The financial results for the division are deteriorating fast. The abbreviated results for the financial year ended 30 September 2022 are as follows: R000 Sales 15 000 Less: Cost of sales 13 000 Material 6 000 5 000 2 000

Labour Overheads Gross profit 2 000 Less: administration cost 1 800 Net profit 200

The managing director is concerned about the results of this division. The production manager is adamant that production is proceeding with the minimum of delays, idle time and wastage. The marketing manager has suggested that the product mix may be wrong and the managing director would appreciate your input on this matter.

3

The following additional information is provided: A statistical analysis of the material and labour cost show the following variable elements in the costs: Material 90% Labour 70% The movement in overheads were monitored over the last three months of the year and the following relationship was noted: Production (units)

Total cost (R) July 2022 14 000 162 000 August 2022 16 000 178 000 September 2022 15 000 170 000 20% of the administration cost is attributable to common head office overhead costs allocated to the different divisions on a pro-rata basis. The administration cost directly related to the division may be divided between fixed and variable cost in a 40:60 ratio. The following apportionment of the sales and elements of the costs among the three products manufactured in this division, has been identified as part of an activity based costing study: A (%)

B (%)

C (%)

Total (%) Sales 42 25 33 100 Material 35 40 25 100 Labour 45 25 30 100 Overhead 40 40 20 100 Administration cost 30 40 30 100

REQUIRED Marks (a) Prepare a statement for the year showing contribution per product line and comment briefly on these contributions.

(15)

4

(b) Calculate the total breakeven sales level (in Rand) for the division, ignoring allocated head office fixed costs. Round off to 2 decimal places where necessary

(3)

(c) Determine the order of sales preference for orders next year, assuming that all cost and sales relationship remain unchanged, in order to maximize contribution as a percentage of sales.