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MAC3761
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Mac3761 Exam Pack with Solutions previous question papers for exam or
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UNIVERSITY EXAMINATIONS

JULY ECP 2021

MAC3761

Management Accounting III

100 Marks
Duration 3 Hours

This paper consists of 10 pages (including this page).

Instructions:
1. This assessment consists of six independent questions.
2. All questions must be answered, and all calculations must be shown.

3. For hand-written answer files, you must not write with a pencil or a red pen. Only use a black pen.
4. You can only upload a PDF document on myUnisa as your answer file.
5. It is your responsibility that once uploaded, you must view your answer file and ensure that it is correct,
complete (no missing pages), legible, it can open, not of poor image quality, not password protected,
and not corrupted.
6. Your attention is brought to the announcement posted on MAC3761 myUnisa site titled “Cheating in
MAC3761 assessments”, as well as the plagiarism declaration in the TL101.

PROPOSED TIMETABLE Marks Minutes

QUESTION 1: WORKING CAPITAL 22 40
QUESTION 2: CAPITAL BUDGETING 18 32
QUESTION 3: BUSINESS VALUATIONS 10 18
QUESTION 4: ABSORPTION VERSUS VARIABLE COSTING 10 18
QUESTION 5: JOINT AND BY-PRODUCT COSTING 12 22
QUESTION 6: STANDARD COSTING; ABSORPTION VERSUS
28 50
VARIABLE COSTING AND CVP
Converting your answers to a PDF file and successfully uploading your
one PDF file. You must successfully upload your PDF file on myUnisa
before 12:45 South African time, 14 June 2021. The submission platform 60
will automatically close at 13:00 (14 June 2021, South African time) and
no submission can be made henceforth.

100 240

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Page 2 of 10
MAC3761
July 2021
QUESTION 1 (22 marks; 40 minutes)
Construct New Africa (CNA) was established in 1994. Today, the group is an integrated
construction services, materials and infrastructure investment group operating in over 10
African countries with more than 1 200 people in its employ.
Since listing 19 years ago, there has been up and down cycles in construction and the market
remains extremely volatile. CNA is concerned about exceeding its overdraft limit of R2 million
in the next two financial periods. It has been experiencing considerable volatility in cash flows
in recent periods because of trading difficulties experienced by its customers, who have often
settled their accounts after the agreed credit period of 60 days. CNA has also experienced
an increase in bad debts due to a small number of customers going into liquidation.
The company has prepared the following forecasts of net cash flows for the next two financial
periods (July and August), together with their associated probabilities, in an attempt to
anticipate liquidity and financing problems. These probabilities have been produced by a
computer model which simulates a number of possible future economic scenarios. The
computer model has been built with the aid of a firm of financial consultants.

July 2021 Probability August 2021 Probability

Net Cash Flow Net Cash Flow
R’000 R’000
8 000 10% 7 000 30%
4 000 60% 3 000 50%
(2 000) 30% (9 000) 20%

CNA expects its cash balances to be overdrawn at the start of July 2021 by R500 000.

REQUIRED

(a) Calculate the following:

(i) the expected cash balance at the end of July 2021; (3)
(ii) the expected cash balance at the end of August 2021; (4)
(iii) the probability of a negative cash balance at the end of August 2021; (2)
(iv) the probability of exceeding the overdraft limit at the end of August 2021. (2)

(b) Comment on the analysis performed in part (a), as well as the forecast
model developed by the company with its underlying assumptions. (3)
(c) Discuss the factors to be considered in formulating a trade receivables
management policy for CNA. (6)
(d) Discuss whether profitability or liquidity is the primary objective of working
capital management. (2)
Total question 1 [22]

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Page 3 of 10
MAC3761
July 2021
QUESTION 2 (18 marks; 32 minutes)
Toppling Goliath (TG) is a stealth brewery, flying fast, under the radar. This has been true
since the day we quietly opened our first ½ barrel brewery and tap room on the west side of
Francis Town, Botswana in 2015. The batches were small, but the taste was gigantic, and
word spread like wildfire. Today, our team brews at a larger production facility on the edge
of town, regularly experimenting at the tap room to satisfy our craving for new and exciting
creations. We are currently in the process of building a new addition to our brewing facility-
construction set to be completed as early as the start of 2022. The addition will include a
larger brewing system as well as a filling line so we can bring exquisitely hand-crafted beer
to our loyal customers in bottles.
The history of TG lies in the dreams of tomorrow, not the pages of the past. The past is for
those who rely on high volume and low value. The past is for those who duplicate rather than
design. The past is for cowards. We are forward thinkers and cunning crafters, quietly
building our revolution.
We are now considering expanding our business into South Africa through a new investment
project. The following draft appraisal of a proposed investment project has been prepared
for our finance director by a trainee accountant. The project is consistent with the current
business operation of TG.

Projected annual cash flows

Year 1 2 3 4 5

Sales (units/year) 250 000 400 000 500 000 250 000

R’000 R’000 R’000 R’000 R’000

Contribution 1 330 2 128 2 660 1 330

Fixed costs (530) (562) (596) (631)
Depreciation (438) (438) (437) (437)
Interest payments (200) (200) (200) (200)
Taxable profit 162 928 1 427 62
Taxation (49) (278) (428) (19)
Profit after tax 162 879 1 149 (366)
Scrap value 250
After tax cash flows 162 879 1 149 (116) (19)
@ 10% discount factor 0,909 0,826 0,751 0,683 0,621

Present values 147 726 863 (79) (12)

Net present value = R1 645 000 – 2 000 000 = (R355 000); therefore, so reject the

project.
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Page 4 of 10
MAC3761
July 2021

The following additional information was included with the draft investment appraisal:

Additional information
1. The initial investment is R2 million.
2. The selling price is R12 per unit (current price terms) and is subject to an increase of
5% per year.
3. The variable cost is R7 per unit (current price terms) and the cost increases at an
annual rate of 4%.
4. The fixed overhead costs are R500 000 per year (current price terms), increasing at
an annual rate of 6%.
5. R200 000 per year of the fixed costs are development costs that have already been
incurred and are being recovered by an annual charge to the project.
6. This investment is financed through a R2 million loan at a fixed interest rate of 10%
per year
7. TG can claim 25% reducing balance capital allowances on this investment and the
current company tax rate is 28%.
8. TG pays taxation one year in arrears at an effective rate of 30% per year.
9. The scrap value of machinery required for the investment project at the end of the
four-year project is R250 000.
10. The real weighted average cost of capital (WACC) of TG is 7%.
11. The general rate of inflation is expected to be 4,7% per year.

REQUIRED

(a) Identify and comment on any errors in the investment appraisal prepared
by the trainee accountant. (5)
(b) Prepare a revised calculation of the net present value of the proposed
investment project and comment on the project’s acceptability. (10)
(c) Discuss problems an entity is faced with when undertaking investment
appraisal in the following areas and comment on how these problems
can be overcome:
(i) assets with replacement cycles of different lengths; (1)
(ii) an investment project has several internal rates of return; (1)
(iii) the business risk of an investment project is significantly different from the
business risk of current operations.
(1)

Total question 2 [18]

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Page 5 of 10
MAC3761
July 2021
QUESTION 3 (10 marks; 18 minutes)
A Pretoria beauty brand is headed for big things. Cosmetics giant, Bella SA, is bidding for
Beauty’s Daughter — a line of hair, body and skincare products born out of a Mamelodi hair
salon more than two decades ago, the company announced on Monday. “This is the end of
part one and the beginning of part two and part three,” Beauty’s Daughter founder Beauty
Kekana told the Daily News.
Kekana, 52, began selling hand-mixed fragrances and lotions out of her small hair salon in
1999 and quickly built a devoted following for products such as its best-selling Mimosa Hair
Honey. If the acquisition of her business is successful, Kekana will continue to be the face
of Beauty’s Daughter and to run its day-to-day operations. This seasoned entrepreneur
hopes to keep on testing and creating new products; even better now that she would have
the backing and distribution network of one of the world’s largest cosmetics dealers.
Both Bella SA and Beauty’s Daughter are listed on the Johannesburg Stock Exchange (JSE)
and are in the same business sector. Financial information of Beauty’s Daughter, which is
shortly to pay its annual dividend, is as follows:

Number of ordinary shares 5 million

Ordinary share price (ex div basis) R3,30
Earnings per share 40,00c
Proposed pay-out ratio 60%
Dividend per share one year ago 23,30c
Dividend per share two years ago 22,00c
Equity beta 1,4

Dividends are expected to grow at the average growth rate experienced over the past three
years.

Other relevant financial information:

Average sector price/earnings multiples 10
Risk-free rate of return 4,60%
Return on the market 10,60%

REQUIRED

(a) Determine the value of Beauty’s Daughter business, using the

Price/earnings method and the Gordons’ Dividend Growth Model. 8
(b) Discuss the significance, to Bella SA, of the values you calculated in part
(a) above, in comparison to the current market value of Beauty’s
Daughter. 2
Total question 3 [10]

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Page 6 of 10
MAC3761
July 2021
QUESTION 4 (10 marks; 18 minutes)
Fitbeat Ltd is a company which manufactures wireless activity wristbands. They have been
manufacturing three different types of wireless devices that respectively track steps, distance
and calories burned. There is an increasing demand for these devices as it claims to make
fitness fun and keep people motivated as they can see real-time statistics of their progress.
Currently Fitbeat Ltd uses the traditional absorption costing system whereby they allocate their
manufacturing overheads based on machine hours.

The following sales and costing information was extracted from the 2021 budget:

Product type Steps Beat Distance Beat Calories Beat Total

Sales R 1 600 000 R 4 750 000 R 3 560 000 R 9 910 000
Direct material cost (R 668 500) (R 800 950) (R 780 000) (R 2 249 450)
Direct labour cost (R 589 230) (R 344 300) (R 674 470) (R 1 608 000)
Marginal income before
manufacturing overheads R 342 270 R 3 604 750 R 2 105 530 R 6 052 550
Manufacturing overheads (R 4 000 000)

The newly appointed cost accountant knows that the traditional costing system relies on
arbitrary allocation of indirect cost and that it could provide misleading information for decision-
making. She advised management to rather make use of activity-based costing (ABC)
techniques to assign the manufacturing overheads.

As a result of the advice given to management, the manufacturing overheads were further
analysed and the following activities and cost drivers were identified:

Manufacturing
Activity Cost driver overhead costs
Machining Machine hours R 1 510 000
Set up Number of set ups R 560 000
Inspection Number of inspections R 900 000
Stores issue Number of store issues R 390 000
Stores receiving Number of deliveries R 640 000
R 4 000 000

The budget for the 2021 year also contains the following total production information:

Product type Steps Beat Distance Beat Calories Beat

Production/Sales volume (units) 2 000 5 000 4 000
Wireless devices (units) per production run 200 250 400
Inspections per production run 5 3 4
Machine hours per wireless device 10 8 5
Number of issues from stores 500 100 400
Number of material deliveries 15 50 35

The machines are set up once for each new production run.

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Page 7 of 10
MAC3761
July 2021
REQUIRED

(a) Calculate the total budgeted manufacturing overheads allocated per

product type if the traditional absorption costing system is used; (2)
(b) Calculate the gross profit for Calories Beat using the proposed activity-
based costing (ABC) technique to assign budgeted manufacturing
overheads. (6)
(c) Interpret the difference between the total budgeted manufacturing
overheads allocated for the Steps Beat product type only if the traditional
absorption costing system is used and the total budgeted manufacturing
overheads allocated for the Steps Beat product type if the activity-based
costing (ABC) technique is used. (2)
Total question 4 [10]

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Page 8 of 10
MAC3761
July 2021
QUESTION 5 (12 marks; 22 minutes)
Pepper Ntaba (Pty) Ltd is a manufacturer of paper products. The company operates a process
where two joint products and a by-product are manufactured. The joint products are newspaper
printing paper and cardboard box making paper and the by-product is pulp. There was no
opening inventory on 1 March 2021.

The following information relates to the month of March 2021 (which represents a typical month):

Production Tonnes sold Selling price per tonne

at split-off point
News printing paper 700 tonnes 600 R 10 000
Cardboard box making paper 800 tonnes 700 R12 000
Pulp 200 tonnes 200 R1 500

The following costs were incurred in March 2021:

Raw materials R800 000

Manufacturing labour R200 000
Manufacturing overheads R300 000
Insurance – administrative building R20 000
Head office security officer salary R15 000
Depreciation – head office building R12 000
Administrative overheads R300 000

Joint costs are allocated on the basis of total sales value at split off point. The company policy
is to allocate net proceeds from the sale of by-products to joint costs. Pulp can be processed
further after split off point and sold at R2 000 per tonne. To accomplish this, the company will
have to rent new machinery at a cost of R3 000 per month. The machine will have to be insured
at R700 per month. Manufacturing labour costs will be R25 000 per month and raw materials
will be R20 000 per month for this alternative.

REQUIRED
Remember to:
• Clearly show all your calculations in detail;
• Where necessary, indicate irrelevant amounts/adjustments with a R0 (nil-value).

