Freezalicious Ice Cream Company in Western Cape
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Freezalicious CC is a small ice cream manufacturer in the sold to large retailers throughout the Western Cape.Western Cape. Their ice-cream is Mr. Mweli, the sole shareholder, has been approached by a large dairy manufacturer who wishes to purchase all the shares in Freezalicious.
The purchase price will be calculated by multiplying the profit of Freezalicious for the year ended 30 June 2021 by a factor of 2.4. In addition, the buyer will pay the standard cost price for the ice-cream stock on hand on 30 June 2021.
Both Mr Mweli and the seller are happy with this arrangement.
You are the accountant at Freezalicious, but due to the small size of the business, you are involved in all finance, administration and manufacturing operations. You have completed your B Comm Accounting, but unfortunately, we’re not selected to complete PGDA.
Mr. Mweli has in an email instructed you to ensure that the production of ice cream in the months of May and June is increased to 20 000 litres more than the expected demand. This is an unusual instruction. The stock levels are usually consistent at 5 000 litres.
The best before the date of ice cream is usually three months after the manufacture date thereof. The standard variable cost of producing 1 litre of ice cream is R5. The standard fixed costs of Freezalicious are R1, 000,000 per month. Normal monthly production and sales are 100 000 litres. Due to excess capacity, it would not increase fixed costs if 120 000 litres were produced in a month.
For the sake of simplicity, assume Freezalicious incurs no other costs.
Freezalicous uses an absorption costing system when valuing its stock. Although standard costs are calculated to help with budget preparation, a standard costing system is not used. Stock is accounted for at a lower cost or net realisable value.
One litre of ice cream sells for an average of R20.
You are required to:
Respond to the email sent by Mr. Mweli in which you address the following issues.
- What effect this action would have on the sale price of Freezalicious
- What your stance is with regard to whether or not this is an ethical course of action, including whether or not you are willing to carry out this instruction.
How might your response be different if you were a registered member of SAICA?