Unit: Advanced Management Accounting
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Login to Access| 1. | If all the umbrellas are sold within the year 2026, they would be sold at Sh.900 each. |
| 2. | If the company is unable to sell all the umbrellas within the year 2026, then they would be sold in the following year at Sh.300 per umbrella. |
| 3. | The production cost per umbrella amounts to Sh.400. |
| 4. | The demand for the umbrellas depends on the performance of the economy which is highly unpredictable. |
| 5. | The following are the possible states of the economy: | ||
| Economy | Probability | Demand (Number of umbrellas) | |
| Good | 0.30 | 500,000 | |
| Average | 0.46 | 350,000 | |
| Poor | 0.24 | 300,000 | |
| 6. | Uwese Ltd. has to decide to produce the umbrellas at one of the states of the economy in order to match forecast demand. |
| 7. | The opportunity cost of not selling an umbrella that is demanded is Sh.100. |
Required: | |
| (i) | Construct a payoff table showing all the possible outcomes. |
| (ii) | Advise the management of Uwese Ltd. on the optimal level of production based on the expected value, maximax and maximin criteria. |
| Market demand | Contribution per unit | Fixed cost | |||
| Probability | Units | Probability | Sh. | Probability | Sh. |
| 0.15 | 2,600 | 0.10 | 600 | 0.30 | 1,600,000 |
| 0.20 | 2,700 | 0.30 | 650 | 0.40 | 1,800,000 |
| 0.30 | 2,800 | 0.60 | 700 | 0.30 | 1,700,000 |
| 0.20 | 2,900 | ||||
| o.15 | 3,000 | ||||
| Market demand | 28 | 14 | 27 | 30 | 90 | 38 | 58 | 67 |
| Contribution per unit | 60 | 20 | 31 | 07 | 57 | 83 | 18 | 01 |
| Fixed costs | 57 | 30 | 69 | 19 | 02 | 29 | 71 | 00 |
| Option.1: | Continue making product “viva”. In this case, the number of customers would be expected to remain at Sh.6,000 per annum. Operational costs would stay at current level of Sh.16,000 per television set per annum. The selling price per television set is Sh.38,000. This profit margin is expected to continue. |
| Option.2: | Zeko Television Ltd. can acquire perfect information from consultants at a cost of Sh.50 million before launching “mega”. The expected profits are as follows under the three states of nature: |
| Option 2: | States of nature | Probability | Profit/(loss) (Sh.“000”) |
| Optimistic | 0.6 | 200,000 | |
| Most likely | 0.3 | 150,000 | |
| Pessimistic | 0.1 | 100,000 |
| Option.3: | Zeko Television Ltd. can launch “mega” television without market survey. If this occurs, there is a 75% chance that there is competition from rival firms. The company aims to achieve a target profit of Sh.180 million per annum from this option. The management accountant estimates annual profits in this situation would be as follows: |
| Option.3: | With competitors | Without competitors | |||
| State of nature | Probability | Profit/(loss) (Sh.“000”) | Probability | Profit/(loss) (Sh.“000”) | |
| Optimistic | 0.3 | 220,000 | 0.5 | 200,000 | |
| Most likely | 0.4 | 200,000 | 0.3 | 150,000 | |
| Pessimistic | 0.3 | (80,000) | 0.2 | 100,000 | |
| Decision alternatives | ||||
| Economic state | Probability | Corporate offices Sh. | Shopping mall Sh. | Residential estate Sh. |
| Optimistic | 30% | 100,000,000 | 110,000,000 | 90,000,000 |
| Most likely | 40% | 70,000,000 | 90,000,000 | 120,000,000 |
| Pessimistic | 30% | 130,000,000 | 90,000,000 | 70,000,000 |
| Probability | High | Medium | Low | ||
| Test | Successful.launch | 0.60 | 0.60 | 0.15 | 0.25 |
| marketing | Unsuccessful.launch | 0.40 | 0.10 | 0.40 | 0.50 |
| Contribution per unit | Sh.800,000 |
| Total weekly fixed costs | Sh.100 million |
| Weekly profit | Sh.220 million |
| Contribution to sales ratio | 40% |
| 1. | The company’s production capacity is not being fully utilised in the current year and three possible scenarios are under consideration. |
