Accounting and Financial Management

Postgraduate Diploma in Business ManagementModule: Accounting and Financial Management CASE STUDY
Postgraduate Diploma in Business Management
PROGRAMME
Postgraduate Diploma in Family Business Management
Bachelor of Business Administration Honours
MODULE
Accounting and Financial Management
YEAR
One (1)
INTAKE
January 2024
TOTAL MARKS
100 marks
FORMATIVE ASSESSMENT 1
[100 MARKS]
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 500 000 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 R670 080 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
20 000 000
24 000 000
Cost of sales
(12 000 000)
(13 000 000)
Gross profit
8 000 000
11 000 000
Selling, general and administrative expenses
(5 000 000)
(6 600 000)
Operating profit
3 000 000
4 400 000
?
?
3 240 000
4 592 000
Interest expense
?
?
Profit before tax
2 940 000
4 352 000
Company tax
(823 200)
(1 218 560)
Profit after tax
2 116 800
3 133 440
Interest on investment
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER:
2023
2022
R
R
Non-current assets
3 480 000
2 700 000
Investment (maturity date 30 June 2025)
2 000 000
1 600 000
Inventories
2 200 000
1 800 000
Accounts receivable
1 400 000
1 100 000
20 000
16 000
9 100 000
7 216 000
Equity
5 370 000
4 156 000
Long-term loan
2 000 000
1 600 000
Accounts payable
1 000 000
800 000
Bank overdraft
50 000
40 000
Dividends payable
600 000
500 000
Company tax payable
80 000
120 000
9 100 000
7 216 000
Assets
Cash
Equity and liabilities
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 R240 000 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 R15 000 per month plus 5% of sales. The administration costs are estimated at R31 000 per
month plus R6 per unit sold. 15 000 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 R1 600 000 which
is expected to have a useful life of six years and a salvage value of R200 000. The installation cost of the
machine is R100 000. 5 000 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 company’s cost of capital is 16%.
If approved, the implementation date would be 02 January 2025.
QUESTION 1
(25 MARKS)
Study the Statement of Comprehensive Income of Colatonic Ltd for 2023 and 2022 and answer the following
questions:
1.1
What evidence does the statement of comprehensive income for the year ended
31 December 2023 provide for each of the following? (Include calculations to support
your answer.)
1.1.1
Increase in investment of R400 000
(3 marks)
1.1.2
Increase in the loan balance of R400 000
(3 marks)
1.2
If the return on capital employed of Colatonic Ltd is greater than the interest rate on the
loan how would this be interpreted by management?
(3 marks)
1.3
Comment on the decrease in selling, general and administrative expenses.
(2 marks)
1.4
Comment on the financial result of the company.
(3 marks)
1.5
Suggest TWO (2) ways in which the company can improve its net profit margin ratio.
(2 marks)
1.6
What amounts would appear in the statement of cash flows for the year ended
31 December 2023 in respect of the following? (Show all calculations.)
1.6.1
Dividends paid
(3 marks)
1.6.2
Company tax paid
(3 marks)
1.6.3
Net change in cash and cash equivalents (Also state if it is an increase or decrease.)
(3 marks)
QUESTION 2
(25 MARKS)
REQUIRED
Use the relevant information provided in the case study to answer the following questions (with ratios
expressed to two decimal places) in respect of 2023.
Note: Use the formulas provided in the formula sheet only (that appear after QUESTION 4).
2.1
Comment on the liquidity of the company. Calculate TWO (2) appropriate ratios to
support your answer.
2.2
Comment on the efficiency of the company regarding the collections from credit sales.
Motivate your answer by using a suitable ratio.
2.3
(4 marks)
Did the company make good use of the credit period allowed by the suppliers? Motivate
your answer with a relevant ratio and offer a recommendation, if necessary.
2.4
(6 marks)
(4 marks)
Comment on the return that the company made on its own and borrowed capital. Support
your answer with the use of a relevant ratio.
(4 marks)
2.5
Calculate the price earnings ratio.
(3 marks)
2.6
Was any provision made by the company to fund its future growth? Motivate your answer
by using an appropriate ratio.
(4 marks)
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 R2 112 000.
(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.
3.4
(5 marks)
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.
3.5
(5 marks)
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 R711 900.
(5 marks)
QUESTION 4
(25 MARKS)
Use the information related to the acquisition of a new machine to calculate the following. (Ignore taxes.)
Use discount factors from the four decimals present value tables only in the relevant calculations.
4.1
Payback Period (expressed in years and months).
(3 marks)
4.2
Accounting Rate of Return on initial investment (expressed to two decimal places).
(4 marks)
4.3
Net present value. Your answer must include the present value calculations and the
calculation of the NPV.
4.4
(6 marks)
Internal Rate of Return (expressed to two decimal places). Your answer must reflect two
NPV calculations (using consecutive rates/percentages) and interpolation.
4.5
(6 marks)
Weighted average cost of capital (expressed to two decimal places) if the initial investment
is funded by ordinary shares and debt in the ratio 3:2 respectively and the cost of ordinary
shares and cost of debt are 18% and 14% respectively. Your answer must include the
values of the ordinary shares and debt.
TOTAL: 100 MARKS
(6 marks)
FORMULA SHEET
Gross profit
X
Sales
Operating profit
X
Sales
Profit after tax
X
Sales
100
Profit after tax
X
1
No. of ordinary shares issued
100
Dividends for the year
1
No. of ordinary shares issued
100
1
X
100
1
100
Retained earnings for the year
1
Profit due to ordinary shareholders
Cost of sales
Earnings per share – Dividend per share
Average inventory
Earnings per share
Accounts receivable
X
Credit sales
Accounts payable
X
Credit purchases
Market price per share
1
Earnings per share
365
Current assets
1
Current liabilities
Current assets – Inventory
Net assets
Current liabilities
X
Total assets
Operating profit
X
Capital employed
Profit after tax
X
100
Total debt
1
Total assets
100
Non-current debt
1
Equity
X
100
1
X
100
Operating profit
1
Interest expense
100
1
X
100
1
Sales
Operating profit
Equity
365
X
100
1