Rovon ( Pty ) LTD manufactures a single product. Rovon ( Pty ) LTD operates in a
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Question:
Rovon Pty LTD manufactures a single product. Rovon Pty LTD operates in a very
competitive market environment. A jobcosting system is used to determine the
production cost per unit which includes all manufacturing overheads.
These overheads are absorbed at a predetermined rates per unit, based on normal
capacity of units per period. Any underover absorbed overhead is immediately
transferred to cost of sales. Assuming normal capacity, the following unit costs were
budgeted, the total being used for pricing the product.
Budgeted unit costs R
Direct materials
Direct labour
Salesmens salaries note
Salesmens commission note
Office administration salaries
Factory salaries and Rent
Additional costs
Production variable
Fixed
Administration and selling costs variable
Fixed
Total costs
Note : Salesmen are paid a basic monthly salary, plus commission on each table sold.
Note : These variable administration and selling costs can be considered to vary directly
with the number of units sold.
Budgeted selling price: a selling price of R is budgeted for the foreseeable future.
Actual results: the following sales and production results were recorded:
Period units Period units
Sales
Production
Actual variable costs incurred per unit equaled those budgeted and the following fixed costs
were incurred in each period:
Manufacturing R
Selling and administration R
The budgeted selling price was achieved on all sales.
REQUIRED:
Based on the budget, calculate the expected breakeven point in units for each
period.
Calculate the actual net income for each period using absorption costing techniques.
In view of the declining sales and profits, due to largely increased competition, the
managing director has asked for suggestions to increase the net profit for period to
Rassuming variable costing The following suggestions were made:
The sales manager recommended an increase in sales commission by R
per unit and additional advertising of R
The production manager suggested reducing the selling price by as well
as increasing advertising as mentioned above. In addition, if R more
was spent during the period on fixed production overheads, he expected to
realize a saving in total variable cost per unit.
As management accountant, you are requested to calculate the increase in sales units
from period required under each suggestion, to achieve the MDs desired profit level.
Briefly comment on the feasibility of each suggestion.
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