QUESTION 1 Secret Scent (hereafter referred to as SS) is a manufacturer of two well-known fragrances named the Flower Petal and The Aura. Secret Scent is a relatively new company which was only started in 2016. Fragrances are known to be very expensive due to the rare ingredients used in them, and the marketing that needs to be done to promote the products. Secret Scent has also spent a lot of time in the design of the packaging to ensure that their perfumes catch the eye of their consumers and make it stand out amongst others. SS exports all sales to Europe, and have settled on the following prices with their customers: Flower Petal Aura Selling price (Euros) 60 50 Selling price (Rands) 960 800 During the year under review an average exchange rate of 1:16, EURO:ZAR applies.

The following information relates to the cost per bottle of perfume:

Note 1: Bottles and Packaging The production of the bottles and packaging are outsourced to an external company, and SS pays for these on a per unit basis. The bottle and packaging are considered to be direct materials.

Flower Petal (Rand) The Aura (Rand) Bottle 90 80 Packaging 50 40

Note 2: Manufacturing overheads The manufacturing overhead costs have been found to have the following costs over the months presented below: March April May June July August Cost (Rand) 506000 580000 540000 650000 625000 560000 Machine hours 2600 2900 2800 3500 3100 2700

Flower Petal The Aura Number of machines hours per unit 2 1.5

Note 3: License Fee A licensing fee of R30 per bottle is paid for the right to manufacture fragrances.

Note 4: Sales Commission In order to promote sales, the sales staff are paid a 2.5% commission on sales made.

Note 5: Marketing Marketing costs worked out to be R120 per bottle of perfume produced for the current period. Management entered into an agreement with a marketing agency to pay a fixed fee for advertising regardless of how many units they sell or produce. The following units were sold and produced in the following months (in total for both products): August September Opening balance 100 200 Number of units produced 1 200 1 500 Number of units sold 1100 1200 Closing balance 200 500

The number of units produced for each product are always in the same ratio as the number of units sold which is the company's sales mix. During September 800 units of Flower Petal 400 units of Aura were exported. SS has been using both Variable and Absorption costing in their business for different reasons. Variable costing has been very helpful with cost volume profit analysis and Absorption Costing is used for external reporting. Absorption costing always allocates fixed manufacturing overheads based on the number of units produced. SS is busy preparing the financial information for the month of September. What is the contribution margin per unit for each product (Flower Petal and The Aura)? What is the current break-even number of units that need to be sold for each product in September? SS is worried about the exchange rate and would like to know the following: How much can the Rand appreciate by at the current level of sales in September before SS start to make a loss assuming the selling price in Euros stays the same? Give the appreciation in terms of a percentage. Assume the following for this question: - Both the Flower Petal and Aura have the same production costs. - The variable cost of manufacturing per unit is R500 for Flower Petal and Aura. - Revenue is equal to R1 088 000. - You may use any other information needed from your calculations in previous questions. Please show your workings clearly.

Draw up the Absorption Costing Income Statement for SS for the month of September. Assuming that the Absorption costing profit is R170 100. What would the Variable costing profit be? What causes the difference in the two profits, and why we would expect them to differ?