(a)
Calculate the unit product cost for a pair of sneakers manufactured by Rocco (Pty) Ltd for each of the two quarters and comment on the gross profit margin generated.
(b)
Prepare the income statement of Rocco (Pty) Ltd for the second quarter ending 30 June 2020 using the variable costing system.

(c)
Prepare the reconciliation between the profit calculated using the absorption costing method (as presented in the previous page) and that calculated using variable costing method for the second quarter ending 30 June 2020.

(d)
Assist the management committee in analysing the decline in the profitability of the company for the second quarter ending 30 June 2020. Include the comparison of profits for the first and second quarters under both methods.

(e)
Calculate the break-even units (pairs of sneakers) of Rocco (Pty) Ltd and indicate the margin of safety units which the company would have for the third quarter of 2020.

(f)
Indicate, with reasons, whether you agree with the chief operations officer’s comment made in the recent management committee meeting.

(g)
Calculate a net cash movement to be presented in the cash budget for Rocco (Pty) Ltd for the last two quarters of the 2020 financial year (quarter 3 and 4).

  

Transcribed Image Text:

Case Study You are a management committee member responsible for corporate affairs and communications at Rocco (Pty) Ltd, a company that specialises in the manufacturing of All Star sneakers. The company has been operating in the South African market for ten years and has been supplying major retail groups such as Edicon, Woollies and Truworths. Rocco (Pty) Ltd operates from a three-story building in Isando that is leased from a local landlord at a cost of R36 000 per month. The ground floor is used as a manufacturing facility whereas the first and second floors are used as offices where the administration and sales staff sits. It is estimated that the cost of materials used in making a pair of sneakers amounts to R38. The company makes use of temporary workers that can be hired and fired as the production manager requires. These workers are paid R120 per hour. Each pair of sneakers takes approximately 18 minutes to make. The company advertises heavily in order to sell the sneakers. An advertising agency that handles all advertising, charges the company an amount of R6 000 per month and sales executives employed by the company earn a total basic salary of R15 000 per month and 5% commission on each pair of sneaker sold. The company's manufacturing process is heavily automated and the equipment used to manufacture the sneakers was acquired on 1 January 2018 at a cost of R2 280 000. The equipment is depreciated at a rate of 20% per annum on cost. Other fixed costs of running this operation on a quarterly basis are depicted in the table below: Quarterly (Rands) Factory supervision Utilities (estimated at the ratio of 3:2 between the factory and offices) 24 000 25 000 11000 Administrative office supplies Administrative office salaries 20 000 There was a heated and awkward debate in the recent management committee meeting held on Tuesday, 12 June 2020 wherein the chief executive officer of the company was furious and passed the following comments: These income statements cannot be right. Our sales in the second quarter are up by 25% over the first quarter, yet these income statement show a precipitous drop in operating profit before tax for the second quarter. Chief financial officer, surely your accounting people have messed something up."The chief executive officer was referring to the following income statements: Rocco (Pty) Ltd Income statements for the first two quarters of the financial year ending 31 December 2020 Quarter 1 (Rands) Quarter 2 (Rands) Sales 480 000 600 000 Cost of goods sold 240 000 367 200 Gross profit 240 000 232 800 200 000 206 000 Operating expenses Operating profit 40 000 26 800 After studying the statements briefly, the chief financial officer replied: "I'm sorry to say that those figures are correct, chief executive officer. I agree that sales went up during the second quarter, but the problem is in production. You see, we budgeted to produce 1 500 pairs of sneakers each quarter, but a strike amongst the employees of our major supplier forced us to cut production in the second quarter back to only 900 pairs of sneakers. That's what caused the drop in the operating profit". Case Study You are a management committee member responsible for corporate affairs and communications at Rocco (Pty) Ltd, a company that specialises in the manufacturing of All Star sneakers. The company has been operating in the South African market for ten years and has been supplying major retail groups such as Edicon, Woollies and Truworths. Rocco (Pty) Ltd operates from a three-story building in Isando that is leased from a local landlord at a cost of R36 000 per month. The ground floor is used as a manufacturing facility whereas the first and second floors are used as offices where the administration and sales staff sits. It is estimated that the cost of materials used in making a pair of sneakers amounts to R38. The company makes use of temporary workers that can be hired and fired as the production manager requires. These workers are paid R120 per hour. Each pair of sneakers takes approximately 18 minutes to make. The company advertises heavily in order to sell the sneakers. An advertising agency that handles all advertising, charges the company an amount of R6 000 per month and sales executives employed by the company earn a total basic salary of R15 000 per month and 5% commission on each pair of sneaker sold. The company's manufacturing process is heavily automated and the equipment used to manufacture the sneakers was acquired on 1 January 2018 at a cost of R2 280 000. The equipment is depreciated at a rate of 20% per annum on cost. Other fixed costs of running this operation on a quarterly basis are depicted in the table below: Quarterly (Rands) Factory supervision Utilities (estimated at the ratio of 3:2 between the factory and offices) 24 000 25 000 11000 Administrative office supplies Administrative office salaries 20 000 There was a heated and awkward debate in the recent management committee meeting held on Tuesday, 12 June 2020 wherein the chief executive officer of the company was furious and passed the following comments: These income statements cannot be right. Our sales in the second quarter are up by 25% over the first quarter, yet these income statement show a precipitous drop in operating profit before tax for the second quarter. Chief financial officer, surely your accounting people have messed something up."The chief executive officer was referring to the following income statements: Rocco (Pty) Ltd Income statements for the first two quarters of the financial year ending 31 December 2020 Quarter 1 (Rands) Quarter 2 (Rands) Sales 480 000 600 000 Cost of goods sold 240 000 367 200 Gross profit 240 000 232 800 200 000 206 000 Operating expenses Operating profit 40 000 26 800 After studying the statements briefly, the chief financial officer replied: "I'm sorry to say that those figures are correct, chief executive officer. I agree that sales went up during the second quarter, but the problem is in production. You see, we budgeted to produce 1 500 pairs of sneakers each quarter, but a strike amongst the employees of our major supplier forced us to cut production in the second quarter back to only 900 pairs of sneakers. That's what caused the drop in the operating profit".

Answer rating: 100% (QA)

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