Question 4

(20 Marks) QUESTION 4 4.1 Gucci Enterprises makes handbags. The fixed costs of operating the workshop for a month total R5 000. Each handbag requires material that cost R20. Each handbag takes 2 hours to make and the business pays the handbag makers R12.50 an hour. The bag makers are all on contract and if they do not work for any reason, they are not paid. Each handbag is sold to fashion stores at R70. The business expects to sell 350 handbags per month. The business is considering to rent a bag making machine. Doing so would increase the total fixed costs of operating the workshop for a month to R9 375. Using the machine will reduce the labour time to 1 hour for each handbag. The handbag makers' labour rate will remain unchanged REQUIRED: 4.1.1 Would you advise the business to rent the machine if you consider the effect on operating profit? (10 marks) 4.1.2 Would your response in 4.1.1 be any different if you considered the breakeven quantity and margin of safety of both options? (5 marks) 4.2 Furncraft Manufacturers manufacture lounge suites that sell for R3 000 per suite. They have the same basic design but may vary the fabric coverings. It has the capacity to produce 1 400 lounge suites each month although production very seldom exceeds 1 000 per month. The sales manager received a request from a cut-price discounter (with many branches who made an offer to buy 300 lounge suites at R2 400 per suite. The latest monthly figures reveal a selling price per unit R3 000 and variable costs of R1 800 per unit with a volume of 900 units. Fixed costs amounted to R810 000. (5 marks REQUIRED Would you advise the sales manager to accept or reject the offer? Substantiate your