| 2. | Each scenario involves reducing the unit selling price on all units sold with an expected consequential effect on the budgeted volume of sales. |
| 3. | Details of each scenario are as follows: | |||
| Scenario | S1 | S2 | S3 | |
| Reduction in unit weekly selling price | 2% | 5% | 7% | |
| Expected increase in sales volume over budget | 10% | 18% | 25% | |
| 4. | The company operates just-in-time (JIT) system and holds no inventory of finished goods. |
| Division | Camera division Sh. | Sky division Sh. |
| Market price per HD camera | 19,000 | |
| Market price per drone | 160,000 | |
| Production cost per HD camera | 10,000 | |
| Assembly cost per hour | 35,500 | |
| Total outsourcing cost of other components | 1,686,670,000 | |
| Fixed non-manufacturing overheads | 10,560,000 | 33,000,000 |
| External demand | 10,000 HD cameras | |
| Production capacity | 22,000 HD cameras |
| Sales demand | Variable cost per unit | ||||
| Condition | Units | Probability | Condition | Sh. | Probability |
| Worst | 45,000 | 0.30 | Worst | 350 | 0.30 |
| Most likely | 50,000 | 0.60 | Most likely | 400 | 0.55 |
| Best | 55,000 | 0.10 | Best | 550 | 0.15 |
| Strategy A: | Advertise locally |
| Strategy B: | Online marketing |
| Strategy C: | Mass media advertisement with the local television media house |
| Market reaction (Demand) | |||
| Marketing strategy | High Sh.“000” | Medium Sh.“000” | Low Sh.“000” |
| Market locally | 1,300,000 | 500,000 | 350,000 |
| Online marketing | 1,500,000 | 850,000 | 410,000 |
| Mass media advertisement | 1,700,000 | 905,000 | (105,000) |
| Budgeted data: | Robox Division Sh. | Safari Division Sh. |
| Selling price per electricity battery | 65,000 | - |
| Selling price per motorcycle | - | 300,000 |
| Variable costs per unit: | ||
| Manufacturing cost per electric battery | 47,000 | - |
| Assembly cost per motor cycle | - | 105,000 |
| Fixed cost per annum: | ||
| Fixed manufacturing cost | 750,000,000 | 1,050,000,000 |
| Units | Units | |
| Production capacity | 220,000 electric batteries | |
| Internal transfers to Safari Division | 120,000 electric batteries | |
| External sales demand | 180,000 electric batteries | 60,000 motorcycles |
| 1 | Safari Division uses two electric batteries manufactured by Robox Division to assemble one motorcycle and sells motorcycles directly to external customers. | |
| 2 | Internal transfer price is set at opportunity costs. | |
| 3 | Robox Division must satisfy the demand of Safari Division before selling the dual electric batteries externally. | |
| 4 | Safari Division is allowed to purchase dual electric batteries from Robox Division or from external supplies. | |
| 5 | Safari Division is considering two purchasing options: | |
| Option 1: | Buy all the electric batteries it requires from Robox Division | |
| Option 2: | Outsource from a cheaper external supplier who has offered to supply all 120,000 electric batteries at a price of Sh.45,000 electric batteries each to Safari Division. | |
| Required: | ||
| (a) | In columnar format, prepare operating statement showing the: | |
| (i) | Net profit for each division if Option 1 is adopted. | |
| (ii) | Net profit for each division and Simplex Group Ltd. as a whole if Option 2 is adopted. | |
| (b) | Robox Division has received a special order from a new customer for the production of 40,000 electric batteries. The manager of Robox Division requires an annual target profit for the division amounting to Sh.6,410,000,000. This order will have no effect on the divisional fixed costs and no impact on the 180,000 electric batteries Robox Division sells to its existing customers. Calculate the minimum transfer price per electric battery to sell the 40,000 electric batteries to the new customer that would enable the manager of Robox Division to achieve the target profit. | |
