Question B3 E-Motors Ltd is a manufacturer of a range of electrically assisted vehicles, and the company produced and sold 60,000 electric scooters during the year ended 31 March 2021. Average cost per scooter in the year ended 31* March 2021 was as follows: Direct materials 85 Direct labour 50 Variable overhead 20 Fixed overhead 35 Total 190 To prepare the budget for the financial year commencing 1" April 2021, the following changes in the current average cost per scooter are estimated. First, due to inflation and pay rises for factory workers, direct labour rate and variable overhead rate are expected to Increase by 5% respectively. Second, upgrading the production facilities is expected to lead to the increase in the total foed overhead by 10%. Third, as a result of product innovation in the materials used for some components in the electric scooters, the direct materials per scooter is expected to increase by 20% The substantial increase in the cost of direct materials is causing concem and alternative sources are being considered. One source quotes a full package of alternative direct materials at the cost of 95 per package, but tests on sample components show that the cheaper materials would increase labour costs by an additional 0.80 per scooter and would lead to a reject rate of 5%. The rejected materials would have to be so poped with no scrap value, and they are detected before the commencement of final assembly. Since the additional labour costs of 0.80 mentioned above also include any work associated with the rejected materials, the reject rate is applicable only to the cost of direct materials. Moreover, now quality control staff with new equipment would be necessary to detect the faulty materials, and this would further increase foxed costs by 90,000 per annum. Selling prices are also considered when the budget is being developed. Normally, solling prices are determined on a cost-plus basis, but there is concern that this would lead to a substantial price rise next year, allowing competitors to take market share from E-Motors Ltd. The sales director estimates that demand drops by 1 250 scooters for every t increase in price. The current selling price is 250 REQUIRED (a) Suggest the better source of direct materials, ether current of new, by comparing the total average cost per scooter between the two a tomatives at the present level of output. Next, calculate the level of output at which the company would be financially indifferent between the two alternatives, and suggest the botter source if the expected output is either above or below the calculated lovel (8 marks) (b) Calculate what selling price would maxim se profit for next year ( If the new source is used () If the current source is used (7 marks) (c) Comment on other factors, both financial and commercial, which should be considered before deciding which material to use and the price which should be charged. (10 marks) Total 25 marks
