Question

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

Materials 4 100

Labour 5 000

Production overheads 2 000

Selling and distribution overheads 1 000

Administration overheads 500

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, 60% of selling and distribution overheads, and 100% of administration overheads. All other costs vary directly with output. Mary wants to know:

a) 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	Estimated monthly demand
14	1500
13	2000
12	2500

Required: Advise Mary on each of the above points, showing your calculations, explaining both the financial and non-financial implications of each where appropriate. PLEASE PROVIDE A RESPONSE FOR ALL THE QUESTIONS

Answer 1