Question $3$:

Spare Parts Ltd manufacturers components for motor vehicle assemblers. Although new

motor vehicle sales are starting to improve, Spare Parts Ltd is still operating for only $3500$

direct labour hours per month, which represents $70$ per cent of normal capacity.

One of Spare Parts Ltd $\text{'}$s valued customers, Titanium Ltd$,$ has approached the marketing

director with a proposal to buy a modified version of one of Spare Parts Ltds existing

components, XXX$.$ The order is for $1000$ units per month, for three months, at a price of

R$204$ per unit. Titanium's regular overseas supplier has been temporarily shut down,

following a fire in its factory.

Spare Parts Ltd standard direct manufacturing cost for component XXX$,$ without

modification, is as follows:

As expected, these direct costs are variable in nature.

Manufacturing overhead is absorbed into production at the predetermined rate of $80\%$ of

standard direct labour cost. This overhead rate consists of the following:

Variable manufacturing overhead varies with direct labour cost.

Spare Parts Ltd$\text{'}$s normal pricing policy is to add a $40\%$ markup to total manufacturing costs.

The production manager has estimated that to modify component XXX to Titanium's

specifications, the following would be necessary:

Additional raw materials per component

Two units of an existing inventory item RS$,$ which has a book value of R$12$ per unit, would be

needed. There are $6500$ units of RS on hand. This material is not regularly used and the

stores manager is planning either to dispose it for R$4$ income per unit, if not used for the

Titanium order, or to use it as a substitute for material NM$.$ One unit of RS could replace

one unit of NM$,$ which is used in the manufacture of another component. No inventory of NM

is on hand at present, and its purchase price is R$14$ per unit.

Additional direct labour per component $(0\mathrm{.}50$ hours per unit$)$

The only additional fixed manufacturing overhead that would be incurred if Titanium$$s order

was accepted would be an amount of R$22000$ per month to cover increased supervision

and clerical costs. If necessary, direct labour could work overtime at the rate of $1\mathrm{.}5$ times the

standard rate of pay.

Required:

$3\mathrm{.}1$ Determine whether Spare Parts Ltd has the necessary capacity to manufacture

Titanium$$s order, including medication, in normal time. $(3)$

$3\mathrm{.}2$ Calculate the total relevant cost of accepting this order and what effect it will have on

the organisation$$s profit over the three$-$month period. In your answer, briefly state why

you have included or excluded from your calculations each cost and revenue item

presented in the question. $(13)$

$3\mathrm{.}3$ Determine the minimum price per unit that Spare Parts Ltd could charge Titanium

without changing its existing profit. $(1)$

$3\mathrm{.}4$ Discuss what other factors Spare Parts Ltd should consider when deciding whether to

accept the order at the price offered. $(3)$