MAC3702 EXAM APPLICATION OF FINANCIAL MANAGEMENT TECHNIQUES Sep; Oct 2021

Sep;Oct 2021 MAC3702 APPLICATION OF FINANCIAL MANAGEMENT TECHNIQUES

QUESTION 1 (100 marks, 180 minutes) PART A (50 marks, 90 minutes) SUPERCOOL LTD Supecool Ltd (“Supecool”) is a South African retailer of clothing and shoes for the teenage market. The company was founded in 2013 by Ms. Sihle Jonas CA(SA) and has a 31 December financial year end. Sihle attributes her success to basing her business model on three foundational pillars, namely, Education, Care and Sustainability. These values form the cornerstone of the company’s business strategy during its continued expansion in the local retail market. For the last five years, the company has imported most of its manufactured clothing from Sungchi, a company based in Beijing, China. Sungchi manufactures teenage clothing and accessories for export and, due to lower manufacturing costs, has provided Supecool with a pricing advantage. This cost advantage has however decreased in recent years because of the deterioration of the South African exchange rate relative to international currencies. The trading environment has been particularly difficult in the last few years due to the entry of numerous competitors, and consumers who have become more price conscious as a result of the poor economic growth being experienced in South Africa. Growth in government debt levels over the past decade, driven by multiple factors that include the poor performance of the economy, has resulted in credit rating downgrades by international credit rating agencies and higher taxes have further eroded consumers’ disposable income. Supecool’s performance has also been impacted by frequent electricity load shedding. The significant economic and social disruption caused by the Covid-19 pandemic has further worsened the situation. The company has continued trading, but at lower sales levels, resulting in a deterioration of operating margins. Despite the ongoing macro-economic challenges, sales of exclusive clothing lines similar to those of Supecool, have been more resilient due to their brand exclusivity, high fashion, quality, use of natural fibres and innovative designs. These lines have not been affected as severely as the lower-cost lines by either declining demand or pricing pressures. Supecool has a strong commitment to environmental neutrality, with a focus on reducing its carbon footprint to a carbon neutral status. Initiatives to achieve this included the requirements that Sungchi should use only natural fibres that are manufactured by hand, coupled with a commitment to not use child labour. Since Sungchi was the only Chinese manufacturer willing to comply with these requirements, it insisted on an exclusive supplier agreement with guaranteed volumes, with only the price being subject to fluctuation. The imported clothing are basic garments that exclude the Supecool branding, embroidered designs, buttons and labels. The company has a factory in Vereeniging that obtains the materials