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. 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 LimitedStatement of Financial Position as at 31 December: 20222021 RRASSETS Non-current assets11 810 0007 560 000Property, plant and equipment10 025 0006 250 000Investments1 785 0001 310 000Current assets4 190 0004 690 000Inventories1 875 0002 350 000Accounts receivable1 925 0002 200 000Cash390 000140 000Total assets16 000 00012 250 000 EQUITY AND LIABILITIES Equity??Ordinary share capital5 480 0003 680 000Retained earnings??Non-current liabilities4 500 0003 800 000Loan (20% p.a.)4 500 0003 800 000Current liabilities2 300 0001 500 000Accounts payable2 300 0001 500 000

Total equity and liabilities16 000 00012 250 000

Statement of Comprehensive Income for the year ended 31 December: 20222021 RRSales10 800 0007 150 000Cost of sales(6 000 000)(3 650 000)Gross profit4 800 0003 500 000Operating expenses(1 800 000)(1 200 000)Depreciation580 000200 000Other selling, general and administrative expenses1 220 0001 000 0000Operating profit3 000 0002 300 000Investment income??Interest expense(880 000)(600 000)Profit beforetax2 600 0002 030 000Company tax(728 000)(568 400)Profit aftertax1 872 0001 461 600

In addition to the above, the followinginformation 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. Dividendsdeclared for the years ended 31 December2021 and 2022 amounted to R1 169 280 and R1 422 000 respectively.

The financial manager of Orbit Limited providedthe following forecastsfor 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 importduties. The cost of operatingthe buses each year is expected to be R4 100 000 and the annual revenuesfrom transporting the passengers are estimated at R7 000 000. The buses

QUESTION 3(25 Marks)

REQUIRED

Refer to the forecasts made by the financial managerfor 2023 and calculate the following independently. As

far as possible, use the contribution margin format of the incomestatement to presentyour 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 marginratio.

(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 totalContribution Margin and Operating Profit/Loss if the salesvolume is 10% below

expectation.

(5 marks)3.5

The selling price per unit (expressed in rands andcents) that will enable the company to

break even.

(5 marks)