CASE STUDY Gelato's (Pty) Ltd is a market leader in the ice cream industry. They produce and sell various ice cream flavours and ice cream accessories, such as various types of ice cream cones, toppings, sauces and ice cream scoops under their own name Gelato's (Pty) Ltd. Their customer base includes various retailers as well as caterers. Based in Gauteng, they operate nationally throughout South Africa and Namibia offering excellent service, managed from their headquarters in Centurion, Gauteng. Recently they have signed a contract to export their state- of-the-art ice cream scoops to the United Kingdom. To be able to provide excellent service levels, Gelato's (Pty) Ltd owns and operates a large facility in Centurion. The warehouse is fenced off with a high security fence and the warehouse is fitted with a state-of-the-art security system. The facility is divided into two areas. Area A is allocated for the production process and Area B is allocated for storage. The bulk storage area for the ice cream scoops is assigned on a random location basis. Sometimes when space is at a premium in the warehouse, the ice cream cones are block-stacked on the floor. A snapshot of the financials of Gelato's can be seen below. Statement of financial position at 31 December 2020 R Assets Non-current assets 10 000 000 Current assets 6 000 000 16 000 000 Equity and liabilities Equity 5 000 000 Non-current liabilities 6 500 000 Current liabilities 4 500 000 16 000 000 Statement of comprehensive income for the year ended 31 December 2020 R Revenue 20 000 000 Cost of sales 12 000 000 Gross profit 8 000 000 Expenses 4 000 000 Profit before interest 4 000 000 Interest 500 000 Profit before tax 3 500 000 Tax 1 500 000 Profit after tax 2 000 000 Pickers can pick up to 50 orders each day. The milk for producing the ice cream is supplied by milk farmers in the KwaZulu-Natal Midlands. Parts for the ice cream scoops are sourced from a company called Scoopy Doo, which is based in the Far East. Gelato's keeps sufficient raw material stock to ensure that they can produce and supply their customers with ice cream scoops at all times. In recent weeks, Gelato's has been experiencing problems with Scoopy Doo! Last month, Gelato's ordered 50 ice cream scoop mechanisms, but only 35 were delivered. The products imported from the Far East come in through the Durban harbour in containers and are then transferred to Centurion via road transport. Once the containers arrive at the warehouse in Centurion, the receiving staff process the receipt. The ice cream scoop parts are packaged in boxes and stored on pallets. Area B of the facility is divided into two sections - one for the perishable goods, e.g. ice cream, and one for the non-perishable goods. The ice cream cones, toppings and sauces are stored on a first-in-first-out basis (FIFO). The warehouse staff mostly put the goods manually into the correct storage bin. Location areas that are too high are accessed by using an old second-hand forklift which spends most of the time being repaired. Gelato's (Pty) Ltd mostly uses racking in their warehouse for both types of products. In 2020, Gelato's did not perform well owing to the Covid-19 pandemic, but over the last 12 months the demand for Gelato's products has doubled as a result of good customer service levels in South Africa. Current forecasting numbers indicate that the upward trend in demand will continue for the next year. Customers place orders on a daily basis via the automated systems which need upgrading as they are battling to handle the increase in demand and this sometimes leads to delayed invoicing and payment by customers. Goods are picked, packed and loaded onto a pallet for delivery nationally via road transport. Deliveries to customers in Namibia can take place either via road transport or via air transport, depending on the size and the urgency of the order. Recently, several of the customers in Namibia have been complaining about receiving short deliveries and incorrect, damaged and expired products. They have also been complaining about the quality of the ice cream scoops, as some of the scoops were malfunctioning. Taking the above case study into consideration, answer the following questions: . . Question 1 [25] Analyse and interpret the statement of financial position in terms of: Return on investment Profit margin Asset turnover Use the information provided in the case study to advise the management of Gelato's on a strategy to increase the return on equity by 20%, taking into account that it is not possible to increase the sales or change the financial structure of the company. . CASE