Profitability & Liquidity Ratio Analysis (DP IB Business Management: HL): Exam Questions

1 hour20 questions
12 marks

Case Study

Banbury Chocolates Ltd manufactures premium chocolates and confectionery. In 2024, the company's sales revenue was $2.4 million, and with the cost of sales amounting to just $960,000, the company achieved a healthy gross profit margin.

Define the term 'gross profit margin'.

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22 marks

Case Study

Cork Fine Foods Ltd produces artisanal cheeses and dairy products. Last year they achieved a profit margin of 15%.

State two ways to improve the profit margin.

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32 marks

Case Study

Peak Performance Bikes Ltd manufactures carbon fibre bicycle frames. The company had capital employed of $4.5 million and profit before interest and tax of $900,000 in 2024. It wants to calculate the return on capital employed.

Define the term 'return on capital employed'.

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42 marks

Case Study

Munich Precision Engineering GmbH produces components for the aerospace industry. In 2024, their return on capital employed was 18%.

State two ways to improve return on capital employed (RoCE).

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52 marks

Case Study

Oslo Furnishings AS manufactures office furniture. The company's current ratio was 2:1 in 2024.

Define the term 'current ratio'.

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62 marks

Case Study

Vilnius Software Solutions provides IT services to businesses. The company's accountant has identified potential liquidity issues.

State two ways to improve liquidity.

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72 marks

Case Study

Shanghai Tech Corporation's financial statements show declining liquidity ratios in 2024.

State two factors that could cause liquidity problems.

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82 marks

Case Study

Unilever, an international consumer goods company, tracks its liquidity through financial ratios. In 2024, its current ratio worsened, partly as a result of increased stock levels.

Describe one way a business could improve its current ratio.

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16 marks

Case Study

Mountain Adventure Gear is a small business that sells outdoor equipment such as hiking boots, tents, and climbing gear. The company’s sales have grown steadily due to increased interest in outdoor activities. However, its financial statements reveal that while revenue has increased, its gross profit margin has decreased.

To address this, the company’s management is exploring ways to reduce direct costs, such as negotiating with suppliers or finding cheaper raw materials. They are also reviewing their pricing strategy, considering whether raising prices for premium products could help offset the rising cost of goods sold.

Additionally, Mountain Adventure Gear is evaluating its return on capital employed (ROCE) to determine whether its recent investment in a new warehouse is generating sufficient returns.

Analyse two advantages and one disadvantage of increasing prices for premium products at Mountain Adventure Gear.

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24 marks

Case Study

Mountain Adventure Gear is a small business that sells outdoor equipment such as hiking boots, tents, and climbing gear. The company’s sales have grown steadily due to increased interest in outdoor activities. However, its financial statements reveal that while revenue has increased, its gross profit margin has decreased.

To address this, the company’s management is exploring ways to reduce direct costs, such as negotiating with suppliers or finding cheaper raw materials. They are also reviewing their pricing strategy, considering whether raising prices for premium products could help offset the rising cost of goods sold.

Additionally, Mountain Adventure Gear is evaluating its return on capital employed (ROCE) to determine whether its recent investment in a new warehouse is generating sufficient returns.

Describe two ways Mountain Adventure Gear can evaluate the success of its recent investment in a new warehouse.

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34 marks

Case Study

Artisan Furniture is a business that produces handmade wooden furniture, including tables, chairs, and cabinets. While the company has maintained steady sales, it has faced challenges with rising material costs and delivery delays.

The company’s recent Statement of Profit or Loss shows that its gross profit margin has declined, although operating expenses have remained constant. Artisan Furniture is considering ways to improve profitability, such as sourcing materials from local suppliers to reduce costs and renegotiating trade credit terms to improve liquidity.

Additionally, management is using liquidity ratios to assess the company’s ability to meet short-term obligations while maintaining adequate cash flow for daily operations.

Explain one advantage and one disadvantage of Artisan Furniture improving its profitability by sourcing materials from local suppliers.

