Question

Harriet Ltd is a South African company that manufactures commercial buses and trucks. The company’s products are customer-focused, technologically advanced and fuel efficient. This has propelled the company to the forefront of the industry. Harriet Ltd was incorporated in 1974 and has a number of manufacturing facilities around the country.
Harriet Ltd is in the process of finalising management accounts for its financial year ended 30 June 2018. Financial information of the business for the financial year ended 30 June 2018 is provided below:

1. Harriet Ltd does not carry any inventory of raw materials and work in progress. The number of buses and trucks sold by Harriet Ltd and the respective selling prices per unit are provided below:

Number of units sold: 40 Busses and 60 Trucks
Average selling price per unit: R1 280 000 Busses and R1 650 000 Trucks

2. Direct material costs per bus and truck amounted to R350 000 and R430 000 respectively. The number of buses and trucks at the end of each year end were as follows:

30 June 2017: 10 Busses and 20 Trucks

30 June 2018:  10 Busses and 10 Trucks

3. The company employs its direct manufacturing labour force as and when required. Based on past experience, the company requires 650 hours and 800 hours to manufacture a bus and a truck respectively. An hourly wage rate for labour force used in the manufacturing of buses amounts to R350. On the other hand, the hourly wage rate for the labour force involved in the manufacturing of trucks is 40% higher than the wage rate for the manufacture of buses.

4. Harriet Ltd entered into an agreement with its parent company, Harriet International Plc that allows Harriet Ltd to sell commercial buses and trucks under the Harriet International Plc trademark. As a result, Harriet Ltd pays a royalty of R75 000 to the parent company for every bus or truck sold. An advertising agency that handles all advertising, charges the company a 5% commission on each bus or truck sold.

5. Fixed manufacturing overhead costs are allocated to production based on the number of machine hours. The fixed manufacturing costs for the 30 June 2018 financial year amounted to R27 540 000. Information pertaining to the utilisation of the machine for 30 June 2018 financial year is as follows:

Actual number of machine hours: 36000 Busses and 72000 Trucks

6. Fixed administration and distribution costs are allocated to buses or trucks based on the number of buses or trucks sold. The fixed administration and distribution costs for the 30 June 2018 financial year amounted to R22 676 000.

REQUIRED

a) Calculate the unit product cost of the buses and trucks manufactured by Harriet Ltd in the 30 June 2018 financial year.

b) Prepare the income statement of Harriet Ltd for the year ended 30 June 2018 for trucks only using the absorption costing method.

c) Calculate profit for the year ended 30 June 2018 of Harriet Ltd for trucks only that would arise if the variable costing method is used.
Do not prepare the income statement but rather reconcile the profit from the absorption costing method determined in part (b) to the variable costing profit.

d) How many buses and trucks should Harriet Ltd sell in order to break-even if the sales mix does not change?

Answer 1

A) Calculation of unit Product cost for the year 2017-18

Particulars Busses Trucks Total

Manufacturing Expenses

Direct material 350000 430000

Direct Wages (650*350) 227500 (800*350*140%) 392000

Royalty 75000 75000

Fixed manufacturing over head(9180000/40) 229500 (18360000/60) 306000

Total Manufacturing Expenses 882000 1203000

Adminstation and Selling & distribution exp.

Commission on sales 5% 64000 82500

Fixed Adm and Selling & dis. (9070400/40) 226760 (13605600/60) 226760

Total fixed expenses per unit 290760 309260

Total product cost per unit 1172760 1512260

B) Calculation of profit under Absorption costing method for 2017-18

Opening Stock value (10*882000) 8820000 (20*1203000) 24060000

Add: Production cost 40*882000) 35280000 (50*1203000) 60150000

Less: Closing stock (10*882000) 8820000   (10*1203000) 12030000

Cost of goods sold (40*882000) 35280000 (60*1203000) 72180000

Add: Selling & dis Exp (40*290760) 11630400 (60*309260) 18555600

Cost of sales 46910400 90735600

Add: profit 4289600 8264400 12554000

Sales 51200000 99000000

c) Calculation of Profit under Variable costing Method

Particulars Busses trucks total

Sales units 40 60 100

Selling price per unit 1280000 1650000

Variable cost per unit

Drect material 350000 430000

Direct Wages (650*350) 227500 (800*350*140%) 392000

Royalty 75000 75000

Commission (5% on selling price) 64000 82500

Total variable cost per unit 716500    979500

Contribution per unit 563500    670500

Total contribution 22540000 40230000 62770000

Less: Fixed overhead

Fixed manufacturing overhead   9180000    18360000 27540000

Fixed Adminstration, S&D overhead 9070400   13605600    22676000

Total fixed overhead 18250400 31965600    50216000

Profit 4289600 8264400    12554000

Reconciliarion of profits between Absorption & variable costing methods

Profit as per Variable costing 12554000

Profit as per Absorption Costing 12554000

D) Calculation of break even units of Busses and Trucks with same sales Mix

Let x be the break even units to be apportioned in the ratio of 40: 60= 2:3

Therefore break even units of Busses is 2x and break even units of Trucks is 3x

At Break even point Total contribution = Total Fixed cost

2x* 563500 + 3x*670500 = 50216000

1127000x + 2011500x = 50216000

3138500x= 50216000

x = 50216000/3138500 = 16 units

So, Break even units of Busses = 2x = 2*16 = 32

Trucks = 3x = 3*16 = 48