ASSIGNMENT 02/2020 SUGGESTED SOLUTIONS MGA40AT/PFO117V

QUESTION 1

Material A 1 104,000 1
Material B 2 180,000
Components 3 200,000
Direct labour 4 58,200 1
Machine hours 5 2,800 1
Fixed overhead 6 NIL
Production director – 7 NIL
meeting
Total relevant cost R545,000

Notes:
1. Material A is in regular use by POULUS LIMITED and consequently its relevant
value is its replacement cost. [1]
The historical cost is not relevant because it is a past cost and the resale value is not
relevant since POULUS LIMITED is not going to sell it since the material is in regular
use and therefore must be replaced. (400kgx 260)

2. Material B is to be purchased for the contract therefore its purchase cost is

relevant.[1] Although only 800 kg are required for the work the minimum order quantity
is 40 litres and as POULUS LIMITED has no other use for this material and there is
no indication that the unused 200kg can be sold, the full cost of purchasing the 1000kg
is the relevant cost.

3. The components are to be purchased at a cost of R1000 each. This is a relevant

cost because it is future expenditure that will be incurred as a result of the work being
undertaken. [1]

4. Since 80 hours of spare capacity are available which have a zero relevant cost, the
relevant cost relates only to the other 180 hours [1]. POULUS LIMITED has two
choices: either use its existing employees and pay them overtime at R340 per hour
which is a total cost of R61,200;[1] or engage the temporary staff which incurs their
cost of R54,000[0.5] plus a supervision cost of R420 which equals R4,200. [0.5]The
relevant cost is the cheaper of these alternatives which is to use the temporary
employees.

5. The machine is currently being leased and it has spare capacity so it will either
stand idle or be used on this work. The lease cost will be incurred regardless so the
only relevant cost is the incremental running cost of R140 per hour. [1]

6. Fixed overhead costs are incurred whether the work goes ahead or not so it is not
a relevant cost.[1]
7. The production director has already had this meeting with the potential client,
therefore the relevant cost is NIL firstly because it is a past cost, and secondly because
even if it were future the director is paid an annual salary and therefore there is no
incremental cost to POULUS LIMITED. [1]

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QUESTION 2

General factory
Harvesting Pressing overhead

Variable overhead (R ) 2 970 000,00 5 350 000,00 1 760 000

RE-allocation 977 777,78 782 222,22 0,50

3 947 777,78 6 132 222,22

POR 28,20 54,75

1 1

Fixed overhead (R ) 500000 1600000 1900000

Re-allocation 1055556 844444,4 -1900000 0,5
1555556 2444444
POR 11,11 21,83
0.5 0.5

Product cost R SP @1.45 (R)

Material 20 0,5
Labour 3 75 0,5
4 104 0,5
VMO 0,5 5 140,99 0,5
0,5 6 328,51 668,50 765,44 0,5
FMO 0,5 5 55,56
0,5 6 130,95 855,01 1 239,77 0,5
VNMO 28,75 697,25 1 011,02 0,5
FNMO 1 5
1 11,4 900,16 1 305,23 0,5

QUESTION 3
Cost driver rate:
Cost R'000 Consumption ‘000 Rate
400 2000 0,20
1300 2500 0,52
1100 5000 0,22
160 1000 0,16
660 990 0,67

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Customer profitability:
Personal
loans Cheque Platinum Savings Total
Contribution 500 000 2 000 000 600 000 320 000 3 420 000

- 316 000 36 000 48 000 400 000

109 200 920 400 166 400 104 000 1 300 000
132 000 550 000 308 000 110 000 1 100 000
70 400 32 000 57 600 - 160 000
120 000 173 333 173 333 113 333 580 000
Total costs 431 600 1 991 733 741 333 375 333 3 540 000
Profit/(loss) 68 400 8 267 -141 333 -55 333 -120 000
[7 marks]
Platinum customer group is contributing the least to company profits. [1]

QUESTION 4

Price Units T Revenue MR Total cost MC

7 000 - - - 3 000 -
6 000 1 6 000 6 000 5 000 2 000
5 000 2 10 000 4 000 8 000 3 000
4 000 3 12 000 2 000 12 000 4 000
3 000 4 12 000 - 17 000 5 000
2 000 5 10 000 (2 000) 23 000 6 000
1 000 6 6 000 (4 000) 30 000 7 000
3 marks for total revenue, 1 mark marginal revenue;1 mark for all the total
costs;2 marks for all correct marginal cost;
From the table, the company’s marginal cost is less than its marginal revenue up until
the second unit is sold. Therefore, from the table we can conclude that this
monopolistic company’s profit-maximizing quantity is about 2 units and its profit-
maximizing price is about R5 000.[1]

