Case Study: Financial Decision-Making at Swift Supplies

Swift Supplies, a medium-sized office supplies company, has been operating successfully for the past five years. The company’s financial statements for the year ended 31 December 2023 reveal the following:

• Statement of Financial Position Highlights:

o Total assets: R5,000,000
o Total liabilities: R3,200,000
o Equity: R1,800,000
• Statement of Comprehensive Income Highlights:

o Revenue: R10,000,000
o Cost of Sales: R6,000,000
o Operating Expenses: R2,000,000
o Interest Expense: R200,000
o Tax Expense: R400,000
o Net Profit: R1,400,000
The company is considering expanding its product line by introducing a range of eco-friendly office supplies. This would require an investment of R1,000,000, which the company plans to finance through a mix of equity and debt. However, the management team is uncertain about the potential financial implications of this decision.

QUESTION 1 (20)

Based on the financial information provided, calculate the following ratios:

o Current Ratio (5)
o Debt-to-Equity Ratio (5)
o Net Profit Margin (5)
o Return on Assets (ROA) (5)

QUESTION 2 (15)

Swift Supplies is considering the eco-friendly product line, expecting to sell 50,000 units annually at a price of R40 per unit. The estimated variable cost per unit is R25, and fixed costs for the new product line are R300,000.

Calculate the break-even point in units. (5)

Determine the contribution margin per unit. (5)

Discuss how changes in fixed costs might impact the break-even point.(5)

QUESTION 3 (20)

Swift Supplies is considering two financing options for the R1,000,000 investment:
o Option 1: Issue additional equity shares.
o Option 2: Take a bank loan at an annual interest rate of 8%.

Calculate the impact of each option on the company’s equity and debt-to-equity ratio. (10)
Compare the financial risks associated with each option. Provide a well- reasoned explanation. (10)

QUESTION 4 (15)

The introduction of eco-friendly products aligns with sustainable practices. However, the production process involves sourcing materials from countries with minimal labor regulations.

Identify and discuss two ethical concerns associated with the company’s decision to source materials from these countries. (10)
Recommend two strategies the company could implement to ensure ethical and sustainable practices. (5)

Answers to Above Questions on Accounting

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