QUESTION 3 (33 marks) (40 minutes)

INDEPENDENT PART A Energy (Pty) Ltd (Energy) is a manufacturer of batteries that are used for home consumption. Its only products are Energy Max batteries (Max) and Energy Rechargeable batteries (Rechargeable). The manufacturing process is labourintensive and the materials used are; Metal Case, Chemical and Powder. No inventories of any type are kept.

The management accountant has received communication from the supplier of materials indicating that, due to lockdown restrictions emanating from the COVID-19 pandemic, they will only be able to supply Energy with 30 000 litres of Chemical and 11 000 kilograms (kg) of Powder in the 2022 financial year. However, there is no limitation on the number of Metal Cases that the supplier will be able to provide.

The following information relates to the budgeted financial year 2022:

Max Rechargeable

R per unit R per unit

Selling price 350 400

Direct Labour 60 80

Raw materials:

Metal Case 32 48

Chemical (40c per milliliter) 50 65

Powder (30c per gram) 35 45

Variable manufacturing overheads 10 17

Fixed manufacturing overheads 20 20

Gross profit 143 125

Units Units

Budgeted annual sales demand 50 000 45 000

Energy has recently been in the news following complaints from community members and some of its casual workers. The community raised matters around the company dumping its left over chemicals at an illegal dumping site which is closer to the community. Energy casual workers were disgruntled by their hourly wage rate which is below the national minimum wage. Mr. Phakade (the Chief Executive Officer (CEO)) has committed to respond to the matters raised as soon as possible. Energy is in the process of evaluating ways in which the company can contribute towards reduction of the impact of chemical waste on the environment from used batteries which at times contaminate soil and ground water. As a result, Management is considering launching a new product called Product Lithium in the upcoming financial year of 2022. Lithium batteries are generally considered to be non-hazardous waste. The management accountant has gathered information about the Product Lithium batteries. Below are all possible available sales outcomes for the product:

Possible outcome number Probability (%) Value (in units)

1 30 10 000

2 25 15 000

3 20 20 000

4 15 30 000

5 ? 40 000

INDEPENDENT PART B Azania Beauty (Pty) Ltd manufactures and sells Anti-blemish skin cream. The company uses the standard variable costing system to control manufacturing costs for its product. The company has a December financial year-end.

Budgeted fixed manufacturing overheads cost for the month was R81 000. All products are sold at R95 per unit. No direct material inventory is held.

The following are the standards set per unit: R per unit

R per unit

Direct material 2,50 kgs at R6 per kg 15,00

Direct labour 60 minutes at R25,50 per hour 25,50

Extract from the actual results for the most recent month of September 2021:

Direct material R84 000 for 12 000 kgs

Direct labour R 98 000 for 3 500 hours

Fixed manufacturing overheads R78 500 Production

units 5 500

a) Calculate contribution per limiting factor and rank the products to optimise the use of capacity available in 2022. (Round off your calculations to a whole number.)

b) Draft a Memorandum to the CEO (Mr. Phakade) in which you identify and discuss two ethical concerns and/or other qualitative factors in the scenario that may have an adverse effect on Energy (Pty) Ltd. Note: In the Memo, refer to yourself as student,

c) (i) Calculate the expected value of the sales quantity.

(ii) Identify the level of sales quantity that Energy (Pty) Ltd is most likely to achieve from Lithium batteries in the 2022 financial year.

c) Calculate the following variances:

(i) Direct labour rate variance.

(ii) Direct material quantity variance.

(iii) Fixed manufacturing overhead expenditure variance.