P2_exam_practice_kit ( Acorn)-1.pdf 1d1tx

CIMA Managment Level – Paper P2

ADVANCED MANAGEMENT ING Exam Practice Kit

Tutor details Tufal Choudhury [email protected] 077 9090 4122

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P2 ADVANCED MANAGEMENT ING Syllabus overview Focusing primarily on the long term, P2 builds on the insights about costs and their drivers (from P1) to provide the competencies needed to analyse, plan and manage costs to the implementation of the organisation’s strategy. It shows how to manage and control the performance of various units of the organisation in line with both short-term budgets and long-term strategy. Finally, P2 covers investment decision making and the risks associated with such decisions. It provides the basis for developing deeper understanding of various types of risk affecting the strategy and operations of organisations (covered in P3).

Syllabus topic

Syllabus weighting

Chapters relevant from the Acorn study manual

A. Cost planning and analysis for competitive advantage

25%

2,5 and 6

B. Control and performance management of responsibility centres

30%

1,4 and 8

C. Long-term decision making

30%

7

D. Management control and risk

15%

7 and 9

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CONTENTS

Objective test questions Chapter

Question page number

Answer page number

1

Introduction to relevant costing

5

143

2

Learning curve theory

19

151

3

Pricing

29

161

4

Beyond budgeting

39

167

5

Activity based costing

49

175

6

TQM techniques

69

191

7

Long-term decision making

89

205

8

Performance management and transfer pricing

103

223

9

Management control and risk

127

237

MOCK 1 MOCK 2

90 minute test (syllabus mixture of 60 questions) 90 minute test (syllabus mixture of 60 questions)

253 283

273 299

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Chapter 1 - Introduction to relevant costing 1.1 Relevant costs need to be considered in decision making. Which of the following if any are characteristics of relevant costs? Future costs Sunk costs Incremental costs Avoidable costs Fixed costs Common costs Differential costs 1.2 Z Plc has 400kg of material in stock that had cost £1,750. The company no longer uses the material and if sold for scrap would earn £1.75 a kg. Z Plc however is considering taking on a special order from a customer, which would require 500kg of this material. The current price of the material at present is £4.50 per kg. When using relevant costing, the cost of this material is: A B C D

A sunk cost of £1,750 An opportunity cost of £700 and an incremental cost of £450 An incremental cost of £1,150 A sunk cost of £1,750 and an incremental cost of £450

1.3 Which of these is a non-relevant cost? A B C D

Variable costs Committed costs Product specific fixed costs Incremental costs

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1.4 Which of these costs if any are not relevant in short term decision making? Head office overheads Depreciation Rent agreement on a building to be confirmed The cost of material bought last year Managers salary of factory Pre-paid elcectric and gas bill Labour costs of staff who are working on a job 1.5 The cost of a scarce resource is: A B C D

Variable costs of scarce resource and market price of resource Contribution lost by using this resource and therefore depriving another product of its use Variable costs of scarce resource and fixed costs of existing product it would be used on Replacement value of the scarce resource

1.6 Opportunity cost is best described as: A B C D

The costs incurred in choosing the next best alternative The most expensive alternative not undertaken The next best alternative foregone by you choosing to make a future decision The least expensive alternative undertaken

1.7 A company has some material in stock and it has no further use for it. Which of these is not a possible opportunity cost? A B C D

Current replacement cost of material Scrap value of material Material cost saved if used on another project Special order request using this material for a customer on an internet auction site

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1.8 In what order does the decision making process normally occur? A B C D

Identify objectives, identify course of action, evaluate course of action, select best option, compare actual v budget Identify course of action, evaluate course of action, identify objectives, select best option, compare actual v budget Compare actual v budget, identify course of action, evaluate course of action, identify objectives, select best option Identify course of action, identify objectives, evaluate course of action, select best option, compare actual v budget

1.9 If a company has a high operating gear ration this means: A B C D

It has high variable costs in comparison total costs Profits are more variable to sales volume changes Profits are less variable to sales volume changes It has low fixed costs in comparison total costs

1.10 A company is considering the acceptance of a one-year contract, which requires the use of two skilled employees. They would be recruited on a one-year contract at a cost of £45,000 per employee. An existing manager earning £80,000 a year, approximately taking up 20% of her time, would also supervise them. Instead of this plan above the company could instead retrain there existing employees who currently earn £35,000 a year. This would require training costs of £20,000 in total and the current existing employees would need to be replaced at a cost to the company of £60,000 in total. This would therefore not require any management time. The relevant cost of the contract would be: A B C D

£90,000 £80,000 £106,000 £170,000

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1.11 ZYP Ltd has a current customer order which requires the use of a machine which was purchased two years ago and currently has a net book value of £9,000. ZYP Ltd could sell the machine now for £8,500, but if the machine is used on the above contract it would require a complete reconditioning if it is to be used again, hence ZYP Ltd will have to pay someone £1,000 to dismantle it and it could not therefore be sold anymore. The cost of operating the machine (variable cost) for the customer would be £4,500 for the job. The minimum price ZYP Ltd should quote the customer should be? A B C D

£5,500 £6,000 £7,500 £14,000

1.12 Qualitative data is concerned with: A B C D

Infinite numbers Opinions Internal data Finite numbers

1.13 A by-product is: A B C D

A product which has a high sales value at the split-off point A product where the costs are not apportioned to it on completion of process Leather when slaughtering a cow Beef when slaughtering a cow

1.14 The skilled labour is currently employed by your company and paid at a rate of $8.00 per hour. If a new job were undertaken it would be necessary either to work 25 hours’ overtime, which would be paid at time plus one half, OR in order to carry out the work in normal time, reduce production of another product that earns contribution of $13.00 per hour. Calculate the relvant cost of skilled labour for the new job.

