MAC3701 Assignment 2 (COMPLETE ANSWERS) Semester 1 2024 (622981) - DUE 18 April 2024

MAC3701 Assignment 2 (COMPLETE ANSWERS) Semester 1 2024 (622981) - DUE 18 April 2024 ;100% TRUSTED workings, explanations and solutions. for assistance Whats-App.......0.6.7..1.7.1..1.7.3.9......... QUESTION 1 (100 Marks; 180 Minutes) Shesha Nami (Pty) Ltd (SN) is a well-established electronic bicycle manufacturing company operating from its plant and distribution centre in Middelburg (Mpumalanga), South Africa. The company has a male-dominated management team and is well known for its quality products and commitment to sustainability. SN makes two types of electrical bikes, namely the Electric mountain bike (E-MTB) and the Electric city bike (E-CB). The E-MTB has a bigger frame and tyres than the E-CB to provide stability and control for more rugged terrains. Both bikes make use of an electric motor, powered by a battery, to assist with propulsion. SN makes use of an absorption costing system and all its inventory items are valued using the first-in-first-out (FIFO) method. SN has a 31 December financial year end. 1. SN’s STANDARD AND BUDGETED INFORMATION FOR THE 2023 FINANCIAL YEAR 1.1. Inventory and manufacturing The company had no budgeted opening and closing inventory of any type. SN budgeted to manufacture the electronic bikes in direct proportion to its standard sales mix. The budgeted manufacturing levels for the 2023 financial year were equal to the company’s normal manufacturing capacity. 1.2. Sales SN budgeted to sell 24 000 E-MTB and 16 000 E-CB units. One bike is equal to one unit. The budget selling price per unit for E-MTB and E-CB was R28 000 and R26 000 respectively. 1.3. Variable and Fixed costs The E-bike manufacturing starts with the frame and suspension made from Aluminium. The frame and suspension are produced according to the bike’s design and specification using various cutting and bonding machinery. Once the frame and suspension are ready, various components (wheels, brakes, drivetrain & other components) are attached to the frame. The key components that differentiate E-bikes from traditional bicycles are the electric motor and lithium-ion battery which are integrated into the bike’s frame. SN employs factory workers for the manufacturing and assembly process. The standard is to allow 8% idle time for these direct labourers. Page 3 of 8 MAC3701 Assessment 02/S1/2024 [TURN OVER] QUESTION 1 (continued) 1.3.1. Variable costs The standard variable cost requirements for one E-MTB and one E-CB unit are: Requirements per unit INPUTS E-MTB E-CB Budgeted price Aluminium 1,8 kilogram 1,5 kilogram R 42 000 per ton Electric motor 1 electric motor 1 electric motor R 3 800 per motor Lithium-ion Battery 1 battery 1 battery R 6 000 per battery Various components 1,1 component sets 1 component set R 12 500 per set Direct labour 90 clock minutes per bike 90 clock minutes per bike R 105 per clock hour Variable manufacturing overheads (VMO) 45 machine minutes 45 machine minutes R13 per machine hour Selling and distribution Refer to 1.4 Refer to 1.4 R50 per bike 1.3.2. Fixed costs Fixed manufacturing overhead costs (FMO) are allocated based on budgeted labour hours and the total budgeted fixed manufacturing overheads were R. 1.4. Selling and distribution costs Selling and distribution costs were budgeted to be a total of R3 000 000 for the year. 1.5. Administrative costs Increased environmental regulations have highlighted some concerns around SN’s CO2 emissions due to greenhouse gases that are released during the welding process. Additionally, SN’s lack of a recycling strategy as an area of concern, due to its use of non-recyclable materials during manufacturing, was underlined. As a result, management budgeted fixed administrative costs of R for the year to accommodate for increased compliance costs. Page 4 of 8 MAC3701 Assessment 02/S1/2024 [TURN OVER] QUESTION 1 (continued) 2. ACTUAL RESULTS FOR THE 2023 FINANCIAL YEAR 2.1. Manufacturing and Sales Rising demand for electrical bikes resulted in intense competition in the market coming from new entrants. Production challenges also meant that the company could not take advantage of demand trends. As a result, actual sales units were 8% lower than budgeted and the actual manufacturing levels were 5% lower than budgeted. Selling prices and sales mix were equal to the budget. There was no actual opening inventory of any type at the beginning of the 2023 financial year and no closing direct raw materials at the end of the financial year. 2.2. Variable and Fixed costs 2.2.1. Variable costs i. Due to global supply chain issues, there was a shortage of lithium-ion batteries in the market which resulted in a 10% increase in the price of batteries from the budget. ii. There was a protected union strike as employees had not received salary increases in violation of the multi-year collective agreement with unions. SN had to make use of semi-skilled casual and undocumented staff to make up for lost production. These manufacturing staff’s limited training and learning curve progression resulted in an increase in manufacturing time to two clock hours per unit. Additionally, the idle time increased to 10%. The labour rate was lower at R90 per clock hour. iii. Unless otherwise stated all the other applicable information will remain the same as the 2023 financial year budgeted information. 2.2.2. Fixed costs The actual fixed manufacturing overheads were R. The actual fixed selling and distribution costs were R500 000. 2.3. Administrative costs A recent environmental audit resulted in an emission fine and a warning of halting operations if emissions were not reduced to an acceptable level. This resulted in administrative costs being 2% higher than budgeted. Page 5 of 8 MAC3701 Assessment 02/S1/2024 [TURN OVER] QUESTION 1 (continued) 3. THE FOLLOWING INFORMATION IS UNDER CONSIDERATION FOR THE 2024 FINANCIAL YEAR BUDGET 3.1. Investigation to upgrade the existing factory and purchase of new machinery. As part of its expansion plans to deal with emissions challenges and take advantage of the demand trends, SN is considering extending its existing plant to increase capacity and adding new state-of-the-art machinery which are quicker and easier to use. Upgrades will also include solar power to minimise energy use and contribute towards energy sustainability in South Africa. The following information was gathered as part of the investigation: 3.1.1. Increased capacity for 2024 will increase manufacturing and sales with the same number of units. E-MTB units will increase to 31 200 and E-CB units to 20 800. 