INFORMATION
The Statement of Comprehensive Income and simplified extract of the Statement of Changes in Equity for Afrox Ltd are provided below:

ADDITIONAL INFORMATION
1. Depreciation for the year amounted to:
2022: R720 000
2021: R1 080 000.
2. Company tax is calculated as a percentage of the pre-tax profit.

QUESTION 2 (20 Marks)

REQUIRED
2.1 Use the information provided below to calculate the ratios for 2022 (expressed to two decimal places)
that would reflect each of the following:
2.1.1 The profit of the company relative to sales after deducting the cost of sales. (2 marks)
2.1.2 The ability of the company to profitably utilize its capital, which includes both debt and equity. (2 marks)
2.1.3 The proportion of the total assets that are financed by total debt. (2 marks)
2.1.4 The ability of the company to repay its short-term debts under distress conditions, on the assumption that inventories would have no value at all. (2 marks)
2.1.5 The portion of the company’s profit that is allocated to each outstanding ordinary share. (2 marks)
2.1.6 An indication of the percentage of profit that has been put back into the company. (2 marks)
2.2 Comment on the following ratios that have been calculated for Sapphire Ltd:
2.2.1 Profit margin (4 marks)
2.2.2 Return on equity (4 marks)

INFORMATION
Excerpts of the financial data of Sapphire Ltd for 2022 are as follows:
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2022

R
Sales 7 800 000
Cost of sales 5 280 000
Operating profit 796 800
Interest expense 105 600
Profit before tax 691 200
Company tax 207 360

Additional information
1. All purchases and sales of inventories were on credit.
2. Inventories on 31 December 2021 amounted to R2 880 000.
3. The following ratios were calculated for 2022 and 2021:

The market prices of the company’s shares for 2022 and 2021 were R4.00 and R3.50 respectively.

QUESTION 3 (20 Marks)

REQUIRED
Study the information given below and answer the following questions independently:
Use the contribution margin ratio to calculate the sales value required to break even. (4 marks)
Calculate the margin of safety (as a percentage). (4 marks)
Determine the sales volume required to achieve double the forecast operating profit for 2024. (4 marks)
Suppose Tiffany Ltd is considering a R50 per unit decrease in the selling price of the product, with the expectation that this would increase the annual sales volume by 25%.
Calculate the total Contribution Margin and Operating Profit/Loss. (4 marks)
Determine the selling price per unit (expressed to the nearest cent) that would enable
Tiffany Ltd to break even, if all 30 000 units are produced and sold. (4 marks)
INFORMATION
Tiffany Ltd produces a single product. The following forecasts for 2024 are available:

The budgeted sales are 30 000 units at R800 per unit. Manufacturing costs include direct materials at R160 per unit, direct labour at R100 per unit, variable overheads at R44 per unit and fixed overheads of R1 920 000. Marketing costs include a sales commission of 6% (of the selling price) and R2 592 000 for advertising and salaries. Administration costs include R4 608 000 for fixed costs and variable costs of R48 per unit sold.

QUESTION 4 (20 Marks)

4.1
REQUIRED
Calculate the following from the information given below:
Payback Period (expressed in years, months and days). (3 marks)
Accounting Rate of Return on initial investment (expressed to two decimal places). (4 marks)
Internal Rate of Return (expressed to two decimal places) if the net cash inflows are R400 000 per year for five years. Your answer must include two net present value
calculations (using consecutive rates/percentages) and interpolation. (5 marks)

INFORMATION
Fego Limited is considering the purchase of Machine X, details of which are provided below:

Year R
Initial investment 0 (1 500 000)
Net cash inflows: 1 480 000
2 600 000
3 380 000
4 272 000
5 360 000

The cost of capital is 12%. Depreciation is calculated using the straight-line method. No scrap value is expected for the machine. Ignore taxes.

4.2 REQUIRED
Study the information given below and determine, based on its Net Present Value (NPV), whether the investment should be favourably considered for acceptance or not.
(8 marks)
INFORMATION
Umdloti Ltd plans an investment in non-current assets costing R3 000 000. The non-current assets are expected to have a four-year life, with the following net profits anticipated:
Year 1 R350 000
Year 2 R750 000
Year 3 R200 000
Year 4 R170 000

Working capital amounting to R200 000 will be required at the start of the project. All the working capital will be
recovered at the end of year 4. The expected scrap value of the non-current assets is R400 000. The cost of capital is 12%. Ignore taxes.

QUESTION 5 (20 Marks)
REQUIRED
Use the information given below to prepare the Cash Budget for each of the first three months of operations
(i.e. January, February, March 2024). Use separate monetary columns for each month.
INFORMATION
The following information relates to Arlon Manufacturers which will commence business on 01 January 2024
with R750 000 cash:
1. New machinery and equipment will be purchased on 02 January 2024 for R300 000. A deposit of 20% will be paid immediately. The balance of the debt as well as finance charges of R18 000 will be paid in
12 equal instalments commencing February 2024.
2. Production will commence on 05 January 2024 and 30% of the sales for February’s will be manufactured
in January. Each month thereafter the production will consist of 70% of the current month’s sales and 30% of the following month’s sales.
3. Estimated sales at R72 per unit are as follows:
Units
January 0
February 8 500
March 11 000
April 10 500

4. Cash sales are expected to comprise 60% of the total sales. A cash discount of 10% will be granted to these customers. The balance of the sales will be on credit. Thirty percent (30%) of the amount owing is expected to be received in the month of the sale and the balance in the month after the sale.
5. Variable manufacturing costs per unit are estimated as follows:

Direct materials will be purchased to meet the production requirements of each month. Sixty percent
(60%) of the purchases is expected to be for cash and the balance on credit. Creditors are expected to be paid in the month after the purchase.
Direct labour costs are settled monthly.
Variable manufacturing overheads will be paid in the month in which they are incurred.
Fixed costs, excluding depreciation of R5 000 per month, are expected to amount to R40 000 per month
and the fixed costs are paid monthly.

Answers to Above Questions on Financial Accounting

Answer 1: The calculation of different types of ratios is performed as follows: