Part A
During 2012 the Australian Company Woolworths Ltd (WOW) sold its subsidiary business called Dick Smith Electronics. Within 8 months of the FOR SALE sign going up Anchorage bought the Dick Smith Business for $20 million. This is the same amount Woolworths Ltd bought the Dick Smith Business for 30 years ago. (Woolworths Ltd bought the business from Dick Smith the man.)
1. Does Woolworths Ltd use historical cost accounting or some other basis?
2. What were the total assets at the end of the financial year?
3. State the accounting equation for Woolworths Ltd in dollar figures at balance date for the end and beginning of the 2012 financial year.
4. What changes have occurred in the company's non-current liabilities over the year? Explain these changes.
5. Does the change in total assets equal the change in total liabilities and the change in total equity? Explain.
6. Did Woolworths Ltd have a 100 per cent beneficial interest in all its subsidiaries?
7. What were the total revenue, net profit attributable to members of Woolworths Ltd and EBIT.
8. Compare the net profit with the net cash flows from operating activities. Which amount is larger? Is this normal?
9. What changes have occurred in the company's financing activities? Explain these changes.
10. What investment activity did Woolworths Ltd' undertake during 2012? Was there a net investment or a divestment?
For Woolworths Ltd using the 2012 year compute the ROE, profit margin ratio, asset turnover ratio, current ratio, debt to equity ratio, interest coverage ratio, NTAB, EPS, DPS and the PER.
Comment on the similarity between the purchase price 30 years ago from Dick Smith and the sales price to Anchorage. Specifically, do you feel that the $20 million investment was worthwhile for the shareholders of Woolworths Ltd? Why or Why not?
Dick Smith Electronics had significant ongoing lease obligations. Define a lease. Why would these lease obligations be relevant to the assessment of the sale of Dick Smith Electronics for Woolworths Pty Ltd? Dick Smith Electronics had not been losing money and its debt obligations equalled its asset value, so why would Woolworths Ltd been keen to sell Dick Smith Electronics.
Part B
Crow's Nest Springs Pty Ltd is a bottler/supplier of bottled spring water to both commercial and residential customers. Crow's Nest Springs corporate headquarters is located in Manchester. It operates distribution centres (DCs) in three territories throughout Queensland. Customers pay a one-time subscription fee of $100 and then $11 per canister. The company began by selling to residential areas and small businesses in the region. In recent years, its sales have moved toward larger businesses. The Toowoomba Centre was the first DC established and is the oldest of the three. The newest centre, Sunshine Coast, was established four years ago and continues to show great growth potential.
Bottling and distribution operations are treated as separate entities. The costs associated with each are easily tracked and charged to the appropriate division. There have been no problems related to the accounting system between the divisions. However, the managers in the distribution division have recently started to raise some questions regarding the accounting systems in place within their division.
Distribution centre operations are relatively straightforward. Bottled water shipments are taken from the main bottling plant and stored at the DCs for delivery to customers at later dates. Most subscribing customers take delivery once every two weeks. Expenses associated with DC operations can be seen in the quarterly profit and loss statement (See Table One). DC overhead includes lease, building maintenance, security and other costs related to running the warehouse facility. Staff and administrative expenses including salaries of sales and support staff, as well as the cost of materials used in running the office (i.e. office suppliers, forms, etc.).
Each distribution centre has its own sales staff. The corporate office handles the subscription process, and provides the drivers and delivery employees with the information regarding delivery type and schedule. The majority of corporate overhead allocated to distribution centres results from the processing and maintenance of subscriptions and schedules.
Crow's Nest Springs allocates these overhead costs based on the proportion of the book value of trucks at each DC facility to the total book value of the entire Crow's Nest Springs delivery fleet. This allocation scheme was implemented at the time the company was founded to relate costs to the most significant cost item. Each DC is treated as a profit centre and DC management is evaluated based upon its territory's net profit performance.
Trucks are requested by distribution centres and purchased by the corporate offices under a corporate fleet contract with a major truck manufacturer. Like interest expense, the lease expense is shown as a separate corporate level expense and is not allocated to the DCs. (See Table Two for relevant data.)
