MAC3701 ASSIGNMENT 2
Part A (A – a): Critical Evaluation of the Actual Income Statement
1. Sales: Agree. Sales are R45,000,000 for Gearboxes and R38,400,000 for Couplings, totaling
R83,400,000.
2. Cost of Sales: We’ll break this down.
- *Direct Material*: Agree based on given calculations (R12,708,000 for Gearboxes, R9,252,000 for
Couplings). Total = R21,960,000.
- *Direct Labour*: Agree. R4,320,000 for Gearboxes, R5,400,000 for Couplings. Total = R9,720,000.
- *Variable manufacturing overhead (VMO)*: Agree. R3,300,000 for Gearboxes, R3,960,000 for
Couplings. Total = R7,260,000.
- *Fixed manufacturing overhead (FMO)*: Agree. R3,000,000 for Gearboxes, R6,120,000 for Couplings.
Total = R9,180,000.
3. Gross profit: Agree based on calculations. R21,612,000 for Gearboxes, R13,668,000 for Couplings.
Total = R35,280,000.
4. Less: Total non-manufacturing costs:
- *Over/Under Allocation*: Agree. R7,500 for Gearboxes, R92,500 for Couplings. Total = R100,000.
- *Fixed and variable selling costs*: Agree. R5,000,000 each for Gearboxes and Couplings. Total =
R10,000,000.
- *Carbon Emissions costs*: Agree based on 7% of sales. R3,024,000 total.
- *Administration costs*: Agree. R12,000,000 total.
5. Net profit: Agree based on calculations. R14,362,000 for Gearboxes, R5,644,000 for Couplings. Total =
R7,906,000 considering total column.
Part A (A – b): Social, Ethical, Environmental, and Business-Related Risks
From the company information, four risks Sizanani may be exposed to during the 2025 financial year
are:
1. Environmental Risk: Increasing scrutiny on carbon emissions impacting profit margins.
, 2. Business Risk: Strained diplomatic and trade relations between South Africa and the United States
affecting 35% of Sizanani’s sales to the US.
3. Social/Ethical Risk: Reliance on skilled artisans and potential impacts of supply chain pressures on
operations and employee management.
4. Business Risk: Rising input costs and global supply chain pressures affecting profitability.
Part B
B-a. Minimum transfer price per unit of rubber seal that CFA is willing to transfer to APM for the 2026
financial year.
To determine the minimum transfer price, we consider the costs CFA would save by not selling
externally and the costs associated with internal transfer. Given CFA operates at full capacity and sells
80% of production externally:
- Variable cost per unit for CFA = Direct Material + Direct Labour + Variable Manufacturing overheads +
External variable selling costs (forgone if transferred internally instead of sold externally)
- Costs per unit = R5,100,000 + R2,100,000 + R600,000 + R900,000 for 1,200,000 units.
- Variable cost per unit = (R5,100,000 + R2,100,000 + R600,000)/1,200,000 = R6.50 per unit. External
variable selling cost per unit = R900,000/1,200,000 = R0.75 per unit.
- Minimum transfer price = Variable cost per unit + Opportunity cost (considering selling externally).
Since CFA is at full capacity and APM wants 350,000 units which are currently bought externally:
- Minimum transfer price = R6.50 (variable costs) + R0.75 (external variable selling cost saved by internal
transfer) = R7.25 per unit considering no opportunity cost of lost sales since we’re looking at costs
saved.
B-b. Maximum transfer price per unit that APM is willing to pay for units transferred from CFA.
APM is currently sourcing at R6.75 per unit externally. APM would be willing to pay up to this external
price for internal sourcing considering no other benefits like reduced lead times are factored.
- Maximum transfer price = R6.75 per unit.
B-c. Comment on whether CFA management would be willing to transfer the rubber seals to APM at
R7.40 per unit.
Given the minimum transfer price for CFA is R7.25 per unit and the proposed price is R7.40 per unit:
- CFA would be willing to transfer at R7.40 per unit because R7.40 > R7.25 (minimum transfer
price).