| (c) | Evaluate FOUR non-financial environmental impact overriding factors to consider before accepting Option 2. | |
| Product | Zerofly | Whyfly | Nofly | Total |
| Selling price per unit (Sh.) | 80 | 20 | 30 | |
| Contribution margin ratio | 20% | 10% | 60% | |
| Sales demand in units | 50,000 | 150,000 | 60,000 | |
| Net profit (Sh.) | - | - | - | 490,000 |
| 1. | There is a 75% chance that the product development exercise will be successful. |
| 2. | The following matrix relates to the new product: | ||
| Market state | Probability | Profit (Sh.“000”) | |
| Very successful | 0.4 | 1,080,000 | |
| Moderately successful | 0.3 | 200,000 | |
| Failure | 0.3 | (800,000) | |
| 3. | The development cost of Sh.360,000,000 has been accounted for in the calculation of the above profits and losses. |
| Net profit/(loss) | |||
| Market conditions | Poor | Fair | Good |
| Probability of market states | 30% | 40% | 30% |
| Number of sandwiches sold: | Sh. | Sh. | Sh. |
| 100,000 | 100,000 | 300,000 | 300,000 |
| 200,000 | (100,000) | 600,000 | 600,000 |
| 300,000 | 0 | 700,000 | 900,000 |
| 400,000 | (300,000) | 600,000 | 1,200,000 |
| Product A | Product B | Product C | |
| Annual sales (units) | 6,000 | 6,000 | 1,000 |
| Selling price (Sh.) | 200 | 320 | 400 |
| Unit cost (Sh.) | 180 | 240 | 300 |
| Processing time required per unit (hours ) | 1 | 1.5 | 2 |
| 1. | The firm is working at full capacity of 17,000 processing hours per year. |
| 2. | Fixed costs are absorbed into unit cost by a charge of 200% of variable cost. |
| 3. | Processing can be switched from one product line to another. |
| 4. | The selling prices are not to be altered. |
| 5 | Information in respect to the maximum demand for each product which Rona Enterprise could alternatively outsource from an independent supplier, for the same quality, is given below at current selling prices: |
| 5. | Product | Expected maximum demand (Units) | Quoted price (Sh.) |
| A | 11,000 | 175 | |
| B | 8,000 | 240 | |
| C | 2,000 | 320 |
| 6. | In the period commencing 1 September 2022 and ending 31 August 2023, the company budgeted for production fixed overheads of Sh.2,000,000. |
Required: | |
| (i) | Compute the shortfall of the limiting factor. |
| (ii) | Determine the optimal production mix indicating the products and quantity to outsource from external supplier. |
| (iii) | Based on your recommendations in (b) (ii) above, determine the net profit for the period 31 August 2023. |
| Sh. | |
| Wholesale price | 5,000 |
| Retail price | 5,500 |
| Export price | 6,000 |
| Decision alternative | |||
| Selling price per bag | Sh.5,000 | Sh.5,500 | Sh.6,000 |
| Conditions | Number of bags to be sold | ||
| High harvest | 13,000 | 12,500 | 8,500 |
| Medium harvest | 10,000 | 9,000 | 8,500 |
| Low harvest | 6,000 | 6,000 | 3,500 |
| Proposal A: | The Company should improve the quality of packaging of its products at a cost of Sh.500 per unit. |
| Proposal B: | The company should spend Sh.2,000,000 on an advertising campaign. |
| Proposal C: | The Company should reduce the selling price by Sh.500 per unit. |
| Investment proposal | ||
| MX Sh. “000” | JX Sh. “000” | |
| Initial cash outlay on non-current assets | 192,000 | 192,000 |
| Net cash inflow: | ||
| Year 1 | 67,200 | 32,000 |
| Year 2 | 67,200 | 64,000 |
| Year 3 | 67,200 | 96,000 |
| Year 4 | 67,200 | 128,000 |
| 1. | The management assesses the cost of capital to the company at 16%. |
| 2. | The Accounting Rate of Return (ARR) calculation is based on the accounting profit which is computed by adding back depreciation to net cash inflow of each year. |
| 3. | Depreciation is on straight-line basis over the assets’ useful life. |
| 4. | Net present value (NPV) method is used to estimate the most viable project when using project life cycle costing. |
| 5. | Ignore tax and residual value. |
| 6. | The present value interest factor (PVIF) of the proposal is as follows: | ||||
| Year | 1 | 2 | 3 | 4 | |
| Present value at 16% | 0.8621 | 0.7432 | 0.6407 | 0.5523 | |
| Selling Price Sh. | Probability | Variable cost Sh. | Probability | Annual Sales volume Units | Probability |
| 400 | 0.3 | 200 | 0.1 | 40,000 | 0.4 |
| 450 | 0.5 | 250 | 0.6 | 50,000 | 0.5 |
| 500 | 0.2 | 300 | 0.3 | 60,000 | 0.1 |
| 1. | Assume that the three factors are statistically independent. |
| 2. | The company uses cost-volume-profit (CVP) analysis to make decisions. |
| 3. | The following random numbers are provided: | ||||||||||
| Selling price: | 8 | 0 | 6 | 1 | 3 | 5 | 1 | 3 | 9 | 1 | |
| Variable costs: | 0 | 4 | 3 | 4 | 6 | 7 | 2 | 8 | 5 | 9 | |
| Sales volume: | 6 | 3 | 9 | 4 | 0 | 9 | 7 | 6 | 8 | 5 | |
| Profits (Sh."000") | ||||
| Model acceptance | Acceptance Probability | Micro | Basic | Macro |
| Excellent | 20% | 60 | 100 | 120 |
| Moderate | 50% | 40 | 60 | 80 |
| Poor | 30% | 20 | 0 | -40 |
| Monetary value (Sh. "000") | -40 | -20 | 0 | 20 | 40 | 60 | 80 | 100 | 120 |
| Utility | 0 | 0.20 | 0.37 | 0.52 | 0.65 | 0.78 | 0.89 | 0.96 | 1.00 |
| Product | D | A | Total |
| Sales volume (units) | 1,200 | 600 | - |
| Sh. | Sh. | Sh. | |
| Unit selling price | 300 | 200 | - |
| Unit variable cost | 150 | 110 | - |
| Unit contribution | 150 | 90 | - |
| Total sales revenue | 360,000 | 120,000 | 480,000 |
| Less: Total variable costs | 180,000 | 66,000 | 246,000 |
| Contribution to direct and common fixed costs | 180,000 | 54,000 | 234,000 |
| Less: Direct avoidable fixed costs | 90,000 | 27,000 | 117,000 |
| Operating profit | 90,000 | 27,000 | 117,000 |
| Less: Common indirect fixed costs | - | - | 39,000 |
| Operating profit | - | - | 78,000 |
| Product | |||
| Details | Exe Sh. | Wye Sh. | Zed Sh. |
| Selling price per unit | 1,200 | 2,000 | 2,250 |
| Production costs per unit: | |||
| Direct materials | 300 | 900 | 600 |
| Variable overheads | 150 | 400 | 450 |
| 1. | Each type of product passes through three departments in which a different type of labour is used. The labour requirements in each department are given below: |
| Department | Rate per hour | Labour requirements per unit (hours) | |||
| Sh. | Exe | Wye | Zed | ||
| 1 | 20 | 3 | 4 | 6 | |
| 2 | 40 | 1 | 2.5 | 4 | |
| 3 | 30 | 5 | 7 | 9 | |
| 2. | There is a shortage of labour in department 2 and it is not possible to increase labour input hours beyond the level currently utilised. |
| 3. | Fixed overheads are budgeted at Sh.5,000,000 per annum and are expected to remain constant. |
| 4. | A recent market survey disclosed that the maximum sales potential for the company is 12,500 units of Exe, 7,500 units of Wye and 8,000 units of Zed. |
Required: Advise the management of Zinc Ltd. on the most profitable production mix and optimal profit using: | |
| (i) | Limiting factor analysis. |
| (ii) | Throughput accounting. |
| Sh. | |
| Plastic waste cost per chair | 300 |
| Labour cost per hour | 200 |
| Fixed overheads per year | 1,250,000 |
| Capital investment | 1,600,000 |
| 1. | The estimated time to produce the first chair is 10 hours. |
| 2. | It is estimated that a learning curve effect of 90% on labour to produce the chairs will be experienced. |
| 3. | The contract requires skilled labour that cannot be increased above the currently available hours. The available hours will produce 5,000 chairs for the first year. |
| 4. | Assume that an equilibrium of labour hours in the first year will be available in both year 2 and year 3. |
| 5. | The selling price per chair is set at Sh.900. |
| 6. | All cash flows occur at the year end while the initial investment is incurred at the start of year 1. |
| 7. | The capital investment has a nil salvage value at the end of the contract period. |