QUESTION 5

(a) In order to ascertain the optimum price, you must use the formula P = a – bQ
Where P = price; Q = quantity; a = intersection (price at which quantity demanded will
be nil); b =gradient of the demand curve.
The approach is as follows:
(i) Establish the demand function i.e P = a – bQ
b = change in price/change in quantity = R5.6/70,000 = 0.00008. (1)
We know that if price = R72,60 quantity = 280,000 units.
We establish ‘a’ by substituting the values for P, Q and b into our demand function:
72,60 = a – 0.00008(280,000)
22,4 + 72,60 = a
Therefore a = 95. (1)
Demand function is therefore P = 95 – 0,00008Q

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(ii) Establish marginal cost
The total marginal cost = R13. (1)

(iii) MR=MC
(1) Establish the marginal revenue function
MR = a – 2bQ
MR = 95– 2(0,00008)Q
MR = 95 – 0,00016Q (1)

(2) Equate MC and MR

13 = 95 – 0,00016Q
0,00016Q = 95-13
0,00016Q = 82
0,00016 0,00016
Q = 512,500 (1)

(3) Find optimum price

P= a – bQ
P = 95 – (0.00008 x 512,500)
= R54 (1)
There are several limitations to using the economist’s model in practice:
1. Market research seldom sufficient: Market research is seldom sufficient to
predict the exact effect of a price change on demand, because many other factors
(e.g., product design, advertising, company image, and quality) are also influential.
2. Limited use: The model is not valid for all forms of markets (an oligopolistic
market, for example, which has only a few sellers).
3. Marginal costs too expensive: Practically speaking, costs accounting systems
cannot provide the marginal cost information needed in the model for a company’s
various product lines. [any 2]

QUESTION 6

Minimum required monthly contribution = R510 000/30 000 units =R17 per unit
(360 000/12 months)
Following is the list of all possible contributions exceeding R510 000(R17 per unit):
(VC)
per Contribution Total
SP (R) unit per unit contribution JP
30 12 18 30 000 540 000 0,3 0,2 0,060

40 12 28 30 000 840 000 0,45 0,2 0,090

40 16 24 30 000 720 000 0,45 0,5 0,225
40 20 20 30 000 600 000 0,45 0,3 0,135

50 12 38 30 000 1 140 000 0,25 0,2 0,050

50 16 34 30 000 1 020 000 0,25 0,5 0,125
50 20 30 30 000 900 000 0,25 0,3 0,075
Probability of earning a monthly contribution of R510 000 is 0,760

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The probability of earning contribution exceeding R510 000 is 76% [5]
• A risk-seeker is one who, given a choice between more or less risky
alternatives with identical expected values, prefers the riskier alternative. He
will use a maximx decision rule.
• A risk averse decision-maker will seek to avoid high levels of risk and will focus
on the less risky alternative. He will use the maximin decision rule.
• A risk neutral decision maker will tend to ignore risk and use the expected value
for decision-making.
[1 mark each =3marks]

QUESTION7 Amounts (R’000)

Reasonable
comply
R5000 x 40%
Company A
Fully comply
EV=R4610
R4600 x 10%
Not comply
R4300x 50%
Reasonable
comply
Company B R4800 x 40%
Fully comply
EV=R4690
R4700 x 10%
Not comply (.2)
R4600 x 50%

Reasonable
comply
Company C R5500 x 40%
EV=R4550 Fully comply
R3500 x 10%
Not comply (.2)
R4000 x 50%

Reasonable
comply
R6000 x 40%
Company D
Fully comply
EV=R5200 R3000 x 10%
Not comply (.2)
R5000 x 50%
[1 mark for EV]
Without perfect information Company A would be chosen since it has the lowest
expected value of R4 160 000.
If the additional information is obtained from Zindlo Limited, then this will give a perfect
prediction of the costs, and the bidder choice can be matched with the type of bidder’s
law compliance. Therefore, if the action is predicted to be reasonably comply
Company B will be selected, if the action is predicted to be fully comply Company D

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will be selected, and if the action is predicted to be not comply Company C will be
selected. The revised expected value is (R4800 x 40%) + (R3000 x 10%) + (R4000 x
50%) =R4 220 000 [2]
Value of perfect information =R4 220 000-R4 160 000= R60 000 [1]
The additional information from Zindlo Limited is not worth obtaining, as it will not
change the decision of selecting Company A. [1]