QUESTION 1(12 marks; 22 minutes)

Poullus Limited (PL), a high-tech electronics manufacturing company, is currently operating at 70% of its maximum capacity. A new customer in Lesotho has asked PL to provide a special order for 200 virtual reality headsets at R2,500 per unit. The potential customer is not a current customer of PL, but the directors of PL are keen to try and win the contract as they believe that this may lead to more contracts in the future from Lesotho. As a result, they intend pricing the contract using relevant costs.

The following information has been obtained from a four-hour meeting that the Production Manager of PL had with the potential customer:

1.400 kilograms of material A will be required. This is a material that is regularly used by PL and there are 700 kilograms currently in inventory. These were bought at a cost of R250 per kilogram. They have a resale value of R220 per kilogram and their current replacement cost is R260 per kilogram.

2.800 kilograms of material B will be required. This material will have to be purchased for the contract because it is not otherwise used by PL. The minimum order quantity from the supplier is 1 000 kilograms at a cost of R180 per kilogram. PL does not expect to have any use for any of this material that remains after this contract is completed.

3.200 components will be required. These will be purchased from Xboks Limited. The purchase price is R1 000 per component.

4.A total of 260 direct labour hours will be required. The current wage rate for the appropriate grade of direct labour is R280 per hour. Currently PL has 80 direct labour hours of spare capacity at this grade that is being paid under a guaranteed wage agreement. The additional hours would need to be obtained by either (i) overtime at a total cost of R340 per hour; or (ii) recruiting temporary staff at a cost of R300 per hour. However, if temporary staff are used they will not be as experienced as PL's existing workers and will require 10 hours supervision by an existing supervisor who would be paid overtime at a cost of R420 per hour for this work.

5.20 machine hours will be required. The machine to be used is already leased for a weekly leasing cost of R12,000. It has a capacity of 40 hours per week. The machine has sufficient available capacity for the contract to be completed. The variable running cost of the machine is R140 per hour.

The company absorbs its fixed overhead costs using an absorption rate of R400 per direct labour hour.

The Production Manager is paid an annual salary equivalent to R15,800 per 8-hour day. Pl's practice is to establish selling prices by applying a mark-up on cost of 45%.

Required:

Calculate the relevant cost of building 200 virtual headsets which may help with the pricing decision.

Note:

Present your answer in a schedule that clearly shows the relevant cost value for each of the items identified above and explain each relevant cost value you have included in your schedule and why the values you have excluded are not relevant. (12 marks)

QUESTION 2(12 marks, 22 minutes)

Dream Limited is engaged in the production of olive oil.

Subtotals of the budgeted overheads for the first six months of the 20X6 financial year (January to June 20X6) revealed the following:

Harvesting

Pressing

General factory overhead

Variable overhead (R )

2 970 000

5 350 000

1 760 000

Fixed overhead (R )

500 000

1 600 000

1 900 000

Budgeted activity

Machine hours

140 000

112 000

Normal capacity

Machine hours

200 000

160 000

1.General factory variable overheads are apportioned in line with machine hours worked in each department and general factory fixed overhead are apportioned on the basis of the normal machine hour capacity of the two departments.

2.It has been a long-standing company practice to establish selling prices by applying a mark-up on cost of 45%. The direct material content is R20 per unit. Each unit of the product will take three labour hours (five machine hours) in the harvesting department and four labour hours (six machine hours) in the pressing department. Hourly labour rates are R25.00 and R26 respectively.

The following actual information relates to the 20X5 financial year:

January-June July-December

20X520X5

Fixed selling and administration costs

(dependent on the number of units sold) R456000R670 000

Distribution costs (Fixed and variable)

(dependent on number of units sold)R1342800R1057100

Sales units40 00030 000

It is expected that the sales units during the first six months of the 20X6 year will be 40000 units. Fixed selling and administration costs will not be incurred as from the 20X6 financial year. During the 20X6 financial year, the distribution costs is expected to be the same as last year's.

Required:

Assuming that your calculations are prepared on 1 January 20X6, calculate four different cost-plus prices using four different cost bases which may help with the pricing decision for Dream Limited.(12 marks)

Note:Round off your calculations to two decimal places.