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1.15 Which THREE of the following are categories of relevant costs? Incremental costs Committed costs Sunk costs Differential costs Absorbed fixed costs Opportunity costs 1.16 A company is preparing a quotation for a one-off job that would require 1,200 kg of Material B. There are 900 kg of Material B in inventory that were bought at a cost of $3 per kg. The company does not foresee any other use for the material. The material held in inventory could be sold for $3.50 per kg. The current purchase price of Material B is $4.50 per kg. The relevant cost of Material B to be included in the cost estimate is: A B C D

$4,050 $4,500 $4,200 $5,400

1.17 When deciding whether to further process a product, what information is required? Select ALL that apply. The common costs of the t process The further processing costs of the product The unit selling price of the product at the point of separation The unit selling price of the product after further processing The percentage losses of further processing the product The actual output of the product from the t process

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1.18 Which of the following is NOT a valid reason why the costs used for decision making may be different from the costs used for profit reporting? Costs used for decision making include only costs that are affected by the decision. Costs used for decision making never include fixed costs. Costs used for decision making do not include past costs. Costs used for decision making include opportunity costs. 1.19 A company makes three components, X, Y and Z. The costs to manufacture the components are as follows:

Variable cost Fixed cost Total unit cost

Component X $ 5 4 9.00

Component Y $ 16 16.60 32.60

Component Z $ 10 7.50 17.50

The fixed costs are an allocation of general fixed overheads. A supplier has offered to supply the components at the following prices: Component X at $8

Component Y at $14

Component Z at $11

Which components should the company buy in order to minimise total costs? A B C D

Components X and Z Component Y only None of the components All of the components

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1.20 The performance of the three divisions of a company is detailed below:

Sales Variable costs Contribution Fixed overheads Net profit

Division W $000 700 560 140

Division X $000 840 420 420

Division Y $000 300 240 60

Total $000 1,840 1,220 620 525 95

40% of the fixed overheads are specific to the individual Divisions. Each division incurs the same level of specific fixed overheads. Which of the divisions should continue to operate if the company's objective is to maximise profits? A B C D

All of the divisions Division W and Division X only Division X only Division X and Division Y only

1.21 When deciding whether to replace a non-current asset, which of the following if any is NOT relevant? Tax balancing charge or allowance on the existing asset Net book value of the existing asset Effect on working capital requirements Removal cost of the existing asset 1.22 Which one of the following is not a relevant cost? A B C D

Incremental cost Committed Avoidable cost Differential cost

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1.23 Which one of the following is a relevant cost when making a decision in the short-term? A B C D

Sunk cost Historical cost Notional cost Differential cost

1.24 Which one of the following would not be a characteristic of a relevant cost or revenue? A B C D

Cash Future Incremental Notional

1.25 Which of the following costs are more relevant for decision making? A B C D

Historical costs Current costs Notional costs Future c osts

1.26 Alan Salt purchased some used mobile phones 6 motnhs ago and one of his regular custoemrs wants to buy them off him but doesnot know what to quote him. He originally bought them for £6,500 and if he put them on Ebay today he’d get £3,500. He could also melt down the phones and use the metal and plastic to manufacture retro computers for his fans. He would have to buy this material in normally for £1,000. What is Alan’s relvant cost here if he were to sell the phones to his regular cusotmer? A B C D

£6,500 £3,500 £1,000 Not possible to say

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1.27 The cost of a supervisor is based on a monthly salary of $3,500 multiplied by 10% as the the project time estimate = $350. If the supervisor cannot complete this project work within his normal hours he will work overtime but he is not paid for this. What is the relevant cost for the project? A B C D

$3,500 $350 $0 Not enough information to calculate this

1.28 It will be necessary to hire specialist machine for a project. In total the project will require the machine for 5 days but it is difficult to predict exactly which five days the machine will be required within the overall project time of one month. One option is to hire the machine for the entire month at a cost of $5,000 and then subhire the machine for $150 per day when it is not required. It is expected that we would be able to sub-hire the machine for 20 days. Alternatively we could hire the machine on the days we need it and its availability would be guaranteed at a cost of $500 per day. What is the relevant cost? 1.29 The overhead absorption rate in a company is £20 per hour and includes power costs which are directly related to machine usage. If a job were undertaken, it is estimated that the machine time required would be ten hours. The machines incur power costs of £0.75 per hour. There are no other overhead costs that can be specifically identified with this job. What is the relevant cost? A B C D

£200 £207.50 £7.50 £0

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1.30 We need 500 square metres of steel for a project. The steel is regularly used, and has a current stock value of $5.00 per square metre. There are currently 100 square metres in stock. The steel is readily available at a price of $5.50 per square metre. What is the relevant cost? A B C D

$2,500 $2,750 $2,200 $2,000

1.31 The skilled labour is currently employed by your company and paid at a rate of $18.00 per hour. If a new job were undertaken it would be necessary either to work 35 hours’ overtime, which would be paid at time plus one half, OR in order to carry out the work in normal time, reduce production of another product that earns contribution of $24.00 per hour. What is the relevant cost? 1.32 The cost of the estimating time of $400 is that attributed to the four hours taken by a manager to analyse information to determine the cost estimate given. It is company policy to add 20% of $1,000 to the production cost as an allowance for istration costs associated with the jobs accepted. The brass fittings would have to be bought specifically for this job: a supplier has quoted the price of $20 for the fittings required. The semi-skilled labour that is needed for the job is $460; currently the company has sufficient paid idle time to be able to complete this work. What is the relevant cost here? $20 $400 $1,080 $880 $460 $480 $0

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1.33 Product M N P

Selling price after common process $/litre 6·25 5·20 6·80

Selling price after further processing $/litre 8·40 6·45 7·45

Further variable processing cost $/litre 1·75 0·95 0·85

Calculate which products are finacnially worthwhile processing further? 1.34 Henry Ford owns a coach which cost him $12,000. The coach today is worth $8,000. Enzo Ferrari has asked if he can borrow the coach. If Enzo borrowed the coach then it would be out of use for Henry for eight days. At the same time Henry has a two day a contract which has already been accepted which contains a significant financial penalty clause. This contract earns a contribution of $250 per day. A replacement coach could be hired for $180 per day. What is the relevant cost? 1.35 Ronnie Biggs a bank robber needs a driver to drive the getaway car for a day. He already has a driver who he pays $60,000 a month, but he is needed by his boss Tony Soprano on a 5 day heist. If Tony uses the driver then Ronnie will need to replace him. The replacement driver would be hired from a recruitment agency that charges $400 per day for a suitably qualified driver. What is the relevant cost to Ronnie if he has to give his driver to Tony? 1.36 General overheads of $2,000 are based upon the overhead absorption rate of $10 per unit as set in the budget. The only general overhead cost that can be specifically identified with the job is the time that has been spent in considering the costs of the job and preparing the quotation. This amounted to $250. What is the relevant cost?