(a) Calculate the total value of closing inventory for the month of March 2021
if pulp is not processed further. (8)
(b) Determine whether the company should in future further process the pulp. (4)
Total question 5 [12]

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Page 9 of 10
MAC3761
July 2021
QUESTION 6 (28 marks; 50 minutes)
Bagging You Please Ltd manufactures and sells two types of bags: Ladies’ bags and Men’s
Bags. The company uses a direct (variable) standard costing system. There was no inventory
on hand on 1 October 2020.

The following information relates to the six month-period that ended on 31 March 2021:

1. Sales & variable data:

Ladies’ Bags Men’s Bags
Number of bags manufactured and sold:
Budgeted (units) 1 000 250
Actual (units) 900 300
Standard selling price per bag R430 R560
Actual total sales value R405 000 R145 800

Standard variable manufacturing cost per bag* R180 R200

Actual material purchased and used (R32 per
metre) R51 840 R18 240

Budgeted variable selling costs R12 000 R2 375

*Included in the standard variable manufacturing costs per bag, are the following raw
material standards:
Ladies’ Bags Men’s Bags

Standard material cost per bag R54 R72

(R36 per metre)

2. Fixed costs consist of the following:

• Rental of an administrative building (unavoidable for the next five years): R13 500
per month.

• Budgeted fixed manufacturing costs amounting to R65 000 in total for the six-month
period (used to calculate a budgeted company-wide overhead recovery rate based
on production units; unavoidable unless the company no longer manufactures any
products).

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MAC3761
July 2021

REQUIRED

(a) Calculate the following based on the above variable costing system:
(i) Sales margin mix variance for the six month-period; (6)
(ii) Sales margin volume variance for the six month-period; (5)
(iii) Material purchase price variance for the six month-period. (2)

(b) Explain how the use of absorption costing instead of direct costing
would affect the sales margin mix variance. Calculations are required. (7)
(c) Calculate the following based on budgeted figures:
(i) Total budgeted breakeven sales value of the company for the six month-period; (4)
(ii) Budgeted breakeven sales quantity for the Ladies’ Bags product for the six month-
period based on the following assumption: on 30 September 2020 the Men’s Bag
product line was discontinued and the standard material purchase price per metre
was adjusted downward by 10%. (4)

Total question 6 [28]

Total question 1 to question 6 [100]

©
UNISA 2021
All rights reserved. No part of this document may be reproduced or transmitted in any form or by any
means without prior written permission of Unisa.

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MAC3702
JAN/FEB 2021

UNIVERSITY EXAMINATIONS
January/February 2021

MAC3702
APPLICATION OF FINANCIAL MANAGEMENT TECHNIQUES

100 marks
3 hours
60 minutes for uploading
This paper consists of 10 pages.

PLEASE NOTE:

1. This paper consists of TWO (2) independent questions.

2. Please answer both questions.
3. All workings, where applicable, must be shown. Please use a dark pen so that the document
is clear when you scan.

PROPOSED TIMETABLE (Avoid deviating from this as far as possible.)

Question Topic Marks Minutes

1 Cash Flow and Analysis of financial and non- 60 108
financial information and Discussion.
2 Valuations and Currency and Interest Rate Risk 40 72
Management
100 180
INSTRUCTIONS FOR UPLOAD OF ANSWERS
Follow these steps to submit your take-home answer file:
1. Access the myUnisa landing page at [Link]
2. Click on the Exams banner (link) available on the myUnisa landing page.
3. Login with your student number and myUnisa password.
4. Find the MAC3702 module code and click on the link to submit your answer file.
5. A new screen will open that will guide you through the steps to upload your answer file.
6. Read the Honesty Declaration statement. If you agree with the statement, type “I agree”
in the text box.
7. Verify your file details to ensure that you are uploading the correct answer file to the correct
course and assessment number.
8. Click on the Continue button to submit your answer file. If you do not click on Continue,
no submission action will take place.

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MAC3702
JAN/FEB 2021

THE INVIGILATOR
Day of the assessment instructions:
1. Please remember to keep your cell phone fully charged for the duration of the assessment.
2. Please log into The Invigilator App if you have not done so yet. You need to be connected to
the internet in order to log in.
3. Scan the QR code below once the examination starts. If you encounter difficulty with scanning
of the QR code, you can also enter the QR access code as indicated at the bottom of the QR
code to start the online invigilation. Please ensure that you are connected to the internet if you
need to enter the QR access code at the bottom of the QR code.
4. Once the QR code is scanned, avoid any disturbances by putting your phone on airplane mode
if possible. No internet connection is needed during the assessment.
5. Keep the Invigilator app open at all times on your cell phone during the assessment.
6. You may place your cell phone next to you. Your cell phone does not need to face you however
should be close enough to hear the notifications from The Invigilator App.
7. The Invigilator App will notify you when an action is required. In order to receive notifications
do not put your cell phone on silent mode and ensure media volume is turned up.
8. When an action is required, a notification beep will be heard, and an instruction will be visible
for you to action promptly.
9. Please take note that once the examination time is over, firstly focus on scanning and
uploading your script to your assessment platforms. Uploading your script is time sensitive.
[Link] your script is uploaded on your assessment platform, you may switch on your data to
start the uploading process on The Invigilator app.

Good Luck!

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MAC3702
JAN/FEB 2021

QUESTION 1 [60 marks, 108 minutes]

You are a senior investment manager with the African Venture Partners Trust, and you spend
most of your time analysing the results of listed companies in an effort to identify suitable
investments for the portfolios of your clients. While reading a report on “Understanding the sector
impact of COVID-19 by Cary Stier, Global Investment Management Leader at Deloitte you were
struck by the following statement:

“Global economic activity is at a standstill as the world takes an aggressive stance to slow the
spread of COVID-19 and that is having broad implications for the investment management
industry. Aggressive fiscal and monetary policy changes combined with critical containment
actions around the world have had a major economic impact, yet liquidity remains scarce and the
outlook for earnings is soft.”

The current market volatility has redirected the attention of most sellers and buyers as it relates
to Mergers and Acquisitions (M&A) activity. Buyers may now emerge in a stronger position to
negotiate transactions while sellers will have to perfect their competitive advantages.

You strongly believe that challenging times can be a catalyst for future innovation and growth and
that the pandemic will increase investor and board of director attention to environmental, social,
and governance considerations.

In view of these changes in the economy, you are considering recommending investments in the
Business Services sector specifically the Fintech (“financial technology”) space. An exponential
rise in smartphone uses, growing adoption of mobile payments in emerging countries and rise of
the m-commerce industry are expected to drive the global mobile payments industry ahead. The
coronavirus outbreak also enhanced the lure for the sector as electronic payments are gaining
precedence due to the contact-less mode of operation. The Business Services sector is likely to
record 4,9% earnings growth in the first quarter of 2021.

Accordingly, you are currently analysing the results of certain companies.

A company called SmartPay Ltd caught your eye and you obtained the following information
regarding this company:

SmartPay Ltd was founded some time ago and operated as a Fintech company that operates a
technology platform offering online payment solutions that include card and payment processors,
mobile payments, and ATM services. In 2004, the company was listed on the JSE and its share
price grew steadily until 2017. From January 2017 to the present date, the shares have doubled
in price and the market in general appears to be most impressed with the performance of the
company. The growth in the share price has been accompanied by growth in the number of online
payment solutions acquired through the takeover of smaller businesses operating in the same
market.

Extracts from the available annual financial statements of SmartPay Ltd are as follows:

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Statement of Financial Position as at 31 December

2019 2018 2017

R'000 R'000 R'000
ASSETS

Non-current assets 16 069 14 696 13 978

Current assets
Inventories 192 085 149 002 109 238
Trade Receivables 425 665 229 633 183 493
Cash and cash equivalents - 1 465 4 352
617 750 380 100 297 083
TOTAL ASSETS 633 819 394 796 311 061

EQUITY AND LIABILITIES

Equity
Share capital 147 834 147 834 147 834
Retained earnings 100 192 82 275 43 901
Total equity 248 026 230 109 191 735

Non-current liabilities
Long-term borrowings 237 652 108 297 61 356

Current liabilities
Trade and other payables 130 732 44 784 41 538
Shareholders for dividends 17 409 11 606 8 290
Bank overdraft - - 8 142
Total current liabilities 148 141 56 390 57 970
Total Liabilities 385 793 164 687 119 326
TOTAL EQUITY AND LIABILITIES 633 819 394 796 311 061

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MAC3702
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Statement of Comprehensive Income for the years ending 31

December

2019 2018 2017

R'000 R'000 R'000

Revenue 1 287 052 934 052 729 571

Operating income 85 430 77 422 56 351

Less: Net interest paid 39 264 20 862 14 342
Net income before taxation 46 166 56 560 42 009
Taxation

SA Normal 1 721 777 -

Dividend Withholding Tax 5 306 2 271 -
Net income 39 139 53,512 42 009

Earnings per share (cents) 56,0 36,3 26,0

Dividends per share (cents) 12,8 9,1 7,5

2019 2018 2017

R'000 R'000 R'000
Operating income is arrived at after depreciation
and loss on sale of non-current assets totaling 3 502 2 237 2 523
and goodwill written off 51 912 4 346 1 134

Statement of changes in equity for the years

ended

2019 2018 2017

R'000 R'000 R'000

Accumulated profit beginning of year 82 275 43 901 14 327

Net profit for the year 39 139 53 512 42 009
Dividends (21 222) (15 138) (12 435)
Accumulated profit end of year 100 192 82 275 43 901

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MAC3702
JAN/FEB 2021

Required (60 marks)

a) Prepare the cash flow statement for SmartPay Ltd for 2018 and 2019 using the available
information; and (15)

b) Perform a financial review of SmartPay Ltd based on the financial information supplied
and the cash flow statements prepared under (a) above and write a report to your line
manager where you discuss whether you would recommend that clients purchase shares
in the company. ( 43)
Communication skills – appropriate style (2)

You have received the following email regarding this task:

The objective of the financial review is to determine whether SmartPay Ltd will be a
suitable investment for clients of African Venture Partners Trust.
In order to establish this, it is necessary to analyse the profitability, financial stability,
growth potential as well as non-financial aspects related to SmartPay Ltd.
You can assume that there is 365 days in the year. You need to calculate the ratios for
2017, 2018 and 2019, where it make more sense calculate the ratio from 2017 to 2019.
Please concentrate on the following:

1. Review of the Statement of Comprehensive income:

a. Growth in sales
b. Growth in earnings
c. Growth in dividends
d. Dividend cover
e. Interest cover
f. Interest calculation
g. Net operating margin
h. SA Normal Taxation
i. Goodwill written off as a percentage of the net income after taxation

2. Review of the Statement of Financial position

a. Debt/Equity ratio
b. Liquidity ratios

3. Other possible conclusions to be drawn from using the Statement of Financial

position:
a. Increase in Fixed Assets
b. Debt ratio

TOTAL MARKS FOR QUESTION 1 [60]

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MAC3702
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QUESTION 2 [40 marks; 72 minutes]

Maximizer Engage (Pty) Ltd (“ME”) is a company that was started two years ago by two university
friends, Marule Dube and Estelle Botha. They developed, among others, a highly sophisticated
customer relationship management (CRM) system.
[Link] (“Sahara”) wants to become South Africa's leading online store selling local and
international products, and wants to do this by retaining a firm focus on the customer by using
a CRM system. With CRM, the Apple and Amazons of this world were not only able to win new
customers, clients, and users – but they got lifetime value out of them. With targeted marketing
campaigns, these brands hit the right people with the right offers, at exactly the right time.
With that in mind, then, ensuring the business have at least some kind of CRM strategy is crucial.
With CRM, you will draw in new leads, juggle unfolding deals, and manage prospects and client
relationships. You will keep your customers engaged, ensuring they continue to use your services
while identifying with your brand and values.

Sahara is very aware that using client data to make decisions has become extremely important
for the success of any business and is therefore considering acquiring ME. Even though ME has
appointed three new developers in the last year, the intellectual property (IP) firmly sits with the
two founders. After non-disclosure agreements were signed, ME shared an abridged statement
of cash flows, with projections of the future cash flows up the financial year 2021.

Maximizer Engage (Pty) Ltd

Statement of cash flows for the year ending 30 September

Actual Forecast
2019 2020 2021
R’million R’million R’million
Profit before interest and tax 16,7 66,4 78,7
Depreciation/Amortisation
Property, plant and equipment 2,2 2,3 2,2
Intangible assets 5,0 9,0 14,0
Net interest -6,6 -8,9 -8,7
Tax -5,6 -11,5 -18,5
Working capital
Trade and receivables -11,4 -10,4 -11,9
Trade and other payables 4,4 2,9 2,9
Capital expenditure
Property, plant and equipment -2,5 -2,0 -2,1
Intangible assets -15,0 -20,0 -25,0
-12,8 27,8 31,6
Interest-bearing debt (net movement) 31,6 4,9 -10,1
Net cash movement for the year 18,8 32,7 21,5

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Additional information
1. The profit before tax in 2020 includes a once-off marketing expense of R1 million.
2. The total interest-bearing liabilities and cash balances were as follows at 30 September
2019:

R’million
Long-term interest-bearing borrowings 70,4
Current portion of the long-term interest-bearing borrowings 4,0
Cash and cash equivalents 20,4

3. The following information is available regarding ME:

o The weighted average cost of capital is 16,5%
o A growth rate of 2,5% is expected from 2022; and
o R5 million cash is required for running the operations

Busi Smit, Sahara’s financial manager, performed a valuation on ME and claimed that the value
as calculated by her is the maximum Sahara should pay for ME. She utilised the information
obtained on ME above, as well as the following Sahara information:

Funding:

Current borrowings consist of three loans from three asset managers with the same terms and
conditions. Interest is charged at prime plus 4%. The repayment dates were renegotiated in the
2019 financial year-end, and the full amount is repayable at the end of the 2025 financial year.
Interest on borrowings is payable semi-annually in arrears (1 October and 1 March). A similar
loan in the market yields 12% (prime plus 5%). Sahara has a target capital structure of 50% debt
and 50% equity; and

Shares were issued by Sahara during the 2019 financial year. Sahara’s equity was independently
valued at R150 million. The shareholders expect a return on investment of 25%.