| 8 | The company has a cost of capital of 12%. |
Required: | |
| (i) | Using the Net Present Value (NPV) of the contract, advise the management of the company on whether to accept or reject the contract. |
| (ii) | State four other factors that the management of the company should consider before making the decision in (b) (i) above. |
| Doll type | Estimated demand Units | Standard material cost sh. | Standard labour cost Sh. | Estimated sale price per unit Sh. |
| A | 50,000 | 20 | 15 | 60 |
| B | 40,000 | 25 | 15 | 80 |
| C | 35,000 | 32 | 18 | 100 |
| D | 30,000 | 50 | 20 | 120 |
| Dress kit | 200,000 | 15 | 5 | 50 |
| Selling price per unit Sh. | Probability | Variable cost per unit Sh. | Probability |
| 200 | 0.25 | 80 | 0.20 |
| 250 | 0.40 | 100 | 0.50 |
| 300 | 0.35 | 120 | 0.30 |
| Quantity sold (units) | Selling price (Sh.) |
| 1 | 150 |
| 2 | 140 |
| 3 | 130 |
| 4 | 120 |
| 5 | 110 |
| 6 | 100 |
| Division | ||
| X Sh. | Y Sh. | |
| Variable cost per unit | 13 | 7 |
| Fixed costs attributable to the product | 50,000 | 70,000 |
| Actual | Proposed | |
| Ordering costs per order (O) | Sh.31.25 | Sh.120 |
| Purchase cost per item (P) | Sh.6.25 | Sh.6.0 |
| Annual Inventory holding cost as a percentage of purchase cost (1) | 20% | 20% |
| Project A Sh. | Project B Sh. | |
| Initial capital outlay | 8,000,000 | 8,120,000 |
| Net cash flows: | ||
| Year | ||
| 2022 | 3,620,000 | 4,260,000 |
| 2023 | 3,620,000 | 3,580,000 |
| 2024 | 3,620,000 | 2.640,000 |
| 2025 | 3,620,000 | 2,100,000 |
| Total cost of producing 10,000 components Sh."000" | Unit cost Sh. | |
| Direct material "Zed" | 1,200 | 12 |
| Direct labour | 1,000 | 100 |
| Variable manufacturing overhead costs (Power and utilities) | 100 | 10 |
| Fixed manufacturing overhead costs | 800 | 80 |
| Share of non-manufacturing overheads | 500 | 50 |
| 3,600 | 360 |
| Fixed overheads | Sh.400 million |
| Variable costs | Sh.1,000 per unit |
| Debtors | Sh.200 million |
| Inventory | Sh.400 million |
| Plant and other assets | Sh.600 million |
| Market condition | Probability | Estimated demand with price increase of: | |
Optimistic | 0.30 | Sh.5 55,000 | Sh.10 40,000 |
| Most likely | 0.50 | 40,000 | 25,000 |
| Pessimistic | 0.20 | 30,000 | 16,000 |
| 1 | The current unit variable cost is Sh.50. However, it is expected to vary in the next production period as follows: |
| Economic condition | Probability | Sh. | |
| High Medium Low | 0.20 0.60 0.20 | 55 52 47 |
| 2 | The fixed cost of production is currently at Sh.335,000 per month. It is expected to vary as follows in the next production period:
|
| Machine useful life (years) | 3 | 4 | 5 | 6 | 7 |
| Number of machines | 20 | 50 | 100 | 70 | 10 |
| Machine useful life (years) | 3 | 4 | 5 | 6 | 7 |
| Net Present Value (Sh.) | 1,010,000 | 330,000 | 290,000 | 860,000 | 1,370,000 |
Events | Probability | Bed only Sh."000" | Decision alternatives Bed and Breakfast Sh."000" | Full board Sh."000" |
| Full boarding | 0.30 | 24,000 | 90,000 | 16,000 |
| Moderate booking | 0.50 | 48,000 | 44,000 | 28,000 |
| Low booking | 0.20 | 6,000 | 8,000 | 18,000 |
| ........................................... | Cost per batch | |||
| Ingredient | Machine hours per batch | Variable Sh. | Fixed Sh. | Total Sh. |
| A | 6 | 200 | 60 | 260 |
| B | 10 | 220 | 70 | 290 |
| C | 12 | 240 | 180 | 420 |
| Cost of assembly | 320 | 130 | 450 | |
| Total cost per batch | 1,420 | |||
| Profit mark-up | 280 | |||
| Selling price | 1,700 | |||
| 1 | During discussion on the budget for the year ending 31 December 2020, the sales manager estimated that sales volume might grow either by 50% or 75% provided the required machine capacity is available. |
| 2 | hile assembly capacity could be increased and meet the projected growth in demand, the machine capacity of 28,000 hours cannot be increased. Therefore, in order to take advantage of the buoyant market, the management is considering the purchase of one of the three ingredients. |
