[SOLVED] Springbok Limited’s budget committee, which had

Springbok Limitedâ€™s budget committee, which had members drawn from all the major functions of the business was meeting to consider the projected income statement 2020/2021, which was composed of the 10 months actuals to the end of January 2011, and estimates for the last two months of the financial year:

After some discussion of information, principally supplied by the finance director, Cecil Afrika, the committee agreed the following changes for the 2021/2022 budget: 30% increase in number of units sold 15% increase in unit cost of materials 20% increase in direct labour cost per unit 34.5% increase in fixed overhead due to the strengthening of the Rand 8% increase in fixed administration and selling expenses. The increase in sales volume was meant to be a significant step towards an ambitious target market share, which had been included in the latest review of Springbokâ€™s strategic plan, at the insistence of the marketing manager, Brian Habana. Despite the changing volume, inventory quantities were expected to change very little over the coming year because of planned improvements in the supply and handling of material and dispatch of finished goods. In addition, no dropped balls or excessive penalties were expected. The managing director, John Smit, set the target profit before tax for 2021/2022 of R2,000,000, and the budget committee were debating what this might imply for the unit selling price, on the basis of information that they had assembled so far. The consensus appears to be that the profit target had been hooked out of somewhere and was very tough, but that presumably this was what John and the chairman, Pieter de Villiers, believed the market expected. Habana was worried that the imposition of the short-term target profit would jeopardize the staged attainment of his long-run market share, â€˜I might be winging it here, but I am concerned that in order to meet the profit targets imposed by John Smit weâ€™ll have to drastically put up our price. If that happens, we might hit the profit, but the knock-on effect will ruin my plans for damaging the prospects of Silverfern Company, who have been trying to take market share from us â€“ I think they are getting desperate because our cost structure and product quality are better than theirs! If we can just keep squeezing them for another year or two, focusing on the centre of their operations and out-flanking them, we might force them out of the market, or get them to agree to a takeover on reasonable terms. Then weâ€™d effectively have the market to ourselves.â€™ Victor Matfield, Habanaâ€™s deputy asked, â€˜Rather than putting up the price, could we outline how many units weâ€™d have to sell at the old price to meet the profit target? Then we could check to see whether it would be within the plantâ€™s capacity and lock into that volume. That would prevent us jumping to incorrect conclusions.â€™ Schalk Burger, the production manager, intervened at this point saying, â€˜It might be a bit of a maul, but we can make up to 150,000 units a year with the present plant. I am not sure we could sustain a high capacity output for long without injury. We might have to invest in extra capacity, which is a whole new ball game. Besides, I donâ€™t really believe we can sell an extra 30,000 units next year, never mind 50,000 units, especially at an enhanced price. I suspect we will only manage to sell an extra 20,000 units at best, and perhaps only 10,000: what would that do for our profits, Cecil?â€™ Cecil replied that any extra sales would certainly prop up profits, but that he didnâ€™t exactly know. He would investigate the various suggestions and come back to the next meeting in a weekâ€™s time with some figures. As he walked back to his office, Cecil privately mused that perhaps the MD and chairman wanted to boost short-term profits to make it easier to raise the capital to take over Silverfern Company â€“ however he wasnâ€™t sure that aggressive budgeting was the right way to go. He knew the line staff were backing him, but perhaps it was time to call on consultant Jake White. Questions for Discussion Write a report to the board of Springbok Ltd, setting out the financial effects of the various proposals and make recommendations as to what price Springbok should charge next year and in the longer run. Show all workings. Your report and presentation should cover: 1. The sales price needed to earn the target profit before tax, using the information compiled by the budget committee. 2. The new variable cost per unit. 3. The number of units that would have to be sold at the old selling price to meet the target profit, and whether this seems feasible. 4. What the profit would be if the sales price calculated in 1. were adopted and sales volume only rose by 15 per cent. 5. Any other factors you think should be taken into account when making decisions about the price to be charged next year, such as any change in risk involved in the cost-volume-profit structure you propose; the link between short- and long-run sales prices; and the interactions between various strategic decisions.

Question: Springbok Limited’s budget committee, which had