Part A (A – a): Critical Evaluation of the Actual Income Statement
1. Sales: Agree. Sales are R45,000,000 for Gearboxes and R38,400,000 for Couplings, totaling
R83,400,000.
2. Cost of Sales: We’ll break this down.
- *Direct Material*: Agree based on given calculations (R12,708,000 for Gearboxes, R9,252,000 for
Couplings). Total = R21,960,000.
- *Direct Labour*: Agree. R4,320,000 for Gearboxes, R5,400,000 for Couplings. Total = R9,720,000.
- *Variable manufacturing overhead (VMO)*: Agree. R3,300,000 for Gearboxes, R3,960,000 for
Couplings. Total = R7,260,000.
- *Fixed manufacturing overhead (FMO)*: Agree. R3,000,000 for Gearboxes, R6,120,000 for Couplings.
Total = R9,180,000.
3. Gross profit: Agree based on calculations. R21,612,000 for Gearboxes, R13,668,000 for Couplings.
Total = R35,280,000.
4. Less: Total non-manufacturing costs:
- *Over/Under Allocation*: Agree. R7,500 for Gearboxes, R92,500 for Couplings. Total = R100,000.
- *Fixed and variable selling costs*: Agree. R5,000,000 each for Gearboxes and Couplings. Total =
R10,000,000.
- *Carbon Emissions costs*: Agree based on 7% of sales. R3,024,000 total.
- *Administration costs*: Agree. R12,000,000 total.
5. Net profit: Agree based on calculations. R14,362,000 for Gearboxes, R5,644,000 for Couplings. Total =
R7,906,000 considering total column.
Part A (A – b): Social, Ethical, Environmental, and Business-Related Risks
From the company information, four risks Sizanani may be exposed to during the 2025 financial year
are:
1. Environmental Risk: Increasing scrutiny on carbon emissions impacting profit margins.
, 2. Business Risk: Strained diplomatic and trade relations between South Africa and the United States
affecting 35% of Sizanani’s sales to the US.
3. Social/Ethical Risk: Reliance on skilled artisans and potential impacts of supply chain pressures on
operations and employee management.
4. Business Risk: Rising input costs and global supply chain pressures affecting profitability.
Part B
B-a. Minimum transfer price per unit of rubber seal that CFA is willing to transfer to APM for the 2026
financial year.
To determine the minimum transfer price, we consider the costs CFA would save by not selling
externally and the costs associated with internal transfer. Given CFA operates at full capacity and sells
80% of production externally:
- Variable cost per unit for CFA = Direct Material + Direct Labour + Variable Manufacturing overheads +
External variable selling costs (forgone if transferred internally instead of sold externally)
- Costs per unit = R5,100,000 + R2,100,000 + R600,000 + R900,000 for 1,200,000 units.
- Variable cost per unit = (R5,100,000 + R2,100,000 + R600,000)/1,200,000 = R6.50 per unit. External
variable selling cost per unit = R900,000/1,200,000 = R0.75 per unit.
- Minimum transfer price = Variable cost per unit + Opportunity cost (considering selling externally).
Since CFA is at full capacity and APM wants 350,000 units which are currently bought externally:
- Minimum transfer price = R6.50 (variable costs) + R0.75 (external variable selling cost saved by internal
transfer) = R7.25 per unit considering no opportunity cost of lost sales since we’re looking at costs
saved.
B-b. Maximum transfer price per unit that APM is willing to pay for units transferred from CFA.
APM is currently sourcing at R6.75 per unit externally. APM would be willing to pay up to this external
price for internal sourcing considering no other benefits like reduced lead times are factored.
- Maximum transfer price = R6.75 per unit.
B-c. Comment on whether CFA management would be willing to transfer the rubber seals to APM at
R7.40 per unit.
Given the minimum transfer price for CFA is R7.25 per unit and the proposed price is R7.40 per unit:
- CFA would be willing to transfer at R7.40 per unit because R7.40 > R7.25 (minimum transfer
price).
