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Microsoft Excel

Calculate the operating and cash conversion cycle of MAMB2623 for 2021 by using the information provided above.


MAMB2623 Income Statement for the year ended 31 December 2021


Cash sales 7952

Credit sales 104808

Cost of sales (all purchases are on credit) 85300

Gross profit 27460

Operating expenses:



General 4600

Administrative 4800

Total operating expenses 15940

Earnings before interest and tax 11520

Interest expenses

Interest on short-term bank loans


Interest on long-term loan 2310

Total interest expenses 3160

Earnings before tax 8360

Tax (40%) 3344

Net income 5016

Other information:

Dividends paid R 2,800,000

Retained earnings R 2,216,000 Share price on 31/12/18 R 24



1.1 Calculate the operating and cash conversion cycle of MAMB2623 for 2021 by using the information provided above. (8)

1.2 Make detailed drawing of the overall operating cycle and all its components. (4)


Note that excel is allowed to perform the calculations for this question, but you’re your

calculation process clearly (i.e. not just the answers).



MAMB Ltd. expects sales of R5 135 000 per month for the months of October, November and December 2022. This is based on the actual sales figure of R4 793 70 for July, R4 956 250 for August and expected sales of R4 468 750 for September 2022.

The firm maintains a stable gross profit margin of 63% per month during all months.

MAMB Ltd. is proud of its credit record with suppliers and sticks to a 15-day average payment period policy. Therefore MAMB Ltd. pays for half its purchases during the month of purchase and the other half is paid in the subsequent month.

Wages and salaries are estimated at a constant base of R1 500 000 per month plus 11 percent of sales for the previous month.

A staff bonus of R 500 000 will be paid at the end of December.

The firm must make a loan repayment of R140 000 per month on an outstanding loan during the whole of 2022.

The firm purchased new machinery and equipment in January 2022 costing R17 000 000. Monthly payments of 1.75% of this purchase price started in February 2022.

A provisional tax payment of 12% of the combined gross profit for July, August and September is due by the end of October.

Cash sales usually make up 30% of sales (thus credit sales make up 70%).

Payment terms on credit sales is 30 days (i.e., one month). However, 20% of credit sales

usually pay only after 60 days.

The company policy is to have at least R50000 in cash every month.

Assume that, if money must be borrowed according to the budget, interest of 0.65% per month is payable on the amount outstanding. This interest is payable after 30 days (i.e. 1- month lag).

2.1 Construct a cash budget for October, November and December, assuming the firm has a beginning cash balance of R50000 (and no cumulative borrowings) in October.

2.2 The sales and cost projections may not be accurate due to an uncertain economic outlook. Accordingly, the financial manager wants to determine the impact on the projected cash budget if the following two alternative scenario was to occur:

2.2.1 Scenario 2: It is possible that the 20% of credit sales that usually pay only after 60 days will not all pay. Accordingly, this scenario must analyse the effect of non- payment by some of these debtors. Assume only 15% (and not 20%) of credit sales pay after 60 days (i.e., 5% of credit sales never pay). For this scenario, also assume cash sales make up only 25% of sales and that sales estimates for October,



November and December are 10% lower than current sales projections

2.3 Provide detailed projections for both scenarios and evaluate the cash flow outcomes. Would MAMB Ltd. be satisfied with the cash flow projections of both scenarios? Explain in detail. (Tip: create four separate budget spreadsheets).


  Question 3 [25 marks]

Mass-produce Ltd. expects to sell 300 units, per day, of line item LLK23Z in the next financial year (assume 360 trading days in year).

The cost price per unit is R123.75.

Currently, an average inventory level (A) of 3000 units is maintained.

The fixed ordering cost for item LLK23Z is R2950 per order (regardless of quantity).

Other costs currently include:

Opportunity cost: R? (to be calculated)

Annual storage costs per unit: R 9.90 per unit.

Annual inventory insurance cost: 2.50% of cost price per unit.

Annual depreciation and obsolescence cost: R 7.43 per unit

Cost of capital: 16%

Consideration must be given to the lead-time from order to delivery. The lead time is 14 days.

The supplier of line item LLK23Z is willing to give a discount of 0.15% on the price if more than 7000 units are ordered at a time and a discount of 0.30% if more than 10000 units are ordered at a time.

3.1 Compare the total inventory cost (TIC) of ordering the EOQ with the TIC associated with current average inventory level if Mass-produce Ltd. Would it be worthwhile to rather order the EOQ? Explain.

3.2 How many orders must be placed annually based on the EOQ?

3.3 Should any of these two discount offers be considered? Explain in detail by comparing it to the TIC costs associated with the EOQ as calculated in question 3.1.


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