Posted: September 13th, 2017
Decision Making and Relevant Information
Paper, Order, or Assignment Requirements
The assignment is designed to enhance your written communication and analytical skills, and your ability to apply theory to a particular practical situation. Please show all your workings and calculations and show the Income Statements for the two scenarios next to each other in one table. You will receive zero marks if your figures are incorrect and you do not show any calculations.
Part A – Decision making and relevant information 20 marks
Spitzer Ltd manufactures a spread for sandwiches. The main raw material for the spread is peanuts. Currently Spitzer Ltd uses peanuts grown in Australia. They currently sell the spread for $500 per tonne. The expected annual production of spread for 2015 is 4 000 tonnes. Spitzer Ltd does not carry any inventory for either raw material, or WIP or finished goods and sells 100% of the spread produced during the year by the end of the year. Following is information projected for the 2015 year:
| Description | Quantity | Cost |
| Direct materials (raw peanuts sourced from Australia) | 3 500 tonnes (87.5% of weight of tonnes sold) | $200 per tonne |
| Direct materials (all other ingredients excluding peanuts) | 500 tonnes (12.5% of weight of tonnes sold) | $40 per tonne |
| Direct manufacturing labour | 17 labourers, working 8 hours per day, 5 days a week, 48 weeks per year | $15 per hour |
| Indirect manufacturing labour | 1 labourer working 5 hours per day, 5 days a week, 48 weeks per year | $18 per hour |
| Salaries: administration staff | 2 clerks | Together $75 000 per year |
| Salary: factory supervisor | 1 person | $80 000 per annum |
| Depreciation: factory | $84 000 per annum | |
| Depreciation: machinery and equipment | $1 000 per month | |
| Depreciation: administration office | $800 per month | |
| Fixed selling and administration expenses | $50 000 per annum | |
| Variable selling and administration expenses | $10 per tonne sold | |
| Other variable manufacturing overhead costs | $2 per direct manufacturing labour hour |
Assume all costs can be classified as either fixed or variable with respect to a single cost driver (units of output).
Management considers sourcing peanuts from Indonesia as it will reduce the cost of raw materials of peanuts to $150 per tonne. The Marketing Manager has advised that sourcing the peanuts from Indonesia at this lower cost will enable the company to decrease the selling price by 10% and increase their market share by 25%. To do this, Spitzer Ltd will have to rent additional premises for the production as the company currently operates at full capacity. Spitzer Ltd can rent a factory about 2km away from their current factory for $5 000 per month, including water and power. Spitzer Ltd will have to purchase machinery and equipment to manufacture the spread in the new premises. Management received a quote for the required machinery and equipment for $40 000. The useful life of the machinery and equipment is 4 years and will be depreciated on a straight line basis. Spitzer Ltd will have to employ an additional four labourers for manufacturing the spread in the new factory. These labourers will be paid $16 per hour and work 40 hours per week for 48 weeks per year. The company will also have to employ one person at the new premises to perform the indirect manufacturing labour tasks. This person will work 3 hours per day, 5 days a week, for 48 weeks per year and will be paid $20 per hour. Apart from these, no changes to any other costs and expenses are expected.
Required:
- Use absorption costing to prepare an Income Statements for 2015 for the following two scenarios:
(a) sourcing the peanuts from Australia, and
(b) sourcing the peanuts from Indonesia. (10 marks)
Calculate the figures for both scenarios for 12 months. Show the tonnes sold, tonnes of direct materials used to produce the spread, and the gross margin and operating profit. Categorise the costs as either product or period costs in calculating gross and net profit.
Please show all your workings and calculations and show the Income Statements for the two scenarios next to each other in one table. You will receive zero marks if your figures are incorrect and you do not show any calculations.
- Discuss qualitative/non-financial information Spitzer Ltd should consider in making a decision. (5 marks)
Part A of the assignment assesses your application of theoretical concepts and issues to a practical situation. Hence, you will only receive full marks for this question if you relate and discuss the qualitative issues in the context of Spitzer Ltd. Pay attention to the “Details” in the “Information about Part A of the assignment” document available in Moodle.
- Based on your calculations in 1 and the qualitative issues considered in 2 above, advise the CEO of Spitzer Ltd whether to accept or reject the suggestion of sourcing the peanuts from Indonesia. You must make a decision about which one of the two scenarios to choose. You will only receive full marks if you justify your arguments and decision. (3 marks)
Please note that 2 marks are allocated for demonstrating appropriate communication skills. To receive these marks your answer must be well written and be free of grammatical and spelling errors. Ensure logical flow in your arguments and that your answer is a coherent discussion.
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