Study the information below and answer the following questions independently:
Problem 1) A prospective customer in an unrelated market offered to purchase 2000 handle grinders for R164000. The angle grinders would be manufactured in addition to he 200000 units sold. The regular sales commission on the 2000 angle grinders would still be paid by Pringle Limited. Should the offer be accepted?
Problem 2) A supplier offered to manufacture the year's supply of 200000 plastic housings for R12 each. Assume that Pringle Limited would avoid R700000 of the fixed costs assigned to housings if it purchases the housings. What would be the effect on operating profit if it purchased rather than made the housings? Show your calculations.
INFORMATION:
Pringle Limited manufactures angle grinders (a power tool). The sales for the year just ended were 200000 units at R200. The table below shows the costs for the year ended of the plastic housing separately from the costs of the electrical and mechanical components.
Electrical & Plastic Angle
mechanical components housing Grinders
Direct materials 8 800 000 1 000 000 9 800 000
Direct labour 800 000 600 000 1 400 000
Variable factory overheads 200 000 400 000 600 000
Other Variable Costs 200 000 - 200 000
Sales commission (10% sales) 4 000 000 - 4 000 000
Fixed Costs 4 440 000 960 000 5 400 000