CASE STUDY Accounting and Financial Management One (1) January 2023 100 PROGRAMME Postgraduate Diploma in Business Management Postgraduate Diploma in Family Business Management Bachelor of Business Administration Honours MODULE YEAR INTAKE TOTAL MARKS FORMATIVE ASSESSMENT 1 Read the case study and answer the questions that follow: [100 MARKS] ORBIT LIMITED: FINANCIAL PERFORMANCE AND FORECASTING The mission of Orbit Limited is to achieve its vision by providing an innovative product and creative customer experiences. Its talented staff are guided by the values, social conscience and customer-centric mindset espoused by the board of directors. At the core of Orbit Limited is its customers. The company is committed to successful growth by delivering excellent service to its customers to whom it offers quality and value. It is for these reasons that Orbit Limited was able to achieve success in the marketplace. However, the management has identified the need to improve in certain respects. The following are the financial statements for the past two years: Orbit Limited Statement of Financial Position as at 31 December: ASSETS Non-current assets Property, plant and equipment Investments Current assets Inventories Accounts receivable Cash Total assets EQUITY AND LIABILITIES Equity Ordinary share capital Retained earnings Non-current liabilities Loan (20% p.a.) Current liabilities Accounts payable 2022 2021 RR 11 810 000 10 025 000 1 785 000 4 190 000 1 875 000 1 925 000 390 000 16 000 000 7 560 000 6 250 000 1 310 000 4 690 000 2 350 000 2 200 000 140 000 12 250 000 ? ? 5 480 000 ? ? 3 680 000 4 500 000 4 500 000 2 300 000 2 300 000 3 800 000 3 800 000 1 500 000 1 500 000 Total equity and liabilities Statement of Comprehensive Income for the year ended 31 December: Sales Cost of sales Gross profit Operating expenses Depreciation Other selling, general and administrative expenses Operating profit Investment income Interest expense Profit before tax Company tax Profit after tax 16 000 000 12 250 000 2022 2021 RR 10 800 000 (6 000 000) 4 800 000 (1 800 000) 580 000 1 220 000 3 000 000 ? (880 000) 2 600 000 (728 000) 1 872 000 7 150 000 (3 650 000) 3 500 000 (1 200 000) 200 000 1 000 0000 2 300 000 ? (600 000) 2 030 000 (568 400) 1 461 600 In addition to the above, the following information is available: All sales and purchases of inventory are on credit. Inventories on 31 December 2020 amounted to R1 500 000. Credit terms of 5/10 net 90 days are granted by creditors. Credit terms of 60 days are granted to debtors. Dividends declared for the years ended 31 December 2021 and 2022 amounted to R1 169 280 and R1 422 000 respectively. The financial manager of Orbit Limited provided the following forecasts for 2023: Sales are estimated at 8 000 units with a selling price of R1 800 each. The manufacturing costs include direct materials of R460 per unit, direct labour of R315 per unit, variable overheads of R170 per unit and fixed overheads of R880 000. Fixed selling and administration costs are estimated at R2 000 000 and the variable selling costs are estimated to be 7.5% of sales. The directors are contemplating diversification in 2024 by entering the passenger transport market. This could be achieved through the purchase of a fleet of midi buses that are expected to cost R9 500 000. An additional R500 000 will be spent on import duties. The cost of operating the buses each year is expected to be R4 100 000 and the annual revenues from transporting the passengers are estimated at R7 000 000. The buses are expected to have a total salvage value of R1 000 000 and the estimated useful life of the buses is five years. The companys cost of capital is expected to reduce to 15%. Depreciation is calculated using the straight-line method. QUESTION 1 REQUIRED 1.1 Calculate the increase in the retained earnings over the two-year period. 1.2 By how much did the interest income increase or decrease from 2021 to 2022? Provide a possible reason for the change. 1.3 Comment on the investing activities of the company. 1.4 Calculate the amount that would be reflected as Changes in working capital in the Statement of Cash Flows for the year ended 31 December 2022. 1.5 Without making use of any ratios, provide an interpretation of the following over the two- year period: 1.5.1 Inventories 1.5.2 Accounts receivable 1.6 Calculate the cost (as a percentage) of not accepting discounts from creditors in settlement of accounts. (25 Marks) (2 marks) (3 marks) (4 marks) (4 marks) (4 marks) (4 marks) (4 marks) QUESTION 2 (25 Marks) REQUIRED Calculate the appropriate ratios (expressed to two decimal places) and provide an interpretation of your answers for each of the following over the two-year period: 2.1 The effectiveness of the company regarding the management of its accounts payable. 2.2 The ability of the company to settle its short-term debts under distress conditions. 2.3 The percentage of the profit that has been retained in the company. 2.4 The profitability of the company from the point of view of the shareholders. 2.5 A measure of the efficiency with which the total assets of company are managed. 2.6 The effectiveness of the credit administration of the company in respect of its customers who purchase on credit. QUESTION 3 (4 marks) (25 Marks) REQUIRED Refer to the forecasts made by the financial manager for 2023 and calculate the following independently. As far as possible, use the contribution margin format of the income statement to present your answers. 3.1. Break-even quantity. 3.2 The sales value required to make an operating profit of R2 016 000, by using the contribution margin ratio. 3.3 The percentage change in the operating profit (expressed to two decimal places), if the selling price and fixed costs increase by 10%. 3.4 The total Contribution Margin and Operating Profit/Loss if the sales volume is 10% below expectation. 3.5 The selling price per unit (expressed in rands and cents) that will enable the company to break even. (5 marks) (4 marks) (4 marks) (4 marks) (4 marks) (5 marks) (5 marks) (5 marks) (5 marks) (5 marks) QUESTION 4 (25 Marks) REQUIRED Refer to the planned diversification for 2024 and calculate the following: 4.1 Payback Period (expressed in years, months and days) 4.2 Accounting Rate of Return on initial investment (expressed to two decimal places) 4.3 Net Present Value 4.4 Internal Rate of Return using interpolation (expressed to two decimal places). 4.5 Internal Rate of Return using interpolation (expressed to two decimal places) if there were no import duties and no salvage value. (3 marks) (5 marks) (6 marks) (6 marks)