Unit: Advanced Management Accounting
7 Questions| 1 | The night shift workers normally consist of 30 skilled men, 15 semi-skilled men and 10 unskilled men, who are paid at standard hourly rates of Sh.80, Sh.60 and Sh.40 respectively. |
| 2 | A normal working week consists of 40 hours. |
| 3 | The weekly output for night shift workers is expected to be 2,000 units. |
| 4 | In the second week of the month of October 2016, the night shift workers consisted of 40 skilled men, 10 semi-skilled men and 5 unskilled men, who were paid at Sh.70, Sh.65 and Sh.30 respectively. During that week, 4 hours were lost due to abnormal idle time and 1,600 units were produced. |
| Actual demand (units) | Frequency |
| 300-399 400-499 500-599 600-699 700-799 800-899 900-999 | 0 16 20 25 14 8 3 |
| "Sh.000" | |
| Materials | 25,000 |
| Labour (2,000 hours x Sh.15,000 per hour) | 30,000 |
| Overhead (50% of labour cost) | 15,000 |
| 70,000 | |
| Profit mark-up (25%) | 17,500 |
| Selling price | 87,500 |
| (i) | If the customer above paid Sh.87,500,000 for the first machine, determine the price he would have to pay later for a second machine. |
| (ii) | Advise the management of Innovators Ltd. on the price quotation per machine if the customer above places an order for the third and the fourth machines as a single order. |
| 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. |
| 1 | Summary of financial data for Everlast Ltd. for the financial year ended 30 June 2016: |
Revenue: | Western Sh. "000" | Eastern Sh. "000" | Central Sh. "000" | Total Sh. "000" | |
| Fees received | 1,800 | 2,100 | 4,500 | 8,400 | |
| Variable cost | (468) | (567) | (1,395) | (2,430) | |
| Contribution | 1,332 | 1,533 | 3,105 | 5,970 | |
| Fixed cost | (936) | (1,092) | (2,402) | (4,430) | |
| Operating profit | 396 | 441 | 703 | 1,540 | |
| Interest cost on long-term debt at 10% | (180) | ||||
| Profit before tax | 1,360 | ||||
| Income tax for the year | 408 | ||||
| Profit for the year | 952 | ||||
Average book values for 2016: | |||||
| Assets: | |||||
| Non-current assets | 1,000 | 2,500 | 3,300 | 6,800 | |
| Current assets | 800 | 900 | 1,000 | 2,700 | |
| Total assets | 1,800 | 3,400 | 4,300 | 9,500 | |
Equity: | |||||
| Share capital | 2,500 | ||||
| Retained earnings | 4,400 | ||||
| Non-current liability: | |||||
| Long-term borrowing | 1,800 | ||||
Current liabilities | 80 | 240 | 480 | 800 | |
| Total equity and liabilities | 9,500 |
| 2 | Everlast Ltd. defines residual income (RI) for each centre as operating profit minus required rate of return of 12% of the total assets of each centre. |
| 3 | At present, Everlast Ltd. does not allocate long-term borrowings of the group to the three separate centres. |
| 4 | Each centre faces similar risk. |
| 5 | Tax is payable at the rate of 30%. |
| 6 | The market value of the equity capital of Everlast Ltd. is Sh.9 million and the cost of equity is 15%. |
| 7 | The market value of long-term borrowing is equal to its book value. |
| 8 | The directors are concerned about the return on investment (ROI) generated by Eastern centre and are considering using sensitivity analysis in order to show how target ROI of 20% might be achieved. |
| 9 | The marketing director stated at a recent board meeting that "The Group's success depends on the quality of service to our clients. In my opinion, we need only to concern ourselves with the number of complaints received from clients during each period as this is the most important performance measure of our business. The number of complaints received from clients is a perfect performance measure. As long as the number of complaints received from customers is not increasing from period to period, then we can be confident about our future prospects". |
| (a) | The most successful centre. Your report should include commentary on return on investment (RO1), residual income (RI) and economic value added (EVA) as measures of financial performance. Detailed calculations regarding each of the three measures must be included as part of your report. |
| (b) | The percentage change in revenue, total cost and net assets during the period that would have been required in order to achieve a target ROI of 20% for Eastern centre. |
| (c) | State whether you agree with the statement of the marketing director in note (9) above. |
| Division X | |
| The electrical component will be produced in batches of 1,000 units. The maximum capacity is 6,000 components per month. |
| Sh.15 per component. |
| Sh.50,000 (these are incurred specifically to manufacture the electrical component). |
| Division Y | |
| Product "Yetu" will be produced in batches of 1,000 units. The maximum customer demand is 6,000 units of product "Yetu" per month. |
| Sh.9 per unit plus the cost of electrical component. |
| Sh.75,000 (these are incurred specifically to manufacture product "Yetu"). |
| Demand (units) | Selling price per unit (Sh.) |
| 1,000 2,000 3,000 4,000 5,000 6,000 | 120 110 100 90 80 67 |
| (a) | Based on a transfer price of Sh.45 per electrical component, advise the management of Sang Ltd. on the monthly profit that would be earned as a result of selling product "Yetu". | |
| (b) | Determine the maximum monthly profit from the sale of product "Yetu" for Sang Ltd. | |
| (c) | Using the marginal cost of electrical component as a transfer price, advise the management of Sang Ltd. on the monthly profit that would be earned as a result of selling product "Yetu" by divisions X and Y and the company as a whole. | |
| (d) | (i) | Using the above scenario, discuss the problem of setting a transfer price. |
| (ii) | Suggest a transfer pricing policy that would help Sang Ltd. to overcome the transfer pricing problems that it faces. |
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