3.1.2. New state-of-the-art machinery, with a 10-year useful life, will be acquired for a cost of R. SN’s accounting policy is to depreciate all machinery in full over its useful life. 3.1.3. The old machinery has a book value of R2 000 000 and a current resale value of R2 500 000. The old machinery will be sold and replaced with the new state-of-the-art machinery. 3.1.4. Direct labour time will be reduced to 60 minutes per bike. 3.1.5. Training on operating the new machinery will cost R500 000. This cost will be covered by the supplier of the machinery. 3.1.6. Expansion to the factory will cost R. This expansion will include solar power to minimise energy use. 3.1.7. Unless otherwise stated, all other applicable information will remain the same as in the 2023 financial year budget information above. 3.2. A POSSIBLE ACQUISITION OF AMANDLA BATTERIES (AB) PTY LTD SN management decided to secure their lithium-ion battery supply and is hence considering the possible acquisition of AB, a company that specialises in the manufacturing of lithium-ion batteries. AB has been known to underpay its workers to boost profits. The company was also recently publicly accused of employing underage children, while management ferociously denied this claim. Page 6 of 8 MAC3701 Assessment 02/S1/2024 [TURN OVER] QUESTION 1 (continued) After the acquisition management will establish the “SNAB Group” with a new group ethos and culture. The newly formed SNAB Group will include a head office and two divisions, namely the current SN company as the SN division (“SND”) and the acquired AB company as the AB division (“ABD”). Notwithstanding being in the same group, each divisional head will report to the head office management, but the divisions will retain their own market and profit objectives. As part of the due diligence, the finance team gathered the following information: 3.2.1. Non-manufacturing staff at AB will be laid off through the section 189 retrenchment process. This is to reduce redundancies in administration staff. 3.2.2. Under the SNAB group, a transfer pricing system will be introduced, ABD will fully supply SND with all the SND’s battery requirements and will to the extent that it is possible, still supply some of the external customers with batteries. 3.2.3. AB’s annual maximum manufacturing capacity is 120 000 batteries, while the related annual external market demand for batteries is 80 000 batteries. 3.2.4. SND will require 52 000 batteries for its planned production. 3.2.5. The budgeted external selling prices and costs per battery are as follows: Details R per unit External selling price 5 500 Direct material and Direct labour 4 500 Variable manufacturing overheads 30 Fixed manufacturing costs 120 Specialised packaging - external sales only 54 Distribution costs - external sales only 2% of the selling price Page 7 of 8 MAC3701 Assessment 02/S1/2024 [TURN OVER] REQUIRED For each question below, remember to: • Clearly show all your calculations in detail; • Where necessary, indicate irrelevant amounts/adjustments with an R0 (nil-value); • Except where otherwise stated, round all the final Rand-amount workings to two decimals, and all other workings to four decimal places; and • Ignore time value of money and all taxation implications. QUESTIONS (a) TO (d) RELATE TO THE 2023 FINANCIAL YEAR (a) Calculate the budgeted break-even sales units per product type for the 2023 financial year. Ignore the implications, if any, of opening- and closing inventory. (16) (b) Prepare the actual statement of profit or loss (income statement) for the 2023 financial year. The statement of profit or loss must include a column for each product and a Total column. Round your final amounts to the nearest Rand. (18) (c) Identify and briefly discuss any five ethical, social, environmental and business-related risks that SN was exposed to during the 2023 financial year. (10) (d) For answering question (d) only, assume the following: • a standard costing system is in place. • the implications, if any, of opening and closing inventory should be ignored. • The standard gross profit for E-MTB is R1 700 Calculate the following variances: (i) Sales volume variance for E-MTB only. (ii) The direct labour idle time variance per product type and in total. (iii) Labour clock rate variance per product type. (iv) Lithium-ion battery purchase price variance for E-CB only. (3) (5) (4) (3) Page 8 of 8 MAC3701 Assessment 02/S1/2024 [TURN OVER] QUESTION 1 (continued) QUESTION (e) RELATE TO THE UPGRADE OF THE FACTORY (e) Draft a memorandum (2 format marks) wherein you: For answering question e(i) only assume that the following per unit: Details E-MTB 2023 E-CB 2023 Standard contribution R 4 000 R 3 500 Standard gross profit R 1 700 R 1 500 (i) SN management wants to understand the short-term impact of upgrading the factory and purchasing new state-of-the-art machinery. From a quantitative perspective, advise SN on whether to upgrade the factory and purchase new state-of-the-art machinery during the 2024 financial year. • As part of this advice please do not provide a reason, for the inclusion/exclusion of each item used in your calculation. Ignore qualitative factors. (ii) Briefly discuss three qualitative factors that SN should consider before deciding to upgrade the existing factory. (2) (10) (6) QUESTIONS (f) & (g) RELATE TO THE POSSIBLE ACQUISITION OF AMANDLA BATTERIES PTY LTD (AB) (f) Briefly discuss five qualitative factors SN should consider before acquiring AB. (10) (g) Determine the budgeted minimum transfer price per one lithium-ion battery at which ABD will be willing to transfer the required batteries to SND for the 2024 financial year.