QUESTION 1 50 MARKS You have recently joined Slam (Pty) Ltd, a company that manufactures and distributes brake pads to the automotive industry, as a financial accountant. The managing director and majority shareholder has asked you to assist him in interpreting the draft financial results for the year ended 30 June 2020 and to review the budget for the new financial year. The company uses first-in-fist out method of inventory valuation. As part of his preparations for the budget for the financial year ended 30 June 2020, the accountant completed a breakeven analysis and concluded that the breakeven production and sales volume amounted to 20 500 units. The fact that the company only sold 20 000 units but is reporting a preliminary profit of R112 000 for the year ended 30 June 2020 has raised a concern about the integrity of the information generated by finance. You established the following: 1. The draft income statement for the year ended 30 June 2020 is as follows: Amount (ZAR) Sales 2 000 000 Cost of sales 1 628 000 o Inventory at beginning of year o Raw materials 500 000 o Direct labour costs 600 000 o Manufacturing overheads 935 000 o Inventory at the end of the year: finished products (407 000) Gross profit 372 000 Fixed administration costs 80 000 Selling costs 180 000 Profit before tax 112 000 2. Sales and production had been budgeted for the 30 June 2020 financial year at 22 000 units. The budgeted selling price for the 30 June 2020 financial year was R100 per unit. Actual production volumes amounted to 25 000 units. The actual unit costs and selling prices as well as fixed costs were all equal to budgeted amounts. Labour is a variable cost. Total actual and budgeted fixed manufacturing overhead costs incurred amounted to R660 000. 3. The company has access to reliable supply of raw materials and therefore does not carry any raw materials inventory. There were no work-in-progress inventories at the beginning or end of the year. Manufacturing overheads and selling costs comprise both fixed and variable costs. Selling costs would have amounted to R190 000 at budgeted sales volumes of 22 000 units.

a)Reperform the calculation of the breakeven production and sales volumes based on the 30 June 2020 budget assumptions.

b)Discuss the reasons for the differences between the actual profit of R112 000 and the profit that would arise if the variable costing method was to be used.

c)Prepare the budgeted income statement (i.e. performance budget) of Slam (Pty) Ltd for the year ending 30 June 2021 presented using absorption costing method.

d)Advise the managing director on possible steps that could be taken to enable the company to achieve its target profit before tax of 10% of revenue. Support your discussion with calculations.

e)Advise the managing director on possible steps that could be taken to enable the company to achieve its target profit before tax of 10% of revenue. Support your discussion with calculations.