| 3 | The following quotation has been received from an external supplier: |
| Ingredient | Price per batch (20 litres) Sh. | |
| A B C | 290 320 390 |
| 4 | The management of QHY Ltd. has decided to buy only one ingredient in any one financial period. |
| Average total cost (Sh.) | Probability |
| 105 107 110 121 125 126 142 156 158 | 0.05 0.10 0.08 0.12 0.14 0.16 0.12 0.18 0.05 |
| (i) | Expected value of the average total cost based on the above probability distribution. |
| (ii) | Evaluate the decision that the company's manager is likely to make based on the average total cost in (c) (i) above and the current average delivery cost of Sh.125 per delivery, assuming the manager is:
|
| Option 1: | Introduce both products. |
| Option 2: | Introduce either of the products. |
| Option 3: | Introduce none of the products, depending on their performance in the market. |
| State of nature | |||
| Decision | Good performance (S1) Sh."million" | Fair performance (S2) Sh."million" | Poor performance (S3) Sh."million" |
| Neither | 0 | 0 | 0 |
| Product 1 only | 30 | 15.6 | 7.2 |
| Product 2 only | 25.2 | 14.4 | 7.2 |
| Both | 52.8 | 8.8 | 3.2 |
| March Sh."000" | April Sh."000" | |
| Sales | 8,000 | 9,000 |
| Cost of sales | (5,000) | (5,500) |
| Gross profit | 3,000 | 3,500 |
| Expenses: | ||
| Selling and distribution costs | (800) | (900) |
| Administrative costs | (1,500) | (1,500) |
| Net profit | 700 | 1,100 |
| 1 | There is a 90% probability that the production processes will remain in control. |
| 2 | The benefit of investigating variances is Sh.55,000. |
| 3 | It will cost Sh.1,500 to inspect the process at the investigation point. |
| 4 | If a correctable cause is discovered, it will cost Sh.10,000 to make the necessary adjustments. |
| High demand for six years | 0.5 |
| Low demand for six years | 0.3 |
| High demand for three years followed by low demand for three years | 0.2 |
| 1 | There is no probability of a low demand followed by a high demand. |
| 2 | Enlargement of capacity will be required and the following options are available:
|
| 3 | The returns expected under the three capacity options and demand levels are estimated as follows: |
| Option | If demand is high | If demand is low | ||
| A | Sh.3.2 million per annum | Sh.1.2 million per annum | ||
| B | Sh.1.8 million per annum | Sh.1.6 million per annum | ||
| C | Upgrade | Sh.2.2 million per annum for three years | Sh.0.6 million per annum for three years | |
| No Upgrade | Sh.1.0 million per annum for three years | Sh.1.6 million per annum for three years |
| Product A | Product B | |
| Revenue | Sh.10 million | Sh.20 million |
| C/S ratio | 15% | 10% |
| 1 | If all the umbrellas are sold within the year 2018, they would be sold at Sh.900 each. |
| 2 | If the company is unable to sell all the umbrellas within the year 2018, then they would be sold in the following year at Sh.300 per umbrella. |
| 3 | The production cost per umbrella amounts to Sh.400. |
| 4 | The demand for the umbrellas depends on the performance of the economy which is highly unpredictable. The following are the possible states of economy: |
| Economy | Probability | Demand (Number of umbrellas) | |
| Good Average Poor | 0.30 0.46 0.24 | 500,000 350,000 300,000 |
| 5 | Tripa Ltd. has to decide to produce the umbrellas at one of the states of the economy in order to match forecast demand. |
| 6 | The opportunity cost of not selling an umbrella that is demanded is Sh.100. |
Required: | |
| (i) | Construct a pay off table showing all the possible outcomes. |
| (ii) | Advise the management of Tripa Ltd. on the optimal level of production based on the expected value. maximax and maximin criteria. |
