Question 1:
Pigeon proofing Ltd sells pigeon deterrents. All of its sales are on credit. Sales for the past two months were as follows:
January February
R50 000 R100 000
It is expected that sales for the next two months will be as follows:
March April
R120 000 R60 000
Collections from credit sales takes place as follows:
- 20% collected in the month of sale
- 80% collected one month following the month of sale
Required:
Calculate the total cash receipts from credit sales for March and April.
Question 2:
You just received R60 000 from a beneficiary and have decided to save it for a deposit on a house. You place it in a fixed deposit account for a term of 3 years and the account pays 13% interest compounded annually. How much will your savings account have in it at the end of the period?
Question 3: Furniture Ltd made a loss last year. Though revenue was up from the previous year, profits were down a lot. The management investigated this and found that a very large amount of their clients are not paying on time or at all. This led to a very high bad debt ratio over the past year. The management has decided to amend the credit policy of the business in order to avoid this in the coming year.
The management together with the bookkeeper have put together the following figures for next year if the credit policy is kept as it is currently. This is based on historical data that has been collected for the past few years.
Current
Sales R1 800 000
Variable costs 60% of sales
Average collection period (ACP) 180 days
Bad debts 15% of sales
Discounts 10% discount given on 20% of total sales
The management also compiled expected figures based on their past experiences and expectations for their proposed credit policy. The terms of the new credit policy are also outlined in the table below:
New
Sales R1 700 000
Variable costs 60% of sales
Average collection period 120 days
Bad debts 7% of sales
Discounts 20% discount given on 40% of sales
The company has a cost of capital of 9% and can use spare cash in new projects or investments that would at least earn this return.
Required:
Calculate the effect that the proposed policy will have on earnings before interest and tax (EBIT) and advise which plan would be better to take. (Assume a 365 day year)
Question 4:
The following information is applicable to questions 4.1 and 4.2:
Doors Ltd purchases doors in bulk and resells them to the public. Last year the company had sales of R1 000 000. Each door is sold for R50. The company rents a shop that comes with a small warehouse at a local mall. The financial manager of the company has estimated that it costs the company R5 per year to keep each door in storage based on the amount of space they have and rental costs. When the company places an order, it takes 11 days for their supplier to deliver new stock and the owner of the business wishes to always keep at least 100 doors in stock. The financial manager has also estimated that it costs the company R1 000 for each order they place.
Question 4.1: Calculate the economic order quantity for Doors Ltd.
Question 4.2: Calculate the re-order point for Doors Ltd.
Question 4.3: A supplier offers the following credit terms: 3/14 net 60. Calculate the cost of giving up the cash discount.
Question 4.4: An organisation has a cash conversion cycle (CCC) of 45 days and an operating cycle of 75 days. What was the company’s average payment period?
Question 5: The following information is applicable to questions 5.1 to 5.4:
Ladders Ltd had their financial year end on 31 July 2015. The manager of the business you work for has tasked you to do an analysis of Ladders Ltd as he wants to go into a supplier agreement with them and needs to be sure that they are profitable and have good working capital efficiency before he signs such a large agreement. Assume that all purchases are on credit. Below you will find extracts from the financial statements of Ladders Ltd:
Extract from the statement of comprehensive income:
Sales R15 000 000
Cost of sales R11 000 000
Operating expenses R2 000 000
Interest R1 200 000
Tax R216 000
Net profit R584 000
Extract from the statement of financial position:
Total assets R8 500 000
Inventory R1 300 000
Other current assets R2 400 000
Total liabilities R8 400 000
Accounts payable R3 200 000
Question 5.1: What was Ladders Ltd’s gross profit for 2015?
Question 5.2: What was the company’s return on assets (ROA) for 2015?
Question 5.3: Calculate the average payment period for the 2015.
Question 5.4: Calculate the current ratio for Ladders Ltd and comment on how this may impact on your business if you were to become a supplier that sells on credit to Ladders Ltd.
Question 6: The following information is applicable to questions 6.1–6.3:
Lerato has recently opened up a new shop in a big mall. The shop will sell ice cream to mall-goers and is located in a busy aisle with lots of foot traffic. Because of her position in the mall, the rent is quite high and Lerato thinks she will have to sell a lot of ice cream for this. She has put together the following breakdown of her expenses and selling price:
Selling price per ice cream R15
Variable costs per ice cream R12
Rent R50 000 per month
Utilities R3 000 per month
Insurance R500 per month
Maintenance R1 000 per month
Question 6.1: Calculate the amount of units that Lerato will have to sell each year in order to break even.
Question 6.2: If Lerato manages to sell 250 000 ice creams in one year and her business has interest costs of R 15 000 per year, what would the business’ degree of financial leverage be?
Question 6.3: Two years later Lerato’s shop is doing well and her total sales for this year and the previous year is looking good. The table below summarises her sales and operating profit (EBIT) for the past two years:
Sales Operating profit (EBIT)
Year 1 R4 500 000 R150 000
Year 2 R4 800 000 R180 000
Calculate the degree of operating leverage for her business.