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44 marks

Case Study

Artisan Furniture is a business that produces handmade wooden furniture, including tables, chairs, and cabinets. While the company has maintained steady sales, it has faced challenges with rising material costs and delivery delays.

The company’s recent Statement of Profit or Loss shows that its gross profit margin has declined, although operating expenses have remained constant. Artisan Furniture is considering ways to improve profitability, such as sourcing materials from local suppliers to reduce costs and renegotiating trade credit terms to improve liquidity.

Additionally, management is using liquidity ratios to assess the company’s ability to meet short-term obligations while maintaining adequate cash flow for daily operations.

Describe two factors Artisan Furniture should consider when renegotiating trade credit terms to improve liquidity.

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54 marks

Case Study

Zenith Publishing specialises in producing e-books and printed novels for a niche audience. The company has seen a steady increase in revenue over the past year but is facing profitability challenges due to rising overhead costs, such as higher rents and utility expenses for its office and warehouse.

Zenith’s management is considering reducing operating expenses by transitioning more operations online, such as offering digital-only publishing services. They are also reviewing their gross profit margin and return on capital employed (ROCE) to determine if their current investment in print publishing remains financially viable.

Additionally, Zenith’s recent liquidity ratios have revealed a slight decrease in the acid test ratio, prompting concerns about its ability to meet short-term financial obligations.

Explain one advantage and one disadvantage of transitioning to digital-only publishing for Zenith Publishing.

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66 marks

Case Study

Zenith Publishing specialises in producing e-books and printed novels for a niche audience. The company has seen a steady increase in revenue over the past year but is facing profitability challenges due to rising overhead costs, such as higher rents and utility expenses for its office and warehouse.

Zenith’s management is considering reducing operating expenses by transitioning more operations online, such as offering digital-only publishing services. They are also reviewing their gross profit margin and return on capital employed (ROCE) to determine if their current investment in print publishing remains financially viable.

Additionally, Zenith’s recent liquidity ratios have revealed a slight decrease in the acid test ratio, prompting concerns about its ability to meet short-term financial obligations.

Analyse two advantages and one disadvantage of using the acid test ratio to evaluate Zenith Publishing’s short-term financial health.

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7
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2 marks

Case Study

UrbanPrint Ltd provides customised printing services for small businesses and events. The company prides itself on offering competitive prices while maintaining quality. In 2024, UrbanPrint earned $342,560 in revenue and incurred $158,240 in cost of goods sold. Operating expenses, including rent and marketing, totalled $78,450.

Selected Financial Data (2024)

Amount ($)

Revenue

342,560

Cost of Goods Sold

158,240

Operating Expenses

78,450

Marketing Budget

12,000

Calculate UrbanPrint Ltd's gross profit margin in 2024 (show all your working).

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8
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2 marks

Case Study

ActivePulse Ltd produces and sells fitness trackers designed to help customers monitor their health. The company has been focusing on reducing production costs and streamlining operations. For 2024, management set a goal of achieving a profit margin greater than 15% to attract new investors. They are reviewing financial data to assess if they have met this target.

Selected Financial Data (2024)

Amount ($)

Revenue

715,290

Cost of Goods Sold

418,730

Operating Expenses

182,450

Depreciation

25,000

Interest Expenses

8,200

Calculate ActivePulse Ltd's profit margin in 2024 (show all your working).

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9
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2 marks

Case Study

ClearFlow Ltd specialises in manufacturing eco-friendly water filtration systems, catering to environmentally conscious households and businesses. The company has invested heavily in new technology and marketing campaigns to boost profitability. Management has set an ambitious target to achieve a return on capital employed (RoCE) greater than 12%.

Selected Financial Data (2024)

Amount ($)

Net Profit

312,500

Non-current Assets

1,280,000

Shareholders’ Equity

1,355,000

Current Liabilities

245,000

Retained Earnings

50,000

Calculate ClearFlow Ltd's return on capital employed (RoCE) in 2024 (show all your working).

