QUESTION 6 10 MARKS Powerhouse (Pty) Ltd, trading as "Powerhouse", manufactures alternative energy products, Powerhouse is only one of the companies owned by the parent company. Voitze. Al administration is done from Voltze's headquarters. Powerhouse has done a segmental report based on the geographical regions allocated to the sales personnel. They buy the manufactured components and assemble them at their premises in order to reduce overhead cost for manufacturing equipment and rental of a plant The following information has been given in terms of the regional break down of costs and income for the financial year ending February 2020: CENTRAL COASTAL LOWVELD KAROO TOTAL R R R R R Sales 1 850 000 750 000 600 000 1 750 000 4 950 000 Direct material 650 000 270 000 240 000 525 000 1685 000 Direct labour 250 000 170 000 250 000 350 000 1 020 000 Overheads 375 000 220 000 255 000 325 000 1 175 000 Gross Profit 575 000 90 000 -145 000 550 000 1 070 000 Marketing 35 000 25 000 25 000 20 000 105 000 Sales Personnel 250 000 185 000 150 000 220 000 805 000 Headquarters' cost 45 000 45 000 45 000 45 000 180 000 Profit 245 000 - 165 000 -365 000 265 000 -20 000 Overheads: Included in overheads is the rent for the premises in which products are assembled and altered. Each region's rent is different: Central pays R20 000 per month Coastal R15 000 per month Lowveld R15 000 per month and Karoo R7 000 per month. All 4 regions have month to month rental contracts, and rental costs can thus be avoided should they close down a regional premises. All other overheads are variable cost Marketing: Each region is responsible for their own marketing. This will usually be in the form of newspaper adverts, radio adverts or billboards. 85% of all marketing costs are avoidable MACC371 - FIRST OPP - 2020 9/10 Sales Personnel: The sales personnel receive a fixed base salary and then receive commission on the sales they make Commission is usually calculated as a percentage of the sales price. The salary of the sales personnel as per the table above, consists of 60% fixed base salary and 40% commission Should a region close down, the sales personnel will be re-employed elsewhere in the company at the same base salary Headquarters' cost: These costs are costs incurred in terms of Powerhouse's administration performed by Voltze's personnel for the whole of Powerhouse. The personnel of Voltze spends a certain percentage of their daily time on work done for Powerhouse, and then Voltze charges Powerhouse on a monthly basis for the allocated fixed costs. The cost is recovered by Powerhouse from the four regions in equal parts It is evident from the information provided that two of the regions are incurring losses. The management has discussed the matter and has come to the conclusion that an analysis, using relevant costing principles, should be done to determine whether the loss incurring regions should be shut down
