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QUESTION 3 (35 MARKS) Saliso Ltd is a division of the Racaza group of companies and manufactures a productwhich it sells (i) On the open market(ii) On a special government contract, which is renewable monthly at theoption of both parties The following information is available for the 2020 financial year: i) Saliso sold 1 000 units per month to the government at a contract price ofR125 per unit.ii) Direct material cost per unit R30 Direct labour cost per unit R40 iii) In 2020 manufacturing overhead costs were absorbed at R40 per unit. TheR40 per unit absorption rate was based on a total number of units sold tothe government plus units sold on the open market. 40% of the total manufacturing overhead cost was variable.The 60% fixed overheads may be analysed into: 1. Fixed costs avoidable if production ceased 50% 2. Depreciation of equipment and premises 30% 3. Apportionment of head office costs 20% iv) Open market sales were made at a level that maximised contribution.Monthly open market demand at different levels of sales was as follows: Monthly Unit Demand Selling Price1 000 R1702 000 R1503 000 R120 v) Maximum monthly manufacturing capacity is 5 000 units. Saliso Ltd is currently preparing a budget for 2021 and you are given thefollowing information: 1) The Government contract will fall away.2) The 2020 variable cost structure and open market demand will remain the same for 2021. The selling prices will also remain the same at the various levels ofdemand. 3) Avoidable fixed cost will increase by 30% above the 2020 level.

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