Full Cost per Unit Analysis and Cost-Plus Pricing for E-Bus Models
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QUESTION 2 (15 Marks)
Examine the information provided below, answer the following questions.
Kearns & Hobbs Limited (K&H) is a South African firm specialising in the assembly of standard 12-metre electric buses (e-buses) for the domestic market... [Introductory text describing the scenario]
... [Data Tables omitted for brevity in transcription, but include costs and department metrics] ...
REQUIRED:
2.1. Using the information provided above, prepare a full cost per unit analysis for each of the two new e-bus models (Model I and Model II). Both models pass sequentially through all three production departments (P1, P2, and P3). Your analysis should:
- Allocate and apportion all overhead cost categories to the four departments (P1, P2, P3, and service department S1).
- Re-apportion S1's costs to the three production departments using machine hours as the re-apportionment basis.
- Absorb the total overheads of each production department into the product cost of Model I and Model II using machine hours as the absorption basis.
- Compute the full cost per unit of Model I and Model II, showing all workings clearly and rounding final answers to the nearest Rand. (10 marks)
2.2. Assuming that K&H Limited applies a cost-plus pricing policy with a 12% markup on full cost, use the full cost per unit of Model I and Model II obtained in 2.1 to calculate the expected selling price per unit for each model of the e-bus, the total revenue expected from the sale of all units of the Model I and Model II of the e-bus, and briefly comment on how the pricing approach aligns with K&H's strategic objective of promoting sustainable mobility solutions in South Africa. (5 marks)
This question includes visual content: The image contains four tables of financial and operational data: 1) Production and direct costs for Model I and II. 2) Actual overhead costs totaling R38,000,000 across categories like utilities, labor, and depreciation. 3) Operational metrics (Floor area, machine hours, direct labour hours, equipment value, inventory value, production runs) for four departments: P1, P2, P3 (manufacturing) and S1 (service). 4) Machine hours required per unit for Model I and II in departments P1, P2, and P3.
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Step by Step Written Solution
In this problem, we need to calculate the full cost and selling price for two e-bus models, Model One and Model Two, for Kearns and Hobbs Limited. We'll start by allocating and apportioning overhead costs to four departments.
Step 1: Allocation and Apportionment of Overheads
First, let's identify the basis for apportioning each cost category. We'll use floor area for utilities and occupancy costs, direct labor hours for indirect labor, value of equipment for depreciation, value of inventory for insurance, and production runs for environmental costs.
| Cost Category | Basis of Apportionment\nFactory Utilities | Floor area (m2)\nIndirect labour | Direct labour hours\nDepreciation | Value of equipment\nOccupancy costs | Floor area (m2)\nInsurance | Value of inventory\nEHS compliance | Production runs |
|---|
Now, we compute the apportioned amounts for P one, P two, P three, and service department S one based on these ratios.
Overhead Apportionment Table (in Rands)
| Category | Total | P1 | P2 | P3 | S1\nUtilities | 6,000,000 | 2.25m | 1.65m | 1.35m | 0.75m\nInd. Labour | 14,500,000 | 5.2675m | 4.8285m | 3.071m | 1.3325m\nDeprec. | 5,000,000 | 2m | 1.5m | 1m | 0.5m\nOccupancy | 6,300,000 | 2.3625m | 1.7325m | 1.4175m | 0.7875m\nInsurance | 5,000,000 | 2.5m | 1.5m | 1m | 0\nEHS | 1,200,000 | 480k | 360k | 240k | 120k |
|---|
Summing up the costs for the service department S one, we get three million, four hundred and ninety thousand Rand. We need to re-apportion this to P one, P two, and P three using machine hours as the basis.
The total machine hours for the production departments are ninety-four thousand. We divide S one's cost based on each department's share.
Step 2: Re-apportioning S1 Costs
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