Ashok and Pravin are equal shareholders in a small agency selling foam rubber products to industries on the east rand. They sell ready$-$made products from their supplier, who allows them to take most of their stock on consignment. Things had been going well for the last few years, but the elimination of an import tariff means that they will have to compete with cheap Asian imports next year. This is expected to reduce demand and$/$or profitably significantly. Pravin has been approached by a UN group to supply them with foam mattresses for humanitarian work in Central Africa and feels that this large $4-$year contract is just what is needed to save the business. The problem is that it will require All$-$Star to set up their own manufacturing plant as the product does not form part of their existing range. This will require taking on a large amount of debt to fund the initial capital investment. Ashok is not interested in this as he hates debt $($All$-$Star has never even had an overdraft facility$)$ and recognises that his expertise is in sales and NOT manufacturing.

Pravin has come to you during the Christmas shutdown and asked you to help him examine the impact of his proposed plan for $2018.$ Before you can do that you need to finalise this year$$s accounts; the following information is available for the year ended $31$st December $2017$:$-$

$1.$ Sales for the year amounted to R$4,000,000($All on credit$).80\%$ of which was paid acrossPravin$$s plan for $2018$ is as follows :$-$

$1.$ As Ashok was not keen to expand, Pravin proposed to buy him out and thus become the sole shareholder of All$-$Star Agencies. A price of R$400,000$ was agreed for Ashok$$s $100,000$ shares and Pravin would pay the money directly to him from his personal savings.

$2.$ An investment of R$1,200,000$ would be made immediately to establish the necessary manufacturing unit to take on the big supply contract. Most of this investment would be funded through raising a L$-$T bank loan of R$1,000,000.$

$3.$ The manufacturing plant was to be depreciated evenly over $4$ years $($which was the duration of the contract$).$ A full year$$s depreciation was to be charged for $2018$ and added to the existing amount of R$225,000$ for the fleet of delivery vehicles.

$4.$ Sales from the ongoing agency business were expected to drop to R$3,000,000$ for the year and commission earned on that would remain at $20\%.$

$5.$ The contract to supply mattresses would result in annual sales of $5,000$ units at R$600$ each. Detailed costings showed that direct production costs would be R$380$ per unit.

$6.$ Pravin disliked unnecessary spending on marketing so planned to reduce Selling & Distribution costs to $3\%$ of total sales.

$7.$ The additional paperwork generated by such a big contract would push General & Admin costs up to R$120,000$ for $2018.$

$8.$ Raw material stocks for the manufacturing process would need to be bought in bulk, so Stock holdings were expected to rise to R$212,000$ by $31$st Dec $2018.$

$9.$ The tax rate for $2018$ would remain the same as last year.

$10.$ As payments for the contract had to be made from Brussels, debtors were expected to more than double to R$1,002,740$ by the end of $2018.$

$11.$ Strict payment terms by the suppliers of the manufacturing raw materials meant that creditors were unlikely to increase. It was agreed to carry forward exactly the same figure as last year.

$12.$ The new debt position would mean that All$-$Star incurred an interest expense for the first time. This was expected to come to R$162,000$ for the year. Pravin also proposed to increase his dividend to $40\%$ of earning after tax.

$13.$ The new trading model would enable Pravin to reduce cash on hand to R$35,260$ by the end of $2018.$ He hoped this plan would not require large amounts of expensive overdraft funding, but had organised a facility with All$-$Star$$s bank just in case. You are to work out what overdraft funding would be required on the projected balance sheet.

You have been asked to prepare the following for presentation to Pravin and the bankers as soon as possible : $-$

$1)$ The Income Statement for the year ended $31$st December $2017$ and the Balance Sheet as at that date.

$2)$ The projected Income Statement and Balance sheet for $2018,$ based on the plan outlined above.

$3)$ Extract the cash flow statement for the year ended $31$st December $2018.$

$4)$ Calculate the ratios for both years

$5)$ As well as preparing the above numbers, you have been asked to offer any advice that you think may be relevant to the future health of All$-$Star Agencies. Pravin has specifically asked you to comment of the following areas :$-$

a$.$ Working Capital Management

b$.$ The profitability of the two different product lines $($agency and manufacturing$)$

c$.$ Asset efficiency

d$.$ His father$$s dislike of debt and the proposed capital structure

e$.$ Liquidity $($particularly ability to make interest repayments$)$

f$.$ His idea of going for the big contract and the idea of possibly running totally separate accounts for the two different product lines

g$.$ The proposed price of buying Ashok$$s $100,000$ shares