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10
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2 marks

Case Study

EcoGrow Ltd sells indoor gardening kits and accessories, targeting urban customers who want to grow their own herbs and vegetables. After a strong year of sales, the company is reviewing its liquidity position to ensure it can meet its short-term obligations in 2024. Management is particularly concerned about maintaining a healthy current ratio to support future investments in product development.

Selected Financial Data (2024)

Amount ($)

Cash

84,250

Trade Receivables

72,340

Inventory

95,760

Prepaid Expenses

15,120

Trade Payables

88,600

Bank Overdraft

34,450

Long-term Loan

250,000

Calculate the current ratio for EcoGrow Ltd in 2024 (show all your working).

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11
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2 marks

Case Study

TechSpark Ltd designs and sells high-end smart home devices. The company is reviewing its liquidity and is particularly focused on its acid test ratio, as its management wants to ensure that short-term liabilities can be covered without relying on inventory. With a push to increase its market share, TechSpark has a significant amount of stock in hand.

Selected Financial Data (2024)

Amount ($)

Cash

125,670

Trade Receivables

95,430

Inventory

110,290

Prepaid Expenses

20,450

Trade Payables

142,380

Bank Overdraft

47,620

Deferred Tax Liability

15,000

Calculate the acid test ratio for TechSpark Ltd in 2024 (show all your working).

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110 marks

Case Study

SoleMate operates a successful chain of shoe shops specialising in affordable yet fashionable footwear for men, women and children. The company’s stores are currently located in suburban shopping centres known for their convenience, ample parking and appeal to family-orientated, budget-conscious shoppers. This location strategy has helped SoleMate grow steadily over the past decade, building strong brand loyalty among families

Recently, however, SoleMate has faced declining sales in its suburban locations due to increased competition from online retailers offering wider selections and discounts. To address this, the company’s management is considering expanding into urban high streets. This strategic move aims to attract younger, trend-conscious consumers, improve brand visibility and rejuvenate the SoleMate brand

The shift to urban areas comes with significant challenges. Urban high street rents are 50% higher than those in suburban shopping centres, adding financial pressure. Additionally, SoleMate must invest an estimated $65,000 per store to redesign interiors, improve aesthetics and tailor its product range to suit urban tastes. Despite these costs, management believes urban stores could bring long-term growth by positioning SoleMate as a more modern and dynamic brand

To evaluate this decision, the company conducted market research, including competitor analysis and customer surveys. The findings showed that 65% of urban shoppers prioritise affordability, but brand image and style are also critical factors. A competitor analysis revealed that rival urban shoe stores charge an average of $50–$70 per pair of shoes, a price point SoleMate could compete with by carefully managing production and overhead costs

Management forecasts that each new urban store could generate a monthly revenue of $25,000, with operating costs projected at $18,000. If successful, this strategy could offset the decline in suburban sales and enable SoleMate to reach a new, profitable market segment. However, there is a risk that the urban move may alienate SoleMate’s core family-orientated customers if brand messaging becomes too focused on younger demographics

The decision to expand will require careful consideration of the financial, operational and strategic implications to ensure the expansion aligns with SoleMate’s long-term goals

Table 1: Financial comparison – Suburban vs urban locations

Metric

Suburban store ($)

Urban store ($)

Monthly rent

10,000

15,000

Initial setup costs

35,000

65,000

Monthly revenue (projected)

18,000

25,000

Operating costs (monthly)

12,000

18,000

Table 2: Competitor analysis – Urban shoe retailers

Competitor name

Average price per pair ($)

Key selling point

Urban Footwear Co.

55

Affordable urban trends

Trendy Steps

65

Stylish, premium quality

StepQuick

70

Fast fashion, high variety

Graph 1: Customer priorities for urban shoe shopping

The following graph illustrates urban customers’ priorities when shopping for shoes, based on SoleMate’s market research.

A bar graph showing that 65% of consumers surveyed prioritise affordability, 20% prioritise style, 10% prioritise brand image and 5% prioritise convenience.
Consumer priorities for urban shoe shopping

Discuss two suitable strategies for SoleMate to maximise profitability from its urban high street stores.

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