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QUESTION 2 (27 marks) Electronic Functions Ltd. ("Electronic Functions") is a manufacturer of various electronic devices. The entity is divided into various departments. In each department a different product line is produced. Electronic Functions has recently noted a decline in the demand of one of their product lines - a cell phone model 808. Although there is still a satisfactory demand for cell phone model X808 (hereafter referred to as "X808") in the market, Electronic Functions would like to evaluate whether the entity should continue to manufacture this product. From continuous market awareness and research performed by the entity, Electronic Functions has noticed that there is a growing demand in the general market for an electronic tablet with certain functionalities. After evaluating their internal operations, Electronic Functions has identified that the entity would be able to manufacture such an electronic tablet (which will be given the name: eTab 777) in the place of X808. Consequently, department B, which is currently utilised for X808's manufacturing, will be used to manufacture eTab777 instead, from which they will be able to derive sales revenue of R2345000 per month. If the eTab777 is introduced, Electronic Functions will not discontinue selling the X808 product line as they do not want to lose its sales income, which is still a substantial amount. Instead, Electronic Functions will hand over the design plan of X808 to an external entity, Matrix, which will then manufacture X808 and sell it to Electronic Functions for R610.00 per unit. Electronic Functions would require 2100 units per month from Matrix to satisfy their current demand. 67 HMAC330-1-Jul-Dec2022-FA1-ES-V3-29062022 ANNEXURE F: FORMATIVE ASSESSMENT 1 The current cost structure of X808 is as follows: Additional information: - The direct employee wages are expected to increase by R27 000 per month in total should eTabs be manufactured. - The total direct material cost is expected to remain the same should Electronic Functions proceed with the manufacturing of eTabs. Additional information: - The direct employee wages are expected to increase by R27 000 per month in total should eTabs be manufactured. - The total direct material cost is expected to remain the same should Electronic Functions proceed with the manufacturing of eTabs. - Currently, fixed manufacturing overheads consist of depreciation and the supervisors' salaries. The supervisors' fixed salaries will increase by R15 000 per month, while depreciation will increase by R8 000 per month. The same physical assets will be used during the production of eTabs as with X808 and no new assets will be purchased. Since depreciation is allocated based on direct labour hours, the increase in depreciation would be due to an increase in direct labour hours (refer to bullet 1 above) and not an increase in assets. - Allocated non-manufacturing overheads to department B (the department in which eTabs will be manufactured) will decrease by R18 000 per month should eTabs be manufactured. These overheads are attributable to salaries of supporting staff and since fewer of their hours will be spent on department B, less costs will be allocated to department B. - Research was performed by Electronic Functions, which costs the entity R50 000 , to equip them with the knowledge needed to manufacture the eTabs. 68 HMAC330-1-Jul-Dec2022-FA1-ES-V3-29062022 ANNEXURE F: FORMATIVE ASSESSMENT 1 Required: 2.1) Advise Electronic Functions Ltd. whether the entity should continue with the manufacturing of X808 or rather manufacture eTabs. Base your advice on financial considerations. (19 marks) 2.2) Highlight four (4) non-financial risks to Electronic Functions Ltd. which the entity should consider while making their current decision. These risks should be relevant given the entity's current scenario. Supplement these risks by proposing one (1) relevant way to mitigate each. (8 marks)