Question 2 Mampala Ltd manufactures premium quality ukuleles. The company produces only one model of ukulele and it sells this to the general public via its own website. In recent years the company has been consistently producing and selling around 3,000 ukuleles per year. The following cost data is relevant to the company's upcoming financial year. Materials Each final, completed ukulele consists of 4,800 cm of mahogany. There is some waste involved in the manufacturing process and 20% of the mahogany used in making a ukulele is lost during construction. Mahogany costs 0.02 per cm to purchase. Each final, completed ukulele also contains 180 cm of ebony. In a similar way to the mahogany, 10% of the ebony used in production is lost during manufacture. The purchase price of ebony is 0.09 per cm? Each ukulele also requires four geared tuning pegs which the company buys from another manufacturer. The cost of each tuning peg is 1.25. The costs of other materials (the bridge, frets and so on) amount to 13 per ukulele. Direct labour It normally takes eight labour hours to manufacture a ukulele and staff are paid 11.00 per hour. Overheads Fixed production overheads are absorbed at a rate of 19 per direct labour hour and non- production overheads at 54 per ukulele. Both these absorption rates are based on the current anticipated production/sales volume of 3,000 ukuleles in the coming year. At the start of the financial year the company adds a mark-up that equates to 10% of selling price to the total cost per ukulele in order to arrive at the selling price for that year. Management have recently been discussing the anticipated sales volume for next year and believe that the volume could be increased by 337% if the selling price per ukulele was 439.99. Required a) Calculate the selling price for the coming year based on the company's standard pricing policy of total cost per ukulele plus 10% of selling price and the anticipated annual production volume of 3,000 ukuleles. (8 marks) b) What target cost per ukulele is necessary if the company is to achieve a profit of 10% of sales value on a selling price of 439.99 per ukulele? (1 mark) c) Recalculate the total cost per ukulele under the assumption that the current sales volume of 3,000 ukuleles increases by 33%% but that no additional overhead costs will be incurred. (6 marks) d) Using the new total cost per ukulele from c), comment on how likely it is that, selling at a price of 439.99, the target cost necessary to earn the required profit margin could be achieved. (Maximum 250 words) (4 marks) e) Outline the key features of target costing as an approach to pricing policy. Compare and contrast these features with the situation of Mampala Ltd. (Maximum 400 words) (6 marks) (Total 25 marks)
