Question

UESTION 4 Ida Brown opened a business by the name of 'Craft for Africa' in Green market Square Cape Town. She bought all her wood frames, wire for toys, African beads and paint aterials from a local supplier. She runs a big business which caters for the tourism dustry and she also exports goods to overseas countries. afer to the financial statements below and answer the questions, OTE: Make use of figures before tax and show ALL the calculations. ICOME STATEMENT OF CRAFTS FOR AFRICA FOR THE YEAR ENDED NOVEMBER 2014

Answer 1

4.1) Return on investment = Net Income/ total Investment

ROI = Net Income after tax / Owner's equity

ROI = 40800 / 374000 = 10.91%

The business is fetching around 11% return on the investment

made by the owner, which is a good return in tourism & export

business.

4.2) Gross profit ratio = Gross profit / Net Sales

GPR = 691000/1439200 = 48%

Gearing ratio = Long term liabilities / Owner's equity

GR = 200000 / 374000 = 53.5%

The risk taking was worthwhile because the business

is enjoying around 50% of gross margin and owner

can gear-up his returns by employing more debts at

lower interest rate than return on capital as Gearing

ratio is at lower level.

4.3) Acid Test Ratio = Debtors + Cash / Creditors

ATR = (80000 + 20000)/ 50000 = 2

Average collection period = 365 / (Credit Sales/Average Debtors)

ACP = (80000*2) *365 / 1439200 = 40 days

Yes, the business is having enough cash to pay its current

debts and it is collecting from debtors at short credit period.

4.4) Current ratio = CA / CL = 110000/50000 = 2.2

The business is having a good short term liquidity position as

Current ratio is above 2 times and Acid Test ratio is at 2.

4.5) The five departments which are to be considered for the

business to be successful are:

a) Production department

b) Sales or marketing department

c) Collection department

d) HR department

e) Accounts & Finance department

4.6) Five aspects of operations management control are:

i) Higher margin on the direct cost incurred. The business

is having around 50% gross margin which is a good contri-

bution towards fixed costs and profits.

ii) Higher receivable turnover ratio of around 9 times. The

business is enjoying lower credit terms with debtors.

iii) Assets turnover ratio is =1439200/(574000+50000) = 2.3.

The business able to rotate the assets more than 2 times a

year, which prove to a good one.

iv) Fixed assets constitutes more than 80% of total assets, so

the business has employed major investment in production

process. Out of this, prime portion pertains to land and buildings.

v) Lower working capital is required to run the business. The net

working capital requirement of the business is R 60000 only.