Question

You are the manager of Compounders Ltd. The company mixes compound for smaller plastic extrusion companies. Compounders Ltd has six (6) mixing machines with a maximum capacity (100%) of 250 ton 250 ton per machine. However, due to power cuts, the machines are currently being operated at 75% of installed capacity. One (1) ton of a compound mixture consists of two (2) raw materials: 0.7 ton of Electrolyte and 0.3 ton of Copper Wire. Assume no wastage. There are no opening and closing inventories. All raw materials purchased are being used in the month of purchase, and all compound mixed are being sold in the month mixed. Each mixing machine requires two (2) operators. The company is operating a nine (9) hour shift and each machine operator earns R75 per hour. No weekend time nor overtime is allowed. The company is a price setter and the pricing policy is based on a mark-up of the total production cost at 50%. The company incurred the following costs for the month:

1. Import (purchase) raw material for one month’s production. Material Electrolyte @ R60 per ton and Copper Wire @ R95 per ton.

2. The import cost amount to R1,000 per 250 ton of Material Electrolyte and R1,500 per 120 ton of Copper wire.

3. Paid the wages based on a twenty (20) working days.

4. The factory foreman earns a salary of R15,000 per month.

5. The cost of security is as follows: Guard at the entrance of the factory R3,500 per month and the guard at the entrance to the admin offices R3,750 per month.

6. The monthly rental amounts to R25,000. Rent is allocated based on floor space occupied. The factory occupies 9,100 ??2 and the office block 3,900 ??2.

7. Office expenses amounts to R64,000 per month.

8. Compound delivery cost amount to R1,200 per 125 ton of compound delivered.

Required: 1.1 Calculate the selling price per ton of the compound mixture. Use the following table in your workings as marks will also be awarded for individual calculations. (Max 20 marks)

No

Cost incurred

Production cost R

Period cost R

1.2 Calculate the variable cost per ton of the compound mixture and the total fixed cost. Use the following table in your workings as marks will also be awarded for individual calculations. (6)

No

Cost incurred

Variable R

Fixed cost R

1.3 Calculate the contribution per ton produced. (2)

1.4 Calculate the break-even tons to be mixed (2)

Answer 1

Capacity 75% * 250	1125	Tons
	Cost incurred		Production cost	Period cost
	Material
	Electrolyte 187.5 * 6 *.7 * 60	47250
	Copper wire 187.5 *6 * .3 * 95	32062.5	79312.5
	Import cost
	Electrolyte 4*1000	4000
	Copper wire 3 * 1500	4500	8500
	Total
	Wages 2 * 6 * 9 * 75 *20days		162000
	Foman salaries		15000
	Security cost		3500	3750
	Monthly rentals		17500	7500
	Office expense			4000
	Delivery expense			10800
	Total cost		285812.5	26050
	Total tons of mixture		1125
	Mixture cost per ton		254.06
	Mark up 50%		127.02
	Selling price		381.08
2		Variable cost	Fixed cost
	Material	87812.5
	Wages	162000
	Foreman salaries		15000
	Security cost		7250
	Monthly rentals		25000
	Office expense		4000
	Delivery expense	10800
	Total	260612.5	51250
	Total tons of mixture	1125
	Variable cost per ton	231.66
3	Selling price per ton	381.08
	Variable cost per ton	231.66
	Contribution per ton	149.42
4	Breakeven point = Fixed cost / contribution per ton
	Break even in units = 51250 / 149.42	343	Tons