[Link] Ltd
Management Accounts
Extract from the statement of financial position on 30 September 2019

2019 2018
R R
Equity and Liabilities
Share Capital 249 366 523 234 899 400
Retained income (75 230 357) (53 768 720)
Total Equity 174 136 166 181 130 680

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The valuation performed by Busi Smit on ME is presented below:

Free cash flow valuation at 30 September 2019 R’million

2019 2020 2021

Profit before interest and tax 16,7 66,4 78,7
Add back: Depreciation 2,2 2,3 2,2
Once-off marketing expense - 1,0 -
Net interest 6,6 8,9 8,7
Tax - per cash flow statement -5,6 -11,5 -18,5
Working capital (net movement) -7 -7,5 -9
Capital expenditure (net movement) -17,5 -22 -27,1
Interest-bearing debt (net movement) 31,6 4.9 -10,1
Free cash flow 27 42,5 24,9
Discount rate
Target capital structure, 50:50
Cost of debt = 12%
Cost of equity = 25%
Thus, weighted average cost of capital:
(12% x 50%) + (25% x 50%) = 18,50%

Discounted cash flows: 2019 - 2021 80,6

Terminal value: (R24.90 x 1.025)/(18.5% - 2.5%) 159,5

Free cash flow valuation summary

R’million
Discounted cash flows: 2019 - 2021 80,6
Terminal value 159,5
Interest-bearing debt -74,4
Cash resources 20,4
Free cash flow valuation 186,1

FUTURE STRATEGY

The Board of Sahara called an emergency meeting to be held on 2 November 2020 following a
number of significant events that had occurred in their environment, which included the new
outbreak of the Coronavirus after the September peak, the downgrading of South Africa by all
three rating agencies to Junk Status, and the sharp weakening of the Rand.

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Moody's maintains cut to South Africa's credit rating to junk

News article by Piet Poggenpoel, journalist at ACB News

In March 2020 rating agency Moody's has cut South Africa's sovereign credit rating to sub-
investment grade, meaning the country has a junk rating from all three major international rating
agencies.

The announcement on Friday evening was therefore not unexpected when all three major
international rating agencies maintained their junk status outlook for the next quarter.

It comes after Moody's warning of SA's growing debt-to-GDP ratio and the negative effect of the
current pandemic on the ratio.

"Unreliable electricity supply, persistent weak business confidence and investment as well as
long-standing structural labour market rigidities continue to constrain South Africa's economic
growth.”

"Structural issues such as labour market rigidities and uncertainty over property rights generated
by the planned land reform remain unaddressed. Moreover, a strategy to stabilise electricity
production has been slow to emerge and has yet to prove its effectiveness."

Required (40 marks)

a) Critically evaluate and comment on the Free Cash Flow (FCF) valuation performed by
Busi Smit, Sahara’s financial manager, in determining the value of Maximizer Engage
(Pty) Ltd for the use by [Link] Ltd’s board of directors. You can accept the
mathematical accuracy of the calculations in the calculation to be correct.

Do not re-perform and recast the calculations on the FCF valuation (11)
Communication skills – appropriate style (1)

b) Describe the key risks to be considered by [Link] Ltd in deciding whether to acquire
Maximizer Engage (Pty) Ltd or not. (17)
Communication skills – communication and logical argument (1)

c) In reference to the Future Strategy emergency meeting, relating to the new Coronavirus
outbreak, credit rating agencies and the weakening of the rand against the major
currencies, prepare the following for the board meeting:
 Identify and describe the impact of the risks arising
 Suggest mitigating factors that could be pursued to address each of the risk
identified
Hint: Look for practical suggestions, be creative and save the business. (10)
TOTAL MARKS FOR QUESTION 2 [40]
GRAND TOTAL [100]

©
UNISA 2021

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UNIVERSITY EXAMINATIONS

Oct/Nov 2020

MAC3761

Management Accounting III

100 Marks
Duration 3 Hours

This paper consists of 11 pages (including this page).

Instructions:
1. This assessment consists of two independent questions.
2. All questions must be answered, and all calculations must be shown.
3. Ensure that you have carefully read the information provided in the following documents:
• Tutorial letter 106.
• “Examination Procedures” [MAC3761_guide] document provided with your timetable on myUnisa.
4. For hand-written answer files, you must not write with a pencil or a red pen. Only use a black pen.
5. You can only upload a PDF document on myUnisa as your answer file.
6. It is your responsibility that once uploaded, you must view your answer file and ensure that is correct,
complete (no missing pages), legible, it can open, not of poor image quality, not password protected,
and not corrupted.
7. Your attention is brought to Notices on myUnisa titled “Unisa has a zero tolerance for any form of
dishonesty or cheating activity related to exams” and “Plagiarism during the examinations”
8. You must always keep the Invigilator app open on your device during the examination.
9. Should you encounter an error or discover a problem with your online exam/assessment submission,
refer to the below link for an Announcement about the procedure to follow for assistance:
[Link]
contacting-the-Student-Communication-Service-Centre

PROPOSED TIMETABLE Marks Minutes

Question 1: Budgeting and planning; Performance Management; Standard costing;
Relevant decision-making; Absorption and direct costing systems; Cost-volume-profit 70 126
(CVP) analysis; Transfer Pricing; Ethics; and Business Valuations.
Question 2: Analysis of financial and non-financial information; Capital structure and
30 54
cost of capital; and Capital budgeting.
Converting your answers to a PDF file and successfully uploading your one PDF file.
You must successfully upload your PDF file on myUnisa before 13:45 South African
60
time, 30 October 2020. The submission platform will automatically close at 13:45
(30 October 2020, South African time) and no submission can be made henceforth.
100 240

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October/November 2020
The Invigilator

Day of the assessment instructions:

• Please remember to keep your cell phone fully charged for the duration of the assessment.
• Please log into The Invigilator App if you have not done so yet. You need to be connected to the
internet in order to log in.
• Scan the QR code below once the examination starts. If you encounter difficulty with scanning
of the QR code, you can also enter the QR access code as indicated at the bottom of the QR
code to start the online invigilation.
• Once the QR code is scanned, avoid any disturbances by putting your phone on airplane mode.
No internet connection is needed during the assessment.
• Keep the Invigilator app open at all times on your cell phone during the assessment.
• You may place your cell phone next to you. Your cell phone does not need to face you however
should be close enough to hear the notifications from The Invigilator App.
• The Invigilator App will notify you when an action is required.
• In order to receive notifications do not put your cell phone on silent mode and ensure media
volume is turned up.
• When an action is required, a notification beep will be heard, and an instruction will be visible.
• Please take note that once the examination time is over, firstly focus on scanning and uploading
your script to your assessment platforms. Uploading your script is time sensitive.
• You can minimise the invigilator app and use your cell phone to scan the exam answer file
document during the upload time.
• Once your script is uploaded on your assessment platform, you may switch on your data to start
the uploading process on The Invigilator app.
• Good Luck!

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October/November 2020
QUESTION 1 (70 Marks; 126 minutes)
Mulaudzi Investments Ltd (“MULA”) holds various investments across several industries. The company’s
investment appetite is limited to the Southern African Development Community (SADC) member
countries. MULA’s reporting currency is the South African Rand (ZAR). MULA uses the absorption
costing system and values its inventories in accordance with the first-in-first-out (FIFO) method. Each
company within MULA’s divisionalised organisational structure is autonomous, has an independent
management team and has a 31 October financial year-end.

1. MULA’s WHOLLY-OWNED INVESTMENTS AND ANNUAL TARGETS FOR BOTH THE 2020
AND THE 2021 FINANCIAL YEARS
1.1. MULAs investment portfolio:
Investment Industry
territory Hospitality & Tele- Logistics Electronics
Leisure communications
South Africa East-Coast Hotel Tablet (Pty) Ltd Far & Wide (Pty) Ltd Tronix (Pty) Ltd
Zimbabwe ZMB Game Reserve – Border Crossing Ltd –
Namibia – NamiMobi Ltd – –

1.2. MULA’s performance targets per company per industry within its investment portfolios:
Targets Industry
Hospitality & Tele- Logistics Electronics
Leisure communications
Return on investment (ROI) 8% 4,50% 11,60% 6,20%
Residual income (RI) R11 million R20 million R15 million R0,25 million
Gross profit margin 12% 15% 18,50% 6%

2. TABLET (PTY) LTD (“TAB”)

TAB manufactures and sells two types of tablets, a basic-home tablet (“BhT”) and a professional tablet
(“PfT”). The main manufacturing component of each tablet is a central processing unit (CPU) and all
TAB's CPUs are bought internally, and exclusively from Tronix (Pty) Ltd ("TRONIX"). One BhT uses one
basic-CPU (“BCU”) while one PfT uses one professional-CPU (“PCU”).

The information in the following two tables was extracted from TAB’s management accounts:
Financial year (FY) FY 2020 FY 2019
Details BhT PfT BhT PfT
Budgeted manufacturing units 300 000 75 000 240 000 60 000
Budgeted sales units 288 000 72 000 240 000 60 000
Actual manufacturing and sales units n.a n.a 238 000 59 000
Standard assembly clock hours per unit 2,5 3,2 3,0 3,6
Actual assembly clock hours per unit n.a n.a 3,0 3,6
Actual assembly work hours per unit n.a n.a 2,64 3,5

Financial information per unit (p/u) BUDGET 2020 ACTUAL 2019

Details BhT PfT BhT PfT
Selling price R2 995 R3 825 R2 900 R3 500
CPU transferred from TRONIX R1 200 R2 000 R1 000 R1 650
Assembly costs (direct labour only) R175 R224 R135 R162
Other variable manufacturing costs R875 R1 580 R875 R1 140

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Page 4 of 11 MAC3761
October/November 2020
QUESTION 1 (continued)
Additional information relating to the above management accounts:
2.1. No opening inventory of any type is budgeted for the 2020 financial year.
2.2. As part of its investment strategy, MULA continuously monitors the gross profit margins of each
company within its investment portfolio. It was noted with concern that TAB’s actual gross profit
amount for each product type was 20% lower than the related budgeted gross profit amounts
throughout the 2019 financial year.
2.3. In each financial year, the standard idle time allowance for the direct labourers is 10%. The total
direct labour cost budget for the 2019 financial year was R31,104 million for BhT and R9,3312
million for PfT.
2.4. TAB’s fixed manufacturing overheads (FMO) are allocated based on the budgeted assembly clock
hours. The pre-determined FMO allocation rate for the 2020 financial year is R150 per clock hour,
up by R30 per clock hour from the 2019 financial year’s pre-determined FMO allocation rate.
Furthermore, for the 2020 financial year, the fixed administrative costs are budgeted for at
R23,5 million.
2.5. TAB’s selling costs are mixed costs. For the 2019 financial year, the actual variable selling costs
were R6 per unit for both products while the total actual fixed selling costs were R500 000. The
total budgeted selling costs for the 2020 financial year is R3,4 million, and this was determined
based on variable selling costs of R8 per unit per product.
2.6. TAB’s target profit before tax for the 2020 financial year is R15,6 million.

3. TRONIX (PTY) LTD (“TRONIX”)

3.1. Budget information for the 2020 financial year:
TRONIX manufactures and sells two types of central processing units (CPUs) used in the manufacturing
of tablets, namely, a basic-CPU (“BCU”) and a professional-CPU (“PCU”). TRONIX’s annual maximum
manufacturing capacity is 600 000 CPUs of which 400 000 are BCUs and 200 000 are PCUs. As part
of the divisionalised organisational structure, MULA has unilaterally determined that TRONIX must
prioritise the supply of the CPUs to TAB. In this regard, for each product type, 40% of the manufactured
CPUs are currently sold to the external market while 60% are sold internally to TAB. No opening
inventory and no closing inventory are budgeted for. Each financial year MULA would determine the
transfer price between TRONIX and TAB as a price equal to TRONIX’s total unit manufacturing costs.
However, for all external sales, a 35% markup is added on TRONIX’s total unit manufacturing costs.

The composition of TRONIX’s budgeted total unit manufacturing costs is as follows: (i) 25% relates to
direct material costs; (ii) 60% relates to direct labour costs; (iii) 10% relates to variable overheads; and
(iv) 5% relates to fixed overheads. TRONIX’s budgeted selling and distribution costs on all external sales
are R25 per unit.

