Theron Ltd is a South African company that manufactures commercial buses and trucks. The companys products are customer-focused, technologically advanced and fuel efficient. This has propelled the company to the forefront of the industry. Theron Ltd is in the process of finalising management accounts for its financial year ended 28 February 2018. Financial information relating to the manufacturing of buses and trucks for the financial year ended 28 February 2018 is provided below: 1. Theron Ltd does not carry any inventory (i.e. stock) of raw materials, work in progress and finished goods. The number of buses and trucks manufactured and sold by Theron Ltd and the respective average selling prices per unit are provided below: Buses Trucks Number of units manufactured and sold 40 60 Average selling price per unit R980 000 R1 350 000 2. Direct material costs per bus and truck amounted to R350 000 and R430 000 respectively. 3. The company employs its direct manufacturing labour force as and when required. Based on past experience, the company requires 650 hours and 800 hours to manufacture a bus and a truck respectively. An hourly wage rate for labour force used in the manufacturing of buses amounts to R350. On the other hand, the hourly wage rate for the labour force involved in the manufacturing of trucks is 40% higher than the wage rate for the manufacture of buses. 4. Fixed manufacturing overhead costs are currently allocated to production based on the number of machine hours. The fixed manufacturing costs for the 28 February 2018 financial year and accompanying notes are summarised below: Amount (Rand) Design and engineering 5 225 600 Quality control 3 840 000 Depreciation and maintenance 8 640 000 Other fixed manufacturing costs 9 834 400 Total fixed manufacturing cost 27 540 000 4.1.The architectural and structural design of the buses and trucks are determined during the initial phase of manufacturing. The costs incurred in this phase are accumulated as design and engineering costs. The appropriate cost driver for the design costs is the actual number of hours spent on a customer order. On average, 32 hours were dedicated to each order for the buses and 40 hours to a single order for the trucks. An order is placed by the customer for each bus or truck purchased. 4.2.Quality control involves a number of testing processes whereby Theron Ltd assess the general handling qualities, operational performance, carbon emission and system operation in normal mode, failure scenarios and extreme conditions. Quality control costs are driven by the number of test driving cycle hours simulated. The average duration of driving cycle is 18 hours for each bus and 20 hours for each truck. 4.3.Theron Ltd has five welding and fabrication machines. Machine hours are the most appropriate cost driver for depreciation and maintenance of the machines. Information pertaining to the utilisation of the machine for 28 February 2018 financial year is as follows: 6 Buses Trucks Actual number of machine hours 36 000 72 000 4.4.Other fixed manufacturing costs refers to cost of rental relating to the premises, salaries of supervisors, electricity costs utilised at the manufacturing premises and other manufacturing costs. The appropriate cost driver of other fixed manufacturing costs is the number of items (i.e. buses and trucks) manufactured in any given year. Theron Ltd entered into an agreement an advertising agency that handles all advertising and the agency charges the Theron Ltd a 5% commission on each bus or truck sold. Fixed administration and distribution costs are allocated to buses or trucks based on the number of buses or trucks sold. The fixed administration and distribution costs for the 30 June 2018 financial year amounted to R21 649 000. REQUIRED (a) Calculate the manufacturing cost per unit of the buses and trucks (i.e. unit product cost) manufactured by Theron Ltd in the 28 February 2018 financial year assuming that Theron Ltd applies the traditional costing. Marks 8 (b) Calculate the manufacturing cost per unit of the buses only (i.e. product unit cost) manufactured by Theron Ltd in the 28 February 2018 financial year assuming that Theron Ltd applies activity-based costing. 11 (c) Is Theron Ltd going to earn a higher profit for the year 28 February 2018 as a result of applying activity based costing instead of the traditional costing system? 3 (d) How many buses and trucks should Theron Ltd sell in order to break-even if the sales mix does not change?