of sales, gross profit, operating expenses (including depreciation on the new and existing machines) and profit from operations for the year to 30 June 2011. (b) Operating Expenses 4747 Add : Depreciation Property 38 (5% of 760) Machine & equipment 66 (20% of 330) Motor vehicles 13.2 (20% of 66) Total 117.2 Operating Expense 4864.2 Revenue = 14,519 + (10% of 14,519) = 14,519 + 1451.9 = 15970.9 Cost of Goods Sold = 9145 + ( 8% of 9,145) = 9,145 + 731.6 = 9876.6 Profit and Loss Account $ 000 Revenues 15970.9 Cost of Goods sold (9876.6) Gross Profit 6094.2 Operating Expenses (4864.2) Profit from operations 1230.1 ( Ehow, how to make profit and loss statement) (c) Calculate Pharmasol Ltd’s gross and net profit margins for both the year to 30 June 2010 (actual results) and the year to 30 June 2011 (projected results). Net profit Margin 2010 2011 Net profit margin = Net profit x100 Net profit margin = Net profit x 100 Sales Sales = 627 x 100 = 1230.1 x 100 14519 15970.9 = 4.32% = 7.84 % Gross profit Margin 2010 2011 Gross profit margin = Gross profit x100 Gross profit margin = Gross profit x 100 Sales Sales = 5374 x 100 = 6094.2 x 100 14519 15970.9 = 37% = 38.158 % (d) Explain why the 2011 projected margins have changed from the actual margins in 2010. The profit margin tells us how much profit a company makes for every one dollar it generates in revenue or sales. (About.com, Web) A higher net profit margin compared to that of your competitors is better for a company. It is calculated by dividing the net income after taxes by the sales. Incase of Pharmasol Ltd the net profit margin in 2010 was 4.32% and it rose by 3.52% in 2011 (7.84%). Why has our net profit margin increased? The reason for this is due to the increase in net profit of Pharmasol over the year. From 627 to 1230.1, increasing the net profit to 603. Why has our net profit increased? The reason being the depreciation expenses that have gone down over the year which directly affect our net profit. The gross profit margin measures the company’s efficiency regarding its manufacturing and production processes. It depicts the efficiency of a company as it tells us about the percentage of revenue/ sales left after subtracting the cost of goods sold. The Gross profit margin for Pharmasol Ltd was in 2010 37% and in 2011 38.2%. So over a year it has increased by 1.2%. Our Gross profit increases only if our Cost of Goods decrease or our revenue increases and in this case we see our revenues have increased and our cost of goods sold have relatively decreased from the previous year. Hence resulting in an overall increase in the gross profit margin. (Investing for beginners, Web) Work Cited Ehow. How to calculate the stock turnover ratio. Web. Retrieved from: http://www.ehow.com/how_5082490_calculate-stock-turnover-ratio.html Ehow. How to make a profit and loss statement. Web. Retrieved from: http://www.ehow.com/how_2305544_make-profit-loss-statement.html About.com. Investing for beginners. Web. Retrieved from: http://beginnersinvest.about.com/od/incomestatementanalysis/a/gross-profit-margin.htm About.com. Net profit margin. Web. Retrieved from: http://beginnersinvest.about.com/od/incomestatementanalysis/a/net-profit-margin.htm Read More