FORMATIVE ASSESSMENT $1[100$ MARKS$]$

Read the case study and answer the questions that follow:

COLATONIC LTD: THE BEVERAGE GIANT

Colatonic Ltd is a marketer of a range of non$-$alcoholic beverages. It commenced operations a few years ago

with an authorized share capital of $500000$ ordinary shares and by $2023$ eighty percent $(80\%)$ of the shares

had been issued. Its product mix includes soft drinks, juices, energy drinks and flavoured water. These

products are marketed under various brands. The company has distribution outlets in all the provinces in

South Africa, with the headquarters in Pretoria. It negotiated with its suppliers for all purchases to be made on

credit terms of $90$ days and it was able to sell all its products to its customers on credit terms of $30$ days.

Colatonic Ltd experienced a great dela of success in the recent years because of its excellent sales strategy

and the clever use of social media. However the entry of cheap energy drinks and flavoured water into the

South African beverage market from China and other countries led to a downturn in the financial performance

in $2023.$ The company did, however, pay an interim dividend of R$670080$ to the shareholders during $2023.$ A

final dividend was also declared at the end of $2023.$ The market price of each share of Colatonic Ltd was R$15$

on $31$ December $2023.$

This following are the financial statements for the past two years:

COLATONIC LTD

STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED $31$ DECEMBER:

$20232022$

R R

Sales $2000000024000000$

Cost of sales $(12000000)(13000000)$

Gross profit $800000011000000$

Selling, general and administrative expenses $(5000000)(6600000)$

Operating profit $30000004400000$

Interest on investment $??$

$32400004592000$

Interest expense $??$

Profit before tax $29400004352000$

Company tax $(823200)(1218560)$

Profit after tax $21168003133440$

STATEMENT OF FINANCIAL POSITION AS AT $31$ DECEMBER:

$20232022$

R R

Assets

Non$-$current assets $34800002700000$

Investment $($maturity date $30$ June $2025)20000001600000$

Inventories $22000001800000$

Accounts receivable $14000001100000$

Cash $2000016000$

$91000007216000$

Equity and liabilities

Equity $53700004156000$

Long$-$term loan $20000001600000$

Accounts payable $1000000800000$

Bank overdraft $5000040000$

Dividends payable $600000500000$

Company tax payable $80000120000$

$91000007216000$

The financial manager of Colatonic Ltd read about the plight of the local child welfare organisation which

aimed to supplement its funds by making and selling cooking bags which can slow$-$cook meals or keep food

warm for long periods. The financial manager approached the board of directors who agreed that the

company should assist the organisation. After discussions with the president and treasurer of the welfare

organisation the following budgeted information for $2024$ was gathered to assist with trying to improve the

profitability and break$-$even quantity for the year:

The fixed and variable manufacturing costs are estimated to be R$240000$ per annum and R$42$ per unit

respectively. The selling price of the cooking bags will be R$120$ each. The selling and distribution costs are

expected to total R$15000$ per month plus $5\%$ of sales. The administration costs are estimated at R$31000$ per

month plus R$6$ per unit sold. $15000$ cooking bags are expected to be sold.

In keeping with its plans for expansion, the company is appraising the production and sale of a new designer

energy drink. This would involve the acquisition of a new machine with a purchase price of R$1600000$ which

is expected to have a useful life of six years and a salvage value of R$200000.$ The installation cost of the

machine is R$100000.5000$ units are expected to be sold annually. The net profit is expected to be R$30$ per unit. The straight$-$line method of depreciation is used by Colatonic Ltd$.$ The companys cost of capital is $16\%.$

If approved, the implementation date would be $02$ January $2025.$

QUESTION $3(25$ MARKS$)$

REQUIRED

QUESTION $2(25$ MARKS$)$

REQUIRED

Use the relevant information provided in the case study to answer the following questions $($with ratios

expressed to two decimal places$)$ in respect of $2023.$

Note: Use the formulas provided in the formula sheet only $($that appear after QUESTION $4).$

$2\mathrm{.}1$ Comment on the liquidity of the company. Calculate TWO $(2)$ appropriate ratios to

support your answer. $(6$ marks$)$

$2\mathrm{.}2$ Comment on the efficiency of the company regarding the collections from credit sales.

Motivate your answer by using a suitable ratio. $(4$ marks$)$

$2\mathrm{.}3$ Did the company make good use of the credit period allowed by the suppliers? Motivate

your answer with a relevant ratio and offer a recommendation, if necessary. $(4$ marks$)$

$2\mathrm{.}4$ Comment on the return that the company made on its own and borrowed capital. Support

your answer with the use of a relevant ratio. $(4$ marks$)$

$2\mathrm{.}5$ Calculate the price earnings ratio. $(3$ marks$)$

$2\mathrm{.}6$ Was any provision made by the company to fund its future growth? Motivate your answer

by using an appropriate ratio.