QUESTION 3 (34 marks) Read the following scenario and answer the question that follows: PetCare Limited ('PetCare") manufactures two products - dog shampoo and horse shampoo. PetCare has always adopted a cost-based pricing model in which it applies a 50% mark-up. After experiencing a recent decline in the demand for PetCare's dog shampoo, a new CEO named Tina Thomason, has been appointed. Mrs. Thomason has suggested that in order to become more competitive, the entity should discontinue assigning overheads based on labour hours and rather opt for activity-based costing The following information is available for overheads for the current financial year: Overhead Annual Cost Cost Driver (Rands) Property costs 700 000 Machine Hours Quality control costs 300 000 Inspections Production setup costs 500 000 Machine set ups The following information is available for each product for the current financial year: Details Dog Shampoo Horse Shampoo Annual demand 20 000 5 000 Total direct material cost for annual 400 000 80 000 production (Rands) Total direct labour cost for annual 200 000 250 000 demand (Rands) Labour hours for annual demand 4 000 6 000 Machine hours required for annual 6 000 8 000 demand 7 HMAC330-1-Jul-Dec2021-SA1-BL- V4-03122021 40 20 Number of inspections required for annual demand Number of machine set ups for 30 20 annual demand Mrs. Thomason is also concerned about the environmental impact the entity may be causing. There is a lot of waste generated by the plastic bottles which are produced for the shampoo and some of the liquid waste for the shampoo is disposed of in the nearby river. 200 000 250 000 Total direct labour cost for annual demand (Rands) Labour hours for annual demand Machine hours required for annual demand 4 000 6 000 6 000 8 000 HMAC330-1-Jul-Dec2021-SA1-BL- V4-03122021 40 20 Number of inspections required for annual demand Number of machine set ups for annual demand 30 20 Mrs. Thomason is also concerned about the environmental impact the entity may be causing. There is a lot of waste generated by the plastic bottles which are produced for the shampoo and some of the liquid waste for the shampoo is disposed of in the nearby river. Required: 3.1. Calculate the total cost of dog shampoo of PetCare Limited under activity-based costing and the original absorption costing method. (16 marks) 3.2. Interpret the results of the calculation in question 3.1. (2 marks) 3.3. Calculate PetCare Limited's current selling price per bottle of shampoo using its original absorption costing method. (4 marks) 3.4. To stimulate demand, the entity could adopt a target pricing approach to setting prices. Explain what target pricing is and discuss one (1) advantage and one (1) disadvantage of this form of pricing in the context of (2 + 2 + 2 = 6 marks) 3.5. Suppose that Mrs. Thomason wishes to measure the social and environmental costs of the entity. Discuss three (3) reasons why this may be difficult. (3 x 2 = 6 marks) 8 HMAC330-1-Jul-Dec2021-SA1-BL- V4-03122021
