University of Fort Hare

Together in Excellence
NKUHLU DEPARTMENT OF ACCOUNTING
FINANCIAL MANAGEMENT 3A
AFM311E
____________________________________________________________________

EXAMINATION SOLUTION

JUNE 2015

ASSESSORS: PROF. L. MAJOVA-SONGCA

INTERNAL MODERATOR: PROF. G. BARTLETT

MODERATOR: KEVIN FREEMAN (NMMU)

QUESTION TOPICS COVERED MARKS MINUTES

1 CVP analysis 40 48

2 Standard Costing 40 48

3 Budgeting 30 36

4 Performance evaluation/transfer pricing 40 48

TOTAL 150 180

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QUESTION 1 (SUGGESTED SOLUTION) (40 MARKS)

a) Break-even point

= Fixed costs/contribution per unit

Calculation of fixed costs

Variable overheads per packet (using High/low method)

= (3 900 000 - 1 900 000)/40 000 = R50 per packetü

Total variable overheads cost = 60 000 x R50 = R3 000 000ü

Total overheads cost = R3 900 000

\ Fixed overheads cost = R3 900 000 - R3 000 000 = R900 000üü

Calculation of contribution per packet

Selling price = R100 per packet

Variable overheads cost = R50 per packet
Material and labour cost = R20 per packet
Contribution = R100 - (R20 + R50) = R30 per packetü

BREAK-EVEN POINT= Fixed costs/contribution per unit

= R900 000/R30 = 30 000 packetsü (6)

b) i) Sales volume

40 000 vs 30 000 = 25% decrease

Current sales can decrease with 25% before a loss will be incurred.üü

ii) Profit at current level:

Contribution (40 000 x 30) 1 200 000

Less: fixed costs (900 000)
Net profit 300 000

The net profit needs to dissolve to 0. Therefore:

Contribution to be sacrificed = 300 000/40 000 = 7,5

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 Therefore, selling price can decrease by R7,5.üü

Therefore, 100 vs 92,5 = 7,5% decrease in sales price may occur, before a
loss will be made.üü

iii) Variable costs

Profit at current level = 300 000

Contribution that needs to be sacrificed = R7,5 per packetü

Therefore, variable costs can increase by R7,5.ü

Therefore, 70 vs 77,5 = 10,7% increase in variable cost may occur, before a

loss will be made.üü

iv) Fixed costs

Fixed costs need to increase by R300 000.

Therefore, 900 000 vs 1 200 000 = 33% increase in fixed cost may occur,

before a loss will be made.üü
(12)

c) Analyse selling price of R125

Contribution (125 - 70) x 17 000 935 000 ü

Fixed costs (900 000) ü
Net profit 35 000 ü

Net profit will be R35 000.

As the net profit is lower than the current level of R300 000, I agree with the
marketing director’s statement.ü
(4)

d) Minimum prices

70 000 packets

Total activity level = current budgeted activity level (40 000) + order (70 000) =
110 000

At a 70 000 level, total operations will be 110 000. However, capacity is limited to

80 000, therefore 30 000 packets to be sacrificed.

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 Learning curve:

Y70 000 = 40/60 . 70 000 -0,322

= 0,01838

0,01838 x 70 000 = 1 286 hours for the contract.

1 286 hours x R20/hour = R25 728 Û

TOTAL RELEVANT COST CALCULATION

R
Additional fixed cost incurred 500 000 üü
Additional variable costs (70 000 x 70) 4 900 000
üü
Lost contribution (30 000 x (100 - 70)) 900 000 üü
Labour Û 25 728 üüü
Total relevant costs 6 325 728

The minimum selling price should be R90,37 per packet.ü (R6 325 728/70 000)
(10)

e) Factors

Company will be operating at full capacity; Lifespan of machines will be reduced;

Likelihood of breakdowns, and no spare capacity to provide bufferüü

Is it a once-off order or will it be repeated?üü

Decision needs to be taken whether the export market should be targetedüü

Loss of customer goodwill, as local sales will have to be sacrificedüü

Dumping allegationsüü

Foreign orders are subject to different credit and payment risks, which need to be
carefully assessedüü

Consider reserve bank exchange requirements in order to sell overseasüü

Consider marketing the idea locallyüü

Other opportunities available other than the orderüü

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 Is the learning curve constant, accurate and will the learning perhaps stop earlier
than expectedüü

Any other valid point (4 x 2) (8)

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