Question

QUESTION 2 (25 marks) R14 R13 | 1 500 2000 2 500 3R12 What would be the optimum price? (10) Mary Poppins, a friend of yours, has recently set up a small business making curtains. She has supplied you with the following figures, and has asked your advice on a number of issues: Costs per month R Materials 4 100 Labour 5 000 Production overheads 2000 Selling and distribution overheads 1000 Administration overheads 500 Required Advise Mary on each of the above points, showing your calculations, explaining both the financial and non-financial implications of each where appropriate The above costs are based on producing and selling 1 200 pairs of curtains per month at a selling price of R15 each 80% of labour costs are fixed, as are 75% of production overheads, 80% of selling and distribution overheads, and 100% of administration overheads. All other costs vary directly with output Mary wants to know. a) How much profit she will make at the proposed production level and selling price?(3) b) How many pairs of curtains she needs to sell to break even at this price? (3) If sales are slower than expected, by how much can she reduce her selling price in order to maintain the budgeted level of sales without making a loss? d) Mary estimates her maximum capacity as 1 500 curtains: would it be worthwhile to drop the price in order to increase sales to capacity? If so, by how much? (5) e) If Mary bought another machine, she could increase her production capacity to 2 500 curtains. Repayments on the machine would be R700 per month, and she would need an extra member of staff, costing R1 000 per month. She would also have to pay a bonus to all staff of 50 cents per pair of curtains, over and above their current wages, and variable production overheads would increase by 30 cents per pair of curtains In order to increase sales, she would have to reduce the price: she estimates demand at different price levels to be as follows: Price monthly Estimated demand