STUDY Gelato's (Pty) Ltd is a market leader in the ice cream industry. They produce and sell various ice cream flavours and ice cream accessories, such as various types of ice cream cones, toppings, sauces and ice cream scoops under their own name Gelato's (Pty) Ltd. Their customer base includes various retailers as well as caterers. Based in Gauteng, they operate nationally throughout South Africa and Namibia offering excellent service, managed from their headquarters in Centurion, Gauteng. Recently they have signed a contract to export their state- of-the-art ice cream scoops to the United Kingdom. To be able to provide excellent service levels, Gelato's (Pty) Ltd owns and operates a large facility in Centurion. The warehouse is fenced off with a high security fence and the warehouse is fitted with a state-of-the-art security system. The facility is divided into two areas. Area A is allocated for the production process and Area B is allocated for storage. The bulk storage area for the ice cream scoops is assigned on a random location basis. Sometimes when space is at a premium in the warehouse, the ice cream cones are block-stacked on the floor. A snapshot of the financials of Gelato's can be seen below. Statement of financial position at 31 December 2020 R Assets Non-current assets 10 000 000 Current assets 6 000 000 16 000 000 Equity and liabilities Equity 5 000 000 Non-current liabilities 6 500 000 Current liabilities 4 500 000 16 000 000 Statement of comprehensive income for the year ended 31 December 2020 R Revenue 20 000 000 Cost of sales 12 000 000 Gross profit 8 000 000 Expenses 4 000 000 Profit before interest 4 000 000 Interest 500 000 Profit before tax 3 500 000 Tax 1 500 000 Profit after tax 2 000 000 Pickers can pick up to 50 orders each day. The milk for producing the ice cream is supplied by milk farmers in the KwaZulu-Natal Midlands. Parts for the ice cream scoops are sourced from a company called Scoopy Doo, which is based in the Far East. Gelato's keeps sufficient raw material stock to ensure that they can produce and supply their customers with ice cream scoops at all times. In recent weeks, Gelato's has been experiencing problems with Scoopy Doo! Last month, Gelato's ordered 50 ice cream scoop mechanisms, but only 35 were delivered. The products imported from the Far East come in through the Durban harbour in containers and are then transferred to Centurion via road transport. Once the containers arrive at the warehouse in Centurion, the receiving staff process the receipt. The ice cream scoop parts are packaged in boxes and stored on pallets. Area B of the facility is divided into two sections - one for the perishable goods, e.g. ice cream, and one for the non-perishable goods. The ice cream cones, toppings and sauces are stored on a first-in-first-out basis (FIFO). The warehouse staff mostly put the goods manually into the correct storage bin. Location areas that are too high are accessed by using an old second-hand forklift which spends most of the time being repaired. Gelato's (Pty) Ltd mostly uses racking in their warehouse for both types of products. In 2020, Gelato's did not perform well owing to the Covid-19 pandemic, but over the last 12 months the demand for Gelato's products has doubled as a result of good customer service levels in South Africa. Current forecasting numbers indicate that the upward trend in demand will continue for the next year. Customers place orders on a daily basis via the automated systems which need upgrading as they are battling to handle the increase in demand and this sometimes leads to delayed invoicing and payment by customers. Goods are picked, packed and loaded onto a pallet for delivery nationally via road transport. Deliveries to customers in Namibia can take place either via road transport or via air transport, depending on the size and the urgency of the order. Recently, several of the customers in Namibia have been complaining about receiving short deliveries and incorrect, damaged and expired products. They have also been complaining about the quality of the ice cream scoops, as some of the scoops were malfunctioning. Taking the above case study into consideration, answer the following questions: . . Question 1 [25] Analyse and interpret the statement of financial position in terms of: Return on investment Profit margin Asset turnover Use the information provided in the case study to advise the management of Gelato's on a strategy to increase the return on equity by 20%, taking into account that it is not possible to increase the sales or change the financial structure of the company