Namibia Public Address Systems (“NPAS”) is considering producing a newly technologically advanced public address system. The prevailing price of similar system in the market is N$4 400. NPAS knows that they will not be able to change this price even if their product is different from the current one I n the market. NPAS’s policy is to charge a profit mark up of 25%.

Cost information for the new public address system (PAS) is as follows:

 Circuit board – The current price of buying it in the market is N$410 each. The supplier sells them in batches of 4 000 boards. The supplier charges an additional delivery cost of N$240 000 per batch.  Wiring – The wiring required costs N$50 per meter. 25cm of wire is needed for each completed PAS. A normal loss of 2% is anticipated on the wiring.

 Indirect material – Indirect material will be N$810 per PAS.

 Assembly labour – The current demand estimation indicates that 100 units of the PAS will be manufactured in total. The first unit requires 3 hours to produce. The cost of labour to be used for costing the PAS should be the labour cost of producing the 50th unit. The workers are paid N$126 per hour and it is anticipated that the workers will learn at a rate of 85%.

 Manufacturing Overheads – Manufacturing overheads have been observed to behave as follows:

Total production overhead Total assembly labour hours

N$ Hours

Month 1 620 000 19 000

Month 2 700 000 23 000

Fixed production overheads are allocated on the basis of assembly labour hours. The annual assembly labour hours are budgeted to be 240 000 assembly labour hours.

Required:

1.1 Calculate the anticipated cost of producing one PSA.

1.2 Determine the target costing gap.