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1.37 Z can sell products R, S or T after this common process or they can be individually further processed and sold as RZ, SZ and TZ respectively. The market prices for the products at the intermediate stage and after further processing are: Market prices per kg: R S T RZ SZ TZ

$ 3.00 5.00 3.50 6.00 5.75 6.75

The specific costs of the three individual further processes are: Process R to RZ variable cost of $1.40 per kg, no fixed costs Process S to SZ variable cost of $0.90 per kg, no fixed costs Process T to TZ variable cost of $1.00 per kg, fixed cost of $600 per month based on prodcutoon levels of 1,200kg. Produce calculations to determine whether any of the intermediate products should be further processed before being sold. 1.38 DVDBusters Ltd is a national chain of film rental shops carrying the latest from the silver screen. Recently they are finding it difficult financially to maintain all their shops and are considering shutting down some of them. Which of the following should they consider if they are basing their decision on relevant costing? A B C D

Shops which have a loss should be discontinued Shops making a contribution loss should be discontinued provided this will not increase sales in other shops Shops with a contribution loss should be discontinued Shops with a contribution loss should not be discontinued if this will make profitable shops bear a portion of the closed down shops overheads

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1.39 David Peckham is evaluating whether to purchase a BMW 320 or continue to use his Rover 75. Both cars are identical in David’s opinion. The BMW costs $25,000 has an estimated service life of ten years, has no scrap value, and will have maintenance costs of $500 per year. The Rover 75 was $12,000 when he bought it brand new and has an existing book value of $6,500. It has an estimated remaining service life of ten years and has no scrap value at the end of ten years. It has a current disposal value of $3,500 and will have maintenance costs of $2,650 per year. Ignoring present value and tax considerations, what should David do? A B C D

Buy the BMW 320 Cannot be determined Be indifferent between both cars Keep the Rover 75

1.40 Usain wishes to discontinue his Broadband Division as he belives it is making losses. The division has contribution margin of $10,000 and allocated overhead of $26,000 (of which $7,000 cannot be eliminated). This shut down would: A B C D

Decrease operating income by $10,000 Decrease operating income by $9,000 Increase operating income by $10,000 Increase operating income by $9,000

1.41 Alan Sweet has 2,000 defective units of a product that cost $4 per unit to manufacture, and can be sold for $2 per unit. These units can be reworked for $1 per unit and sold at their full price of $6 each. If Alan reworked the defective units, how much extra benefit will he obtain? A B C D

$2,000 $6,000 ($6,000) $12,000

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1.42 An additional cost that results from a particular course of action is known as a(an): A B C D

Sunk cost Opportunity cost Incremental cost Net present cost

1.43 Stuart Brand 17,000 defective units of a product that cost $3 per unit to manufacture, and can be sold for $1 per unit. These units can be reworked for $3 per unit and sold at their full price of $5 each. Should Henny-Penny rework the defective units, how much incremental net return will result? A B C D

$85,000 ($34,000) $0 $17,000

1.44 The cost to produce 8,000 units at 70% capacity is: Direct materials: $16,000 Direct labour: $8,000 Factory overhead, all fixed: $12,000 Selling expense (40% variable, 60% fixed): $8,000 What unit price would the company have to charge to make $2,000 on a sale of 500 additional units that would be shipped out of the normal market area? A B C D

$7.40 $7.80 $8.90 $7.00

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Chapter 2 – Learning curve thoery 2.1 X Plc has received an order for eight units of product F. The time estimated for the production of the first unit will be 50 hours and a 90% learning curve is expected. The rate of pay is £5 an hour. The direct cost is £500 a unit and specific fixed cost associated with the order will be £3,500. The average cost of each unit (to the nearest £1) for this order would be? A B C D

£682 £8,958 £4,567 £1,120

2.2 The average cost of the first 100 units of product X made was £44.45 per unit after applying an 80% learning curve effect. What was the cost of making the first unit (to the nearest £1)? A B C D

£196 £201 £206 £211

2.3 W Ltd used the following standard cost for the first 200 units worked for a new product in one of its factories; it was believed that a 90% learning effect is in operation. The time taken for the first unit was 10 hours. Average time for the first 200 units was 4.47 hours The standard time per unit to use for the next 200 units built (to the nearest one decimal) would be? A B C D

4.0 hours 4.5 hours 3.6 hours 4.1 hours

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2.4 A general law found to operate in many situations that would indicate that 20 per cent of something causes 80 per cent of something else, would be called? A B C D

Pareto law Usage value law Requisite law Perpetual law

2.5 Complete the following sentances by putting in the missing words in the correct order: falls, avareage, doubles, fixed Learning curve theory is the theory that as output the by a percentage each time this happens.

time per unit

2.6 Which of these if any are assumptions of learning curve theory: Heavy automation in production and so scope for learning Repetitve work and so speed and accuracy can be improved Consitensy in the workforce and so knowledge is retained Extensive breaks in production so skills and techniques are learned Early stages of production 2.7 If it is found that a 74% learning curve applies, it means that: A B C D

Each time output doubles on a cumulative basis, the cumulative average labour hours per unit increase by 26% Each time input doubles on a cumulative basis, the cumulative average labour hours per unit increase by 26% Each time output doubles on a cumulative basis, the cumulative average labour hours per unit fall by 26% Each time input doubles on a cumulative basis, the cumulative average labour hours per unit fall by 26%

