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4 999 990 ## al 14% _ 16:40 CMA611S...NE 2018 Question 4 (25 marks) Namaqua-Pumps Ltd is a pump-manufacturing company based in Rundu, Kavango West. Namaqua-Pumps has been in the business for a few years now, and it supplies pumps to the local market. The financial that Namaqua-Pumps should also export its product to other regions in order to enlarge their footprint. Although Namaqua-Pumps has experienced significant growth in revenue in previous years, however, the growth has recently slowed down. This is mainly due to the harsh economic environment within Namibia There is fear among the employees that they may be retrenched due to the harsh economy. However, the company management's public announcement on its website reads as follows: "We as Namaqua- Pumps will do our very best to ensure the well-being of not only our employees, but also the community around us. We are aware of the current situation and we are trying our utmost best to make sure that there would not be any retrenchment of our employees. We are also experiencing difficulty with limited resources at our disposal, but we will do everything possible to ensure that employees' jobs are safe and that our community projects continue. Any changes to this will be discussed with the respective unions." Namaqua's Pump system As part of his preparations for the budget for the month of May 2018, the previous accountant of the Namaqua-Pumps completed a breakeven analysis and concluded that the breakeven production and sales volumes amounted to 20 500 pumps. The fact that the company only sold 20 000 pumps but is reporting a preliminary profit of N$130 000 for the month of April 2018, has raised a concern about the integrity of the information generated by the division's accounting department. Management of Namaqua-Pumps had some queries regarding the calculations performed in the division. The following have been established: Page 4 of 5 Pare 4 OT 5 NS Namaqua-PUMP Ltd ACTUAL STATEMENT OF PROFIT OR LOSS FOR THE MONTH ENDING 30 APRIL 2018 Notes Sales 2 000 000 Less: Cost of sales (1 700 000) Opening stock - Inventory at beginning of month Production costs 2 125 000 Inventory at end of the month - Finished goods (425 000) Production overheads -over/under recovery 90 000 Gross profit Selling costs Administration costs 390 000 (180 000) (80 000) Net income before tax for the month 130 000 1) 2) Notes: Sales and production had been budgeted for April at 22 000 pumps. The budgeted fixed manufacturing overheads was N$660 000 The budgeted selling price for April was N$100 per pump. Actual production volumes exceed actual sales. 3) The actual unit costs and selling prices were all equal to budgeted amounts. 4) 25% of selling costs are variable. 5) Administration costs are fixed. 6) Production overheads are absorbed based on pumps produced. 7) Statement of profit or loss was prepared according to absorption costing. Requirement: (25) a) Briefly discuss the reasons why the Namaqua-Pumps Ltd reported a profit for the month of April 2018 while selling less pumps than the anticipated breakeven point. b) Calculate the actual units of pump systems produced for the month of April 2018 for Namaqua-Pump. c) Explain whether there is an under-absorption or an over-absorption of overheads based on the statement of profit or loss for April 2018 for Namaqua-Pumps. d) Assume that the actual units of production was 25 000 for the month of April 2018. Calculate the total variable cost per unit of Namaqua-Pumps for April 2018. e) Calculate the contribution and net profit that Namaqua-Pumps could achieve if sales increase to 26 000 units. END OF QUESTION PAPER Page 5 of 5 4 999 990 ## al 14% _ 16:40 CMA611S...NE 2018 Question 4 (25 marks) Namaqua-Pumps Ltd is a pump-manufacturing company based in Rundu, Kavango West. Namaqua-Pumps has been in the business for a few years now, and it supplies pumps to the local market. The financial that Namaqua-Pumps should also export its product to other regions in order to enlarge their footprint. Although Namaqua-Pumps has experienced significant growth in revenue in previous years, however, the growth has recently slowed down. This is mainly due to the harsh economic environment within Namibia There is fear among the employees that they may be retrenched due to the harsh economy. However, the company management's public announcement on its website reads as follows: "We as Namaqua- Pumps will do our very best to ensure the well-being of not only our employees, but also the community around us. We are aware of the current situation and we are trying our utmost best to make sure that there would not be any retrenchment of our employees. We are also experiencing difficulty with limited resources at our disposal, but we will do everything possible to ensure that employees' jobs are safe and that our community projects continue. Any changes to this will be discussed with the respective unions." Namaqua's Pump system As part of his preparations for the budget for the month of May 2018, the previous accountant of the Namaqua-Pumps completed a breakeven analysis and concluded that the breakeven production and sales volumes amounted to 20 500 pumps. The fact that the company only sold 20 000 pumps but is reporting a preliminary profit of N$130 000 for the month of April 2018, has raised a concern about the integrity of the information generated by the division's accounting department. Management of Namaqua-Pumps had some queries regarding the calculations performed in the division. The following have been established: Page 4 of 5 Pare 4 OT 5 NS Namaqua-PUMP Ltd ACTUAL STATEMENT OF PROFIT OR LOSS FOR THE MONTH ENDING 30 APRIL 2018 Notes Sales 2 000 000 Less: Cost of sales (1 700 000) Opening stock - Inventory at beginning of month Production costs 2 125 000 Inventory at end of the month - Finished goods (425 000) Production overheads -over/under recovery 90 000 Gross profit Selling costs Administration costs 390 000 (180 000) (80 000) Net income before tax for the month 130 000 1) 2) Notes: Sales and production had been budgeted for April at 22 000 pumps. The budgeted fixed manufacturing overheads was N$660 000 The budgeted selling price for April was N$100 per pump. Actual production volumes exceed actual sales. 3) The actual unit costs and selling prices were all equal to budgeted amounts. 4) 25% of selling costs are variable. 5) Administration costs are fixed. 6) Production overheads are absorbed based on pumps produced. 7) Statement of profit or loss was prepared according to absorption costing. Requirement: (25) a) Briefly discuss the reasons why the Namaqua-Pumps Ltd reported a profit for the month of April 2018 while selling less pumps than the anticipated breakeven point. b) Calculate the actual units of pump systems produced for the month of April 2018 for Namaqua-Pump. c) Explain whether there is an under-absorption or an over-absorption of overheads based on the statement of profit or loss for April 2018 for Namaqua-Pumps. d) Assume that the actual units of production was 25 000 for the month of April 2018. Calculate the total variable cost per unit of Namaqua-Pumps for April 2018. e) Calculate the contribution and net profit that Namaqua-Pumps could achieve if sales increase to 26 000 units. END OF QUESTION PAPER Page 5 of 5