(a) Directors of ABC Ltd. wish to diversify. Presently, ABC Ltd. is into selling finished goods from its own godown. ABC Ltd…

(a) Ratio analysis of ABC Ltd.

Basis. Total sales are used (₹3,00,000; ₹3,74,000). Capital employed is closing net assets (₹1,00,000; ₹1,47,000) and net worth is capital plus reserves (₹1,00,000; ₹1,17,000). Average stock uses the assumed ₹10,000 opening stock. The collection period uses credit sales and 365 days.

• (i) Gross profit ratio (GP ÷ Sales × 100): 2021-22: 64,000/3,00,000 = 21.33%; 2022-23: 76,000/3,74,000 = 20.32%.
• (ii) Operating expenses to sales (Opex ÷ Sales × 100): 2021-22: 49,000/3,00,000 = 16.33%; 2022-23: 57,000/3,74,000 = 15.24%.
• (iii) Operating profit ratio ((GP − Opex) ÷ Sales × 100): 2021-22: 15,000/3,00,000 = 5.00%; 2022-23: 19,000/3,74,000 = 5.08%.
• (iv) Capital turnover (Sales ÷ closing capital employed): 2021-22: 3,00,000/1,00,000 = 3.00 times; 2022-23: 3,74,000/1,47,000 = 2.54 times.
• (v) Stock turnover (COGS ÷ average stock): 2021-22: 2,36,000/35,000 = 6.74 times; 2022-23: 2,98,000/77,000 = 3.87 times.
• (vi) Net profit to net worth (NP ÷ Net worth × 100): 2021-22: 15,000/1,00,000 = 15.00%; 2022-23: 19,000/1,17,000 = 16.24%.
• (vii) Receivables collection period (Receivables ÷ Credit sales × 365): 2021-22: 50,000/2,70,000 × 365 = 67.6 days; 2022-23: 82,000/3,42,000 × 365 = 87.5 days.

Reasons for the changes

1. Gross profit ratio fell. Sales grew 24.7% but cost of goods sold grew 26.3%. With stable purchase prices, this points to price cuts, discounts or a changed sales mix to push volume.
2. Operating expenses fell as a share of sales. Fixed administrative (₹19,000) and warehousing costs were spread over higher sales, though transport (+67%) and selling (+27%) costs rose with volume.
3. Operating profit ratio edged up to 5.08%, as cost savings slightly outweighed the lower margin.
4. Capital turnover fell from 3.00 to 2.54. Capital employed rose 47% (₹30,000 debentures issued on 7 April 2022) against 24.7% sales growth; the funds went into fixed assets (+₹10,000) and mainly working capital (+₹37,000), not yet yielding proportionate sales.
5. Stock turnover fell sharply from 6.74 to 3.87. Stock rose from ₹60,000 to ₹94,000 (stock-piling, perhaps for diversification, or slow-moving goods); 2021-22 is also flattered by the low assumed opening stock.
6. Return on net worth rose from 15% to 16.24%. Profit grew 26.7% while net worth grew only 17%, because part of the expansion was financed by debentures (trading on equity). Reserves rose only ₹17,000 against ₹19,000 profit (about ₹2,000 appropriated), and no debenture interest is shown, so the return may be overstated.
7. Collection period lengthened from about 68 to 88 days (liberal credit to boost sales, weaker collection); cash fell to ₹7,000.

Conclusion. Growth has been bought with thinner gross margins, heavier inventory and slower collections. Before diversifying, ABC Ltd. should tighten its stock and credit control.

(b)(i) Choosing among leasing, leveraged buying and hire-purchase

The right choice is the option with the lowest present value of after-tax cash outflows, weighed against the need for ownership and flexibility.

• Ownership: under leasing it stays with the lessor; under leveraged buying the buyer owns from day one; under hire-purchase it passes after the last instalment.
• Tax shield: leasing gives it on lease rentals; leveraged buying on depreciation and loan interest; hire-purchase on depreciation and the interest element.
• Residual value: belongs to the lessor under leasing, and to the buyer under leveraged buying and hire-purchase.
• Balance sheet and flexibility: leasing shifts obsolescence risk and carries no borrowing covenants; leveraged buying raises gearing and brings loan covenants; hire-purchase needs a down payment and the asset can be repossessed.

Decision rule. Discount after-tax lease rentals, and loan or hire-purchase instalments net of interest and depreciation tax shields and salvage value, at the after-tax cost of debt; choose the cheapest (the comparison is a discounted-cash-flow one, not a merely accounting one). Qualitatively, leasing suits technologically obsolescent assets. Leveraged buying suits long-lived core assets when the firm has unused debt capacity. Hire-purchase suits firms that want eventual ownership with staggered payments.

(b)(ii) When sale and lease-back is preferable

Under a sale and lease-back, the firm sells an asset it owns, usually property or plant, and leases it back so that it can keep using it. It is preferable when:

• the firm needs immediate liquidity for expansion, working capital or debt repayment, and fresh borrowing is costly or restricted by covenants;
• the asset is non-core, appreciated in value or under-utilised as capital, so selling it unlocks value while its use continues;
• the lease rentals are fully tax-deductible and give a better tax shield than depreciation on a largely depreciated asset;
• the firm wants to lower gearing, shift the risks of maintenance and ownership, and focus its capital on its core business.

(c) Channel conflict: types and management

Channel conflict arises when one channel member's actions prevent the channel from achieving its goals. Its sources include incompatible goals, unclear roles and territories, and differing perceptions.

Types of channel conflict

1. Vertical conflict: between different levels of the same channel. For example, a manufacturer and distributors disputing margins, credit terms or service levels.
2. Horizontal conflict: between members at the same level. For example, dealers of one brand poaching customers across territories or undercutting prices.
3. Multichannel conflict: when the producer sells through two or more channels that serve the same market. A common case is e-commerce or direct sales undercutting traditional dealers.

Mechanisms to manage conflict

• Superordinate goals: persuade members that the channel competes as a whole against rival channels.
• Clear channel design: exclusive or clearly defined territories, role charters, and different products, brands or price bands for each channel.
• Pricing discipline: uniform or minimum advertised prices and fair margins for each channel.
• Communication and co-optation: dealer councils, joint planning, and exchange of people between levels.
• Incentives and power: reward-based and expert power, such as training, credit support and performance bonuses, in preference to coercion.
• Dispute resolution: diplomacy, mediation, arbitration; litigation last.
• Channel integration: vertical marketing systems (corporate, contractual or administered) led by a channel captain. Omnichannel models can credit local dealers for online orders in their area.