Monko $($Pty$)$ Ltd $($Monko$)$ was started in $2010$ by the two brothers Morena and Qinisa.

Monko produces and sells perfumed body sprays for adults and has decided to diversify into

body sprays for teens $($with more youthful fragrance notes$)$ to increase sales.

Existing Products

The current body sprays for adults have three distinct products namely, Monna, Hlooho,

and Chama. The following information is available for the $2024$ financial year:

$$ The selling price per bottle of Monna, Hlooho, and Chama is R$110,$ R$120,$ and R$130,$

respectively.

$$ The quantity production and sales are $1000$ Monna, $3000$ Hlooho, and $2000$

Chama.

$$ The total variable manufacturing costs:

o Monna, R$20000$

o Hlooho, R$84000$

o Chama, R$50000.$

$$ The fixed manufacturing costs allocated to Monna, Hlooho, and Chama are

R$30000,$ R$35000,$ and R$40000,$ respectively.

$$ The variable period costs per unit are R$40$ for Monna, R$30$ for Hlooho, and R$35$ for

Chama.

$$ The special perfume used only in the adults$$ body spray is limited in the market. The

special perfume requirements to produce one bottle are:

o Monna, $5$ milliliters $($ml$)$

o Hoolho, $10$ ml

o Chama,$20$ ml$.$

New Product

It was decided to introduce a single fragrance for teens in $2025$ to establish the market

before venturing into other fragrances. The brothers have decided on the name, Monate,

which will be sold at R$120$ per $100$ ml bottle. The brothers estimated that they would start

with $15000$ bottles. They are currently looking into whether to buy the basic spray that is

used as the basis for Monate from an external manufacturer or to make the basic spray for

the $15000$ bottles of Monate themselves. If they purchase the basic spray externally, they

will still incur some direct material and direct labour costs to create Monate from the basic

spray.

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$[$CONFIDENTIAL$]$

$[$TURN OVER$]$

MAC$2601$

MAY $2024$

Production of $15000$ bottles of Monate if the basic spray is also produced internally:

$$ Per bottle of Monate, the direct material $($before packaging$)$ and direct labour costs

will be R$30$ and R$25,$ respectively.

$$ The other variable manufacturing cost will be R$10$ per bottle of Monate before the

cost of the packaging is taken into account.

$$ The fixed cost relating to the Monate will be allocated to bottles of Monate at R$10$ per

bottle.

$$ Each empty bottle $($the packaging$)$ will cost R$5.$ The packaging costs were not

included in the above direct materials or other variable manufacturing costs.

Purchase of basic spray externally as a basis for creating $15000$ bottles of Monate:

$$ If the basic body spray is purchased, the basic body spray cost will be R$40$ per bottle

of Monate. The basic body spray purchased will already be inclusive of glass bottles

that Monko can use $$as is$$ for their Monate packaging without having to incur

additional packaging costs.

$$ The direct material costs will be reduced by $30\%.$

$$ Both the labour costs and other variable manufacturing costs $($excluding packaging$)$

will be reduced by $20\%.$

$$ The fixed manufacturing costs will be the same.

$$ Transport cost will be R$6$ per bottle.

Morena recalls from his university days that when deciding between make and buy, one

uses the relevant costing principles.

REQUIRED

$($a$)$ Rank the body sprays for adults $($Monna$,$ Hlooho, and Chama$)$ in the

order that they will maximise the profitability of Monko.

Marks

$(10)$

Note: Provide a reason for each cost$/$revenue not included.

$($b$)$ Advise the brothers, based on quantitative $($financial$)$ factors, on

whether Monko should make or buy the basic spray for the Monate

body sprays.

$(10)$

Note: Provide a reason for each cost$/$revenue not included.

$($c$)$ Discuss qualitative $($non$-$financial$)$ factors that Monko should

consider for the make or buy of the basic spray for Monate.