Fed Ltd. (Fed) is a canned food manufacturer located in the Eastern Cape. The entity has...

 

  

Transcribed Image Text:

Fed Ltd. ("Fed") is a canned food manufacturer located in the Eastern Cape. The entity has a 30 June financial year-end. Fed manufactures the following product lines: • Canned chickpeas • Canned tomatoes • Canned corn • Canned green peas The same machinery is used to manufacture all of the product lines. During the production processed, employees are required to operate the machinery and perform other manufacturing related activities. Employees only work during certain hours as permitted by the labour law additional hours above this are considered overtime and must be paid at a higher labour rate. It is possible for Fed to readily make use of such overtime hours; however, the entity is not currently doing so. Consequently, the number of hours during which the machinery is operational is limited to 3 100 hours per month. Following is each product lines cost per unit: Sales price Direct material Direct labour Variable manufacturing overheads Fixed manufacturing overheads Variable selling and administration overheads Fixed selling and administration overheads Chickpeas Tomatoes Corn 5.20 0.96 1.20 0.40 0.71 0.51 0.33 3.10 0.27 0.84 0.59 0.90 0.46 0.26 4.40 0.73 0.96 0.44 0.73 0.48 0.29 Green Peas 3.80 0.55 0.87 0.52 0.82 0.53 0.31 The total fixed manufacturing overheads for each month are R501 000. Absorption costing is used to allocate the fixed manufacturing overheads based on the machine hours. The total fixed selling and administration overheads for each month are R176 600. Fed's market demand for the various product lines are: Chickpeas Tomatoes Corn Green Peas 188 000 211 700 245 000 159 000 Option 1 To assist in meeting the market demand of all the product lines, Fed may elect to make use of employees' over time. Direct labours' will have to be compensated 150% of their normal rate per hour for each overtime hour. A resulting increase of R19 700 will also be experienced in fixed manufacturing overheads as the supervisor will also have to be on site during the overtime hours and other increased activities. The variable manufacturing overheads will also increase with 20%. Option 2 The Corn-product line could be outsourced to an external supplier who will sell the Corn to Fed at a price of R4.00 per unit. 2.2. Advise Fed Ltd. on which of the two options (overtime or outsourcing) the entity should proceed with to satisfy the market demand. Assume that: • 819 hours overtime are required. • All the product lines' market demand can be met besides for 146 952 units of canned tomatoes for which overtime will be required. • Tomatoes' contribution is R0.94 per unit. • Corn requires 222 machine hours per unit. Fed Ltd. ("Fed") is a canned food manufacturer located in the Eastern Cape. The entity has a 30 June financial year-end. Fed manufactures the following product lines: • Canned chickpeas • Canned tomatoes • Canned corn • Canned green peas The same machinery is used to manufacture all of the product lines. During the production processed, employees are required to operate the machinery and perform other manufacturing related activities. Employees only work during certain hours as permitted by the labour law additional hours above this are considered overtime and must be paid at a higher labour rate. It is possible for Fed to readily make use of such overtime hours; however, the entity is not currently doing so. Consequently, the number of hours during which the machinery is operational is limited to 3 100 hours per month. Following is each product lines cost per unit: Sales price Direct material Direct labour Variable manufacturing overheads Fixed manufacturing overheads Variable selling and administration overheads Fixed selling and administration overheads Chickpeas Tomatoes Corn 5.20 0.96 1.20 0.40 0.71 0.51 0.33 3.10 0.27 0.84 0.59 0.90 0.46 0.26 4.40 0.73 0.96 0.44 0.73 0.48 0.29 Green Peas 3.80 0.55 0.87 0.52 0.82 0.53 0.31 The total fixed manufacturing overheads for each month are R501 000. Absorption costing is used to allocate the fixed manufacturing overheads based on the machine hours. The total fixed selling and administration overheads for each month are R176 600. Fed's market demand for the various product lines are: Chickpeas Tomatoes Corn Green Peas 188 000 211 700 245 000 159 000 Option 1 To assist in meeting the market demand of all the product lines, Fed may elect to make use of employees' over time. Direct labours' will have to be compensated 150% of their normal rate per hour for each overtime hour. A resulting increase of R19 700 will also be experienced in fixed manufacturing overheads as the supervisor will also have to be on site during the overtime hours and other increased activities. The variable manufacturing overheads will also increase with 20%. Option 2 The Corn-product line could be outsourced to an external supplier who will sell the Corn to Fed at a price of R4.00 per unit. 2.2. Advise Fed Ltd. on which of the two options (overtime or outsourcing) the entity should proceed with to satisfy the market demand. Assume that: • 819 hours overtime are required. • All the product lines' market demand can be met besides for 146 952 units of canned tomatoes for which overtime will be required. • Tomatoes' contribution is R0.94 per unit. • Corn requires 222 machine hours per unit.

Answer rating: 100% (QA)

Option 1 Overtime Overtime is the better option for Fed Lid in this situation as it is the more costeffective solution With the overtime the entity can still meet the market demand for all of its prod... View the full answer