FORMATIVE ASSESSMENT 2 [100 MARKS] Answer ALL questions in this section QUESTION ONE (25 Marks) Limpopo Limited plans to manufacture a new energy efficient outdoor light and the following information is available: The estimated sales for the year 2024 are 5000 units at R30 each. The estimated costs for the 2024 year comprise of direct materials and direct labour of R9 and R2 per unit respectively. Fixed factory overheads are R20 000 per annum, fixed administrative expenses are R23 000 per annum and selling expenses are calculated at 20% of selling price per unit. Required: 1.1 Calculate the breakeven quantity (round off to nearest unit). (5) 1.2 Calculate the breakeven value. (4) 1.3 Calculate the breakeven value using the marginal income ratio. (4) 1.4 Calculate the selling price per unit if the profit per unit is R2 using the sales quantity of 5000 units provided in the information above. (5) 1.5 Calculate the new breakeven quantity and value if the selling price is decreased by 10% (round off to nearest unit). (7) QUESTION TWO (25 Marks) Omega Limited intends purchasing a new machine and has a choice between the following two machine: Machine ABC: The cost of this machine is R200 000 with an expected economic life of 5 years and a residual value of R20 000. Depreciation is calculated on the straight-line method. The expected new cash flows are as follows: Year 1 R68 000 Year 2 R54 000 Year 3 R64 000 Year 4 R60 000 Year 5 R52 000 Machine XYZ: The cost of machine XYZ is R220 000. It has an expected economic life of 5 years with no residual value. Depreciation is calculated on the straight-line method. The expected new cash flows are R66 000 per annum every year for the 5-year period. Omega Limited estimates that its cost of capital is 14%. Required: 2.1 Calculate the payback period for machine XYZ (answers must be expressed years, months and days) (4) 2.2 Calculate the accounting rate of return for Machine ABC. (5) 2.3 Explain two advantages of using the accounting rate of return in capital investment appraisal. (2) 2.4 Calculate the net present value of each machine (round off to nearest rand). (8) 2.5 Calculate the internal rate of return for Machine XYZ. (6) QUESTION THREE (25 Marks) INFORMATION: Extracts of the Statement of Comprehensive Income and Statement of Financial Position for the year ended 31 December 2024 are given for the two companies viz. ABC Limited and XYZ Limited. Extract of Statement of Comprehensive Income for the year ended 31 December 2024: ABC LIMITED XYZ LIMITED R R Sales 3 400 000 1 000 000 Cost of Sales 2 300 000 432 000 Depreciation 140 000 20 000 Other operating expenses 130 000 25 000 Interest on loan 90 000 30 000 Income tax 222 000 148 000 Note: All the income and expenses of both companies are included in the figures above. Extracts of Statement of Financial Position as at 31 December 2024: ABC LIMITED XYZ LIMITED R R Non-current assets 980 000 620 000 Current assets 857 500 205 000 Share capital 1 000 000 500 000 Retained earnings 120 000 40 000 Non-current liabilities (15%) 510 000 230 000 Current liabilities 207 500 55 000 Extracts of Statement Changes in Equity for the Year ended 31 December 2024: ABC LIMITED XYZ LIMITED R R Dividend for the year 259 000 138 000 REQUIRED: Use the information provided above to answer the following questions: 3.1 Compare and comment on the profitability of both companies using the following ratios: 3.1.1 Return on capital employed (5) 3.1.2 Profit margin (5) 3.2 Calculate the earnings retention ratio of both companies and explain how shareholders can benefit from a higher retention ratio. (8) 3.3 Compare the two companies with regard to the amount of debt that each company uses to finance its assets (as a percentage). (5) 3.4 Suggest two ways in which ABC Limited can improve its gross profit margin without increasing its selling prices. (2) QUESTION FOUR (25 Marks) 4.1 REQUIRED Complete the table below for the transactions provided using the following methods of inventory valuation: 4.1.1 Weighted average cost (10 marks) 4.1.2 FIFO (10 marks) Purchases Issues/Returns to supplier Balance Date Quantity Price Amount Quantity Price Amount Quantity Price Amount INFORMATION The following information was extracted from the records of Fan Limited, a manufacturing company, for an inventory item called Fan Plus used in Project Amy for March 2024: March Transaction details 01 07 09 10 16 22 30 Opening inventory: 6 000 units @ R40 each. Invoice received for 144 000 units @ R44 each. Transferred 105 000 units to the production department. Returned 15 000 damaged units (purchased 07 March) to the supplier. Invoice received for 30 000 units at R48 each. Transferred 45 000 units to production. Invoice received for 15 000 units @ R52 each. 4.2 Earned Value Management (EVM) serves a crucial role in project management by providing a structured and integrated approach to monitor, control, and analyze project performance, particularly in terms of schedule and cost. You are required to discuss what is the purpose of EVM for schedule and cost control. (5)