Top Paper (Pty) Ltd (TP) is a company based in Epping, Cape Town specialising in the production and sale of wood free paper in the form of coated, uncoated and speciality paper.
TP has received an order from ‘U’ Magazine for the delivery of 50 000 boxes of mechanical coated paper at a price of R200 per box. One box consists of 5 reams of paper, and there are 500 pages in a ream of paper. The turnaround time that ‘U’ Magazine requires should TP accept this orders is one month.
‘U’ is South Africa’s best-selling English language magazine, and the marketing director, Mr Mondi believes that this order presents an opportunity for future sales to the magazine and catalogue market. The operations director, Mr Typek is however a bit more sceptical as he understands that although the production of the mechanical paper will have similar resource requirements to that of wood free paper, the two process are different in that the wood free paper requires a chemical process whereas the mechanical paper will require a mechanical process, which outside of TP’s area of expertise.
The CEO, Mrs Rotatrim is undecided and has approached you the Management Accountant of TP, to perform a preliminary assessment of the financial impact on TP should this order from ‘U’ Magazine be accepted.
The new product development team has put together the following information regarding the resource requirements for the ‘U’ Magazine order.
De-barked wood
5kg of de-barked wood will be required per box. De-barked wood is used in all of the paper products produced by the company and is purchased from Wood Chips (Pty) Ltd, a local wood mill. 300,000kgs of de-barked wood is currently in inventory, which was originally purchased at R60 000 per batch of 10 000 kg. Wood Chips (Pty) Ltd has advised that future purchases will be at R70 000 per batch. De-barked wood can only be bought in batches of 10 000kg from Wood Chips (Pty) Ltd, who is the only supplier of de-barked wood in the Cape Town area.
Water based chemical
TP mixes large quantities of a water based chemical with the de-barked wood, in a large pressure boiler after which paper pulp is formed. This mixing process is required for the
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production of all paper products produced by TP. The production team estimates that 500 ml of this water based chemical will be required per box of coated mechanical paper. The company currently has 30 000 litres of this chemical on hand but is unable to obtain more litres before the ‘U’ Magazine deadline, as it is a very unique chemical that is currently only manufactured and sold by limited suppliers. A secondary market thus exists for the sale of this water based chemical at R3 per litre, as it has become a necessary yet scarce resource in the production of paper. Would TP have sold any to the secondary market? Surely would’ve used in production if scarce. Otherwise indicate that would have sold all as would be able to restock or indicate restock time. Also need to indicate secondary market trades at a premium.
Starch Solution
The mechanical coated paper will require the paper pulp is formed, and then treated with a starch solution that seals the paper’s surface and helps to avoid excessive ink absorption during printing. This treating process is not required for the production of wood free paper products. 200 ml of the starch solution will required per box of coated mechanical paper. The starch solution however is unfortunately also not available within the next month but TP still has 12 000 litres on hand of this solution from a once-off order they received for a year ago. At the time the cost of the solution cost R3,50 per litre. TP was going to use 8 000 litres of this solution to fulfil a special order from a campus newspaper for newsprint paper. The total contribution expected from the campus newspaper order is R20 000.
Packaging:
Packaging is outsourced to a company that takes care of all of TP’s packaging requirements. The packaging cost will amount to R5 per box. The packaging company will charge an initial design cost of R500,000.
Machine hours
Special machinery is required for the pulping, de-mulching, drying and pressing of manufactured paper. TP only has a maximum 440 000 machine hours available until the order form “U’ Magazine is due in one month’s time. In addition to the ‘U’ Magazine order, TP also has the following production scheduled for the next month.
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Number of boxes
Wood-free uncoated paper
37 500
Wood-free coated paper
97 500
Wood-free speciality paper
15 000
The market demand of these boxes is expected to equal its production and has machine hour requirements and as well as expected contribution per box as presented below:
Machine hours per box
Contribution per box
Wood-free uncoated paper
1
R 115
Wood-free coated paper
1,5
R 180
Wood-free speciality paper
2
R 225
Given that the ‘U’ Magazine order is a mechanical process it will greater amount of machine time at 5 hours per box.
Labour:
Labour requirements per box are as follows:
Labour hours per box
Wood-free uncoated paper
0,5
Wood-free coated paper
0,75
Wood-free speciality paper
1
Mechanical coated paper
1,5
4
Labour consists of permanent, salaried employees who earn an average of R50 per hour. Labour currently has 20,000 hours spare which can be used to produce the ‘U’ Magazine order. Labour is permitted to work up to 60,000 hours of overtime for the duration of the ‘U’ Magazine order at an overtime premium of 50%.
Manufacturing overheads
Manufacturing overheads are allocated to products on the completed boxes produced, at a rate that is determined at the beginning of the year, based on expected costs and activity levels. In the previous financial year (2021) total manufacturing overheads amounted to R32m when 740 000 boxes were produced, while total manufacturing overheads in 2020 amounted to R36m when 900 000 boxes were produced.
1.1 Calculate the financial impact of accepting the order from ‘U’ Magazine using relevant costing principles and advise whether or not the order should be accept or not. Show all workings clearly (45)
1.2 Identify and discuss any other considerations that the company should take into account in their decision to accept the order from ‘U” Magazine.

Answer rating: 100% (QA)

To assess the financial impact of accepting the order from U Magazine you will need to calculate the total cost of producing the 50000 boxes of mechanical coated paper as well as the expected revenue ... View the full answer