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2.8 If actual initial batch labour costs were more than the estimated cost due to the actual learning rates being worse than expected? Which of the following if any apply here: Positive impact on labour costs involved and may have an overall decrease in costs. Higher prices would now be needed to maintain expected profits. Negative impact on labour costs involved and may have an overall increase in costs. Lower prices would now be chargeds to customers as costs are lower. 2.9 If it is found that a 66% learning curve applies complete the table below (all figures should be to 1 decimal palce): Units

Hours

Average hours

1

5

5

2

4

8

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The following information applies to 2.10 and 2.11: A company is planning to launch a new product. It has already carried out market research at a cost of $50,000 and as a result has discovered that the market price for the product should be $50 per unit. The company estimates that 80,000 units of the product could be sold at this price before one of the company’s competitors enters the market with a superior product. At this time any unsold units of the company’s product would be of no value. The company has estimated the costs of the initial batch of the product as follows: Direct materials Direct labour ($10 per hour) Other direct costs

$000 200 250 100

Production was planned to occur in batches of 10,000 units and it was expected that an 80% learning curve would apply to the direct labour until the fourth batch was complete. Thereafter the direct labour cost per batch was expected to be constant. No changes to the direct labour rate per hour were expected. 2.10 Calculate the revised expected cumulative direct labour costs for the four levels of output given the actual cost of $280,000 for the first batch (you should do you answers to the nearest $000). 2.11 Calculate the actual learning rate exhibited at each level of output (you should do you answers to the nearest $000). 2.12 In your calculations, you anticipated that the time taken for the first unit would be 40 minutes and that a 75% learning curve would apply for the first 30 units. Note: The learning index for a 75% learning curve is -0.415 Calculate the expected time for the 6th unit of output to the nearest 1 decimal place.

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2.13 Market penetration or a penetration pricing policy has various implications, Which if any of the following do not apply here? This kind of pricing policy is good for high quality products This can only work in a fast growing economy This kind of pricing policy is good for inferior products The economies of scale for the product should be achieved quicker High amounts profit can be earned per unit sold Competition may be discouraged and leave the market 2.14 The estimated labour time required for the first batch is 40 hours, but due to the nature of the product and the manufacturing method to be used, it is expected that an 80% learning curve will apply. Calculate the expected time for the eighth batch to 2 decimal places. 2.15 Month 1 2 3 4

Total batches produced to date 1 2 4 8

Learning rate 75% 75% 90%

For months 3 to 4, state possible reasons why the actual learning rates differed from the expected rates. Labour force is getting quicker Decrease in staff turnover More reworks Increase in staff turnover Staff have become disinterestd and less moticateed Inferiror materials being used There is not much more that can be learned now Production is in its early stages

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2.16 If the total time taken to produce the first eight batches of a toy was 182⋅25 hours, calculate the cumulative learning rate given that the first batch took 45 hours. Your answer should be to the nearest whole %. The following information applies to 2.17, 2.18 and 2.19: Time for the 1st batch was 10 hrs and the learning rate is 70%. The learning will have ceased after 30 batches. Note: The learning index value for 70% learning curve is 0.5146. 2.17 How long does it take to make the first 30 batches? 2.18 How long does it take make the 30th batch? 2.19 How long should it take to make 50 batches?

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2.20 Report 1 Output (batches) Direct labour hours Direct labour cost ($)

Budget 60 163.53 $1,962

Actual 50 93.65 $1,146

Variance 10 (A) 69.88 (F) $816 (A)

Flexed budget 50 68.91 $826.92

Actual 50 93.65 $1,146

Variance

Report 2 Output (batches) Direct labour hours Direct labour cost ($)

24.74 (A) $319.08 (A)

Select from the following whch you think, if any, are better to aid diecison making in respect of the above reports: Report 1 is better as it is easier to see how costs behave. Report 1 is better as it allows an understanding of how many much should have been spent if we made 60 batches. Report 2 is better as it compares actuals to flexed budget information. Report 1 is better as it shows the real difrence in output. Report 2 is better has it allows us to understand how many hours should have been used if you are making 50 batches. The following information applies to 2.21 and 2.22: Each unit of a product was expected to take 8 hours to produce at a cost of $15 per hour. Actual output of the product was 560 units However, the production manager now realises that the standard time of 8 hours per unit was the time taken to produce the first unit and that a learning rate of 90% will apply. Note: The learning index for a 90% learning curve is -0.1520 2.21 Calcuulate the total time taken to make 560 units (nearest whole hour).

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The following information applies to 2.22 and 2.23: The first batch of 100 units will take 1,500 labour hours to produce. There will be an 85% learning curve that will continue until 6,400 units have been produced. Batches after this level will each take the same amount of time as the 64th batch. The batch size will always be 100 units. Note: The learning index for an 85% learning curve is -0.2345 2.22 Calculate the cumulative average time per batch for the first 64 batches (2 decimal places) 2.23 Calculate the time taken for the 64th batch (2 decimal places) The following information applies to 2.24, 2.25, 2.26 and 2.27: A company is developing a new product. During its expected life it is expected that 8,000 units of the product will be sold for $90 per unit. The direct material and other non-labour related costs will be $45 per unit throughout the life of the product. Production will be in batches of 1,000 units throughout the life of the product. The direct labour cost is expected to reduce due to the effects of learning for the first four batches produced. Thereafter the labour cost will remain at the same cost per batch as the 4th batch. The direct labour cost of the first batch of 1,000 units is expected to be $40,000 and a 90% learning effect is expected to occur. There are no fixed costs that are specific to the product. Note: The learning index for a 90% learning curve = -0.152 2.24 Calculate the average direct labour cost per batch of the first four batches. 2.25 Calculate the direct labour cost of the 4th batch. 2.26 Calculate the contribution earned from the product over its lifetime.