The following statement was appended to the management report of TRONIX’s 2019 financial year: “We
(TRONIX) are of the view that the current transfer price between TRONIX and TAB, as determined by
MULA, is a cause of conflicts and thus not in the best interest of MULA. Our BCUs have an active
external market; therefore, the minimum transfer price appears to be the best suited budgeted transfer
price for the 2020 financial year”

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Page 5 of 11 MAC3761
October/November 2020
QUESTION 1 (continued)
3.2. Investigation to possibly discontinue (close-down) TRONIX:
Over the past few years, TRONIX’s direct labour costs have progressively increased at an alarming rate.
This is mainly due to trade union pressures, industrial action settlements, and amendments to some
aspects of labour legislations. In the past, MULA had continuously engaged with the relevant authorities
about the volatile labour environment being an impediment to maintain a flourishing business in the
country. However, its cries were met with ferocious attacks and anger. In one of the engagements,
MULA was told to “either shape-up, or ship-out”. As a result, MULA is considering the possibility to
discontinue TRONIX effective 1 November 2020 and, on the same day, possibly acquire an 85% equity
stake in Electro X (Pty) Ltd (“ELX”), a Namibian company owned by one of Namibia’s wealthy families,
and whose operations is similar to that of TRONIX. In this regard, MULA has already started negotiating
favourable labour conditions with Namibian authorities to formalise an agreement on fixed low wages
for the next five years, amongst others. Within the SADC region, acquisitions of this nature require
various co-operations and approvals – in the main from (i) the relevant competition commissions; (ii) the
respective revenue authorities; (iii) trade unions; (iv) Common Market treaties; and (v) Free Trade areas
– approvals from South Africa, Namibia and from the SADC.
In the instance that TRONIX is discontinued, the following will be applicable:
3.2.1. TRONIX’s non-current assets (administrative buildings and the factory) will be sold for cash on
1 November 2020. On this day, the book value of administrative assets will be Rnil (zero) while
the related resale value will be R75 000. The proceeds from the sale of the factory property (with
a book value of R50 million) will be R55 million. The annual depreciation on administrative assets
was determined at R0,2 million.
3.2.2. A 2,0% sales commission on the selling prices will be payable for the sale of the non-current
assets as per 3.2.1.
3.2.3. Retrenchment costs will be R20 million. The normal annual salary bill of R528 million is already
included in the loss for the financial year as per 3.2.6. below. At the start of the 2021 financial
year, all of TRONIX’s employees together will have accumulated 350 leave-days at a cost of
R400 per day. Accumulated leave is only paid out upon involuntary termination of employment.
The retrenched employees will sign a non-disclosure agreement relating to the operational
secrets and the appalling working conditions they experienced at TRONIX. None of TRONIX’s
employees will be kept and/or redeployed within MULA’s organisational structure.
3.2.4. TRONIX will pay R2,5 million in penalties and fines for breaching employment contracts because
of winding up.
3.2.5. Winding up costs of R1,5 million will be paid together with a settlement of R32 million for liabilities.
3.2.6. For the 2021 financial year, if operations continue normally, the loss (excluding non-cash items)
from normal operations is expected to be R0,625 million.

4. PROPOSAL TO ACQUIRE 85% EQUITY STAKE IN ELECTRO X INCORPORATED (“ELX”)

In the instance that MULA acquires the 85% equity stake in ELX, the following information will be
applicable:
4.1. Information extracted from ELX’s audited financial statements:
Details Notes 2020 2019 2018 2017
R’000 R’000 R’000 R’000
Net profit/(loss) after tax (i) 13 000 3 600 (4 800) 17 600
Dividends paid (ii) 1 950 540 0 2 640
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Page 6 of 11 MAC3761
October/November 2020
QUESTION 1 (continued)
Notes relating to the above financial information:
(i) Included in the net profit/(loss) after tax for 2019 and 2018 is R20 million (pre-tax) and R28 million
(pre-tax), respectively, for penalties and fines (exceptional items) for breaching various labour
legislations. The corporate tax rate applicable to ELX is 25%.
(ii) The company’s dividend payout ratio is expected to be maintained into the future.

4.2. ELX’s year-end is 31 October.

4.3. The average earnings-yield of electronics companies listed on the Johannesburg Stock Exchange
(JSE) is 25%.

4.4. Within the SADC region, on average, unlisted shares trade at 12% below listed shares.

4.5. MULA will table a R50 million cash offer to the shareholders of ELX for the acquisition of the 85%
equity stake in ELX as at the start of the 2021 financial year.

4.6. ELX’s management personnel have been with the company since its inception. This management
team of ELX will continue to manage ELX post the acquisition.

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October/November 2020
QUESTION 1 (continued)
REQUIRED
For each question below, remember to:
• Clearly show all your calculations in detail;
• Round all your workings to two decimals; and
• Where necessary, indicate irrelevant amounts/adjustments with a R0 (nil-value).
(a) “Goal congruence” is often referred to as a prerequisite for a successful decentralisation.
(i) Explain the term “goal congruence” from MULA’s perspective and provide one
example related to the scenario to illustrate your explanation. (2)
(ii) From the perspective of a divisionalised organisational structure, discuss how MULA
could be affected by the potential negative consequences of decentralisation. (5)
(b) Assuming that TAB operates a standard costing system, calculate the following variances
for the 2019 financial year:
(i) TAB’s sales mix variance for product type PfT only. (3)
(ii) TAB’s direct labour idle time variance for product type BhT only. (3)
(c) (i) Prepare TAB’s budgeted statement of profit or loss (income statement) for the 2020
financial year; and (7)
(ii) Based on the gross profit margin calculated in (c)(i) above, briefly comment on
whether TAB is budgeted to achieve the gross profit margin target as set by MULA. (1)
§ Support your commentary with necessary and relevant calculations.
§ Ignore all possible taxation implications.
(d) In answering question 1 (d) only, assume the following two points regarding TAB for the
2020 financial year:
1. All the implications of opening and closing inventory are to be ignored.
2. All the other budgeted information remains as given in the scenario.
Calculate the budgeted units of BhT and PfT that TAB will need to manufacture and sell
during the 2020 financial year to achieve its target annual profit before tax. (8)
(e) Regarding the appended statement to TRONIX’s 2019 management report:
From TRONIX’s perspective and with reference to the 2020 financial year budgeted
information, critically evaluate and comment on the view that the minimum transfer price
is the best suited budgeted transfer price for the internal transfer of BCUs during the 2020
(10)
financial year.

§ In answering question 1 (e), ignore the possible discontinuation of TRONIX.

§ Show all relevant and appropriate calculations to support your evaluation.
§ Calculations – 7 marks; Discussion and commentary – 3 marks.

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October/November 2020
QUESTION 1 (continued)
(f) With regard to the possible discontinuation of TRONIX:
From a quantitative perspective, advise on the possible implication of discontinuing
TRONIX on its 2021 financial year only.

§ Your advice must be from TRONIX’s perspective only.

§ Support your advice with all relevant and applicable calculations.
§ Ignore the possible acquisition of ELX.
§ Ignore the possible taxation implications.
§ Ignore all implications beyond the 2021 financial year. (11)
(g) Assume that TRONIX is discontinued and that MULA acquires the 85% equity stake in
ELX on 1 November 2020:
(i) Using the Price/Earnings (P/E) multiple valuation method, establish the
reasonableness of the cash offer tabled by MULA to the shareholders of ELX for their
85% equity stake in ELX as at 1 November 2020. (12)

(ii) By reference to information evident from the scenario, discuss four non-financial
factors that MULA will need to consider in its assessment of ELX for possible
acquisition. (8)
Total question 1 [70]

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Page 9 of 11 MAC3761
October/November 2020
QUESTION 2 (30 Marks; 54 minutes)
Far & Wide (Pty) Ltd (“FW”) is a logistics company owned by Mulaudzi Limited. FW specialises in door-
to-door, overnight and same-day deliveries. FW makes use of highly advanced technology to plan and
coordinate its various delivery routes across the country.

1. EXTRACTS FROM FW’S FINANCIAL STATEMENTS AT 31 OCTOBER 2020:

Profit or loss items Notes 2020 2019
R’000 R’000
Revenue 1.1 87 000 85 500
Cost of services rendered 1.2 (43 500) (38 000)
Other operating expenses 1.3 (25 100) (23 800)
Finance costs (3 500) (4 500)
Profit before taxation 14 900 19 200
Taxation expense (3 800) (4 900)
Net profit for the year R11 100 R14 300
Financial position items Notes 2020 2019
R’000 R’000
Trade and other receivables 1.1 17 000 6 000
Other assets 91 620 104 300
TOTAL ASSETS R108 620 R110 300
Capital and reserves
Ordinary share capital 1.4 50 000 50 000
Retained earnings 18 340 10 420
Liabilities
Long-term loan 1.5 23 000 25 000
12% Preference share capital (@R4 par value each) 1.6 8 000 8 000
Trade and other payables 5 800 5 000
Bank overdraft 0 7 180
Courier deposits 1.7 300 500
Dividends payable (ordinary & preference) 1.9 3 180 4 200
TOTAL EQUITY AND LIABILITIES R108 620 R110 300
Salient items 2020 2019
Operating days 366 365
Corporate tax rate 28% 28%
Notes and additional information:
1.1. 80% of revenue is generated on credit to contractual corporate customers, while 20% is generated
from “pay-as-we-deliver” household customers.
1.2. Cost of services rendered does not include any once-off or exceptional expenses.
1.3. Other operating expenses include depreciation and amortisation charges of R13,1 million (2019:
R13,3 million).
1.4. FW has more than 2,2 million shares in issue. On 31 October 2020, these shares were trading at
R25 each while FW’s Price/Revenue multiple was 0,7 times on that same day.
1.5. On 31 October 2020, the market value of the long-term loan was R23,5 million.
1.6. On 31 October 2024, all the preference shares will be redeemed at 6% discount on par value. On
31 October 2020, the market-related cost of similar redeemable preference shares was 12,6%.
1.7. All corporate customers are required to pay a “courier deposit” as security for the afforded credit
facility. Upon cancellation of any corporate customer contract, the courier deposit is repaid in full.

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October/November 2020
QUESTION 2 (continued)
1.8. As at 31 October 2020, the market-related cost of equity was 11,5% and the market-related cost
of the long-term loan was 14,0%.
1.9. All dividends are declared on 31 October and subsequently paid on 15 March the following year.

2. INVITATION TO TENDER
FW was approached by the University of Azania (“UAZ”), a leading distance-learning tertiary institution,
to tender for the provision of door-to-door courier services of the UAZ study materials. The tender
requires an overnight delivery of the study materials to UAZ’s registered students. The tender price as
put forward by UAZ is R75 million. The following additional information was made available to you to
assist FW in assessing the financial viability of the tender:

2.1. The delivery vans and working capital requirements

FW will require a fleet of 50 delivery vans (vans) for the entire 3-year duration of the contract (tender
period) and a R5 750 000 investment in working capital at the beginning of the tender period. The
purchase price of each van is R650 000. FW already has five of the required vans and these five vans
were bought new 24 months ago at R650 000 per van and were never used since then. When in use,
each van will clock on average 50 000 kilometres (km) per year. In their first two years, the fuel
consumption of each van will be 7-litres/100km and thereafter 7,5-litres/100km. For the duration of the
tender period, FW will employ 10 new graduates from UAZ’s School of Logistics for a logistics
management internship programme and 50 matriculants from the nearby community as drivers of the
vans. The annual stipend for both the internship programme and the drivers will be R150 000 per person.

The South African Receiver of Revenue (SARS) allows wear and tear on delivery vans at 40% in year
1 and year 2, thereafter, 20% in each of the subsequent year(s). Wear and tear is only allowed starting
from the year in which the delivery van is brought into use.

2.2. Revenue
Revenue receipts will be made at the end of each year. R28 million of the tender price will be received
in the first year, after which the receipt will increase by 5% per year but will be limited to the outstanding
portion of the tender price not yet received. SARS will allow taxation of revenue on a cashflow basis.

2.3. Fuel costs

FW will enter into a fuel supply contract will Zarsol (Pty) Ltd at a rate of R12,5 per litre (p/l) in the first
two years of the tender period and thereafter the rate will increase to R14 p/l.

2.4. Maintenance costs

The maintenance of the vans is compulsory. Each van is always bought with a free standard
maintenance plan of 2-years or 100 000km, whichever comes first. A free maintenance plan allows a
customer to use the vehicle without incurring any maintenance costs for the duration of the plan. The
price of the free maintenance plan is never used to reduce the purchase price of the vans. The market
price of the maintenance is R18 000 per van per year during the first two years of the tender period.
Thereafter, the price of the maintenance will increase to R20 000 per van per year. Where applicable,
the maintenance costs are paid annually in cash.

2.5. Insurance costs

The insurance cost for each of the 50 delivery vans will be R1 800 per month for the duration of the
tender period.