QUESTION 3(10 marks, 18 minutes)

Semona Bank would like to determine the price to charge for customer services and which classes of customers should be emphasized or de-emphasized. It has provided details of the activities and the cost drivers relating to those expenses that can be attributed to customers as follows:

Activity

Activity costs

(R)

Activity driver

Activity volume

Providing ATM services

400 000

Number of transactions

200 000

Computer processing

1 300 000

Number of transactions

2 500 000

Issuing Statements

1 100 000

Number of statements

500 000

Collections

160 000

Number of transactions

100 000

Customer inquiries

660 000

Telephone minutes

600 000

The following are annual information on the four types of customers:

Personal Loans

Cheque accounts

Platinum

accounts

Savings accounts

Number of product

7 000

28 000

12 000

2 000

ATM transactions

0

160 000

18 000

20 000

Computer transactions

210 000

1 800 000

320 000

200 000

Number of statements

60 000

250 000

140 000

50 000

Number of transactions for collections

40 000

8 000

16 000

0

Telephone minutes

80 000

280 000

160 000

70 000

Annual operating profit contribution

500 000

2000 000

600 000

320 000

Required:

Prepare Direct Customer Profitability Analysis for each of the four customers.

(10 marks)

Question 4 (8 marks; 14 minutes)

Lefola Limited is the only manufacturer of product G_Easy in the Popa Land. It has provided documented levels of demand at certain selling prices for product G_Easy which are as follows:

Price per unit

Demand Units

Total costs

7 000

0

3 000

6 000

1

5 000

5 000

2

8 000

4 000

3

12 000

3 000

4

17 000

2 000

5

23 000

1 000

6

30 000

Required:

Using a tabular approach, calculate the marginal revenues and marginal costs for product G_Easy at the different levels of demand, and so determine the selling price at which Lefola Limited's profits are maximized.

QUESTION 5(8 marks;14 minutes)

Zonakha Limited specialises in the production of a range of healthy products. It is about to launch a new product, the 'Healthy Energy Bar', a unique green bar which is capable of providing unprecedented levels of energy from the seaweed used. The company's development costs have been high and it is expected that the product will only have a five-year life cycle.

Zonakha Limited is now trying to ascertain the best pricing policy that they should adopt for the Energy Bar's launch onto the market. Demand is very responsive to price changes and research has established that, for every R5,60 increase in price, demand would be expected to fall by 70,000 units. If the company set the price at R72,60, only 280,000 units per week would be demanded.

The costs of producing each energy bar is R13,00:

Required:

(a)Determine the optimum price and quantity at which the company profits would be maximized.(6 marks)

(b)Describe the limitations of using the model in (a) above. (2 marks)

Formulae:

Demand curve P = a - bQa = price when Q = 0 MR = a - 2bQ

b = change in price

change in quantity

QUESTION 6(8 marks;14 minutes)

A company plans to sell 360 000 units per annum of a new product but they uncertain of the selling price per unit and a variable cost per unit. The marketing department has provided the estimates of sales demand and their associated probabilities for each possible selling price as well as estimates of variable costs and their associated probabilities. The estimates are as follows:

Selling prices and P and VC and their respective probabilities:

Selling price R per unit

Probability

30

30%

40

45%

50

25%

Variable costs and their respective probabilities:

Unit variable cost R per unit

Probability

12

20%

16

50%

20

30%

Fixed costs are estimated to be R 84 000 per annum.

Required:

Calculate the probability of earning a monthly contribution of greater than R510000.(5 marks)

Describe the attitude of a decision-makers who might choose the 'maximax; 'maximin' and the 'expected value' decision rules.(3 marks)

QUESTION 7(8 marks; 14 minutes)

Department of Procurement in Kuvuku Land has to decide which of the four bidding companies is to be awarded the correctional services' IT upgrade tender. The directors believe that the tender will assist the correctional services centres with updating and expanding the centers' IT capacities in line with modern innovations like electronic fingerprinting, electronic monitoring for parolees, and even to allow centers to use IT to let victims know more about parole hearings.

The tender will be awarded to the bidding company that meets the price requirement and not the functionality as well as administrative requirements as previously done. However, the directors agreed that the functionality and the administrative requirements will be considered when there are parties, during the evaluation phase, that might raise concerns relating to these requirements.

There is a 40% chance that the bidder will reasonably comply with some Sections of the Constitution of Kuvuku Land, a 10% chance the bidder will comply fully with some Sections of the Constitution of Kuvuku Land and a 50% chance that the bidder will not comply with some Sections of the Constitution of Kuvuku Land.

The company uses expected value to make this type of decision.

The department provided the following information:

Bidder's law compliance

Company A

Company B

Company C

Company D

R'000

R'000

R'000

R'000

Reasonably comply

5 000

4 800

5 500

6 000

Comply fully

4 600

4 700

3 500

3 000

Not comply

4 300

4 600

4 000

5 000

Zindlo Limited, market research company, believes it can provide perfect information on how much the actual cost could be the IT infrastructure typically required for projects like this IT upgrade tender.

Required:

Calculate the maximum amount that should be paid for the information from Zindlo Limited. (8 marks)