Accounting

Question 3 Makesmart Ltd is a company that manufactures coffee machines to sell directly to the public. While the coffee machines can come in different colours and features, they sell two main designs: the 'Supen'or'. which lters coffee Italian style and the \"Grande' which, in addition to ltering coffee Italian style. has a steam spout for frothing milk. The home market for both products is very competitive. In recent years. the demand for the Grande has been rising, and demand for the Superior has been falling. Makesmart Ltd currently uses traditional absorption costing and cost-plus pricing. Prices are based on production cost plus 24% (approximately) in order to try to meet pricing pressures. The company needs to make a markup of 24% to satisfy the requirements of the shareholders as well. Superior Grands E E Selling price per unit 68.42 121.05 Material usage per unit 5 kg 15.00 8 kg 24.00 Labour per unit 2 hrs 12.00 3 hrs 18.00 Emmlon overheads per 2500 50.00 25.00 per machine hour latte] production cost per 52.00 92.00 Prot per unit 16.42 29.05 (c) Makesmart Ltd is launching a new coffee pod that ts into their coffee machines. These pods are manufactured using innovative ecofriendly materials to make the coffee suitable for an overseas market where environmentally friendly products are in more demand than in the home market. Discuss the most appropriate pricing strategy for the Superior and Grands coffee machines. as well as the ecofnendly coffee pods as they enter into the new international market. You may want to consider the following pricing systems in your explanation: (i) Target cosng and target pricing (ii) Penetration pricing (iii) Price skimming. (9 marks) (Total 40 marks) Budgeted information for both coffee machines. using the absorption costing system, is as follows: The board of directors has been investigating alternative costing systems to help in their need for competitiveness. The management accounting team have carried out in-depth analysis and have prepared the following data: It Cost Drivers Machining costs 900,000 Machine hours Set up costs 1.600.000 Number of batches Store movement costs 1,500,000 Number of movements Total overhead 4,000,000 The production team collected the following data: Cost driver Information sueeor Gra nde Budgeted production (units) 100,000 30,000 Number of batches I 100 100 Number of store movements 150 100 Number of machine hours per unit (a) (b) 1 2 Calculate the total cost per unit, and the prot per unit, for each product, using Activity Based Costing. You should assume that the directors would not immediately change the prices charged to customers. They would review prices after the marketing department has conducted further market research. {21 marks) Based upon the information now known from your calculations In (a) above and assuming that a cost + 24% markup would be applied to the revised ABC based costing. calculate and discuss how Makesmart Ltd could compete where the competitions' price for the Superior equivalent is 63.60 and the Grande equivalent sells for 124.50. (10 marks) (QUESTION CONTINUES ON NEXT PAGE)