FORMATIVE ASSESSMENT $1[100$ MARKS$]$

Answer ALL questions

QUESTION ONE $(25$ Marks$)$

$1\mathrm{.}1$ Explain the significance of cash budgets in financial planning for businesses. $(5)$

$1\mathrm{.}2$ INFORMATION

The information provided below was taken from the books of Modern Traders for the financial year ended $31$ May $2024.$

Extract of statement of comprehensive income for the year ended $31$ May $2024$

R

Sales $480000$

Cost of sales $240000$

Rent income $12000$

Advertising $4800$

Salaries and wages $72000$

Rates and taxes $1200$

Other operating expenses $96000$

Additional information

$1.$ All inventories are priced at cost plus $25\%.$

$2.$ Sales are divided equally each month. Sales are expected to increase by $18\%$ for the financial year ending $31$ May

$2025.$

$3.$ Fifty percent $(50\%)$ of the sales are for cash and the balance is on credit. Debtors normally pay their accounts as

follows:

$40\%$ in the month of the sale, and these debtors are entitled to a $5\%$ discount$$

$55\%$ one month after the sale

The balance is usually written off as bad debts.

$2.$ Purchases for June and July are expected to be R$20000$ per month. All purchases are for cash.

$3.$ In terms of the lease agreement rent is received monthly. The rent for the year ending $31$ May $2025$ is expected to be

$10\%$ more than the previous twelve months.

$4.$ Advertising is paid for monthly and is estimated to be $8\%$ of each month$$s sales.

$5.$ Salaries and wages will increase by $10\%$ with effect from $01$ July $2024.$

$6.$ Rates and taxes are paid in one instalment for the year during July $2024.$ Rates are calculated at $80$ cents $($R$0\mathrm{.}80)$ per

R$100$ on the value of the premises. The premises are valued at R$300000.$

$7.$ Other operating expenses are expected to increase by $5\%$ and are spread evenly throughout the year.

Operating expenses are paid for in the month in which they are incurred.

$8.$ On $31$ May $2024$ an unfavourable bank balance of R$18000$ appeared in the ledger of Modern Traders.

REQUIRED

Prepare each of the following for June and July $2024$ from the information provided below. $($Provide separate monetary

columns for each month.$)$

$1\mathrm{.}2\mathrm{.}1$ Debtors collection schedule $(6)$

$1\mathrm{.}2\mathrm{.}2$ Cash budget $(14)$

QUESTION TWO $(25$ Marks$)$

INFORMATION:

Bean Coffee, a local coffee shop, is considering expanding its operations by opening a new branch. The owners want to

ensure that the new branch will be profitable and are seeking advice on conducting a break$-$even analysis.

Bean Coffee estimates the following for the new branch:

$$ Fixed Costs: R$50,000$ per month

$$ Variable Costs per Coffee Sold: R$5$

$$ Selling Price per Coffee: R$20$

The owners anticipate selling an average of $2,000$ coffees per month at the new branch.

REQUIRED:

$2\mathrm{.}1$ Calculate the break$-$even point in terms of the number of coffees Bean Coffee needs to sell each month to

cover its fixed and variable costs.

$(4)$

$2\mathrm{.}2$ Discuss what does the break$-$even point signify for Bean Coffee? $(2)$

$2\mathrm{.}3$ If Bean Coffee wants to make a monthly profit of R$10,000,$ how many coffees do they need to sell? $(5)$

$2\mathrm{.}4$ Discuss the importance of break$-$even analysis for businesses like Bean Coffee. $(4)$

$2\mathrm{.}5$ Suggest some strategies Bean Coffee can implement to lower its break$-$even point. $(10)$

QUESTION THREE $(25$ Marks$)$

INFORMATION:

John is considering investing in a retirement fund. He has two options: Option A offers a lump sum payment of R$500,000$

after $10$ years, while Option B offers a lump sum payment of R$800,000$ after $20$ years. John wants to analyze these

options using time value of money calculations to determine which option is more beneficial.

REQUIRED:

$3\mathrm{.}1$ Calculate the present value of Option A and Option B assuming an annual interest rate of $6\%.(5)$

$3\mathrm{.}2$ Use the results obtained in $3\mathrm{.}1$ above to determine the future value of Option A and Option B after the respective

investment periods

$(6)$

$3\mathrm{.}3$ If John wants to achieve a target retirement fund of R$1,000,000,$ which option should he choose? $(2)$

$3\mathrm{.}4$ Discuss the impact of changing interest rates on the present and future values of the investment options $(6)$

$3\mathrm{.}5$ Explain how the time value of money concept influences investment decisions. $(3)$

QUESTION FOUR $(25$ Marks$)$

$4\mathrm{.}1$ In November $2023,$ Sundeck Limited started making budget plans for the $12$ months commencing on $01$ January $2024.$

Projected sales value was R$8700000$ as compared to R$7350000$ for $31$ December $2023.$ The estimates of the operating

results for the current year $(2023)$ are shown in the Statement of Comprehensive Income below.

Statement of Comprehensive Income for the year ended $31$ December $2023$

R

Sales $7350000$

Cost of sales $(4634000)$

Labour $1838000$

Material $1044000$

Overheads $1486000$

Depreciation $266000$

Gross profit $2716000$

Selling expenses $(610000)$

General and administrative expense $\_(646000)$

Profit before tax $1460000$

Taxation $\_(438000)$

Net profit $\_1022000$

Assumptions for the financial year $2024$:

$$ Manufacturing labour will fall to $24\%$ of sales because volume efficiency would be more than offset high