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2.27 Due to the low lifetime product volume of 8,000 units the company now believes that learning may continue throughout its entire product life. Calculate the rate of learning required (to the nearest whole percentage) to achieve a lifetime product contribution target of $150,000, assuming that a constant rate of learning applies throughout the product’s life. The following information applies to 2.28 and 2.29 A new product has a budgeted total profit of $75,000 from the first 64 units. The time taken to produce the first unit was 225 hours. The labour rate is $40 per hour. A 90% learning curve is expected to apply indefinitely. Note: The learning index for a 90% learning curve is -0.152 2.28 Calculate the sensitivity of the budgeted total profit from the first 64 units to independent changes in the labour rate (do all workings and answer to 2 decimal places). 2.29 Calculate the sensitivity of the budgeted total profit from the first 64 units to independent changes in the learning rate (do all workings and answer to 2 decimal places). 2.30 A management ant is considering analysing a new production process to determine the implications of a learning curve. Which of the following factors would make such an analysis relevant? Select ALL that apply. The process is highly mechanised The process is highly labour intensive The process is complex The process is relatively new Staff turnover is rapid

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Chapter 3 - Pricing 3.1 Which of the following is NOT a factor causing an increase or decrease in demand? A B C D

Fashion Cost of factors of production Advertising Technology

3.2 The price elasticity of demand measures A B C D

The change in demand to changes in prices The change in price to changes in demand The correlation of changes between demand and price The correlation of demand to price

3.3 If a company had an inelastic demand curve and wanted to increase its sales revenue, you would recommend: A B C D

A cut in price An increase in price A reduced advertising campaign A money off coupon scheme

3.4 The price elasticity demand of an elastic demand curve is: A B C D

Greater than zero Between zero and -1 Less than -1 Infinity

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3.5 Which of these is NOT true about perfect competition: A B C D

Large number of buyers Large number of sellers Different goods and services Free entry and exit to market

3.6 Which of these is true about monopolistic competition: A B C D

A few buyers One seller Different goods and services Barriers of entry and exit

3.7 A company offers a much lower price to consumers than they charge to businesses. This is an example of differential pricing using which basis? A B C D

Product version Time Place Market segment

3.8 The selling price of Product G is £350 each unit and it is expected that 50,000 units will be sold this year. The company requires a return on investment of 15% for this year based on the current investment of £25m in research, development and advertising. The target cost per unit for the year is? A B C D

£245 £275 £305 £315

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3.9 A company has found that the maximum demand for their product is 75,000 units every year. They also know that for every £1 change in selling price the number of units demanded will change by 25 units. The company also has calculated that the number of units in order to maximise profit will be 60,000 units. The price at which these units will be sold at to achieve profit maximisation would be? A B C D

£600 £650 £700 £750

3.10 When is a market penetration strategy appropriate? If demand is inelastic If the product has a short product lifecycle If the demand is elastic If the product is very expensive to manufacture If the product is recognised as inferior by customers The firm wants to discourage new entrants in to the industry 3.11 A company offers customers if they buy a ‘set menu’ a selection of starters, mains and puddings to choose from, for a certain price. This form of pricing is known as? A B C D

Market skimming Loss leader Product bundling Price discrimination

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3.12 XYZ Plc has estimated that at a price of £100 no units will be sold and for each £2 reduction in price there would be one additional unit sold. Fixed cost is £80 per week. Variable costs are expected to be £50 per unit for the first 8 units sold; thereafter each unit will cost £5 more than the preceding one. The most profitable number of units sold on a weekly basis would be? A B C D

10 units 11 units 13 units 14 units

3.13 At a price of £80 a company expects to sell 10,000 units of a product. If it were to increase the price to £81 it would expect total revenue of £769,500. The price elasticity of the product is? A B C D

3.0 3.5 4.0 4.5

3.14 Which of these is NOT an advantage of market skimming? A B C D

May extend the life of the product life-cycle Good for innovative products where little competition exists initially Good for high quality products Good for elastic demand

3.15 Which of these is an advantage of market penetration? A B C D

Good for inelastic demand Good for high quality products May discourage competition May extend the life of the product life-cycle

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3.16 A company sells bleach and decides to price one of its bleaches, the extra long lasting bleach known as “Wicked!”, higher than the rest of its range of bleaches. This is an example of: A B C D

Price discrimination Product line pricing Loss leaders Psychological pricing

3.17 The disadvantage with full cost plus pricing is that it is: A B C D

Time consuming and difficult Not good for long-term profitability analysis Not suitable for an ABC system Not suit price/demand conditions

3.18 Which one of these is NOT an advantage of marginal cost plus pricing: A B C D

Better understanding of cost Used when variable cost is available only (traders) Good for short-term decision-making Ensures fixed overheads are recovered in the long-term

3.19 Target costing is when a company: A B C D

Sets a target budget for a product Takes into the market price and a desired level of profit when costing a product Includes variable costs and product specific fixed costs only in its target budget Bases its costs only on the market price

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3.20 Which of the following is most likely to produce a horizontal demand curve? A B C D

Monopoly Monopolistic competition Perfect competition Oligopoly

3.21 Charging a very low price on one item in order to generate customer loyalty and increased sales of other items is called A B C D

Market penetration Loss leader pricing Product penetration Skim pricing

3.22 The use of “skim pricing” as a marketing technique will result in A B C D

Non recovery of promotional costs Enticing new customers to buy a product or service High prices normally at an early stage of the product lifecycle Low prices so denying competitors opportunities to gain market share

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3.23 Complete the diagram for the product (or industry) life cycle below, by matching the appropriate numbers (1 to 5) identified for each stage, to the words given below the diagram?

