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Read the case study and answer the questions that follow: COLATONIC LTD: THE BEVERAGE GIANT Colatonic Ltd is a marketer of a range of non

Read the case study and answer the questions that follow:
COLATONIC LTD: THE BEVERAGE GIANT
Colatonic Ltd is a marketer of a range of non-alcoholic beverages. It commenced operations a few years ago with an authorized share capital of 500000 ordinary shares and by 2023 eighty percent (80%) of the shares had been issued. Its product mix includes soft drinks, juices, energy drinks and flavoured water. These products are marketed under various brands. The company has distribution outlets in all the provinces in South Africa, with the headquarters in Pretoria. It negotiated with its suppliers for all purchases to be made on credit terms of 90 days and it was able to sell all its products to its customers on credit terms of 30 days. Colatonic Ltd experienced a great dela of success in the recent years because of its excellent sales strategy and the clever use of social media. However the entry of cheap energy drinks and flavoured water into the South African beverage market from China and other countries led to a downturn in the financial performance in 2023. The company did, however, pay an interim dividend of R670080 to the shareholders during 2023. A final dividend was also declared at the end of 2023. The market price of each share of Colatonic Ltd was R15 on 31 December 2023.
This following are the financial statements for the past two years:
COLATONIC LTD
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER:
2023
2022
R
R
Sales
20000000
24000000
Cost of sales
(12000000)
(13000000)
Gross profit
8000000
11000000
Selling, general and administrative expenses
(5000000)
(6600000)
Operating profit
3000000
4400000
Interest on investment
?
?
3240000
4592000
Interest expense
?
?
Profit before tax
2940000
4352000
Company tax
(823200)
(1218560)
Profit after tax
2116800
3133440
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER:
2023
2022
R
R
Assets
Non-current assets
3480000
2700000
Investment (maturity date 30 June 2025)
2000000
1600000
Inventories
2200000
1800000
Accounts receivable
1400000
1100000
Cash
20000
16000
9100000
7216000
Equity and liabilities
Equity
5370000
4156000
Long-term loan
2000000
1600000
Accounts payable
1000000
800000
Bank overdraft
50000
40000
Dividends payable
600000
500000
Company tax payable
80000
120000
9100000
7216000
The financial manager of Colatonic Ltd read about the plight of the local child welfare organisation which aimed to supplement its funds by making and selling cooking bags which can slow-cook meals or keep food warm for long periods. The financial manager approached the board of directors who agreed that the company should assist the organisation. After discussions with the president and treasurer of the welfare organisation the following budgeted information for 2024 was gathered to assist with trying to improve the profitability and break-even quantity for the year:
The fixed and variable manufacturing costs are estimated to be R240000 per annum and R42 per unit respectively. The selling price of the cooking bags will be R120 each. The selling and distribution costs are expected to total R15000 per month plus 5% of sales. The administration costs are estimated at R31000 per month plus R6 per unit sold. 15000 cooking bags are expected to be sold.
In keeping with its plans for expansion, the company is appraising the production and sale of a new designer energy drink. This would involve the acquisition of a new machine with a purchase price of R1600000 which is expected to have a useful life of six years and a salvage value of R200000. The installation cost of the machine is R100000.5000 units are expected to be sold annually. The net profit is expected to be R30 per
unit. The straight-line method of depreciation is used by Colatonic Ltd. The companys cost of capital is 16%. If approved, the implementation date would be 02 January 2025.
QUESTION 3
(25 MARKS)
REQUIRED
Study the information provided by the child welfare organisation and answer the following questions independently. The expanded contribution margin model must be used to answer questions 3.1,3.2 and 3.4.
3.1
Calculate the break-even quantity.
(5 marks)
3.2
Calculate the sales volume required to achieve an operating profit of R2112000.
(5 marks)
3.3
Calculate the selling price per unit (expressed to the nearest cent) that will enable to welfare organisation to achieve an operating profit of R50 per unit.
(5 marks)
3.4
Suppose the selling price is decreased by R20 per unit with the expectation that this would increase the sales volume by 20%. Is this a good idea? Motivate your answer with the relevant calculations.
(5 marks)
3.5
Calculate the margin of safety (in units) if the selling price drops to R110 per unit with the expectation that the fixed costs can be reduced to R711900.
(5 marks)

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