Perfect Paints Ltd manufactures decorative paint at its factory in Wadeville, Johannesburg. Two basic product ranges are
Question:
Perfect Paints Ltd manufactures decorative paint at its factory in Wadeville, Johannesburg. Two basic product ranges are manufactured, namely the ProTouch and BestGuard ranges. Paint is sold in 20 litre containers to hardware stores and paint shops. Perfect Paints also distributes the paint directly to building contractors and property developers at the same price as it sells to the shops.
Perfect Paints Ltd has one production line and as a result the paint is manufactured in batches. Standard production batches are 200 containers (20 litres each) of paint for ProTouch and 50 containers (20 litres each) of paint for BestGuard. BestGuard also requires more labour time. Machines in the production line need to be reset and cleaned after each batch of paint has been produced and set-up costs are incurred for each new batch. The following is an extract from the budgeted financial information of Perfect Paints Ltd for the year ending 30 September 2021.
PERFECT PAINTS LTD BUDGETED FINANCIAL INFORMATION FOR THE YEAR ENDING 30 SEPTEMBER 2021 | |||
Notes | ProTouch (Rands) | BestGuard (Rands) | |
Selling price per 20 litre containers | 595.00 | 765.00 | |
Manufacturing cost per 20 litre containers | |||
• Direct materials | 205.00 | 230.00 | |
• Direct labour | 1 | 100.00 | 125.00 |
• Manufacturing overheads | 2 | 210.00 | 210.00 |
Gross profit per 20 litre containers | 80.00 | 200.00 | |
Number of 20 litre containers of paint produced and sold | 3 | 100 000 | 50 000 |
- Direct labour is sourced from a local labour broker who ensures that labourers are available at the request of Perfect Paints Ltd to meet the production schedule. The labour broker is paid R50.00 per hour. Labour brokers retain an average of 7 to 10% of the fee charged to clients as a commission.
- Fixed manufacturing overheads have been allocated to finished products based on the total planned production of 150 000 containers of paint. Budgeted manufacturing overheads for the year ending 30 September 2021 are as follows:
R’000 | Nature of cost | |
Batch set-up cost | 7 600 | Fixed |
Water and electricity | 7 500 | Variable |
Rental of factory premises | 4 800 | Fixed |
Depreciation of machinery | 3 800 | Fixed |
Salaries | 7 800 | Fixed |
31 500 |
- Perfect Paints Ltd has budgeted to produce and sell 150 000 containers of finished product in the 2021 financial year. Machine hours are limited to 6 000 for the year ending 30 September 2021. Each machine hour yields 50 containers of ProTouch paint or 25 containers of BestGuard paint. Planned production of ProTouch is 8 500 containers of paint per month during the financial year except during December, when production decrease to 6 500 containers. Containers of BestGuard paint will not be manufactured during December and January because of holidays. Planned production for the rest of the year is 5 000 containers of BestGuard paint per month.
- Operating expenses of Perfect Paints Ltd comprises selling, distribution and administration costs which have been budgeted at R10 per container sold and fixed costs of R15 285 000 for the 30 September 2021. Fixed operating expenses will be allocated based on the revenue earned.
REQUIRED:
a) Calculate the number of containers that must be sold by Perfect Paints Ltd during the 30 September 2021 financial year in order to break-even.
Assume a constant sales-mix.
b) Critically evaluate the allocation of fixed manufacturing overheads between the two products (i.e. ProTouch and BestGuard) used by Perfect Paints Ltd and make recommendations for improvement (if any).
Expert Answer:
