SECTION B

Answer any TWO questions in this section.

Question $2($ABC$)$

Kwazulu Manufacturing Ltd $($KML$)$ is a company that manufactures air$-$frying

machines to sell direct to the public. While the air$-$frying machines can come in

assorted styles and features, they sell two main designs: the 'Sword', which offers a

single frying drawer and the 'Spear' which offers a double$-$drawer frying

configuration, allowing for the simultaneous preparation of two different dishes.

The home market for both products is very competitive. In recent years, the

demand for the 'Spear' has been rising, but demand for the 'Sword' has been

falling, leading to unsatisfactory returns to the shareholders. Market analysis has

shown that 'Sword' is over$-$priced by $5\%$ and 'Spear' is very competitively

positioned at $10\%$ below the competition.

KML currently uses traditional absorption costing and cost$-$plus pricing. Prices are

based on production cost plus $35\%($approximately$)$ in order to try to meet pricing

pressures. The company needs to make a profit margin of $25\%$ to satisfy the

requirements of the shareholders.

Budgeted information for both air$-$fryer machines, using the absorption costing

system, is as follows: The board of directors have been investigating alternative costing systems to help

in their need for competitiveness. The management accounting team have carried

out in$-$depth analysis and have prepared the following data:

The production team collected the following data:

Required:

$($a$)$ Calculate the total cost per unit, and the profit per unit for each

$(21$ marks$)$

product, using Activity Based Costing, based on the minimum

shareholder return required.

$($b$)$ Based upon the information now known from your calculations

$(6$ marks$)$

in $($a$)$ above, calculate the market prices and explain what

price you would apply to 'Sword' and 'Spear' in this highly

competitive market to avoid a price war. Show your workings. $($c$)$ KML is launching an accessory that fits into their air$-$frying

machines. This accessory is manufactured using innovative

ecofriendly materials to make the air$-$fryers more suitable for

the growing Vegan market where environmentally friendly

products are in more demand than in other established

markets.

Discuss the most appropriate pricing strategy separately for

each of the $($i$)$ 'Sword' air$-$fryer, the $($ii$)$ 'Spear' air$-$fryer, and

the $($iii$)$ ecofriendly accessory as they each go forward in their

respective markets.

You may want to consider the following pricing systems in

your explanation:

Cost $+$ Plus pricing

Target costing and target pricing

Penetration pricing

Price skimming.