QUESTION 1 50 MARKS Exelon Racket (Pty) Ltd is a producer of sports equipment and manufactures two products. tennis and squash rackets. The company has been in operation over the last 20 years, and production processes have undergone a radical change from labour intensive handmade wooden rackets to carbon fibre machine manufactured rackets. In the past, the company operated an absorption costing system. Due to the initial nature of the company, fixed manufacturing overheads were allocated using labour hours. This basis is still being used by the company. However, management is concerned that the current basis will lead to incorrect cost information resulting in poor decision making by management and the mispricing of rackets. Budgeted product information for the year ended 31 March 2021 is summarised in this table: Total cost (R) Description Selling price Direct materials Direct labour Variable selling costs Fixed manufacturing overheads 150 Fixed administration and distribution costs st Production in units Sales in units Tennis Rackets (per unit) en = 900 200 150 20 10 000 9 000 Squash Racket (per unit) 800 100 125 20 6 000 6 000 1 500 000 2 400 000 000 ca 150 the tooo X PL = 150 000 there was no opening inventory of tennis or squash rackets at the beginning of the period. Also, there is no opening or closing work-in-progress or raw materials for both products. The fixed administration and distribution costs are allocated to tennis rackets and squash rackets based on units sold. A consultant, employed by the company to investigate alternatives to their current absorption costing system has made the following two recommendations: 4500 a) To operate a variable costing system in order to provide the relevant information required for management decision-making purposes. b) To operate an activity-based costing (ABC) and absorption costing system to meet the external financial accounting reporting requirements and for internal decision-making purposes. 9000 X 900 = During his investigation, the consultant identified the major activities, cost drivers and the costs associated with each of these activities within the fixed manufacturing overhead costs. His findings are summarised in the table below: fmed Monfavery Archead Manfandang Cost (R) 200 000 250 000 800 000 250 000 +500 000 The consultant also recorded his findings regarding the utilisation of the cost drivers by each of the two products. His findings are noted in the table below. Major activities Purchasing Machine set up costs Inspection Heating Tennis Rackets (In total) 15 000 units of power wo 3 000 purchase orders m/o 5 000 inspection hours M/O 3 500 set-ups M/0 120 000 labour hours Con Cost driver Number of purchase orders Number of set ups Inspection hours Units of power A Commissions Lite Squash Rackets (In total) 10 000 units of power 2 000 purchase orders 3 000 inspection hours 1 500 set-ups 30 000 labour hours (d) Calculate the gross profit of Exelon Racket (Pty) Ltd for the year ended 31 March 2021 for tennis rackets only if an activity-based costing system is adopted. 2 Activity based Cos Particulars Sale Income Direct Material Dinct Labowy Costing System 9000 15000 Tennis Racket. 9000 900 9000 200 Variable Cost "Selling. fixed abministrative I distribution cost 2400000 Net Income 9000 150 9000 20 fixed Manufacturing lost Purchasing (200000 Machine Setup (250000 x 35000 200000 3000 5000 Inspection (80000 5000 Heating (250000 x 8000 x 15000 10000 8100000 1800000 1350000 180000 1440000 120000 175000 500000 375000 2160000 What is the cost of sales and Gross profit for this calculation?