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October/November 2020
QUESTION 2 (continued)

REQUIRED
For each question below, remember to:
• Clearly show all your calculations in detail;
• Round all your workings to two decimals, except where otherwise stated;
• Where necessary, indicate irrelevant amounts/adjustments with a R0 (nil-value); and
• Where necessary, assume amounts are before tax, unless where otherwise stated.
(a) For question 2(a) only, assume that FW uses book values and closing balances when
calculating and analysing the ratios:

Calculate the following ratios for both the 2020 and the 2019 financial years and provide
a possible reason for each movement:
(i) Trade receivable collection period (3)
(ii) EBITDA margin (3)
(iii) Ordinary dividend payout ratio (3)
(b) Provide one possible reason why FW’s working capital management would not include
the management of trading inventory. (1)
(c) With regard to the invitation by UAZ to tender:
(i) Calculate FW’s weighted average cost of capital (WACC) as at 31 October 2020,
and briefly explain the importance of WACC to FW in its assessment of the financial
viability of the tender. (8)
§ Calculations – 6 marks
§ Explanation – 2 marks
(ii) Based on capital budgeting principles, advise FW whether it will be financially
beneficial to accept the tender.

§ Show all your calculations to support your advice.

§ Your advice must be based on quantitative analysis only. (12)
Total question 2 [30]
Total question 1 and question 2 [100]

©
UNISA 2020
All rights reserved. No part of this document may be reproduced or transmitted in any form or
by any means without prior written permission of Unisa.

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UNIVERSITY EXAMINATIONS

January/February 2021

MAC3761

Management Accounting III

100 Marks
Duration 3 Hours

This paper consists of 9 pages (including this page).

Instructions:
1. This assessment consists of two independent questions.
2. All questions must be answered, and all calculations must be shown.
3. This is a closed-book examination, and you may not refer to any of your study material or any other 3rd
party resources/sources.
4. Ensure that you have carefully read the information provided in the following documents:
• MAC3671 Exam Guidance for Jan/Feb 2021.
• “Student guide: Unisa File Submission” [MAC3761_guide] document provided with your timetable
on myUnisa.
5. For hand-written answer files, you must not write with a pencil or a red pen. Only use a black pen.
6. You can only upload a PDF document on myUnisa as your answer file.
7. It is your responsibility that once uploaded, you must view your answer file and ensure that is correct,
complete (no missing pages), legible, it can open, not of poor image quality, not password protected,
and not corrupted.
8. Your attention is brought to Notices on myUnisa titled “Unisa has a zero tolerance for any form of
dishonesty or cheating activity related to exams” and “Plagiarism during the examinations”.
9. You must always keep the Invigilator app open on your device during the examination.
10. Should you encounter an error or discover a problem with your online exam/assessment submission,
refer to the below link for an Announcement about the procedure to follow for assistance:
[Link]
contacting-the-Student-Communication-Service-Centre

PROPOSED TIMETABLE Marks Minutes

Question 1: Risk management and governance; Capital budgeting; Capital structure
50 90
and cost of capital; and Business valuations.
Question 2: Direct and Absorption costing systems; Budgeting and planning; Cost
classification and behaviour; Performance Management; Transfer pricing; Standard 50 90
costing; and Overheads allocation.
Converting your answers to a PDF file and successfully uploading your one PDF file.
You must successfully upload your PDF file on myUnisa before 14:45 South African
60
time, 2 February 2021. The submission platform will automatically close at 14:45
(2 February 2021, South African time) and no submission can be made henceforth.
100 240

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Page 2 of 9 MAC3761
January/February 2021
The Invigilator

Day of the assessment instructions:

• Please remember to keep your cell phone fully charged for the duration of the assessment.
• Please log into The Invigilator App if you have not done so yet. You need to be connected to the
internet in order to log in.
• Scan the QR code below once the examination starts. If you encounter difficulty with scanning
of the QR code, you can also enter the QR access code as indicated at the bottom of the QR
code to start the online invigilation.
• Once the QR code is scanned, avoid any disturbances by putting your phone on airplane mode.
No internet connection is needed during the assessment.
• Keep the Invigilator app open at all times on your cell phone during the assessment.
• You may place your cell phone next to you. Your cell phone does not need to face you however
should be close enough to hear the notifications from The Invigilator App.
• The Invigilator App will notify you when an action is required.
• In order to receive notifications do not put your cell phone on silent mode and ensure media
volume is turned up.
• When an action is required, a notification beep will be heard, and an instruction will be visible.
• Please take note that once the examination time is over, firstly focus on scanning and uploading
your script to your assessment platforms. Uploading your script is time sensitive.
• You can minimise the invigilator app and use your cell phone to scan the exam answer file
document during the upload time.
• Once your script is uploaded on your assessment platform, you may switch on your data to start
the uploading process on The Invigilator app.
• Good Luck!

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Page 3 of 9 MAC3761
January/February 2021
QUESTION 1 [50 Marks; 90 Minutes]
BlueSky Wings Limited (“BlueSky”) is a South African registered company with a 31 January year-end.
BlueSky operates commercial aircraft for both domestic and international travels. Currently, the
company owns only two aircraft that are predominately used for international travels. Being highly
competitive, the South African domestic air travel market is a relatively low margin business proposition
and thus less attractive to BlueSky. As such, BlueSky’s focus is on international routes rather than
domestic routes, and therefore it is not an airline of choice amongst South African passengers.

To maximise profitability from its international travel business, BlueSky’s aircraft are seldom on the
ground. The company’s chief executive officer (CEO) is known for saying “the only time I want to see
my aircraft touching the ground is when it lands”. Despite offering its pilots remuneration that is notably
above the industry norm, the company’s pilot turnover is considerably higher than the industry average.
In several instances, on the back of the company’s back-to-back flight schedules, BlueSky had been
compelled to employ inexperienced, although suitably qualified pilots. The health and wellness of the
pilots is a top priority, therefore, BlueSky’s pilots are obliged to sleep after each shift to minimise fatigue.

BlueSky’s flight-bookings, payments, check-ins and enquiries are done online only. The company only
accepts online credit card payments and requires a “travel deposit” via a customer’s credit card. The
travel deposit is used as insurance against flight cancellations without the required 48-hours’ notice and
is only released 5 days after the trip. Due to historical information technology (IT) related challenges,
the company has recently outsourced all its IT function to a recently formed Dubai-based IT company.

1. PROPOSED PURCHASE OF AN ADDITIONAL AIRCRAFT

As part of assessing the financial viability of purchasing an additional commercial aircraft (B-737), Ms
Du Plessis (BlueSky’s management accountant) prepared the below capital budgeting working paper:

Subject: New commercial aircraft (B-737) capital budgeting exercise

Prepared by: Management Accountant – Karen Du Plessis
Details Calculations and/or details Notes R million
Purchase price 1.1 (168)
Working capital requirements 1.1 (98)
Revenue R1,8 billion x 4 years 1.2 7 200
Fuel costs R720 million(m) x 4 years 1.2 (2 880)
Salaries R120m x 4 years 1.2 (480)
Repairs and maintenance R20m x 2 years 1.3 (40)
Other operating costs (2 532)
Variable overheads R30m x 4 years 1.2 120
Fixed – hangar rental costs R3m x 4 years 1.4 12
Fixed – Depreciation 1.5 2 400
Interest expense on loan R180m x 5 years 1.6 (900)
Recoupment 180
Proceeds on sale 1.1 180
Less: Tax base Correct tax base at end of year 4 1.5 0
Net cash flows before taxation R282
Taxation R282m x 28% 2.6 (R78,96)
Expected total net cash flow R203,04
Internal rate of return (IRR) R203,04m ÷ ($168m ÷ $0,07) = 8,46%
Conclusion: B-737 is expected to generate total net cash flows of R203,4 million and IRR of 8,46%
for the four years under review. Despite the IRR being lower than the company’s weighted average
cost of capital (WACC), the expected total net cash flow is nonetheless positive. The financial viability
of the new aircraft is therefore acceptable, I therefore recommend that the new aircraft be purchased.
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January/February 2021
QUESTION 1 (continued)
Notes and additional information:
1.1. If financially viable, the new aircraft will be purchased on 1 February 2021 at a purchase price of
$168 million. The applicable exchange rate is R1: $0,07. This aircraft will be used for four years
after which it will be sold for R180 million. The working capital investment required will be
R98 million, however, only 90 cents for every invested R1 will be recouped at the end of year four.
1.2. Based on historical observations of the company’s similar projects, these items are always
impacted by the annual general inflation. The average general inflation rate for the four years
under review is expected to be 4,5% per annum (p/a).
1.3. The aircraft will be bought with a free 2-year standard service and maintenance plan relating to
the first two years. Subsequently, the service and maintenance costs will be R20 million per year.
1.4. Two years ago, BlueSky entered into a long-term lease agreement to lease an aircraft hangar
(“aircraft garage”) at a fixed rent expense of R3 million per year. This leased hangar has capacity
to house four aircraft at a time.
1.5. BlueSky depreciates aircraft at 20% per annum on a straight-line basis while the South African
Revenue Services (SARS) allows wear and tear on a straight-line basis over four years only for
similar aircraft. You can assume that both the depreciation charge and the tax base are correct.
1.6. The purchase of the aircraft will be financed by a 5-year Rand-denominated term loan from a
South African financial institution at an interest expense of R180 million p/a payable annually in
arrears. According to Ms Du Plessis, debt is cheaper and therefore, no other form of finance was
considered to finance the aircraft.

2. FINANCING OF THE NEW AIRCRAFT

At the presentation of the capital budgeting working paper as per point 1 above, BlueSky’s CEO
questioned Ms Du Plessis’ exclusive preference of debt finance in financing the full purchase price of
the aircraft as opposed to a combination of debt and equity funding. The CEO rather proposed that the
aircraft be financed in line with BlueSky’s current debt:equity structure. In this regard, the following
information is made available:
2.1. BlueSky’s current permanent capital structure at market values as at 31 January 2021:
Ordinary share capital 6 million shares R1,5 billion
Term loan R0,8 billion
Non-redeemable preference shares 2,5 million shares @ R100 nominal value each R0,3 billion
Debentures R0,4 billion
2.2. BlueSky will issue 4 million new ordinary shares at their market value as at 31 January 2021.
BlueSky’s shares have a beta of 1,4. The market return rate is 9,5% p/a, and the risk-free rate is
100 basis points above the prime lending rate of 7,5% p/a.
2.3. The required total debt will be split equally between the applicable debt instruments as per the
company’s permanent capital structure. The market-related pre-tax interest rate of similar term
loans is 8% p/a.
2.4. Non-redeemable preference shares are issued at a fixed rate of 11% p/a. Similar preference shares
are currently issued in the market at 150% of the prime lending rate.
2.5. BlueSky issued all its existing debentures at nominal value of R800 each and at a post-tax fixed
interest rate of 6,5% p/a. All issued debentures as at 31 January 2021 will be redeemed on
31 January 2027 at a 2,5% discount on nominal value. On 31 January 2021, the market value of
similar debentures was R782 each.
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January/February 2021
QUESTION 1 (continued)
2.6. The applicable corporate taxation rate is 28%.
2.7. BlueSky uses the weighted average cost of capital (WACC) to assess the financial viability of capital
investments. The company includes the funds required for the capital investment project being
assessed, since the project under consideration will impact the current capital structure.

3. PROPOSED ACQUISITION OF BiDFLEST CABIN CATERING PTY LTD (“BCC”)

BlueSky is currently contracting BCC to provide catering services in all its aircraft. Although BCC is one
of the BiDFLEST Group’s 25 subsidiaries, it is registered and operates as an independent company.
Despite BCC being a going concern, as part of its unbundling strategy, BiDFLEST Group is considering
selling its 80% equity stake in BCC with the effective deal date of 31 December 2020, this amid stiff and
increasing competition from Aircraft Foods Incorporation (“AFI”), a company with similar business
activities to BCC. AFI is a foreign company that is listed in the New York Stock Exchange (NYSE) only.
Regarding the proposed acquisition of BCC, the following additional information is made available:

3.1. BCC was established and incorporated in 1995 and has been in operation since then.
3.2. BCC’s financial performance in each of the recent four financial years is as follows:
Details 2020 2019 2018 2017
R’000 R’000 R’000 R’000
Revenue 5 500 22 050 21 000 20 000
Cost of services rendered (5 200) (8 820) (8 400) (8 000)
Other operating costs (2 350) (2 205) (2 100) (2 000)
Profit/(loss) for year (R2 050) R11 025 R10 500 R10 000
Dividends declared and paid R0 R2 205 R0 R0

3.3. BCC’s 2020 financial performance was severely impacted by the COVID-19 pandemic. Under
normal circumstances, the company’s profit for the year would have grown by approximately 5%
from the immediate preceding financial year. On the back of COVID-19, BCC was approved for a
R13,6 million business relief fund for the 2020 financial year, and these funds will be received in the
2021 financial year. Beyond the 2020 financial year, BCC is expected to maintain its historical
growth in profits.

