You are the business advisor to an investor who is keen to fund the development of a range of outdoor camping equipment. After reviewing a market survey, undertaken at a cost of R750 000 to investigate consumer preferences, your client decided to launch a range of portable camping tables. You have been requested to assist in the development of a production and pricing strategy for the new entity. You have prepared the following forecast information relating to the new camping table:

Selling Price 245 Direct Labour (2 hours) (40) Direct Material (60) Variable Overhead (25) 120 An estimate of the annual overheads in respect of production of the new table is presented below: R Supervisors salary 160 000 Electricity 75 000 Depreciation 250 000 Quality Control 150 000 Rent, rates and taxes 75 000 Indirect materials 75 000 785 000 The entity will consist of two manufacturing departments (assembly and painting) and a maintenance department. For fixed overhead allocation purposes, the table will spend an hour in each of the manufacturing departments. The production manager has provided you with the following planned activity for each of the departments: Assembly Painting Maintenance % of indirect materials used 40 55 5 Book value of machinery R500 000 R500 000 R250 000 Megawatt hours 2 000 1 000 500 Employees 10 8 2 Floor area occupied (m2) 1 000 800 400 Maintenance hours 200 450 - Number of inspections 400 200 - Machine Hours 4 000 7 500 - Labour hours 10 000 6 000 - The demand for the table is expected to be 10 000 units in the first year and the owner has requested that the closing stock for the year be 500 units. In addition to the above, manufacturing overheads, the expected sales and marketing costs are R500 000 per annum (of which 50% are fixed). At a recent strategy session, the owner remained committed to commence the venture. However, he voiced concern about the recent labour problems that several business sectors have been experiencing. He advised that he is considering focusing on the design and marketing of camping equipment and outsourcing all manufacturing to a local sports equipment manufacturer.

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2. Compute the estimated product cost per unit for the new table. (25)

3. Calculate the margin of safety and comment on this ratio.

4. Calculate the product mix that will maximise profits. (14)

5. Based on the profit maximising product mix calculated in 4 above, prepare a budgeted income statement using variable costing principles. (14)

6. Based on the profit maximising output calculated in 4 above, prepare a budgeted income statement using absorption costing princip