Spirit Bakery usually has a good return on investment (ROI). Last year the profits fell, and the managing director thinks the entity should restructure the current pricing strategy based on mark- up. The production manager however believes the problems may be attributed to an inappropriate costing system where overheads were not properly absorbed into the final product.

The production manager thinks that other utilities are to be apportioned using floor area and the service departments provide support to the production as well as the other service departments. The estimated overhead costs for the entity for December 2022 are as follows:

Budgeted Overheads

Plant depreciation Plant insurance Power

$1,750,000 $1,800,000 $3,250,000

Heat and Lighting Other utilities Rent and Rates

$6,500,000 $ 500,000 $2,200,000

In addition, the following overheads have been allocated to cost centers:

Budgeted Overheads

Indirect Material Indirect Labour

Bakery

$10,600,000 $ 5,500,000

Packaging

$6,400,000 $3,700,000

Stores

1,000 10 30,000 5,000 $15,000,000 36,000 - 10,000

Store

$1,200,000 $1,800,000

Maintenance

500 10 50,000 5,000 $15,000,000 18,000 100 -

Maintenance

$800,000 $200,000

Total

10,000 225 200,000 100,000 $100,000,000 180,000 500 100,000

Further information presented below:

Basis

Floor area (m2) # of employees Machine Hours Labour hours Plant values ($)

Kilowatt Hours # of requisitions Maintenance hrs.

Bakery

6,000 125 100,000 10,000 $45,000,000 90,000 250 60,000

Packaging

2,500 80 20,000 80,000 $25,000,000 36,000 150 30,000

The entity uses the same materials for all its products and the average raw material price is listed at $300 per kilogram. While, the average direct labour hour rate is listed at $275 per hour. The pricing policy of the entity is to maintain a margin of 20% on all its products. The data below pertains to both products:

Raw material per kg Direct labour hours Machine hours

Required:

Original Spicy

6 3 4 3 1 2

a) Prepare the overhead analysis schedule showing the allocated, apportioned, and re-

apportioned factory overhead costs for each cost center.

b) Calculate the OARs

c) Calculate the selling prices, total costs, and profits for each product.

(26 marks) (4 marks) (10 marks)

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Question 2 (25 marks)

Mega Value's main product is the sugar lollipop. Each item is sold for $800 with a profit margin of 25% each. The company orders 450,000 units quarterly and management wants to know the optimal order quantity. To place each order, the entity designates a single employee who is paid at a rate of $50 per hour which takes a maximum of five hours. The cost of holding each unit of inventory is $4.

Management was advised by the supplier that a 2.5% discount will be given if the company doubles its current lot size. On the other hand, a 5% discount will be granted for two and a half times the current lot size and a 10% discount if the order size is four times the amount.

Required:

a) Calculate the EOQ based on the formula. (3 marks)

b) Calculate the total cost based on the EOQ. (4 marks)

c) Calculate the total cost for each individual alternate order quantity including the current

policy. (16 marks)

d) Which order quantity is considered the optimal order quantity and why? (2 marks)