3.4. On 31 December 2020, the ordinary shares of AFI were trading at $0,75 per share on the NYSE
while the annual market rate of return of the aviation catering industry by reference to the NYSE
was 6%. On this date, the applicable exchange rate was R1: $0,071). Despite the country risk factor,
AFI is arguably the only company with similar risk profile and growth prospects as BCC.
3.5. Resulting from strong yearly earnings since the 2000 financial year, the majority of which were
ploughed back into the company, BiDFLEST Group has always been reluctant to sell BCC.
However, because of continuing disagreements over dividend payout, the BiDFLEST Group is now
ready to divest from the aviation catering industry.
3.6. Post the COVID-19 pandemic, the BiDFLEST Group expects BCC to return to its operational
excellence and profits well into the future, hence a goodwill value of approximately R25 million for
BCC is agreed upon. Furthermore, BCC’s administrative office block was recently valued by the
Ekurhuleni Municipality at R75 million, a value that is approximately 2% above the property’s fair
market value. Except for this administrative office block, BCC does not own any other non-operating
assets.
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January/February 2021
QUESTION 1 (continued)

REQUIRED
For each question below, remember to:
• Where applicable, clearly show all your calculations in detail;
• Round all your workings to two decimals, except where otherwise stated;
• Where necessary, indicate irrelevant amounts/adjustments with a R0 (nil-value); and
• Where necessary, assume amounts are before tax, unless where otherwise stated.
(a) Identify and discuss five key risks that BlueSky is confronted with; and describe how
each of these risks can be mitigated. (10)
(b) By reference to capital budgeting technique and principles thereof, critically evaluate
Ms Du Plessis’ capital budgeting working paper and subsequently comment whether
the basis of her conclusion thereto is correct.
§ Your evaluation must be limited to the aspects deemed inconsistent with, or
not applied consistent with, the capital budgeting technique and principles
thereof.
§ You are not required to perform or reperform a capital budgeting exercise. (12)
(c) Assist Ms Du Plessis to answer the CEO’s question about the preference of debt to
finance BlueSky’s new aircraft purchases by discussing possible advantages to
BlueSky for utilising debt as a form of finance. (4)
(d) Take into consideration the below three points in answering question 1 (d) only:
1. Assume that the purchase price of the new aircraft is R2,8 billion;
2. Except for point 1 above, all the other applicable information remains as given in the
scenario; and
3. By reference to points 1 and 2 above, assume that the correctly calculated annual
net cash flows (all in arrears) from the new aircraft as determined by a capital
budgeting exercise are as follows:
Details R million
CF0 CF1 CF2 CF3 CF4
Annual net cash flows -R2 890 +R750 +R750 +R760 +R550

Based on the net present value (NPV) principles and taking into consideration the above
three points, advise BlueSky whether it should purchase the new aircraft.
§ Your advice (1 mark) must be supported by all relevant and necessary
calculations (13 marks).
§ In your advice, no qualitative and/or non-financial factors must be considered
or presented. (14)
(e) Given the information made available in the scenario, identify and motivate for the most
appropriate valuation method that BlueSky should use to establish the value of 80%
equity stake in BCC as at 31 December 2020.
§ You are not required to perform a valuation exercise.
§ Identification (1 mark) and motivation (9 marks).
§ Where necessary, support your motivating factor(s) with calculations. (10)
Total question 1 [50]

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Page 7 of 9 MAC3761
January/February 2021
QUESTION 2 [50 Marks; 90 Minutes]
Climate Control Group (“2C Group”) is a group of companies that operates a divisionalised
organisational structure. 2C Group has a 31 January year-end, and uses an absorption costing system
while accounting for its inventory using the first-in-first-out (FIFO) valuation method. The 2C Group has
five companies, three of which are (i) the Head Office (Pty) Ltd (“HO”), (ii) Industrial Fans Limited
(“iFani”), and (iii) Mottow Limited (“Mottow”). All the companies within the 2C Group are registered
separately, independent of one another and have autonomous management teams.
The HO is an administrative hub and is solely responsible for the entire group’s (i) administrative
decisions, (ii) capital investment decisions and (iii) decisions about the capital structure. All other
decisions are the responsibility of the respective companies. Mottow manufactures and sells electrical
motors used in the manufacturing of light-duty industrial fans. iFani specialises in the assembly and
selling of light-duty industrial fans (“LDI-fans”) used for climate and temperature control in manufacturing
factories. One of iFani’s direct materials (electrical motors) used in the assembly of the LDI-fans are
bought exclusively from Mottow at a price that equals Mottow’s full unit manufacturing costs for each
motor. Mottow’s management has consistently raised discontentment about this transfer price, mainly
because of its impact on Mottow’s performance. This transfer represents 2C Group’s only internal sales.

1. BUDGET INFORMATION FOR THE 2021 FINANCIAL YEAR

1.1. Manufacturing units, sales units and market demand for the two companies:
Details iFani Mottow
Maximum manufacturing capacity in units 500 000 750 000
Budgeted manufacturing units 450 000 750 000
External market demand in units 450 000 575 000
Budgeted internal sales units N/A 450 000

1.2. Mottow is required to transfer to iFani all the electrical motors required by iFani before selling to
external customers.
1.3. No inventory item of any type is budgeted for.
1.4. Budgeted costs and selling prices information per unit are as follows:
Details Reference LDI-fan Electrical
motor
External selling price R10 200 R7 500
Variable selling costs 1.5 R18 ?
Direct material costs 1.6 ? R1 500
Direct labour costs R500 R2 000
Variable manufacturing overheads (VMO) 1.7 R552 R768
Fixed manufacturing overheads (FMO) 1.7 R? R?
1.5. The selling costs relate to sales to external customers only. Mottow’s total budgeted selling costs
is R4,5 million (all variable).
1.6. Direct materials for the LDI-fans comprise of electrical motors, blades, and sundry components
only. The budgeted costs of blades and sundry components is R726 per LDI-fan.
1.7. Manufacturing overheads relates to factory machinery. The standard machine time is the same
for VMO and FMO. VMO are budgeted for at R120 per machine hour per LDI-fan and at R240 per
machine hour per electrical motor. Within each company, FMO are allocated on a predetermined
rate based on the budgeted machinery hours. The total budgeted FMO for Mottow for the 2021
financial year is R180 million, 45% thereof relates to fixed factory rental costs; 15% to fixed
machinery set-up costs; and the remaining 40% to fixed indirect labour costs.
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Page 8 of 9 MAC3761
January/February 2021
QUESTION 2 (continued)
1.8. As part of performance management exercise for the 2021 financial year, the below summarised
version of the full budgeted management accounts is made available:

Summarised statement Mottow Summarised statement iFani Mottow

of financial position R’000 of profit or loss R’000 R’000
Non-current assets 5 400 000 Revenue 4 590 000 ?
Cash and bank 0 Internal sales 0 ?
Inventory 450 000 External sales 4 590 000 2 250 000
Trade debtors 517 500 Less: Cost of sales 3 015 000 ?
Total assets 6 367 500 Gross profit 1 575 000 897 600
Ordinary share capital 4 637 600 Less: Selling costs 8 100 4 500
Retained earnings 212 000 Less: Net operating costs 1 095 000 890 000
Term loans 350 000 Profit before tax 471 900 3 100
Debentures 814 400 Less: Tax expense 122 694 781,2
Bank overdraft 28 500 Profit for the year 349 206 2 318,8
Trade creditors 325 000 Dividends payable 22 500 17 391
Total equity and liabilities 6 367 500

1.8.1. iFani and Mottow have 3 000 000 and 2 898 500 ordinary shares in issue, respectively. No
changes in the number of ordinary shares was budgeted for.
1.8.2. Mottow expects minimal changes to trade debtors and trade creditors from the 2020 financial
year closing balances.
1.8.3. Mottow’s net operating costs include the following amongst others (i) R8 million in interest
income, (ii) R15 million in depreciation expense, and (iii) R68 million in interest expense.
Included in the R68 million interest expense is R2,9 million for interest on bank overdraft.
1.8.4. Dividends payable relate to ordinary shareholders for the 2021 financial year only. Historically,
dividends were primarily paid from cash generated from operations.
1.9. The targeted key performance indicators for the 2021 financial year budget are as follows:
Details iFani Electrical motors
Mottow Industry
average
Controllable investments R5,286 billion ? N/A
Controllable profit R0,6819 billion ? N/A
Current ratio 9,2:1 ? 2,7:1
EBITDA ? ? N/A
EBITDA margin 14,42% ? 22,3%
Effective taxation rate 26,0% ? 27,2%
Gross profit margin 34,31% ? 41,5%
Dividend yield 5,0% 4,0% 3,1%
Return on investment 12,9% ? 18,5%
Residual income R142,728 million ? N/A

1.10. All companies within the 2C Group uses the same forecasted weighted average cost of capital
(WACC).

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Page 9 of 9 MAC3761
January/February 2021
QUESTION 2 (continued)
2. EXTRACT OF THE ACTUAL MANAGEMENT ACCOUNTS FOR THE 2021 FINANCIAL YEAR:
Details iFani
Units manufactured 402 500
Units sold 397 500
Revenue R4 034 625 000
Variable manufacturing overheads @ R122 per machine hour R221 954 600
Fixed manufacturing overheads R150 000 000
REQUIRED
• Where applicable, clearly show all your calculations in detail;
• Where necessary, indicate irrelevant amounts/adjustments with a R0 (nil-value);
• Round all your workings to two decimals, except where otherwise stated; and
• Ignore taxation and time value of money implications, unless stated otherwise.
(a) Using the existing transfer price approach, determine the budgeted transfer price per
electrical motor for the 2021 financial year. (3)
(b) Mottow’s management is of the view that, if the minimum transfer price principles were
applied to determine the budgeted transfer price for the 2021 financial year, Mottow’s
budgeted gross profit would be R1,9 billion instead of the current R897,6 million.
Comment on whether the above view by Mottow’s management is correct. (11)
§ Show all calculations (9 marks) to support your commentary (2 marks).
§ Where applicable round amounts to the nearest Rand.
(c) As part of the performance management exercise for the 2021 financial year:
(i) By reference to key performance indicators as per point 1.9, calculate Mottow’s
missing values for budgeted profitability ratios only, and for each of these ratios,
provide one reason for the difference to the corresponding industry related ratio. (6)
(ii) Calculate and compare Mottow’s forecasted return on investment (ROI) to that of
the industry average. (11)
(iii) Calculate and compare Mottow’s forecasted residual income to that of iFani’s. (4)
(iv) Calculate Mottow’s forecasted market price per ordinary share as at 31 January 2021
and briefly provide one possible reason for the difference between the forecasted
market price and the corresponding nominal value. (3)
(d) Assume that instead of one product (electrical motors), Mottow also manufactures (in
small batches) and sells petrol-powered motors. In this regard, discuss whether the
current fixed manufacturing overheads allocation technique will still represent the most
accurate fixed manufacturing overheads allocation technique. (4)
(e) Assuming that a standard costing system is in place, calculate the following variances
for iFani for the 2021 financial year:
(i) Sales price variance. (2)
(ii) Variable manufacturing overheads efficiency variance. (3)
(f) With regard to iFani, assume a predetermined fixed manufacturing overhead allocation
rate of R90 per machine hour. Prepare a journal entry to process iFani’s over-/under-
allocation of fixed manufacturing overheads (FMO), if any, for the 2021 financial year.
§ All the over-/under-allocation of FMO are treated as period costs.
§ Journal entry narration is not required. (3)
Total question 2 [50]
© UNISA 2021
All rights reserved. No part of this document may be reproduced or transmitted in any form or by any means without prior written permission of Unisa.

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UNIVERSITY EXAMINATIONS

January/February 2021

MAC3701

Application of Management Accounting Techniques

100 Marks
Duration 3 Hours

This paper consists of 8 pages (including this page and the Invigilator App instructions).

Instructions:

1. All questions must be answered, and all calculations must be shown.

2. This is a closed-book examination; hence, you may not refer to any of your study material,
notes, internet, etc. during the examination.
3. Ignore taxation and the time value of money.
4. Please ensure you have carefully read and follow the instructions provided in:
• The updated Tutorial letter 102
• Invigilator App documents
• “Examination instructions” document provided with your timetable on myUnisa
5. You are reminded that you should make use of the Invigilator App, which information is on
the next page.

PROPOSED TIMETABLE

Marks Minutes
Question 1: Topics
Budgeting and planning; Joint and by-product costing; Advanced CVP
analysis; Standard costing; Long-term pricing; Transfer pricing; Direct-
100 180
and absorption costing; Performance management; Relevant decision-
making – Further processing and Ethical, social, business and other
related matters.
Converting your answers to a PDF file and successfully uploading your
one PDF file. (You must successfully submit your PDF file before 18:00, 60
South African time, 29 January 2021)
100 240

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Page 2 of 8
MAC3701
January/February 2021
Invigilator App

1. Day of the assessment instructions:

• Please remember to keep your cell phone fully charged for the duration of the assessment.
• Please log into The Invigilator App if you have not done so yet. You need to be connected to the
internet in order to log in.
• Scan the QR code below once the examination starts. If you encounter difficulty with scanning of
the QR code, you can also enter the QR access code as indicated at the bottom of the QR code
to start the online invigilation. Please ensure that you are connected to the internet if you need to
enter the QR access code at the bottom of the QR code.
• Once the QR code is scanned, avoid any disturbances by putting your phone on airplane mode if
possible. No internet connection is needed during the assessment.
• Keep the Invigilator app open at all times on your cell phone during the assessment.
• You may place your cell phone next to you. Your cell phone does not need to face you however
should be close enough to hear the notifications from The Invigilator App.
• The Invigilator App will notify you when an action is required. In order to receive notifications do
not put your cell phone on silent mode and ensure media volume is turned up.
• When an action is required, a notification beep will be heard, and an instruction will be visible for
you to action promptly.
• Please take note that once the examination time is over, firstly focus on scanning and uploading
your script to your assessment platforms. Uploading your script is time sensitive.
• Once your script is uploaded on your assessment platform, you may switch on your data to start
the uploading process on The Invigilator app.
• Good Luck!