Competitor's reaction | Product X Sh. "000" | Product Y Sh. "000" | Product Z Sh. "000" |
| Strong Normal Weak | 400 600 1,000 | 800 1,200 1,600 | 1,200 800 1,000 |
| Number of tickets sold | Profit Sh. "000" |
| 5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000 | (20,000) (5,000) 35,000 55,000 75,000 90,000 115,000 130,000 150,000 |
| Sales price of Sh.150 Forecast sales volume | Probability | Sales price of Sh.240 Forecast sales volume | Probability |
| 20,000 30,000 40,000 | 0.1 0.6 0.3 | 18.000 16,000 20,000 24,000 | 0.1 0.3 0.3 0.3 |
| 1 | Fixed production cost of the venture will be Sh.380,000. |
| 2 | The level of advertising and publicity costs will depend on the sales price and the market aimed for. With a sales price of Sh. 150 per unit, the advertising and publicity costs will amount to Sh.120,000. With a sales price of Sh.240 per unit, these costs will amount to Sh.1,220,000. |
| 3 | Labour and variable overhead costs will amount to Sh.50 per unit produced. |
| 4 | Each unit produced requires 2 Kgs of raw materials and the basic cost is expected to be Sh.40 per Kg. However, the suppliers of the raw materials are prepared to lower the price in return for a firm agreement to purchase a guaranteed minimum quantity. If Best deal Ltd. contracts to purchase at least 40,000 Kgs, then the price will be reduced to Sh.37.5 per Kg for all purchases. If Best deal Ltd. contracts to purchase a minimum of 60,000 Kgs, then the price will be reduced to Sh.35 per Kg for all purchases. It is only if Best deal Ltd. guarantees either of the above minimum levels of purchases in advance that the appropriate reduced prices will be effected. |
| 5 | If Best deal Ltd. was to enter into one of the agreements for the supply of the raw materials and was to find that it did not require to utilise the entire quantity of materials purchased, then the excess could be sold. The sales price will depend upon the quantity that is offered for sale. If 16,000 Kgs or more is sold, the sales price will be Sh.29 per Kg for all sales. If less than 16,000 Kgs are offered, the sales price will only be Sh.24 per Kg. |
| 6 | Irrespective of the amount sold, the costs incurred in selling the excess raw materials per kg. will be as follows: Sh. Packaging 3.00 Delivery 4.50 Insurance 1.50 |
| 7 | Best deal Ltd.'s management team feels that losses are undesirable while high expected monetary values are desirable. Therefore, it is considering the utilisation of a formula that incorporates both aspects of the outcome to measure the desirability of each strategy. The formula to be used to measure desirability is: Desirability = L+ 3 E Where: L = The lowest outcome of the strategy. E = The expected monetary value of the strategy. The higher this measure is, the more desirable the strategy. The marketing manager seeks your advice, as the management accountant, to assist in deciding on the appropriate strategy. |
| (a) | Prepare statements showing the various expected outcomes of each of the choices open to Best deal Ltd. |
| (b) | Advise the management of Best deal Ltd. on the best choice of strategies if the company's objective is to: |
| (i) | Maximise expected monetary value. | |
| (ii) | Minimise the harm done to the firm if the worst outcome of each choice was to occur. | |
| (iii) | Maximise the score on the above mentioned measure of desirability. |
| Probability | Effect on membership numbers |
| 0.3 | Remain at their current level of 4,000 members per annum. |
| 0.7 | Increase to 4,800 members per annum. |
| The effect on operational costs for the next four years is expected to be: | |
| Probability | Effect on operational costs |
| 0.4 | Increase to Sh.6,000 per annum per member. |
| 0.6 | Increase to Sh.8,000 per annum per member. |
| Any improvements are expected to last for four years. | |