QUESTION 2 [40 MARKS] Your finance director (FD) has been tasked by the board to evaluate the profit impact of changing the current costing system from variable costing to absorption costing. The FD has requested you to gather all the necessary information and provide the relevant calculations. You obtained the following information:

i. Demonstrate the variation in the level of profitability between the two costing systems. (19) ii. Explain why there is a difference. (8) iii. Explain to the director what would happen to profit figures in period 2 if 27,000 units are manufactured and 32,000 units are sold considering 5,000 opening inventory from period 1. (5) iv. Which costing system would you recommend and why? (8) You may ignore taxes in your response.

Detail 32,000 27,000 Units produced/manufactured during the period Units sold during the period Variable cost per unit Selling price per unit Total fixed costs for the period (NB: Includes R960,000 fixed manufacturing costs) R80 R200 R1,500,000