QUESTION 1

1.1
Retained earnings for 2015:
R
Total Equity and Liabilities

R
2 400 000

Less:
Retained earnings 2014 (200 000)
Current Liabilities
Non-current liabilities

(575 000)
(325 000)

Ordinary Share Capital (1 200 000)

Total

(2 300 000)

Retained Earnings 2015

100 000

1.2 To assess the credit worthiness of Atlas LTD given the balance sheet
information,Senzo Manufacturers should calculate ratios that determine Atlasability
to meet its short term debt obligations.
Current ratio =Current assets /current liabilities
=1 500 000/575 000
=2.61:1

Acid test ratio

Current

assets-Inventory/current

liabilities
= (1 500 000-800 000)/575 000
= 1.22:1

Given the above ratios, Senzo manufacturers should grant Atlas ltd the credit since its
current ratio shows that its current assets can meet its short term debt obligations. The

acid test also shows that without depending on the sale of inventories, Atlas ltd would
still be able to cover their short term debts(Mancosa,2013:104).
1.3.1 Property Plant and Equipment (700 000)
The reported values are shown at cost value less accumulated depreciation. The
Equipment has depreciated and it needs replacement since it is reaching the end of its
economic life.
1.3.2 Fixed deposit (200 000)
This is an intangible asset from the companys long term investments. There are capital
gains on the investment. It can be recommended that the company venture into more
investments since these long term assets do not depreciate (Mancosa, 2013:47).
1.3.3 Inventories (800 000)
The company is holding too much inventory. Therefore there is an opportunity cost of
using the funds in other profitable ventures. It is recommended that the firm use an
inventory management system that ensures that the company turns over inventory
quickly (Mancosa,2013:47)..

QUESTION 2
2.1 According to the policy, amount that should be retained is:
40/100x 315 000= R 126 000
Retained Earnings= Profit due to ordinary shareholders-Ordinary dividend for the year
=R315 000-R114 200
=200 800
The retained earnings policy has been followed.
2.2
Debtor collection period=Accounts Receivable/Credit sales X 365
=800 000/7 000 000 X365
=41.71 days
Therefore the management has not been effective in the management of its accounts
receivable since the days showed by the above ratio are more than the 30 days
stipulated in the credit terms.
2.3
Creditor payment period=Accounts payable/credit purchases X 365
Credit purchases calculated as follows:
Cost of sales
Add closing inventory

5 600 000
1 600 000

Less opening Inventory (1 800 000)

Total purchases

(5 400 000)

Credit purchases= 5 400 000X80/100

=4 320 000
Creditor payment period=400 000/4 320 000X365
33.795 days

No. Saturn is not taking advantage of the credit terms offered by its trade creditors since
it pays creditors too early.The firm is offered 90 days to pay but it pays its creditors
within 34 days.
2.4
Return on investment:
Return on Equity=Profit after tax/Owners Equity X100/1
=315 000/1 200 000
=26.25%
26.25% is higher than the prevailing interest rate of 15%, therefore it is considered
satisfactory, and hence the shareholders would be satisfied with the return on their
investment.
2.5
Gross margin ratio=gross profit/sales X 100/1
1 400 000/1 000 000 X 100/1
=20%
Mark up

=20%X 600 000

=120 000

Selling price=cost price +mark up

=600 000+120 000
=R 720 000

It should sell the goods for a total of R 720 000 to achieve the current gross margin.

QUESTION 3
3.1
Per

unit Volume

x
280
180
(100)

sales
Variable costs
Contribution margin

Total

200 000

35.7

=
2000

%
Fixed costs
Operating Profit

(100 000)
100 000

Workings for variable costs and fixed costs

Variable costs:
Direct material

92

Labour(R30X2hrs) 60
Commission

28
180

Commission as 10% of selling price = 10/100 x280 =R28

Fixed costs= 96 000+4000 advertising costs=R100 000

Break even quantity=fixed costs/contribution margin per unit

=100 000/100
=1000 units
3.2
Per
x

unit Volume
=

Total

sales
Variable costs
Contribution margin

230
180
(50 )

2000

100 000

35.7

%
Fixed costs
(100 000)
Operating Profit
0
Working back from operating profit at zero, we find that the total contribution margin
should equal fixed costs. Given 2000 units as the quantity, we deduce the contribution
margin, and then work out the sale value by adding the variable costs and the
contribution per unit.

3.3
Per

unit Volume

x
250
180
(70)

sales
Variable costs
Contribution margin
Fixed costs
Operating Profit
The total contribution margin is 140 000

Total

500 000
2000

140 000
(100 000)
40 000

28%

Operating profit is 40 000

3.4
Per
sales
Variable costs
Contribution margin

x
280
152
(128)

unit Volume

Total

256 000

45.71

=
2000

%
Fixed costs
Operating Profit

(206 000)
50 000

Salaries per month =Fixed costs after Salaries - Fixed costs before the salary

=206 000-100 000

=106 000
3.5
Yes, renting the machine increases operating profit by R18 000 as shown below.
Rent machine:
Per
x
280
165
(115)

sales
Variable costs
Contribution margin

unit Volume

Total

230 000

41.1

=
2000

%
Fixed costs
Operating Profit

(112 000)
118 000

Without machine rental:

Per
x
280
180
(100)

sales
Variable costs
Contribution margin

unit Volume

Total

200 000

35.7

=
2000

%
Fixed costs
Operating Profit

(100 000)
100 000

Calculations of fixed costs and variable costs

Fixed costs=96 000+4 000+12 000=R112 000
Variable costs:
Labour 1.5 x P30

45

Direct materials

92

Commission

28
R165

QUESTION 4
4.1
4.1.1
Credit sales: 114 000x 40/60=76 000

Total sales=credit sales +cash sales

=76 000+ 114 000
=R190 000
4.1.2
15%=2500
100%= total loan
Cross multiplying
Total loan

=2500x100/15
=R16 667

4.1.3
Salaries with 12%increase in February=40320
112%=40320
100%=salaries in January
Cross multiplying
Salaries in January=R40320x 100/112
=R36 000
4.1.4
Cash purchases are 50% of purchases
Credit purchases

=45 000x50/50
=45 000

Total purchases

=cash purchases + credit purchases

=45 000+45 000

=R90 000
4.1.5
cash budget of heinz enterprises for 3 months ended31
March 2016
Januar

Februar

March

cash receipts
cash sales
receipts from debtors
cash payments

y
214000
114000
100000
(21350

y
205400
125400
80000
(225820

224800
136800
88000
(21482

cash purchases of inventory

payment to creditors
salaries and wages
interest on loan 15%
other cash operating epenses
cash surplus/(shortfall)
Opening cash balance
closing cash balance

0)
45000
50000
36000
2500
80000
500
25000
25500

)
43000
60000
40320
2500
80000
(20420)
25500
5080

0)
47000
45000
40320
2500
80000
9980
5080
15060

Since the bank balance is expected to be favourable each month, the company does
not need overdraft facilities during the period. However, the cash position is not good
since in February the company did not generate enough cash to cover its payments.
The cash deficiency was met by cash balances in the bank.
4.2
4.2.1
If the order is rejected the total contribution margin is R138 000 calculated as shown in
the table below
Per
x

unit Volume
=

Total

sales
Variable costs
Contribution margin

40
26.20
(13.80)

10 000

138 000

34.5
%

Fixed costs
Operating Profit

(118 000)
20 000

Calculation of fixed and variable costs:

Fixed costs=fixed factory overheads+ fixed selling and administrative costs
=58 000+60 000
=118 000
Unit Variable costs:
Direct materials 140 000/10 000

=14

Direct labour 60 000/10 000

=6

variable factory overheads 40 000/10 000

=4

variable selling and admin costs= 22 000/10 000

=2.20
26.20

4.2.2
Differential revenue from accepting the offer:
1000 units @R28

28 000

Differential cost by accepting the offer:

1000 units@R24 (14+6+4)

(24 000)

Differential profit from accepting the offer

The special order would increase operating profits.

QUESTION 5
5.1
5.1.1

4000

Operating cash flows

=Revenues-Operating expenses

=300 000-120 000

=180 000
Net cash flows =operating cash flows + depreciation
=180 000+116 000
=296 000
Calculation of depreciation: cost salvage value/number of years
=R600 000-R20 000/5
=R116 000p.a
Calculation of NPV:
Year
Y0
Y1
Y2
Y3
Y4
Y5
Y5

Cash
flows
600 000
296 000
296 000
296 000
296 000
296 000
scrap 20 000

Discount

Present

factor 12%
1
0.8929
0.7972
0.7118
0.6355
0.5674
0.5674

value
(600 000)
264 298
235 971
210 693
188 108
167 950
11 348

NPV

478 369

value

5.1.2
Accounting rate of return:
ARR

=Average annual profit/Average investmentX100/1

=180 000/310 000 X100/1

=58%
Average investment =cost of machine salvage value/2
= (600 000+20 000)/2
=R310 000

Average annual profit

= Revenues-Operating expenses

=300 000-120 000

=R180 000 p.a
Therefore 180 000*5/5 =R180 000

5.1.3
Internal Rate of Return
By Trial and Error:

Year

1-5
Investmen

Cash

Discount

Discount

Present

Present

inflow

factor

factor

value

value

p.a
196 000

18%
3.1272

19%
3.0576

18%
612 931
600 000

19%
599 290
600 000

12 931

(710)

t
NPV

By interpolation
IRR= 18%+ 12 931/(12 931+710)

=18%+ 12 931/13 641

=18+0.94795
=18.95%

5.2
5.2.1
Raw material usage variance
= (Actual quantity-standard quantity) X standard price
= (25 000-27 000) X R4
=R8 000 (Favourable)
Note:
Standard quantity=3 x 9000=27 000m
Actual quantity=25 000m
Standard price=R4 per meter

5.2.2
Labour Efficiency variance
= (actual time worked-standard time allowed) X standard rate
=(13000-13500)XR15
= (R7 500) Favourable
Note:
Standard time allowed

=9000 units X 1.5 hours per unit

=13 500hrs
Actual time worked =208 000/16
=13 000hrs

Bibliography
Anonymous.2013.MBA Year 2 Accounting for Decision-Making.Mancosa