2. QR Code

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Page 3 of 8
MAC3701
January/February 2021
QUESTION 1 100 Marks
On 31 December 2019 Mrs Neptune, a chemical specialist by profession, quit her high-paying job of
17 years to start Solar System (Pty) Ltd (“SOSY”), a chemical manufacturing company. SOSY has a
31st of December financial year end, adopted the absorption costing system and values all its
inventories using the first-in-first-out (FIFO) method.

1. SOSY’s MANUFACTURING PROCESS:

SOSY’s manufacturing process is recognised as a joint manufacturing process. This process

simultaneously yields three separately identifiable chemicals: (i) Chemical Pluto (“Pluto”); (ii) Chemical
Mercury (“Merc”); and (iii) Chemical Saturn (“Sarn”). Merc is incidental to the manufacturing process
whereas the other two chemicals are crucial to the commercial viability of SOSY. SOSY’s joint costs are
allocated to the joint products using the physical measures method.

All the manufacturing activities before the split-off point are specialised in nature and thus
performed by Mrs Neptune only. These specialised activities are: purchasing and introduction of direct
raw material (neutral-chemical) into the manufacturing process; chemical mixing and balancing;
chemical processing; and chemical cooling. The Neutral-chemical is purchased in litres and it is
introduced at the beginning of the manufacturing process only. 5% of the purchased neutral-chemical
litres evaporates during storage and before it is introduced into the manufacturing process. This is the
only loss that occurs. The cost of this loss is correctly included in the purchases costs of the neutral-
chemical.

According to SOSY’s manufacturing requirements, each litre of the introduced neutral-chemical yield:
600 millilitres (ml) of Pluto; 50 ml of Merc; and 350 ml of Sarn. The manufacturing activities do not
increase or decrease the quantity of the introduced neutral-chemical and the manufactured chemicals.

All the specialised activities are performed at a leased property (Property A) only. Property A is custom-
built for SOSY’s specialised activities only, specifically in relation to temperature control with regard to
strict chemical requirements. Property B, another leased property, is exclusively used by SOSY for
further processing processes. Currently, only Pluto is further processed, and all the other chemicals are
sold at the split-off point. Further processes do not increase or decrease the quantity of the manufactured
chemicals.

SOSY’s administrative functions are non-specialised in nature.

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Page 4 of 8
MAC3701
January/February 2021
QUESTION 1 (continued)
2. THE FOLLOWING BUDGET INFORMATION RELATES TO THE 2020 FINANCIAL YEAR

Mrs Neptune provided you with the following working paper (“WP”) for review:

Working paper subject : Budgeted joint costs allocation to the joint products
WP 01
Period : Year-ending 31 December 2020
Details Section Workings/Notes Amount
reference R’000
Neutral-chemical purchase costs 2.3. 1 400 000 litres x R320 448 000
Chemical mixing and balancing costs 2.4. 5 000 litres x R450 2 250
Chemical processing costs 2.5. 5 000 litres x R120 600
Chemical cooling costs 2.6. given 38 060
Temperature control costs 2.6. given 1 200
Rent expenses – properties 2.7. (R25K + R8K) x 12 months 396
Salary – Mrs Neptune 2.8. given 2 500
Fixed administrative costs 2.9. not joint costs 0
Packaging labour costs 2.10. non-manufacturing costs 0
Other variable manufacturing overheads 2.10. given 6 827
Further variable processing costs 2.10. only incurred by Pluto 0
Joint costs to allocate to the joint products R499 833
Allocated to Pluto 1. R499 833 ÷ 3 chemical types R166 611
Allocated to Merc 1. R499 833 ÷ 3 chemical types R166 611
Allocated to Sarn 1. R499 833 ÷ 3 chemical types R166 611

2.1. Budgeted sales are 700 000 litres of Pluto @ R900 per litre (p/l); 80 000 litres of Merc @ R50 p/l;
and 350 000 litres of Sarn @ R700 p/l. Except for Merc whose budgeted variable distribution costs
is R12 p/l, all the other products’ budgeted variable distribution costs are R50 p/l per product.

2.2. No opening inventory of any type is budgeted for and where applicable, closing inventory relate to
finished goods only.

2.3. Budgeted total purchases of the neutral-chemical are 1 400 000 litres @ R320 p/l.

2.4. Chemical mixing and balancing occur in batches of 5 000 litres per batch at 150 hours per batch.
The related budgeted costs are R450 per hour.

2.5. Chemical processing is budgeted for at R120 per hour of chemical mixing and balancing.

2.6. Chemical cooling is budgeted for at R38 060 000 while Property A’s temperature control costs
(which does not include property rental costs) are budgeted for at R1 200 000.

2.7. Property A and Property B are both rented for the entire financial year at R25 000 per month and
R8 000 per month, respectively.

2.8. Mrs Neptune’s annual remuneration is R2 500 000.

2.9. The budgeted total fixed administration costs are R2 904 000.

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Page 5 of 8
MAC3701
January/February 2021
QUESTION 1 (continued)

2.10. Other additional budgeted information:

Cost item Pluto Merc Sarn Total
R’000 R’000 R’000 R’000
Packing labour costs (manufacturing costs) 20 000 500 9 000 29 500
Other variable manufacturing overheads 3 200 27 3 600 6 827
Further variable processing costs 4 000 0 0 4 000
Total R27 200 R527 R12 600 R40 327

3. ACTUAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2020:

Details Notes Actual

Pluto Merc Sarn Total
Sales volume (in litres) 695 000 70 000 340 000 1 105 000
Selling price per litre R920 R50 R690
Gross profit percentage 45% 60% 45%
Neutral-chemical
- Litres purchased 3.1 ?
- Litres issued to manufacturing 3.1 1 339 500
- Purchase price per litre 3.1 ?
Fixed administrative costs R3 000 000

Notes relating to the actual results above:

3.1. The actual purchase price per litre of the Neutral-chemical was one percent lower than the
budgeted purchase price per litre. Actual evaporation occurred as per the manufacturing
process. There was no actual closing inventory of the neutral-chemical.

4. THE FOLLOWING INFORMATION IS UNDER CONSIDERATION REGARDING THE 2021

FINANCIAL YEAR BUDGET

4.1. Investigation to further process Chemical Sarn

As part of its expansion plans, SOSY is considering to further process Sarn into Germ, a chemical used
in the Gas exploration industry. The following information was gathered in this regard:

4.1.1. A total of 80 000 litres of Sarn will be further processed into Germ at a litres’ ratio of 1:1. The
losses of the further process are considered immaterial.
4.1.2. The expected selling price is R1 000 per litre of Germ, and the related variable distribution costs
will be 5% of the selling price per litre. All manufactured litres of Germ will be sold.
4.1.3. SOSY will invest R10 000 000 in a specialised machinery with a five years useful life. The
machine will be housed at Property B and will be exclusively used for the further processing of
Sarn into Germ.
4.1.4. The only other direct material required in the further processing is 0,5 kilograms per litre of input
(Sarn), at a purchase price of R300 000 per tonne. This other direct material does not increase
or decrease the litres of the manufactured chemical Germ.

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MAC3701
January/February 2021
QUESTION 1 (continued)

4.1.5. A total of 60 000 direct labour hours will be required for further processing purposes. SOSY pays
their labourers a fixed monthly salary and currently has existing spare capacity of 12 500 direct
labour hours. Any additional capacity if needed is available at R180 per hour.
4.1.6. Germ’s specific fixed manufacturing overheads are expected to be R80 per machine hour. It
takes 30 machine minutes to process one litre.
4.1.7. Unless otherwise stated, all other applicable information will remain the same as in the 2020
financial year budget information above.

4.2. New Chemical Mars (“Mars”) launch

In order to expand its chemicals offering and take advantage of the increasing space-exploration, SOSY
is considering entering the Mars market. Mars is a chemical used by astronauts to neutralise various
waste products while in space. These neutralised waste products are discarded in the ocean just before
the space aircraft lands from space. The expected investment to manufacture Mars is R12 000 000. The
estimated cost price is R500 p/l and the annual demand is expected to be 100 000 litres. SOSY’s target
rate of return on capital invested is 20% per annum.

As part of the investigation it was noted that the space-exploration and chemicals manufacturing
companies were heavily criticised by Ms Greeta Thuunberg (an environmental activist) at the recent
World Economic Forum. Ms Thuunberg lambasted these companies for (i) excessive use of coal-
powered manufacturing facilities; (ii) the use of environmental unfriendly chemicals in their
manufacturing processes; (iii) their appalling chemicals’ discarding practices; and (vi) the high carbon
monoxide emissions during the launching of the space aircraft.

4.3. Possible acquisition of Ama-Ventilator Chemicals (PTY) Ltd (AMC)

Following the COVID-19 outbreak, SOSY’s executive management decided it was an opportune time to
assess the possible acquisition of AMC, a company that specialises in the manufacturing of chemical
Venus which is used by the ventilators to fight against COVID-19. As part of the due diligence,
Dr Masheleng (SOSY’s Chief Financial Officer) gathered the following information:
4.3.1. SOSY will need to establish a new separate Division which will be solely responsible for the
manufacturing and the subsequent selling of chemical Venus.
4.3.2. The manufacturing of chemical Venus requires Merc as the main ingredient. SOSY has a
capacity to manufacture 100 000 litres of Merc and the related external demand will remain at
80 000 litres.
4.3.3. In order to fully meet the demand of chemical Venus, 50 000 litres of Merc will be transferred to
the newly established division.
4.3.4. Merc that will be transferred internally will not require packaging labour costs.
4.3.5. The other variable manufacturing overheads to manufacture 100 000 litres of Merc will be
R60 000.
4.3.6. The variable distribution costs (refer to 2.1 above) are only incurred on external sales.
4.3.7. Unless otherwise stated, all the other applicable information will remain the same as 2020
financial year budget information.

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January/February 2021
QUESTION 1 (continued)

REQUIRED
For each question below, remember to:
• Clearly show all your calculations in detail;
• Where necessary, indicate irrelevant amounts/adjustments with a R0 (nil-value);
• Round all your workings to two decimals, except where otherwise stated; and
• Ignore all the taxation implications.
(a) Briefly discuss the characteristics, classification and the appropriate accounting treatment (4)
of Merc in SOSY’s financial records.
(b) Calculate SOSY’s budgeted annual manufacturing yields in litres per chemical type for the
2020 financial year. (4)
In answering question (c), (d) and (e) only, assume that the budgeted annual manufacturing
yields for the 2020 financial year are: 800 000 litres of Pluto; 80 000 litres of Merc; and
450 000 litres of Sarn.
(c) Critically evaluate the correctness of each item on the “budgeted joint costs allocation to
the joint products” working paper.

In your evaluation, you must:

▪ Focus on the application of costing principles;
▪ Review workings/notes for errors, where applicable, provide correct workings;
▪ Not recalculate the joint costs to be allocated to products; and
▪ Not recalculate the allocation of joint costs to joint products. (12)
(d) Assume that the budgeted joint costs to be allocated to Pluto for the 2020 financial year is
R360 000 000.

Prepare the budgeted statement of profit or loss (income statement) for the 2020 financial
year for the Pluto chemical only. (10)
(e) In answering question (e) only, further assume the following for the 2020 financial year:
1. The variable component of the budgeted joint costs allocated to each product was
as follow: R316 per litre of Pluto and R222 per litre of Sarn.
2. The fixed component of the budgeted joint costs is R200 000 000.
3. No inventory of any type is budgeted for.
4. Except for assumed budgeted manufacturing yields; point 1; 2; and 3 above, all the
other applicable information remains as given in the scenario.
Calculate the total budgeted break-even sales value for the Sarn chemical type only for
the 2020 financial year. (11)

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QUESTION 1 (continued)

(f) Assume that a standard costing system is in place at SOSY and where applicable the
standard gross profit percentage is 40% for each product. Calculate the following standard
costing variances for the 2020 financial year:
(i) Sales mix variance per chemical type and in total for products Pluto and Sarn only. (5)
(ii) Neutral-chemical purchase price variance. (3)
(iii) Fixed administrative costs expenditure variance. (2)
(g) Briefly discuss three possible reasons for an adverse neutral-chemical purchase price
variance. (3)
(h) From a quantitative perspective, advise SOSY whether or not to further process Sarn into
Germ during the 2021 financial year. Ignore qualitative factors. (12)
(l) As part of the Mars chemical launch investigation:
(i) Calculate the target selling price per litre of Mars using the targeted rate of return
on invested capital approach. (5)
(ii) Identify and briefly discuss six social and environmental concerns which could (12)
potentially negatively affect: (i) the launch; and (ii) SOSY’s continued operations.
(j) Assume that SOSY resolved to acquire AMC and subsequently establishes two divisions
managed by two independent management teams:

(i) Determine the budgeted minimum transfer price per litre at which the selling division
will be willing to transfer the required 50 000 litres of Merc for the 2021 financial year. (13)
(ii) From a controllable profit perspective, briefly discuss how the minimum transfer price
you calculated in (j)(i) above can impact the performance of each of the two divisions.
(i.e the seller of chemical Merc and the buyer of chemical Merc). (4)
Total question one [100]

©
UNISA 2021
All rights reserved. No part of this document may be reproduced or transmitted in any form or
by any means without prior written permission of UNISA.