Sales

3

2

1

4

5

Time

A Maturity

B Senility

C Harvest

D Director

E Introduction

F Decline

G Growth

3.24 Complete the following table below by selecting the correct pricing strategy according to the examples given within the table. Select THREE of the possible options (A to F) below the table. Example

Pricing strategy

A retailor offering a sandwich and drink for a combined price A train operator charging different prices according to the time of travel A bar using ‘happy hour’ (low prices) to encourage sales when off peak A Pricing

B Price Discrimination

C Loss Leader

D Product Bundling

E Psychological Pricing

F Variable Pricing

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3.25 Which of the following if any are NOT ways of distinguishing a good from a service? Greater tangibility More labour intensive Less perishability Easier to brand Existence of inventory Greater homogeneity Difficult to return Greater separability 3.26 Which ONE of the following methods would include various products sold at a combined price? A B C D

Promotional pricing Product orientation Product differentiation Product bundling

3.27 A rapid increase in sales and profits are a characteristic of which ONE of the following stages of the product life cycle? A B C D

Introduction stage Maturity stage Saturation stage Growth stage

3.28 Which ONE of the following is a stage of the product lifecycle? A B C D

Obsolescence Maturity Entropy Saturation

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3.29 Which ONE of the following marketing would best describe a chocolate manufacturer selling a 250ml jar of its instant hot chocolate, combined and sold along with two bars of its chocolate for a special promotional price? A B C D

Pricing Multiple product pricing Promotional pricing Product bundling

3.30 Store loyalty cards and product differentiation are both forms of? A B C D

Non-price competition Sale promotions Public relations Personal selling

3.31 Complete the following table below for the following product life-cycle stages by matching each stage to the characteristics given below the table? Select all FOUR of the possible options (A to D) below the table and place them in the correct order.

PLC Theory

Characteristics (insert letters A to D)

INTRODUCTION GROWTH MATURITY DECLINE

A

High sales volume and economies of scale, profitability and cash-flow positive.

B

Customer’s unaware and low consumer adoption, cashflow and profit negative.

C

Consumer adoption rapidly increases, profitability and cash-flow improve.

D

Product obsolescence and over capacity within the industry.

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Chapter 4 - Beyond budgeting 4.1 Which of the following statements apply to feedforward control? (i) It is the measurement of differences between planned outputs and actual outputs. (ii) It is the measurement of differences between planned outputs and forecast outputs. (iii) Target costing is an example. (iv) Variance analysis is an example. A B C D

(i) and (iii) (i) and (iv) (ii) and (iii) (ii) and (iv)

4.2 Which of the following best describes a basic standard? A

A standard set at an ideal level, which makes no allowance for normal losses, waste and machine downtime.

B

A standard which assumes an efficient level of operation, but which includes allowances for factors such as normal loss, waste and machine downtime.

C

A standard which is kept unchanged over a period of time.

D

A standard which is based on current price levels.

4.3 The term ‘budgetary slack’ refers to the: A

Lead time between the preparation of the functional budgets and the approval of the master budget by senior management

B

Difference between the budgeted output and the actual output

C

Difference between budgeted capacity utilisation and full capacity

D

Intentional over estimation of costs and/or under estimation of revenue in a budget

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4.4 S has several sales teams, each of whom is allocated a specific territory. S has used traditional budgeting techniques in the past to provide targets and to motivate sales staff. The sales director is considering switching to a beyond budgeting approach. Which of the following are potential benefits of beyond budgeting? Select ALL that apply. Coordination between sales and production will improve There will be less scope for budget slack Sales staff will be better motivated Coordination and cooperation will increase across the sales department Less time will be spent on budgeting 4.5 Which of the following if any may be considered to be objectives of budgeting? Co-ordination Marketing Communication Expansion Resource allocation 4.6 What is feedforward control? A

The comparison of actual results with planned outcomes and taking action to correct differences in order to achieve the desired future results.

B

The comparison of forecast results with planned outcomes and taking action to avoid forecast differences.

C

The forecasting of future events as a basis for a system of budgetary planning and control.

D

The communication of budgetary plans to budget holders in advance of the budget period.

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4.7 What does responsibility ing mean? Select all that apply if any. To allow comparisons between the budge and actual results and then any major differences can be investigated. To allows mangers to be responsible for the management of resources that they have been allocated in the budget, and as a result assessed on the success of resource management. To allow a more efficient production of goods and services because they can be linked with one another. To allow judgements to be made on the performance of the managers by comparing the actual results with the budget. To allow targets to be created for managers that they will want to achieve. To allow everyone to understand what resources are available and how they are to be allocated to different budgets.

4.8 What is the behavioural side of budgets concerned about? Select all that apply if any. How budgets or standards affect people within an organisation How budgets or standards affect costs How budgets or standards affect profits How budgets or standards affect the environment How budgets or standrads affect resource allocation 4.9 Which of these are advantages of participation of staff in budget preparation? Select all that apply if any. Greater motivation of staff Faster process in setting the budget Reduction in busget padding Targets are more likely to be accepted by staff Useful if revenue and costs are stable

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4.10 Which of these are disadvantages of participation of staff in budget preparation? Select all that apply if any. Inexpereinced staff Reduced training costs of staff for budget preparation Targets are less likely to be achived Increased slack in the budget Slower process 4.11 Beyond budgeting may include the following: Select all that apply if any: Focus on cost control not cash forecasts Budgets revised more frequently and a longer time horizon when forecasting Using a fixed budget to make comparisons Benchmarking for continuous improvement 4.12 Please use some of the following words: Rigid, Flexible, Flexibilty, Rigidity, Information, Acceptance, Conformance, Internally, Externally To complete the following sentances with respect to Beyond Budgeting. The traditional budget process is too ______________ and requires __________ to it with not enough _______________ .With the constantly changing business environment, managers need to be having more up to date _____________ to help them make decisions. The budget process is often too bureaucratic, __________ focussed and time consuming.

