Unit: Advanced Management Accounting
11 Questions| 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. |
| 1. | The demand for the company’s’ product is dependent on disposable income and price of the products. |
| 2. | The analysis of variances table: | ||
| Source | Degrees of freedom | Sum of squares | |
| Model | 3 | 187 | |
| Error | 9 | 4 | |
| Total | 12 | 191 | |
| 3. | The parameter estimates and their errors: | ||
| Variable | Estimate | Standard error | |
| Constant | 1.5 | 2.000 | |
| Price | -1.4 | 0.1934 | |
| Income | 5 | 0.2700 | |
| X | Y | Z | |
| Units produced and sold | 12,000 | 16,000 | 8,000 |
Sh. | Sh. | Sh. | |
| Sales price per unit | 50 | 70 | 60 |
| Direct material cost per unit | 16 | 24 | 20 |
| Direct labour cost per unit | 8 | 12 | 8 |
Product overhead costs | Total Sh. | Cost drivers | |
| Machining costs | 102,000 | Machine hours | |
| Production scheduling | 84,000 | Number of production runs | |
| Set up costs | 54,000 | Number of production runs | |
| Quality control | 49,200 | Number of production runs | |
| Receiving materials | 64,800 | Number of components receipts | |
| Packaging materials | 36,000 | Number of customer orders | |
| Information on the cost drivers is given as follows: | |||
| X | Y | Z | |
| Direct labour hours per unit | 1 | 1.5 | 1 |
| Machine hours per unit | 0.5 | 1 | 1.5 |
| Number of components per unit | 3 | 5 | 8 |
| Number of component receipts | 18 | 80 | 64 |
| Number of customers orders | 6 | 20 | 10 |
| Number of production runs | 6 | 16 | 8 |
| 1. | The replacement cost of a new machine is Sh.1 million with expected useful life of five years. |
| 2. | The machine will have no salvage value after decommissioning it. |
| 3. | It is expected that 20,000 units of Salfa will be produced and sold at a transfer price of Sh.300 per unit over the five year period as follows: |
| Year | 1 | 2 | 3 | 4 | 5 | |
| Units sold (“000”) | 6 | 5 | 4 | 3 | 2 | |
| 4. | Variable costs are expected to be Sh.165 per unit produced and sold. | |||||
| 5. | The incremental fixed costs, mainly the wages of a maintenance engineer are expected to be Sh.200,000 per year. |
| 6. | Alumax Ltd. uses an imputed interest cost of capital of 13% for the investment appraisal purposes. |
| 7. | Depreciation on this machine is calculated on initial cost of the investment at the start of the year. |
Required: | |
| (i) | The residual income (RI) for each of the five years. |
| (ii) | The return on investment (ROI) for each of the five years. |
| 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. | |
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