QUESTION 5 (20 marks) (24 minutes) This question consists of two separate parts,

Question

QUESTION 5 (20 marks) (24 minutes) This question consists of two separate parts, both of which must be answered. PART 5.1 (10) Zet Ltd and Bee Ltd manufacture the same Product Q and both use identical equipment, machine X in the manufacturing process. Each paid R2million for machine X which has the capacity to produce 200 units per hour. The operating profit per unit is R95 for both companies. Zet Ltd operates its factory seven hours a day, five days a week while Bee Ltd operates 9 hours a day on weekdays. REQUIRED 5.1.1 Calculate production in units for each company. 5.1.2 Calculate the respective companies' Return on assets (ROA). Explain why the ROA of one company is better than the other If Zet Ltd didn't have any debt in its capital structure what will the Return on equity (ROE) be and why? Explain what the cash conversion cycle is used to measure. 5.1.3 5.1.4 5.1.5

Explanation / Answer

5.1.1

For company Zet Ltd - production in unit =

= 200 units*7hrs*5days*52 weeks

=364000 units are produced in a year.

For company Bee Ltd - production in unit=

= 200units*9hrs*5days*52weeks

= 468000 units produced per year.

5.1.2.

Return on assets= net income/ value of asset

Net income for Zet Ltd = 364000u. * R95 = R34580000

Less depreciation= 20000000*10%=2000000

Net income= 34580000-2000000= R32580000

Net income for Bee ls = 468000*R95= R 44460000-2000000

Net income= R42460000

Therefore Return on assets of Zet Ltd = R32580000/20000000

= 162.9%

&

Return on assets of Bee Ltd = R42460000/20000000

= 212.3%

Because of no information about expenditure and taxes and other liabilities and assets return on assets is higher.

5.1.3.

Return on assets of Bee Ltd is higher than Zet Ltd because of its production is higher and therefore profit is also higher and uptiultima return on assets is higher.

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