QUESTION 4 (20 Marks)

4.1 REQUIRED

Study the information provided below and calculate the:

4.1.1 Total Marginal Income and Net Profit/Loss after the relocation. (3 marks)

4.1.2 Break-even quantity before and after the relocation. (6 marks)

INFORMATION

A South African based company, Egoli Limited, manufactures motors for refrigerators. The following information relates to the period ended 31 August 2018, when the company produced and sold 10 000 motors.

R

Sales 12 000 000

Variable costs 4 000 000

Fixed production costs 3 000 000

Fixed marketing and administration costs 2 000 000

Management is considering relocating its manufacturing facilities to Swaziland to reduce costs. Variable costs are expected to average R250 per unit; and fixed costs are anticipated to be R3 975 000. The selling price will be changed to R1 000 per unit and the sales volume is expected to increase by 10%.

4.2

REQUIRED

Answer each of the following questions independently from the information provided below:

4.2.1 Calculate the selling price per unit that will enable the project to break even.

(3 marks)

4.2.2 The company is considering replacing a part that has a cost of R400 with a new and improved part costing R500 per unit in the coming year. Calculate the new break-even quantity. (3 marks)

4.2.3 A new machine that would be needed to increase plant capacity in 2018 would cost R400 000. The only increase in fixed costs, over the previous year, would be caused by the installation of the new machine to increase plant capacity. Depreciation on the new machine will amount to R80 000 per year. Calculate the break-even value after the

increase in fixed costs. (5 marks)

INFORMATION

Project A of Trinity Limited produces computers. In 2017, the company sold 10 000 computers at R5 000 each. Fixed costs amounted R10 000 000 and variable costs amounted to R2 900 per unit.