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4.13 Please use some of the following words: Quickly, Stable, Dynamic, Innovation, Costs, Customer, Slowly, Resources To complete the following sentances with respect to Beyond Budgeting. Beyond budgeting will allow businesses to react __________ in a __________ environment giving management the advantage to change and allocate __________ . This should result in better ___________, lower __________ and improved ________ and supply loyalty. 4.14 Which of these are NOT the main principles of Beyond Budgeting? Select all that apply. Managers are given less discretion and freedom to make decisions Manager’s targets are linked with the organisations strategy Everyone has undefined areas of responsibility Front line teams are responsible for managing the business relationships with customers and suppliers Information should be transparent and relevant

4.15 Which of these is not an example of a KPI? Select all that apply if any. Number of complaints Courtsey of staff Nuumber of breakdowns Percentage increase in sales The product range Profit

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4.16 Which of these is not an example of CSF? Select all that apply if any. No of late deliveries Number of repeat business sales Easy of use of product New internal control system Stock turnover Price elasticity of demand 4.17 Which of these is an example of a KPI? Select all that apply if any. Share price growth Strategy developemt Training days per emplyoee Number of machine breakdowns per day Earnings per share Average customer ratings 4.18 Which of these is an example of a CSF? Select all that apply if any. Net Present Value Percentage of staff suggestions for improvement Number of products launched Return on capital employed The functions of a product Number of defective products 4.19 Which of these relate to control? Select all that apply if any. can be negative (adverse) or positive (favourable) is based on comparing actual to a standard of performance It isa pre-emptive reaction to actual change Examples of control is a rolling budget Control action would be ‘closing the stable door after the horse has bolted’

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4.20 Which of these relate to feedforward control? Select all that apply if any. Forecasting ahead and doing something now before the event occurs They are good for adaptive planning Examples of feedforward control is variance analysis Control action would be ‘closing the stable door before the horse bolts’ Part of the output of a system is measured and returned as input to regulate the systems further output. 4.21 Fill in this diagram of an open loop control system using the words below: Input, Sensor, Comparator, Output, High Level Controller, Effector, Process

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4.22 Which of these if any describe a double feeback loop system? Select all that apply if any. It is an open loop control system Corrective action is not automatically taken Environmental factors are not considered before any control action It is not a closed loop control sytem It includes human intervention 4.23 Which if these if any describe a single loop system? Select all that apply if any. It is an open loop control system Corrective action is automatically taken Environmental factors are not considered before any control action It is a closed loop control sytem It includes human intervention 4.24 Which of these defines the “High Level Controller” in an open control system? A B C D

Detects information it is programmed or instructed to find Compares results against a predetermined standard or plan It is either automatic or human action taken to correct future undesired outcomes It is human intevention

4.25 Whioch of these defines the “sensor” in an open control system? A B C D

Detects information it is programmed or instructed to find Compares results against a predetermined standard or plan It is the process undertaken to make or create value It is the input of raw data

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4.26 Associate the correct word with the relevant example, not all words will apply. Input, Process, Sensor, Output, Comparator, Effector, High Level Controller Sales being generated by sales reps Comparisons are made between the target level of sales expected by sales reps and the actual results The report showing level of sales and commissions earned by different sales reps Sales manager takes action over those sales reps that did not meet their sales targets

4.27 Associate the correct word with the relevant example, not all words will apply. Input, Process, Sensor, Output, Comparator, Effector, High Level Controller The sales manager will review the level of sales and production and in conjunction with the production manager and together agree on appropriate action to increase or decrease raw materials levels to ensure that a satisfactory level of production is reached to sales. Comparisons are made between the actual level of sales and actual level of production of finished goods. This is a quality control procedure of the finished product to ensure it meets certain standards. These are the products themselves which are sold customers. The raw materials are used in the production process. Raw materials being delivered to a factory to go into production.

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4.28 Which of these defines the “comparator” in an open control system? A B C D

Detects information it is programmed or instructed to find Compares results against a predetermined standard or plan It is the process undertaken to make or create value It is the input of raw data

4.29 Which of these defines the “Effector” in an open control system? A B C D

Detects information it is programmed or instructed to find Compares results against a predetermined standard or plan It is either automatic or human action taken to correct future undesired outcomes It is human intevention

4.30 Which of these, if any, are why budgetary planning and control might be inappropriate in a rapidly changing business environment. Stifle innovation and creativity. consume large amounts of management time to set Too internal in focus Ceate barriers within departments Too short-term in focus

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Chaper 5 - Activity based costing 5.1 RDE plc uses an activity based costing system to attribute overhead costs to its three products. The following budgeted data relates to the year to 31 December 2008: Product Production units (000) Batch size (000 units)

X 15 2.5

Y 25 5

Z 20 4

Machine set up costs are caused by the number of batches of each product and have been estimated to be £600,000 for the year. Calculate the machine set up costs that would be attributed to each unit of product Y. The following information is given for sub-questions 5.2 and 5.3 below RS has recently introduced an activity based costing system. RS manufactures two products, details of which are given below: Budgeted production per annum (units) Batch size (units) Machine set-ups per batch Processing time per unit (minutes)

Product R 80,000 100 3 3

Product S 60,000 50 3 5

The budgeted annual costs for two activities are as follows: Machine set-up Processing

$180,000 $108,000

5.2 The budgeted processing cost per unit of Product R is: A B C D

$0.20 $0.51 $0.60 $0.45

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5.3 The budgeted machine set-up cost per unit of Product S is: A B C D

$150 $1.80 $1.50 $30

The following data are given for questions 5.4 and 5.5 DRP Limited has recently introduced an Activity Based Costing system. It manufactures three products, details of which are set out below: Product D 100,000 100 3 2 2

Budgeted annual production (units) Batch size (units) Machine set-ups per batch Purchase orders per batch Processing time per unit (minutes)

Product R 100,000 50 4 1 3

Product P 50,000 25 6 1 3

Three cost pools have been identified. Their budgeted costs for the year ending 31 December 2004 are as follows: Machine set-up costs Purchasing of materials Processing

£150,000 £70,000 £80,000

5.4 Calculate the annual budgeted number of: (a) batches (b) machine set-ups (c) purchase orders (d) processing minutes 5.5 Calculate the budgeted overhead unit cost for Product R for inclusion in the budget for 2004.

