Spice Industries Ltd (SIL) produces a variety of spices, such as cinnamon, cumin, cardamom and star anise. The spices are distributed to food operators around the country. Its spices are prevalent, especially as the gourmet food trend expands across the nation. There is a constant demand for quality and freshness. As a result, the demand for spices is expected to increase in the coming years. SIL's fixed cost is the cost of operating the plant. The plant processes the spices for a month for $4,500. Variable costs are raw spices and labour costs. Each kilogram of processed spices requires raw spices, which cost \$18. Each kilogram of spices takes two hours to process and pack, and the business pays the labour $27 an hour. The labours are all on contracts that specify that they are not paid if they do not work for any reason. The spices are sold to a wholesaler for $90 per kilogram. SIL expects to sell 500 kilograms of spices a month. The business has the opportunity to rent a spice processor. Doing so would increase the total fixed costs of operating the plant for a month to $18,000 and reduce labour to one hour per kilogram of spices. The workers would still be paid $27 an hour. Before deciding to rent the processor, the managing director asked you for the following information: 1. What is the break-even point for the business? Without a new processor and with a new 2. How much profit would the business make each month from selling the spices when it sells 500 kg per month? (Show working clearly) a. Assuming that the business does not rent the spice processor? ( 3 marks) b. Assuming that it rents the processor? ( 3 marks) (6 marks) 3. Study and comment on the figures you calculated in (1) and (2). Relate your comment to the margin of safety and operating gearing concepts ( 7 marks). You should also recommend to the managing director whether to rent the processor (3 marks). (Word limit: 200 words or less) Spice Industries Ltd (SIL) produces a variety of spices, such as cinnamon, cumin, cardamom and star anise. The spices are distributed to food operators around the country. Its spices are prevalent, especially as the gourmet food trend expands across the nation. There is a constant demand for quality and freshness. As a result, the demand for spices is expected to increase in the coming years. SIL's fixed cost is the cost of operating the plant. The plant processes the spices for a month for $4,500. Variable costs are raw spices and labour costs. Each kilogram of processed spices requires raw spices, which cost \$18. Each kilogram of spices takes two hours to process and pack, and the business pays the labour $27 an hour. The labours are all on contracts that specify that they are not paid if they do not work for any reason. The spices are sold to a wholesaler for $90 per kilogram. SIL expects to sell 500 kilograms of spices a month. The business has the opportunity to rent a spice processor. Doing so would increase the total fixed costs of operating the plant for a month to $18,000 and reduce labour to one hour per kilogram of spices. The workers would still be paid $27 an hour. Before deciding to rent the processor, the managing director asked you for the following information: 1. What is the break-even point for the business? Without a new processor and with a new 2. How much profit would the business make each month from selling the spices when it sells 500 kg per month? (Show working clearly) a. Assuming that the business does not rent the spice processor? ( 3 marks) b. Assuming that it rents the processor? ( 3 marks) (6 marks) 3. Study and comment on the figures you calculated in (1) and (2). Relate your comment to the margin of safety and operating gearing concepts ( 7 marks). You should also recommend to the managing director whether to rent the processor (3 marks). (Word limit: 200 words or less)
