SEC-REAC (Pty) Ltd is a private security and armed response company that operates in the Northern suburbs of Cape Town.

During a board meeting in early January 2021, the following issues were discussed:

1.Covid-19 and the economic downturns' negative influence on the company's business.

2.The likelihood of imminent retrenchment of staff, and steps that could be taken by the company to prevent these retrenchments by utilizing these workers in an alternative productive capacity

3.Opportunities for the company to help less privileged people.

As a result of these discussions, the following plan was formulated:

1.The company will form a new division to manufacture armoured steel security doors. These doors will increase the safety of families living in areas which have experienced an increase in crime-rate and gang violence. In an effort to assist these communities, the doors will be distributed at affordable prices.

2.Security guards earmarked to be retrenched will be trained in welding (metalwork) so that they can be utilised in the new division and protected from retrenchment.

3.Part of a rental property, currently a garage for security vehicles, will be utilized as a factory for the production of the steel doors.

4.Two unused vehicles will be sold and the money will be used to buy welders and other machines.

5.If viable, the whole concept should be operational by 1 March 2021.

The company's management accountant produced the following budget for the steel door division for the 5 months ending 31 July 2021 at a meeting the following week.

R

Sales 10000 units

5000000

Production costs

3520 000

-Material

*Steel (240000 meters)

1920 000

*Special welding rods (20000 rods)

200 000

-Labour (20000 hours)

600 000

-Overheads

*Indirect labour

200 000

*Electricity

100 000

*Rent

300 000

*Depreciation

200000

R1480 000

He also produced the following cost-volume-profit data.The data accurately reflect the cost variability

Sales volume (units)

8 000

10 000

15 000

Sales value

4000 000

5000 000

7500 000

Total cost

2956 000

3520 000

4930 000

Profit

1044 000

1480 000

2570 000

Normal/practical capacity is 16000 units.

At a meeting on 10 August 2021, the financial performance of the steel doors was discussed.The financial accountant, Ms Naledi Ntando, produced the following income statement prepared on a full absorption costing basis for presentation and discussion.

SEC-REAC (Pty) Ltd

Steel door divisions

Income statement for the 5 months ended 31 July 2021

R

Sales 12000 units5760000

Standard cost of goods sold:4224000

Standard gross profit1536000

Variances

Material (unfavourable)(60000)

Labour (unfavourable)(360000)

Overheads (favourable)315000

Actual profitR1431000

At the meeting, the managing director, Mr Leon Sullivan (an ex-policeman) was very impressed and commented.

"Given the economy which is even worse than 5 months ago, we only under performed by R49000 than budgeted! With this, we managed to keep everybody happy and even made a profit.We increased our production by 50% to meet the increased demand of 20%.I see we spent R360000 above budget on labour, but this was to be expected in view of the high inflation rate and increased union pressure".

Ms Ksheera Rama CA(SA), a non-executive member of the board, despite knowing that the purpose of the steel door division was for social upliftment, felt that business is business and the company cannot afford to make losses.

She therefore asked you (as CIMA-consultant) to investigate further and to confirm that the division has indeed performed admirably.She would also like to know at what sales level the division will start to make losses.But overall, she wants your opinion whether SEC-REAC(Pty)Ltd made the right decision in starting the steel door division.She is prepared to pay your fee out of her own pocket.

You gathered the following additional information:

Actual cost to manufacture the 15000 units during the 5 months ended 31 July 2021.

R

Raw material

-Steel (450000 meters)2 925000

-Welding rods (45000 rods)315 000

Labour (45000 hours)1260000

Overheads

-Indirect labour220000

-Electricity165000

-Rent300000

-Depreciation200000

You have decided ANALYSE the actual performance over the 5 months using the variable costing method.

REQUIRED:

-As an appendix

i)Calculate the break-even sales in units based on the budget.(6)

ii)Calculate the current safety margin percentage.(2)

iii)Calculate the actual profit using the variable costing method showing the value of closing inventory at standard cost.(Assume a total budgeted fixed cost of R700000).(4)

iv)Reconcile the profit as per the absorption costing method with the profit as per variable costing method (calculated in (iii)).(2)

v)Calculate the following variances:

-Sales volume and price(3)

-Material price and usage(4)

-Labour rate and efficiency(3)

-Variable overhead(1)

-Fixed cost (total)(1)

vi)Reconcile the budgeted profit with the actual profit calculated in (iii). (4)

-Written report

vii)Explain why you used the variable costing method and not the absorption method in your analysis, and explain the financial implicationsthereof.(4)

viii)Discuss probable reasons for the variances calculated in (v).(8)

ix)Your opinion (financial and non-financial) on SEC-REAC (Pty) Ltd's decision to start manufacturing the security doors.

Answer rating: 100% (QA)

Here is my analysis of the SECREAC Pty Ltd steel door division Appendix i Breakeven sales in units based on the budget Budgeted fixed costs R700000 Budgeted contribution per unit Budgeted selling pric... View the full answer