Question

Question 1 30 marks You are the manager of Compounders Ltd. The company mixes compound for smaller plastic extrusion companies. Compounders Ltd has six (6) mixing machines with a maximum capacity (100%) of 250 ton per month. However, due to power cuts, the machines are currently being operated at 75% of installed capacity. One (1) ton of a compound mixture consists of two (2) raw materials: 0.7 ton of Electrolyte and 0.3 ton of Copper Wire. Assume no wastage. There are no opening and closing inventories. All raw materials purchased are being used in the month of purchase, and all compound mixed are being sold in the month mixed. Each mixing machine requires two (2) operators. The company is operating a nine (9) hour shift and each machine operator earns R75 per hour. No weekend time nor overtime is allowed. The company is a price setter and the pricing policy is based on a mark-up of the total production cost at 50%. The company incurred the following costs for the month: 1. Import (purchase) raw material for one month’s production. Material Electrolyte @ R60 per ton and Copper Wire @ R95 per ton. 2. The import costs amount to R1,000 per 250 ton of Material Electrolyte and R1,500 per R120 ton of Copper Wire. 3. Paid the wages based on a twenty (20) working days. 4. The factory foreman earns a salary of R15,000 per month. 5. The cost of security is as follows: Guard at the entrance of the factory R3,500 per month and the guard at the entrance to the admin offices R3,750 per month. 6. The monthly rental amounts to R25,000. Rent is allocated based on floor space occupied. The factory occupies 9,100 ??2 and the office block 3,900 ??2. 7. Office expenses amounts to R64,000 per month. 8. Compound delivery cost amount to R1,200 per 125 ton of compound delivered.

Required:

1.1 Calculate the selling price per ton of the compound mixture. Use the following table in your workings as marks will also be awarded for individual calculations (Max 20 marks)

No    Cost incurred    Production Cost:(R) Period Cost: (R)

1.2 Calculate the variable cost per ton of the compound mixture and the total fixed cost. Use the following table in your workings as marks will also be awarded for individual calculations. (6) No    Cost incurred Variable: (R) Fixed Cost: (R)

1.3 Calculate the contribution per ton produced. (2)

1.4 Calculate the break-even tons to be mixed (2)

Question 2 15 marks Johnson B (Pty) Limited is considering a project that would require an initial investment of R924, 000 and would have a useful life of eight (8) years. The annual cash receipts would be R600,000 and the annual cash expenses would be R240,000. The salvage value of the assets used in the project would be R138,000. The company uses a discount rate of 15%. Additional Working Capital of R400,000 will be required for the project.

2.1 Compute the net present value of the project (10)

2.2 Compute the Payback period (3)

2.3 Would you recommend the Investment (2)

Please use the following template to assist you:

   TEMPLATE

No Transaction Time period Value Factor PV

1    Working capital investment

2    Initial investment

3    Cash flows in

4    Cash flows out

5    Salvage value

6    Working capital recovery

7    NPV

NB: Ignore taxes for this question (thus no depreciation should be considered)

Question 3 5 Marks Varney Company makes rolling suitcases. Its sales budget for four months is:

   Month Sales R

March 15,000

April    20,000

May    40,000

June 60,000

Varney's policy is that ending inventory of finished suitcases should equal 30% of the next month's sales. Beginning inventory (March 1) is 5,300 suitcases. Each suitcase required 1.5 meters of ballistic nylon. The ending inventory policy for nylon is that 20% of the following month's production needs must be on hand. On March 1, Varney had 10,450 meters of nylon in inventory.

Required:

3.1 What is the desired ending inventory of suitcases for April? (1)

3.2 What is the budgeted production of suitcases for April? (1)

3.3 What is the desired ending inventory of nylon for March? (1)

3.4 What are the budgeted meters of nylon to be purchased in March? (1)

3.5 Assuming each suitcase required two meters of ballistic nylon, what is the desired ending inventory of nylon for March? (1)

Answer 1

Question 1:

Computation of Total Production Cost:

Current activity level : 250 tons x 75% = 187.5 tons

Direct Materials ( 187.50 x 0.7 x 60 + 187.50 x 0.3 x 95)	R 13,218.75
Import Costs ( 187.50 x 0.7 ) / 250 x R 1,000 + ( 187.5 x 0.3 ) / 120 x R1,500	1,228.13
Direct Labor ( 6 machines x 2 operatorsx 9 hours x 20 days x R75)	162,000
Factory Foreman Salary	15,000
Cost of Factory Security	3,500
Factory Rent	17,500
Total Cost	R212,446.88
Output in Tons	187.5 tons
Production Cost per ton	R1,133.05 per ton

1.1 Selling price per ton = R 1,133.05 + 50% = $ 1,699.58.

1.2 Variable costs per ton = R ( 13,218.78 + 1,228.13 + 162,000) / 187.50 tons + R1,200 / 125 = R 950.65

Total fixed costs per month : R 111,250.

1.3 Contribution margin per ton = R(1,699.58 - 950.65) = R748.93

1.4 Break-even tons = R111,250 / R748.93 = 148.55 tons per month

Question 2:

2.1 NPV of the project : $ 467,300

2.2 Payback period : 3.68 years.

2.3 Yes, the investment is recommended. The NPV is positive, and the payback happens in the fourth year of project life.

		Time Period	Value	Factor	PV
1	Working Capital Investment	0	(400,000)	1.0000	(400,000)
2	Initial Investment	0	(924,000)	1.0000	(924,000)
3	Cash Flows In	1-8	600,000	4.4873	2,692,380
4	Cash Flows Out	1-8	(240,000)	4.4873	(1,076,952)
5	Salvage Value	8	138,000	0.3269	45112
6	Working Capital Recovery	8	400,000	0.3269	130,760
7.	NPV				467,300

Question 3:

3.1 Desired ending inventory of suitcases for April : 12,000 suitcases

3.2 Budgeted production of suitcases for April : 26,000 suitcases

3.3 Desired ending inventory of nylon for March : 7,800 meters.

3.4 Budgeted meters of nylon to be purchased in March : 20,900 meters.

3.5 Desired ending inventory of nylon for March : 10,400 meters.

Production Budget:

	March	April	May	June
Budgeted unit sales	15,000	20,000	40,000	60,000
Desired ending inventory ( 30% of next month sales)	6,000	12,000	18,000
Total needs	21,000	32,000	58,000
Less: Beginning inventory	5,300	6,000	12,000
Budgeted Production in units	15,700	26,000	46,000

Direct Materials Budget:

	March	April	May	June
Nylon needed in production	23,550	39,000	69,000
Desired ending inventory ( 20% of next month production needs)	7,800
Total Needs	31,350
Less: Beginning Inventory	10,450
Budgeted Purchases	20,900