1 (36 marks) The following information relates to Windhoek Play Centre ("WPC") a company that manufactures children toys and PlayStations. The company has developed an exciting PlayStation called the WiKi Players and wants to introduce it to the market. The budgeted production costs are as follows: Direct materials Direct labour Manufacturing overheads Total manufactured cost per unit Standard cost N$ 360 210 315 590 60% of the manufacturing overhead is variable. Variable distribution costs are estimated to be N$120 per unit, while sales commission and discount will be 10% of selling price. Based on forecast sales of 3 000 units per year, fixed selling and administrative costs of N$540 000 will be allocated to the WiKi Players. WPC has invested N$825 000 in new equipment for the product and incurred market research costs of N$150 000. Average net working capital for the product is expected to be N$75 000. WPC requires new products to provide a return on capital employed of at least 18%. Required Assume that the firm uses the absorption approach to cost-plus pricing. Marks Sub- total Total 1.1 1.1.1 Calculate the mark-up that is needed to achieve 18% ROCE. 1.1.2 Using this mark-up, calculate the selling price for one Wiki Players. 9 9 2 11 1.1.3 Assuming that all of the WiKi Players that can be produced can be sold at the price calculated in (1.1.2), prepare a profit statement for WiKi Players for the first year of production. 7 18 1.2 Assume that the company uses the contribution approach to cost- plus pricing. 1.2.1 Calculate the mark-up that is needed to achieve 18% ROCE. 1.2.2 Using this mark-up, calculate the selling price for one Wiki Players. 9 27 2 29 29 1.2.3 Assuming that all of the Wiki Players that can be produced can be sold at the price calculated in (1.2.2), prepare a profit statement for WiKi Players for the first year of production. 7 36 Total Marks 36 Question 2 (20 marks) Superior Namibia Electronic Group ("SNEG") produces and sells a range of small domestic electrical appliances. Although there is a wide range of sandwich makers already in the market, SNEG is considering introducing a new model that uses less energy. Based on the competition, the sales department expects that the maximum price at which the new product can be sold is N$600. At that price they expect that 4 500 of the sandwich makers could be sold per year. Development costs for the new range are estimated to be N$1.5 million, new equipment required would cost N$300 000, and average net working capital would be N$450 000. SNEG anticipates its future return on capital invested to be 20% and requires that new products should not reduce this. The management accountant has prepared the following estimates to produce one sandwich maker: Direct materials Direct Labour Manufacturing overheads Selling and administration Total N$ 90 175 50 5 320 Marks Sub- total Total Required 2.1 Calculate the target cost of each sandwich maker Calculate the target costing gap and advise SNEG on how they can achieve this target cost 2.2 SNEG also sells electric jugs and estimates that if it reduced the selling price of jugs to zero, it the maximum demand will be 6 000 jugs. For every N$10 by which it increases price, it estimates that 2.3 sales will fall by 500 jugs. Based on its cost structure, the company has determined that it will achieve maximum profits when sales are 4 000 jugs. At this volume, at what price should it sell each jug to maximise profits? Total marks 5 10 10 55 10 20 10 10 Question 3 (25 marks) Super Appliance Manufacturers Ltd has a wide range of manufacturing activities. The company operates on a divisionalised basis with each division being responsible for its own manufacturing, sales and marketing, and working capital management. Divisional chief executives are expected to achieve a target of 20% return on sales. A disagreement has arisen between two divisions which operate on adjacent sites. The Boiler division has the opportunity to manufacture a geyser using a new heater element developed by the Electric division. Currently there is no other source of supply for an equivalent heater in the required quantity of 45 000 units a year, although a foreign manufacturer has offered to supply up to 15 000 units in the coming year at a price of N$13.50 each. Electric's current Page 11 of 16 FACULTY OF COMMERCE, MANAGEMENT AND LAW selling price for the heater is N$18. Although Electric's production line is currently operating at only 50% of capacity, sales are encouraging and Electric confidently expects to sell 150 000 units in 2022, and its maximum output of 180 000 units in 2023. Electric has offered Boiler's requirements for 2022 at a transfer price equal to the normal selling price, less the variable selling and distribution costs that it would not incur on this internal order. Boiler responded by offering an alternative transfer price of the standard variable manufacturing cost plus a 20% margin on selling price. The two divisions have been unable to agree, so the corporate operations director has suggested a third transfer price equal to the standard full manufacturing cost plus 15%. However, neither divisional chief executive regards such a price as fair. Electric's 2022 budget for the production and sale of heaters, based on its standard costs for the forecast 150 000 units sales, but excluding the possible sales to Boiler, is as follows: Sales revenue (150 000 units @ N$18 each) Direct Manufacturing costs Bought in materials Labour Packaging Indirect manufacturing costs Variable overheads Line production salaries Depreciation Capital equipment Capitalised development costs Total manufacturing costs Sales and distribution costs Salaries of sales force Carriage General overhead Total costs Profit Additional information N$000 2 700 540 635 60 15 45 225 90 1 610 75 30 75 1790 910 1. The costs of the sales force and indirect production staff are not expected to increase up to the current production capacity. 2. General overhead includes allocation of divisional administrative expenses and corporate charges of N$20 000 specifically related to this product. 3. Depreciation for all assets is charged on a straight-line basis using a five-year life span and no residual value. 4. Carriage is provided by an outside contractor. Required Calculate each of the three proposed transfer prices and comment on 3.1 how each might affect the willingness of Electric's chief executive to engage in inter-divisional trade. Outline an alternative method of setting transfer prices which you 3.2 consider to be appropriate for this situation, and explain why it is an improvement on the other proposals. Total marks Marks Sub- Total total 20 20 20 20 5 25 25 25 25 Total marks assignment 1: 81 marks Assignment 2 Question 1 (13 marks) Windhoek Manufacturers produces two products, Amber and Black. The following cost estimates have been prepared using the traditional absorption costing approach. Selling price per unit Production costs per unit: Material costs Direct labour costs Manufacturing overhead cost Profit per unit Additional information. Estimates sales demand Machine hours per unit Amber Black N$ N$ 69 93 27 24 6 15 22 12 18 24 36 Amber Black 9 000 0.75 12 000 1.20 Marks Required Sub- Total total 1.1 Calculate the return per machine hour for each product if through put accounting approach is used. 5 5 1.2 Calculate the profit for the period, using a throughput accounting approach, assuming the company priorities Black Total marks 8 13 13 13/16