The Souk manufactures two types of stainless-steel sheets namely Ferritic stainless-steel sheets (FSS) and Austenitic stainless-steel sheets (AUSS). FSS is manufactured in batches by melting iron and chromium in an electric arc furnace after which the mixture is refined, decarburised, cast, grounded and rolled. AUSS is also manufactured in batches, by melting nickel, iron and chromium in the electric arc furnace and then refining, decarburising, casting, grounding and rolling the mixture. The iron direct raw material used in the manufacturing process are bought from scrap iron vendors.

Souk has the capacity to melt 1 million tonnes of raw material per financial year. The electric arc furnace can melt 300 tonnes of raw material at a time (one batch) and uses 132 megawatt-hours (MWh) of electricity to melt one batch of FSS raw materials and 150 MWh to melt one batch of AUSS raw materials. Uninterrupted electricity is important for the optimal working of the furnace and for reducing the maintenance required on the furnace. The Souk operates during off-peak hours when there is usually more electricity available.

1. Budgeted information for the financial year ending 31 December 2022

1.1. Souk is budgeted to run at 90% capacity and will produce the same number of batches per month.

1.2. The standard manufacturing ratio is one batch of FSS to 1,5 batches of AUSS.

1.3. FSS is sold at R20 000 per tonne and AUSS at R22 000 per tonne. It is expected that all stainless-steel products manufactured will be sold during the month in which they are manufactured.

1.4. Souk budgeted to have no opening and closing inventory of any kind.

1.5. Souk buys its electricity directly from Eskom and is charged R1 850 per MWh. Souk is also charged an electricity network usage fee of R20 000 per month.

1.6. It was budgeted that no losses will occur in the manufacturing process. One tonne of finished stainless steel will require a total of one tonne of direct raw materials.

1.7. It is budgeted that FSS will consist of 15% chromium and 85% iron while AUSS will consist of 18% chromium, 8% nickel and the remainder iron.

1.8. Souk suppliers indicated that the direct raw material prices will be R2 800 per tonne for iron, R3 000 per tonne for chromium and R580 per tonne for nickel.

1.9. Direct labour costs are R1 600 per direct labour clock hour and it takes 1,5 and 2 direct labour clock hours to manufacture one tonne of FSS and one tonne of AUSS, respectively.

1.10. Variable manufacturing overhead (VMO) costs, which exclude the direct electricity costs used for the electric arc furnace, are allocated based on machine time used in the manufacturing of each product. The VMO recovery rate per machine hour is R3 200 per hour and it takes 150 and 165 machine minutes to manufacture one tonne of FSS and one tonne of AUSS sheets, respectively.

1.11. The delivery of the finished goods stainless-steel products takes place using diesel heavy vehicles. The variable delivery cost per tonne is R1 870.

1.12. The other budgeted fixed costs for the year are:

Details	R
Electric arc furnace maintenance cost	23 040 000
Quality inspection costs	10 000 000
Selling and distribution costs	32 400 000
Permanent manufacturing staff salaries	40 000 000
Depreciation of manufacturing machinery	20 500 000
Administrative costs	92 000 000
Total	217 940 000

1.13. Souk budgeted to recover all the budgeted fixed manufacturing overhead (FMO) costs. The FMO allocation rate is based on budgeted machine hours.

2. Actual information for the month ending on 30 September 2022

2.1 27 000 tonnes of FSS and 40 500 tonnes of AUSS were produced in the month.

2.2 5 400 tonnes of chromium and 21 650 tonnes of iron were purchased and used to manufacture FSS. The actual purchase prices for chromium and iron were 5% per tonne more than the budgeted prices.

2.3 The actual machine time for the month was 67 950 and 111 200 machine hours for FSS and AUSS respectively

3. Planned information relating to the month ending on 30 November 2022

The production manager has been informed by Eskom that they will only be able to provide the Souk with 33 900 MWh for its electric arc furnace during November 2022 due to load shedding. The production manager is concerned about this because the electric arc furnace requires consistent electricity at a high level of megavolt-amperes to reduce damage to and maintenance of the furnace. The finance team further informed him that due to the diesel price, running the diesel generators might not be cost-efficient, especially in light of the increased competition from companies that import cheap stainless steel.

The increased load shedding also affects Souks chromium providers and Souk will only be able to procure 12 650 tonnes of chromium during November. In addition, Souks management received a communique from the police informing them of the increase of scrap iron vendors who acquire their scrap iron through illegal means such as stealing train tracks. The communication also highlighted the implications for Mills if they were caught buying scrap iron without receiving the necessary documents from their vendors showing the source of the scrap iron.

Question:

a. briefly discuss if the Souk is a price setter or a price taker when determining their long-term selling prices and,

b. In a management meeting, one of the managers stated, we should apply the same costing principles when determining the selling price for special once-off orders and when determining the long-term selling price of our other products. Indicate if you agree or not with the aforementioned statement and motivate your answer. No calculations are required.