40 MARKS QUESTION 3 This question is made up of three unrelated sections. Section 1 Ms Sally Scott obtained a patent on a small electronic device and organised to sell the product under Scott Products Inc. in order to produce and sell the device. During the first month of operations, the device was very well received by the market. Ms Scott anticipated healthy profit from sales of the product but was very surprised to see a loss for the month on her income statement. This statement was prepared by her accounting firm, which takes great pride in providing its clients with timely financial data. The statement follows: Amount (R) Scott Products Inc. Income Statement Sales (40 000 units) Less variable expenses Variable cost of goods sold* Variable selling and administration expenses Contribution margin Less fixed expenses Fixed manufacturing overhead Fixed selling and administration expenses Operating loss *Consists of direct materials, direct labour and variable manufacturing overheads 200 000 110 000 80 000 30 000 90 000 75 000 20 000 (5000) Ms Scott was discouraged by the loss shown for the month, particularly because she had planned to use the statement to encourage investors to purchase shares in the new company. Her friend, who is a CA(SA), however, has a view that if the company had used absorption costing, a nice profit for the month would have been reflected. Selected cost data relating to the product on the first month of operations is as follows: Units produced Units sold 50 000 40 000 1.00 Variable costs per unit Direct materials Direct labour Variable manufacturing overhead Variable selling and administration expenses 0.80 0.20 0.75 REQUIRED Marks (a) Prepare the income statement of Scott Product Inc. using the absorption costing. 5 (b) 4 Was the CA(SA) correct in suggesting that the company really earned a profit for the month? Explain. (c) How many units should Scott Product Inc. sell if Ms Scott would like to achieve a net profit after tax of R43 200? Assume a tax rate of 28% is applicable. TOTAL MARKS 15