Maxwell Ltd (Maxwell) is a company that focuses on the design and manufacture of light-emitting diode (LED) products. Maxwell was founded in 1987 and has become an industry leader in the lighting industry and is currently selling to over 95 countries worldwide. Maxwell is a strategic partner to SAMZUNG. A major accomplishment by Maxwell is the fact that SAMZUNG recently awarded them their; "Annual Most Valuable Partner" for the current financial year. Maxwell has grown significantly in recent years with a substantial market share in the LED industry. Maxwell has only two major competitors, and although the competitors target the same customers, their products are not always regarded as the same standard of that of Maxwell. Maxwell recently refurbished its manufacturing operation and replaced all out dated equipment with the newest equipment available on the market at a cost of R50 000 000. The current resale value of all of the old equipment that was replaced is R4 000 000. The offices were also upgraded and are modern and spacious. The main source of income for Maxwell is currently the production and sales of a variety of LED products. These products are sold in batches. Data with regards to these LED products are given below

LED Bulb residential (R/batch) LED Bulb commercial (R/batch) LED Panel (R/batch) LED Tube (R/batch) Selling price R8 400 R6 000 R11 700 R14 400 Usage per batch LED Bulb residential (per batch) LED Bulb commercial (per batch) LED Panel (per batch) LED Tube (per batch) Ferrous material (Fe) 1kg 2kg 1kg 3kg Non-Ferrous material (NFe) 1 2 3 4 Direct labour hours (dlh) 2dlh 2.5dlh 3dlh 2.5dlh Machine hours (mh) 3mh 8mh 5mh 4mh Demand per month LED Bulb residential (batches) LED Bulb commercial (batches) LED Panel (batches) LED Tube (batches) Maximum demand 1 000 3 500 2 800 4 500 Minimum demand 500 1 750 1 400 2 250 Average demand* 1 000 2 000 1 500 2 000 * The average demand is based on Maxwells commitments due to the average confirmed sales orders per month for the next year. The cost or rate per cost element is as follows: Ferrous material (Fe) R450/kg Non-ferrous material (NFe) R750/ Direct labour R240/dlh Variable manufacturing overhead R350/mh Expansion opportunity and pilot project due to the coronavirus (COVID-19) pandemic Due to the increase in demand in medical equipment and consumables Maxwell are considering the possibility to manufacture medical LED bulbs. The current factory will need to be renovated; but this does not make sense as that will mean that most of the R50 000 000 investment in new equipment would be lost, due to this required renovation. There is however an adjacent factory building available for rent on a month to month basis at R140 000 per month. Maxwell is willing to test the market for six months, from 1 April 2020 to 30 September 2020. Production will start almost immediately (i.e. from the 1st of April 2020). If this pilot-project is successful, management will consider long-term investment into this new business model and will also consider purchasing the adjacent factory building. The management of Maxwell is proposing a sales price calculated at marginal cost plus 25%. Initial market research into the average demand (as a percentage of full capacity) is 66.67%.

In order for Maxwell to manufacture one batch of medical LED bulbs the following would be required: 1 hour of direct labour; a machine hour; 1kg of Ferrous material (Fe); and 2 of Non-Ferrous material (NFe). Two assistant managers currently working at Maxwells main manufacturing plant, who each currently earn R18 500 per month, will be transferred to the new factory for the duration of the pilot-project in order to assist in managing the new facility and to train new staff. Two temporary staff members will be employed at the main manufacturing plant to replace the staff transferred to the new factory. Three temporary staff members will also be employed at the new factory for the duration of the pilot-project. Each of the temporary appointments will earn a salary of R7 500 per month. Maxwell will rent some of the old equipment that would be needed to the new factory at a fee of R100 000 per month for the duration of the pilot-project. The equipment has the capacity to produce 7 500 bathes of medical LED bulbs per month. The current resale value of the equipment that will be used is R2 000 000, and is expected to be R1 800 000 in six months time. Depreciation on these equipment is written off on a straight line basis of 20% per annum

REQUIRED: a) Use relevant costing principles to determine whether the six- month pilot-project should be embarked on or not and accordingly make a recommendation to the management of Maxwell.

