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 $$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:

R

Direct materials $60$

Direct labour $(1$ hour$)50$

Standard direct cost $110$

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:

$\%$ standard direct labour cost

Variable manufacturing overhead $20\%$

Fixed manufacturing overhead $60\%$

Predetermined manufacturing overhead rate $80\%$

Variable manufacturing overhead varies with direct labour cost.

Spare Parts Ltd$$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. $(3)$ Question $4$: $[10]$

Share Std Deviation Avg Return D:E Ratio

A $10\%11\%0\mathrm{.}8$

B $12\%11\%0\mathrm{.}9$

C $15\%14\%1\mathrm{.}2$

Required:

$1.$ Mrs Apple is a risk taker. Which share is she most likely to invest in and why? $(2)$

$2.$ Mrs Smith is risk$-$averse. Which share is she most likely to invest in and why? $(2)$

$3.$ Mr$.$ Smith wants to make the best possible investment, regardless of risk. Advise him as to which share he should invest in$.$ Provide any supporting calculations and comments

which may be necessary. $(4)$

$4.$ Define financial risk, and determine which share represents the company with the highest financial risk. $(2)$