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 two years.

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 year ended 31 December 2021 and 2022 amounted to R1 169 280 and R1 122 000 respectively.

The financial manager of Obit 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 material 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 director are contemplating diversification in 2024 by entering the passenger transport market. This could be achieved through the purchased 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 revenue from transporting the estimated at R7 000 000. The buses are expected to have a total savage 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 captured using the straight line method.

Obit Limited

Statement of Financial Position as at 31 December:

OBIT LIMITED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20222021 RRASSETS Non-currents assets 11 810 0007 560 000Property, plant and equipment 10 025 0006 250 000Investments 1 785 0001 310 000Current assets 4 190 0004 690 000Inventories 1 875 0002 350 000Accounts receivables 1 925 0002 200 000Cash 390 000 140 000Total assets 16 000 00012 250 000 EQUITY AND LIABILITY Equity ? ? Ordinary share capital 5 480 0003 680 000Retained earnings ? ?Non-current liabilities 4 500 0003 800 000Loan (20% p.a)4 500 0003 800 000Current Liabilities 2 300 0001 500 000Accounts payables 2 300 0002 300 000Total equity and liability 16 000 00012 250 000

State of Comprehensive Income for the year ended 31 December:

20222021 RRSales 10 8000 0007 150 000Cost of sales (6 000 000)(3 650 000)Gross profit 4 800 0003 500 000Operating expenses (1 800 000)(1 200 000)Depreciation 580 000 200 000Other selling, general and administrative expenses 1 220 0001 000 000Operating profit 3 000 0002 300 000Investment income ? ?Interest expense(880 000)(600 000)Profit before tax 2 600 0002 030 000Company tax (728 000)(568 100)Profit after tax 1 872 0001 461 600

QUESTION 1

1.1 Calculate the increase in the retained earnings over 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 receivables (4 marks)

1.6 Calculate the cost (as percentage) of not accepting discount from creditors in settlement of accounts (4 marks )

QUESTION 2

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 (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 the 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

Refer to the forecasts made by the financial manager for 2023 and calculate the following independently: As for as possible, use the contribution margin format of the income statement to present your answer.

3.1 Break-even quantity (5 marks)

3.2 The sales vale 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.

3.5 The selling price per unit (expressed in rands and cents) that will enable the company to break even. (5 marks)

QUESTION 4

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 f Return using interpolation (expressed to two decimal place (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)