The bottled-water industry is experiencing strong growth, as is Crow's Nest Springs. While Crow's Nest Springs' business seems to be profitable, all is not well within the ranks of the organization. Corporate has been pressuring DCs to expand their territories and increase delivery volume, but DCs have been reluctant to meet this request. Some DC managers are beginning to question the amount of overhead being charged to them. They complain that increased deliveries will only cause overhead costs to rise. DC drivers are also unhappy; they complain about being overburdened by their ever-expanding routes and the pressure to meet difficult delivery schedules.
Table One: Quarterly Profit and Loss Statements for Crow's Nest Springs Three Distribution Centres ($000)
|
|
Toowoomba
|
Brisbane
|
Sunshine Coast
|
|
Revenues
|
|
865.0
|
|
928.0
|
|
776.4
|
|
Expenses:
|
|
|
|
|
|
|
|
Delivery wages
|
34.2
|
|
40.0
|
|
33.6
|
|
|
Overtime wages
|
4.2
|
|
3.2
|
|
4.4
|
|
|
Staff and administration
|
150.0
|
|
120.0
|
|
125.0
|
|
|
DC overhead
|
75.0
|
|
80.0
|
|
125.0
|
|
|
Petrol
|
24.0
|
|
28.1
|
|
26.0
|
|
|
Truck maintenance
|
105.0
|
|
65.0
|
|
75.0
|
|
|
Corporate overhead
|
235.7
|
(628.1)
|
283.0
|
(619.3)
|
391.3
|
(780.3)
|
|
Net profit
|
|
236.9
|
|
308.7
|
|
(3.9)
|
Table Two: Data for Crow's Nest Springs analysis
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Toowoomba
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Brisbane
|
Sunshine Coast
|
|
Delivery employees
|
80
|
70
|
50
|
|
Delivery employee wages ($ per hour)
|
8
|
8
|
8
|
|
Total subscriptions
|
8,533
|
7,200
|
5,040
|
|
Deliveries per quarter
|
51,198
|
43,200
|
30,240
|
|
Canisters delivered per quarter
|
75,000
|
78,000
|
62,400
|
|
Average kilometres driven per delivery
|
4
|
4.5
|
5.2
|
|
New subscriptions this quarter
|
400
|
700
|
900
|
|
Trucks based at distribution centre
|
70
|
65
|
60
|
|
|
|
|
|
|
Truck value ($)
|
700,000
|
690,000
|
670,000
|
|
Accumulated depreciation ($)
|
350,000
|
270,000
|
90,000
|
|
Allocation base ($)
|
350,000
|
420,000
|
580,000
|
|
Overhead allocation percentage
|
26
|
31
|
43
|
Additional Notes:
Truck average is 161/100km
Petrol cost is $1.20/litre
Delivery charge is $11 per canister delivered
Subscription fee is $100 per subscription
Judy Tsai, Assistant to the Controller, has been assigned the task of examining the situation and developing alternatives if, indeed, a solution is needed.
Required
Describe the problems, if any, at Crow's Nest Springs. Specifically, discuss issues related to decision making, cost allocation and incentives.
Describe some alternative ways to allocate corporate overhead.
Which allocation system would you choose? If implemented, what effects do you believe it's implementation would have upon Crow's Nest Springs' distribution operations?
Calculate net profit for the three DCs using an overhead allocation based on total subscriptions and compare these results with those found under the present system.
How does total profit of Crow's Nest Springs Ltd compare across the original allocation and the new allocation scheme?
General Requirements:
1. Be as concise and efficient in your writing as possible. You should not need any more than twelve double spaced A4 pages (12 point font) to answer the assignment. You may be able to answer sufficiently in a lot less. The assignment involves numbers and calculations and therefore the format of presentation will mainly determine your pages required. Please try to present this in a neat and easy to follow format.
2. Place references for all questions at the end of the assignment not at the end of each question.
3. You can use dot points or tables to help present your answer if you wish.
4. Assignment extensions will be granted if needed due to medical, work or personal reasons. However, extensions will not be granted for more than one week. This is because I cannot post back marked assignments and solutions until all assignments have been received. It is unfair on other students to delay the return of their marked assignments unduly.