QUESTION $2[20]$

Rovon $($Pty$)$ LTD manufactures a single product. Rovon $($Pty$)$ LTD operates in a very

competitive market environment. A job$-$costing system is used to determine the

production cost per unit which includes all manufacturing overheads.

These overheads are absorbed at a pre$-$determined rates per unit, based on normal

capacity of $12000$ units per period. Any under$/$over absorbed overhead is immediately

transferred to cost of sales. Assuming normal capacity, the following unit costs were

budgeted, the total being used for pricing the product.

Budgeted unit costs R

Direct materials $40\mathrm{.}50$

Direct labour $41\mathrm{.}20$

Salesmen$$s salaries $($note $1)0\mathrm{.}80$

Salesmen$$s commission $($note $1)1\mathrm{.}00$

Office administration salaries $2\mathrm{.}00$

Factory salaries and Rent $5\mathrm{.}00$

Additional costs

Production $-$ variable $4\mathrm{.}30$

$-$ Fixed $9\mathrm{.}00$

Administration and selling costs $-$ variable $3\mathrm{.}00$

$-$ Fixed $3\mathrm{.}20$

Total costs $110$

Note $1$: Salesmen are paid a basic monthly salary, plus commission on each table sold.

Note $2$: These variable administration and selling costs can be considered to vary directly

with the number of units sold.

Budgeted selling price: a selling price of R$150$ is budgeted for the foreseeable future.

Actual results: the following sales and production results were recorded:

Period $1$ units Period $2$ units

Sales $110009000$

Production $130008000$

Actual variable costs incurred per unit equaled those budgeted and the following fixed costs

were incurred in each period:

Manufacturing R$170000$

Selling and administration R$75000$

The budgeted selling price was achieved on all sales.

REQUIRED:

$1.$ Based on the budget, calculate the expected break$-$even point in units for each

period.

$(5$ marks$)$

$2.$ Calculate the actual net income for each period using absorption costing techniques.

$(5$ marks$)$

$3.$ In view of the declining sales and profits, due to largely increased competition, the

managing director has asked for suggestions to increase the net profit for period $3$ to

R$349000($assuming variable costing$).$ The following suggestions were made:

$3\mathrm{.}1$ The sales manager recommended an increase in sales commission by R$1\mathrm{.}00$

per unit and additional advertising of R$6000.$

$3\mathrm{.}2$ The production manager suggested reducing the selling price by $10\%$ as well

as increasing advertising as mentioned above. In addition, if R$7500$ more

was spent during the period on fixed production overheads, he expected to

realize a $0,5\%$ saving in total variable cost per unit.

As management accountant, you are requested to calculate the $\%$ increase in sales units

from period $2$ required under each suggestion, to achieve the MD$$s desired profit level.

Briefly comment on the feasibility of each suggestion. $(10$ marks$)$