QUESTION 3 20 MARKS You are the business development manager of Smooth Foundries Ltd and are engaged in considering the plans for the company for the financial year ending 30 June 2022 (1 July 2021 to 30 June 2022). The sales manager expects to achieve 10 000 tons of widget castings at R250 per ton, but in his budget, the production manager tells you that, according to the design specification capabilities of his machines, only 8 000 tons of output will be possible. Consequently, you prepared the following budget based on 8 000 tons for the next financial year ending 30 June 2022: Budget for the 30 June 2022 Sales (8 000 tons at R250 per ton) 2 000 000 Expenses 1 800 000 Direct material (all variable) 300 000 Direct labour (all variable) (15 000 hours x R80 per hour) 1 200 000 Manufacturing overheads (50% fixed) 140 000 Administration overheads (all fixed) 60 000 Selling & distribution costs (80% fixed) 100 000 Profit before tax 200 000 Smooth Foundries Ltd does not keep any stock and produces only enough to meet the sales. The production manager suggests two ways in which output could be increased to 10 000 tons: Alternative 1: Subcontract the production of 2 000 tons to a competitor at a price of R205 per ton. Alternative 2: Produce the extra 2 000 tons by working an additional shift (3 200 extra direct labour hours at R100 per hour). It is hoped that there would be no fixed production overhead costs, but the plant would then operate beyond its designed capacity. In both alternatives, non-manufacturing fixed overhead costs would increase by R10 000 and R20 000 for the administration and selling & distribution costs respectively. REQUIRED (a) Prepare budgeted income statements to be expected from each of the two suggested ways of increasing production using the absorption costing method. Hint: Each budget must be for 2 000 tons (not for full 10 000 tons) using the layout below. Sub-contract Additional shift Marks 8 (b) Discuss, with reasons, which of the two alternatives should be implemented. 7 (c) Prepare a revised budgeted income statement (based on your choice in (b) above) for Smooth Foundries Ltd for the financial year ending 30 June 2022 using the variable costing method. Hint: the budget must be for 10 000 tons. 5 TOTAL 20