• CASE STUDY
  PROGRAMME
  Postgraduate Diploma in Business Management
  Postgraduate Diploma in Family Business Management
  Bachelor of Business Administration Honours MODULE
  Accounting and Financial Management YEAR
  One (1) INTAKE
  January 2023 TOTAL MARKS
  100
  FORMATIVE ASSESSMENT 1
  [100 MARKS]
  Read the case study and answer the questions that follow:
  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. It’s 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:
  2022
  2021
  R
  R
  ASSETS
  Non-current assets
  11 810 000
  7 560 000
  Property, plant and equipment
  10 025 000
  6 250 000
  Investments
  1 785 000
  1 310 000
  Current assets
  4 190 000
  4 690 000
  Inventories
  1 875 000
  2 350 000
  Accounts receivable
  1 925 000
  2 200 000
  Cash
  390 000
  140 000
  Total assets
  16 000 000
  12 250 000
  EQUITY AND LIABILITIES
  Equity
  ?
  ?
  Ordinary share capital
  5 480 000
  3 680 000
  Retained earnings
  ?
  ?
  Non-current liabilities
  4 500 000
  3 800 000
  Loan (20% p.a.)
  4 500 000
  3 800 000
  Current liabilities
  2 300 000
  1 500 000
  Accounts payable
  2 300 000
  1 500 000
  Total equity and liabilities
  16 000 000
  12 250 000
  Statement of Comprehensive Income for the year ended 31 December:
  2022
  2021
  R
  R
  Sales
  10 800 000
  7 150 000
  Cost of sales
  (6 000 000)
  (3 650 000)
  Gross profit
  4 800 000
  3 500 000
  Operating expenses
  (1 800 000)
  (1 200 000)
  Depreciation
  580 000
  200 000
  Other selling, general and administrative expenses
  1 220 000
  1 000 0000
  Operating profit
  3 000 000
  2 300 000
  Investment income
  ?
  ?
  Interest expense
  (880 000)
  (600 000)
  Profit before tax
  2 600 000
  2 030 000
  Company tax
  (728 000)
  (568 400)
  Profit after tax
  1 872 000
  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 company’s cost of capital is expected to reduce to 15%. Depreciation is calculated using the straight-line method.
  QUESTION 1
  (25 Marks)
  REQUIRED
  1.1
  Calculate the increase in the retained earnings over the two-year period.
  (2 marks)
  1.2
  By how much did the interest income increase or decrease from 2021 to 2022? Provide a possible reason for the change.
  (3 marks)
  1.3
  Comment on the investing activities of the company.
  (4 marks)
  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.
  (4 marks)
  1.5
  Without making use of any ratios, provide an interpretation of the following over the two-year period:
  1.5.1
  Inventories
  (4 marks)
  1.5.2
  Accounts receivable
  (4 marks)
  1.6
  Calculate the cost (as a percentage) of not accepting discounts from creditors in settlement of accounts.
  (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.
  (5 marks)
  2.2
  The ability of the company to settle its short-term debts under distress conditions.
  (4 marks)
  2.3
  The percentage of the profit that has been retained in the company.
  (4 marks)
  2.4
  The profitability of the company from the point of view of the shareholders.
  (4 marks)
  2.5
  A measure of the efficiency with which the total assets of company are managed.
  (4 marks)
  2.6
  The effectiveness of the credit administration of the company in respect of its customers who purchase on credit.
  (4 marks)
  QUESTION 3
  (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.
  (5 marks)
  3.2
  The sales value required to make an operating profit of R2 016 000, by using the contribution margin ratio.
  (5 marks)
  3.3
  The percentage change in the operating profit (expressed to two decimal places), if the selling price and fixed costs increase by 10%.
  (5 marks)
  3.4
  The total Contribution Margin and Operating Profit/Loss if the sales volume is 10% below expectation.
  (5 marks)
  3.5
  The selling price per unit (expressed in rands and cents) that will enable the company to break even.
  (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)
  (3 marks)
  4.2
  Accounting Rate of Return on initial investment (expressed to two decimal places)
  (5 marks)
  4.3
  Net Present Value
  (6 marks)
  4.4
  Internal Rate of Return using interpolation (expressed to two decimal places).
  (6 marks)
  4.5
  Internal Rate of Return using interpolation (expressed to two decimal places) if there were no import duties and no salvage value.
  (5 marks)