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MAC3702
MAY/JUNE 2020
UNIVERSITY EXAMINATIONS

May/June 2020

MAC3702

APPLICATION OF FINANCIAL MANAGEMENT TECHNIQUES

100 marks
3 hours
30 minutes additional time for uploading

THIS PAPER CONSISTS OF EIGHT (8) PAGES.

INSTRUCTIONS:

Please remember to complete the Honesty Declaration.

Follow these steps to submit your take-home answer file.

1. Access myUnisa at [Link] and login using your student number and
myUnisa password.
2. Click on the “myAdmin” tab in the top navigation.
3. In the “Assessments” submenu, click on the “Assessment Info” tool in the drop-down
list.
 Locate the section for UNISA summative assessments at the bottom of the list.
 Find the corresponding portfolio number for your module.
 Click on the Submit link in the Action column and follow the steps described below.
Load the answer file from your PC to myUnisa:
 Click on the Browse button next to File Name.
 In the Choose File dialog box, select the file you want to upload, and then click OK.
 Select the correct file format from the File Format drop-down list. Only PDF formatted
files are allowed to be uploaded.
 Click on the Continue button. If you do not click Continue, no submission action will
take place.
 The link for upload will close at exactly 18:30pm.

PLEASE NOTE:

1. The paper consists of ONE (1) question.

2. All sub section parts (a) to (g) must be answered and clearly indicated.
3. All calculations must be shown.

4. PROPOSED TIME-TABLE: (Avoid deviating from this as far as possible.)

Question Subject Marks Time

number (minutes)
Capital budgeting, Weighted average cost of capital, Working
1 100 180
Capital Management, Ratios and Discussion.
100 180

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Question 1 (100 marks; 3 hours)

Eddy Fashion Holdings (“EFH”) is South Africa’s oldest and biggest retailer by assets and is
listed on the Johannesburg Stock Exchange. In the recent years the company has struggled
to deliver impressive results as it faces serious competition from both local and international
retailers. The company’s share price was trading at 4 598 cents on 01 October 2018, at the
start of the financial year, but had lost about 52% of its value by the end of September 2019
as it recorded a net loss of R109 million. With no dividend declared at the end of the year, this
loss brought the company’s net asset value down to R1 269 billion. EFH’s significant
shareholders include the Public Investment Corporation (22%), Rembrandt Group (19%) and
African Rainbow Capital (15%). Only 50% of the company’s authorised shares remains
unissued.

The company has approached the Industrial Development Company (IDC) for a possible
capital injection into the business of up to R8 850 million in order to pay off its interest-bearing
debt, increase working capital levels, and embark on a new expansion programme. EFH
requires R600 million for its ARISE & DREAM project (see Part A below); R8 billion to repay
its long-term debts (see Part B); and R250 million (see Part C) to manage liquidity for the next
few months. IDC has proposed that EFH issues new EFH ordinary shares in return for the
capital injection into EFH business.

Part A – ARISE & DREAM Project

EFH will be embarking on a new comprehensive business model that is aimed not only at
revenue generation, but also at the empowerment of upcoming and aspiring young designers.

The EFH procurement team has already identified four of South Africa’s top young designers
to be part of the new clothing range called “ARISE & DREAM”. The designers will
conceptualise and design the clothes which will then be sent to EFH’s trusted local
manufacturers to manufacture the required quantities for all its 350 participating stores. Once
major alterations and renovations have been completed at these stores, ARISE & DREAM
clothing range will be sold for a period of five years (ending December 2025) before the range
becomes out of fashion. It is estimated that afterwards the company will be able to find
substitute products to sell utilising space previously occupied by ARISE & DREAM clothing
range. Each store is expected to generate an average trading profit of R65 000 per annum on
the extra space going forward (after taking into account future wear and tear allowances). This
trading profit will increase at 4,80% per annum.

The final four top young designers, with their designs showcased below, are: Nkhensani Nkosi,
Amanda Laird, Mzukisi Mbane and Jacques van der Watt.

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TOP 4 YOUNG DESIGNERS:

Style For All, by Nkhensani Nkosi Cherry, by Amanda Laird

Imprint, by Mzukisi Mbane Lace and frills, by Jacques van der Watt

1. Capital expenditure
The first two years (2020 & 2021) will be for the construction phase, however, ARISE &
DREAM sections at all participating stores will be operational at the end of the first year.
Full capacity will only be reached at the end of 2023. At the start of the project EFH will
spend R245 million on alterations and renovations and another R245 million will only be
spent a year later (these qualify for 5% wear and tear allowance). The balance of the
project amount will be spent between store fittings and working capital (see note 3 below).
Working capital will be equivalent to 50% of the store fittings costs. Store fittings will also
be purchased at the beginning of the project and are subject to a capital allowance of 20%.
Wear and tear as well as capital allowance are only deductible once the stores are opened
and operational (pro rata applies).

2. Working capital
The working capital will only be required once the ARISE & DREAM sections at all
participating stores are operational. 60% of the total working capital requirement will be
provided for in the first year of opening the stores, with the balance being provided in the
following year. Only 90 cents in a Rand of the invested working capital will be recovered
at the end of the project.

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3. Sales
The young designers have signed a five-year agreement to design the clothing range to
be sold at the 350 participating stores. The range entails men’s, women’s, kids’, footwear
and accessories for every occasion. The expected number of units to be sold by each
designer per annum are given below, with the starting average price per item. The ARISE
& DREAM clothing line is priced at a mark-up of 50% on cost (manufacturing).
Manufacturing costs include designers’ fees paid to the four young designers.

Number of units expected to be sold and unit price:

Expected annual % of capacity (Quantity)
Number of
Design Average price
units per 2021 2022 2023 2024 2025
per unit 2
store1
Cherry 2 000 R200
Lace and frills 2 000 R150
55% 90% 100% 100% 100%
Imprint 2 000 R150
Style For All 2 000 R100

1
This is at full capacity per store per year. There is a demand, spread evenly throughout the year for all the
products manufactured each year. All four clothing labels will be available at all participating stores.
2
This average price per unit is the price at the start of the construction phase. The selling price will increase
by 6% per annum.

4. Operating/trading costs
Expected operating costs will amount to a total of R30 million per annum for all the
participating stores (excluding marketing costs). These operating costs will be incurred at
the same time the revenue is realised. The company will also be embarking on a 3D
marketing campaign for its new clothing range. The 3D marketing will display the new
clothing range using a 3D clothing visualisation technology at various shopping centres
where the participating stores are located. Payment for related marketing costs, made in
advance, will be R2 million in the first year of launching the clothing range but will reduce
by 20% (based on the initial marketing cost) in each following year. Excluded from the
amounts above is an annual depreciation charge of 10% on buildings and 25% on
equipment and fittings. Depreciation is only accounted for once the asset has been brought
into use.

5. Salaries
The company will have to contract a digital marketing manager and Sethu Ndamase with
eight years’ experience in the advertising industry has already been identified. Sethu
Ndamase will likely start at the beginning of 2020 in order to familiarise herself with the
business. The job requires her to manage, develop and expand the marketing department
with current marketing technology models and tools. She will be responsible for:

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 Creating efficient, effective advertising strategies in digital spaces to promote the

new clothing range.
 Focus on increasing sales and brand loyalty by holding events or campaigns to
increase awareness and surveys.

No interview has been conducted with her yet but her expected salary package for the
2020 financial year will be R982 377 with an expected increase of 8% per annum and
included in this amount are the following:

 Annual contribution to the retirement fund of R100 000, and

 Once-off reallocation cost of R38 000 and a sign-on bonus of R100 000 (these
amounts will be paid at the start of the contract).

Sethu Ndamase was referred to EFH by one of the reputable recruitment agencies, and
the agency will be paid R120 000 for their work in identifying the suitable candidates for
this job. This payment will be effected at the beginning of 2020.

Part B – REPAYMENT OF DEBT

EFH has the following interest- and dividend-bearing facilities at 30 September 2019:

Preference share capital: The three million preference shares were issued three years ago
at a nominal cost of R605 per share, which bear a fixed dividend yield of prime+20bps. Similar
shares are estimated to be trading at R581 each. The redemption date of all these shares is
29 September 2025.

Debentures: 10-year term debentures for R3 144 million were also issued around the same
time as the preference shares above. The finance costs (net of tax) on these debentures
amount to R249 million per annum. The premium and the annual administration costs are
waived, but there is a once-off administration fee of R15 million payable on 30 September
2025. Debentures structured in this manner incur interest at prime lending rate.

Long-term loan: A loan of R871,5 million was obtained on 2 October 2018 and its capital is
repaid in three equal annual instalments. The fixed 11% interest is also paid on the last day
of each financial year. Similar loans bear an interest rate of about 9,75%.

Subordinated debt: EFH also obtained an unsecured subordinated debt from African
Rainbow Capital for R2 010 million on 10 October 2015 at an equivalent interest rate of
prime+2. Similar subordinated debt facilities are estimated to yield an interest at prime lending
rate.

Short-term loan: The loan for R450 million was obtained from CreditSis Bank at prime lending
rate and is repayable on 28 February 2020. The loan was taken out to settle unexpected legal
costs after the company was embroiled in a price-fixing scandal. The company was forced to
take out this loan due to low cash reserves at the time. The cash position of the company has
since improved as EFH closed the year with more than R300 million of cash and cash
equivalents and a zero balance on its bank overdraft facility.

The interest expense on this loan for the year ending 30 September 2019 was R26 million.
Similar loans and overdraft facilities are generally priced around prime+1.

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Part C – WORKING CAPITAL MANAGEMENT

EFH’s debt levels have been on the rise in recent years due to a number of internal and
external factors which have unfolded over the years. One of the major internal factors cited is
poor liquidity management processes. The company has often flout the budgeting/forecasting
processes and as a result finds itself having to use expensive debt to fund any deficits in its
working capital. However, since the IDC bailout application the management team has
implemented more stringent controls around the working capital of the company.

The statement of financial position on 30 September 2019 had net current assets of
approximately R2 billion and is made up of the following:

* Net current assets Rm

Inventory (6 132 000 items of clothing) 1 533
Trade and other receivables 3 752
Trade and other payables 3 432
Income tax liabilities 299
Cash and cash equivalents 341
Other current assets 102
* The net current assets exclude the interest-bearing liabilities given in Part B above.

Cash sales average 25% of total sales and each month’s credit sales are invoiced on the last
day of the month. Credit sales are also collected as follows:
o 60% within 7 days after the invoice date;
o 28% by the end of the month after sales.
o 9% by the end of the second month after sales; and
o 3% is uncollectible.

Half of the monthly purchases the company makes, is paid for in the month of purchase and
the remainder in the following month. The number of items of clothing (units) in each month’s
closing inventory equals 120% of the next month’s units of sales. EFH maintains an average
product mark-up of 33% on selling price. The company also expects in the foreseeable future
to maintain the existing average cost price per unit (as indicated in net current assets above).

The actual and budgeted sales of EFH are given below:

Month Units
September 2019 (Actual) 5 253 000
* October 2019 (Actual) 5 110 000
November 2019 (Budgeted) 5 876 500
December 2019 (Budgeted) 6 054 000
January 2020 (Budgeted) 5 270 000
February 2020 (Budgeted) 5 538 600
* Actual units purchased during October 2019 totalled 6 029 800.

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Part D – ADDITIONAL INFORMATION

 EFH undertakes projects that have an internal rate of return of at least 20%.
 As at 30 September 2019, EFH had 840 million authorised ordinary shares.
 The South African corporate income tax is rate 28%.
 Prime lending rate is 10,25% and the cost of equity is 15,2%.

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REQUIRED

a) By calculating the internal rate of return, determine whether EFH should undertake the
ARISE & DREAM project. [You can scale your workings down by Rm]
(27)

b) Using market values at 30 September 2019, calculate the weighted average cost of
capital (WACC).
(18)

c) Draw up a purchases (production) budget in units for EFH for the months of November,
December 2019 and January 2020.
(10)

d) Calculate budgeted cash receipts and payments for the months of November, December
2019 and January 2020.
[Focus only on the sales and costs associated with the purchase of inventory]
(15)

e) Calculate the following ratios for EFH for the year ended 30 September 2019; and provide
practical ways the ratios can be improved (use market values where possible):
 Interest-bearing debt equity ratio (net)
 Current ratio
 Return on equity
 Price/book ratio
 Cash interest cover
(Calculations – 5 marks; comments – 12 marks)
(17)

f) Determine the number of shares to be issued by EFH to the Industrial Development

Company if the parties agree to the terms of the bailout (also calculate the new
shareholding by the major shareholders after the deal).
[Assume for the purpose of this deal each EFH share is priced at premium of 10% above
its current share price]
(8)

g) Discuss the factors that should have been considered before deciding on obtaining the
funds from the Industrial Development Company. No calculations are required.
(5)

TOTAL: 100 MARKS

UNISA 2020

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