Maxwell Ltd (Maxwell) is a company that focuses on the design and manufacture of light-emitting diode (LED) products. Maxwell was founded in 1987 and has become an industry leader in the lighting industry and is currently selling to over 95 countries worldwide. Maxwell is a strategic partner to SAMZUNG. A major accomplishment by Maxwell is the fact that SAMZUNG recently awarded them their; "Annual Most Valuable Partner" for the current financial year. Maxwell has grown significantly in recent years with a substantial market share in the LED industry. Maxwell has only two major competitors, and although the competitors target the same customers, their products are not always regarded as the same standard of that of Maxwell. Maxwell recently refurbished it's manufacturing operation and replaced all out dated equipment with the newest equipment available on the market at a cost of R50 000 000. The current resale value of all of the old equipment that was replaced is R4 000 000. The offices were also upgraded and are modern and spacious. The main source of income for Maxwell is currently the production and sales of a variety of LED products. These products are sold in batches. Data with regards to these LED products are given below. Maxwell Ltd (Maxwell) is a company that focuses on the design and manufacture of light-emitting diode (LED) products. Maxwell was founded in 1987 and has become an industry leader in the lighting industry and is currently selling to over 95 countries worldwide. Maxwell is a strategic partner to SAMZUNG. A major accomplishment by Maxwell is the fact that SAMZUNG recently awarded them their; "Annual Most Valuable Partner" for the current financial year. Maxwell has grown significantly in recent years with a substantial market share in the LED industry. Maxwell has only two major competitors, and although the competitors target the same customers, their products are not always regarded as the same standard of that of Maxwell. Maxwell recently refurbished it's manufacturing operation and replaced all out dated equipment with the newest equipment available on the market at a cost of R50 000 000. The current resale value of all of the old equipment that was replaced is R4 000 000. The offices were also upgraded and are modern and spacious. The main source of income for Maxwell is currently the production and sales of a variety of LED products. These products are sold in batches. Data with regards to these LED products are given below. Maxwell Ltd (Maxwell) is a company that focuses on the design and manufacture of light-emitting diode (LED) products. Maxwell was founded in 1987 and has become an industry leader in the lighting industry and is currently selling to over 95 countries worldwide. Maxwell is a strategic partner to SAMZUNG. A major accomplishment by Maxwell is the fact that SAMZUNG recently awarded them their; "Annual Most Valuable Partner" for the current financial year. Maxwell has grown significantly in recent years with a substantial market share in the LED industry. Maxwell has only two major competitors, and although the competitors target the same customers, their products are not always regarded as the same standard of that of Maxwell. Maxwell recently refurbished it's manufacturing operation and replaced all out dated equipment with the newest equipment available on the market at a cost of R50 000 000. The current resale value of all of the old equipment that was replaced is R4 000 000. The offices were also upgraded and are modern and spacious. The main source of income for Maxwell is currently the production and sales of a variety of LED products. These products are sold in batches. Data with regards to these LED products are given below. Maxwell Ltd (Maxwell) is a company that focuses on the design and manufacture of light-emitting diode (LED) products. Maxwell was founded in 1987 and has become an industry leader in the lighting industry and is currently selling to over 95 countries worldwide. Maxwell is a strategic partner to SAMZUNG. A major accomplishment by Maxwell is the fact that SAMZUNG recently awarded them their; "Annual Most Valuable Partner" for the current financial year. Maxwell has grown significantly in recent years with a substantial market share in the LED industry. Maxwell has only two major competitors, and although the competitors target the same customers, their products are not always regarded as the same standard of that of Maxwell. Maxwell recently refurbished it's manufacturing operation and replaced all out dated equipment with the newest equipment available on the market at a cost of R50 000 000. The current resale value of all of the old equipment that was replaced is R4 000 000. The offices were also upgraded and are modern and spacious. The main source of income for Maxwell is currently the production and sales of a variety of LED products. These products are sold in batches. Data with regards to these LED products are given below