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QUESTION 2 [ 2 0 ] Rovon ( Pty ) LTD manufactures a single product. Rovon ( Pty ) LTD operates in a very competitive

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 40.50
Direct labour 41.20
Salesmens salaries (note 1)0.80
Salesmens commission (note 1)1.00
Office administration salaries 2.00
Factory salaries and Rent 5.00
Additional costs
Production - variable 4.30
- Fixed 9.00
Administration and selling costs - variable 3.00
- Fixed 3.20
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 R150 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 R170000
Selling and administration R75000
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
R349000(assuming variable costing). The following suggestions were made:
3.1 The sales manager recommended an increase in sales commission by R1.00
per unit and additional advertising of R6000.
3.2 The production manager suggested reducing the selling price by 10% as well
as increasing advertising as mentioned above. In addition, if R7500 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 MDs desired profit level.
Briefly comment on the feasibility of each suggestion. (10 marks)

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