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The following data are given for sub-questions 5.6 to 5.8 K makes many products, one of which is Product Z. K is considering adopting an activity-based costing approach for setting its budget, in place of the current practice of absorbing overheads using direct labour hours. The main budget categories and cost driver details for the whole company for October are set out below, excluding direct material costs: Budget category Direct labour Set-up costs Quality testing costs* Other overhead costs

£ 128,000 22,000 34,000 32,000

Cost driver details 8,000 direct labour hours 88 set-ups each month 40 tests each month absorbed by direct labour hours

* A quality test is performed after every 75 units produced The following data for Product Z is provided: Direct materials Direct labour Batch size Set-ups Budgeted volume for October

budgeted cost of £21.50 per unit budgeted at 0.3 hours per unit 30 units 2 set-ups per batch 150 units

5.6 Calculate the budgeted unit cost of product Z for October assuming that a direct labourbased absorption method was used for all overheads. 5.7 Calculate the budgeted unit cost of product Z for October using an activity-based costing approach. 5.8 Explain in less than 50 words, why the costs absorbed by a product using an activitybased costing approach could be higher than those absorbed if a traditional labour-based absorption system were used, and identify two implications of this for management.

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The following data are given for sub-questions 5.9 to 5.11 SM makes two products, Z1 and Z2. Its machines can only work on one product at a time. The two products are worked on in two departments by differing grades of labour. The labour requirements for the two products are as follow: Minutes per unit of product Department 1 Department 2

Z1 12 20

Z2 16 15

There is currently a shortage of labour and the maximum times available each day in Departments 1 and 2 are 480 minutes and 840 minutes, respectively. The current selling prices and costs for the two products are shown below:

Selling price Direct materials Direct labour Variable overheads Fixed overheads Profit per unit

Z1 £ per unit 50.00 10.00 10.40 6.40 12.80 10.40

Z2 £ per unit 65.00 15.00 6.20 9.20 18.40 16.20

As part of the budget-setting process, SM needs to know the optimum output levels. All output is sold. 5.9 Calculate the maximum number of each product that could be produced each day, and identify the limiting factor/bottleneck. 5.10 Using traditional contribution analysis, calculate the ‘profit-maximising’ output each day, and the contribution at this level of output. 5.11 Using a throughput approach, calculate the ‘throughput-maximising’ output each day, and the ‘throughput contribution’ at this level of output.

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5.12 CJD Ltd manufactures plastic components for the car industry. The following budgeted information is available for three of their key plastic components:

Selling price Direct material Direct labour

W £ per unit 200 50 30

X £ per unit 183 40 35

Y £ per unit 175 35 30

Units produced and sold

10,000

15,000

18,000

The total number of activities for each of the three products for the period is as follows: Number of purchase requisitions Number of set ups

1,200 240

1,800 260

2,000 300

Overhead costs have been analysed as follows: Receiving/inspecting quality assurance Production scheduling/machine set up

£1,400,000 £1,200,000

Calculate the budgeted profit per unit for each of the three products using activity based budgeting. The following data are given for questions 5.13 and 5.14 LM operates a parcel delivery service. Last year its employees delivered 15,120 parcels and travelled 120,960 kilometres. Total costs were $194,400. LM has estimated that 70% of its total costs are variable with activity and that 60% of these costs vary with the number of parcels and the remainder vary with the distance travelled. LM is preparing its budget for the forthcoming year using an incremental budgeting approach and has produced the following estimates: • All costs will be 3% higher than the previous year due to inflation • Efficiency will remain unchanged • A total of 18,360 parcels will be delivered and 128,800 kilometres will be travelled. 5.13 Calculate the total variable costs related to the number of parcels delivered. 5.14 Calculate the total variable costs related to the distance travelled. 53 | P a g e

5.15 An ABC system refers to A B C D

A Japanese style problem solving device that is particularly helpful in inventory management An inventory management method that concentrates effort on the most important items Accuracy, brevity and clarity in the quality of system reporting A mainframe solution to managing inventory

5.16 Which of these is an advantage of ABC? A B C D

Very good for a company which has one or two products Gives 100% illustration of what drives fixed costs Cheap to run and maintain More efficient management of resources

5.17 For a hospital which of these does not seem like a sensible activity and cost driver? A B C D

Activity Insurance for building Phone appointments Patient main reception Length of patient stay

Cost driver Maintenance costs No. of patients No. of patients No. of patients

5.18 Satisfying customers whilst minimising resource use is an example of: A B C D

Activity based management Customer profitability analysis Distribution channel profitability Business process re-engineering

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5.19 Y Ltd operates an activity based costing system to allocate overhead to cost units. In its budget for the year, the company expected to undertake a total number of quality control inspections of 550 at a total cost of £5,775. During this period, a total number of inspections of 468 were undertaken, which incurred an actual cost of £4,500. The over or under recovery of these costs for the above period was A B C D

Over absorption £414 Under absorption £414 Over absorption £1,275 Under absorption £1,275

5.20 A Ltd has recently introduced an activity based costing system. It manufactures two products details were as follows: Product A Budgeted annual production (units) 50,000 Batch size (units) 1,000 Machine set ups per batch 7

Product B 30,000 300 5

Budgeted costs for the machine set up for the above period was £55,250. The budgeted machine set up cost per unit for the above period was: A B C D

£50 £55 £60 £65

5.21 An ancy practice recovers its fixed salaries of audit managers, by charging a fixed amount to a client on the basis of the number of hours of consultation provided. Budgeted salaries for the period were £300,000 and actual salaries and consulting hours performed for the period were £320,000 and 16,000 hours respectively. There was an over absorption of salary overhead for the period of £24,000. The overhead absorption rate per consultancy hour would have been? A B C D

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5.22 The ing entry for an over absorption of production fixed overhead for a period, within an integrated system of cost bookkeeping would be? A B C D

Debit Work-in-progress Production overhead control Cost of sales Production overhead control

Credit Production overhead control Profit and loss Production overhead control Finished goods control

5.23 The double entry for the transfer of completed production for a company operating an integrated cost ledger bookkeeping system would be? A B C D

Debit Work-in-progress Cost of sales Finished goods control Cost of sales

Credit Finished goods control Work-in-progress Work-in-progress Finished goods control

5.24 Activity based costing (ABC) is claimed to provide more accurate product costs than a traditional absorption costing system. Which of the following statements does NOT this claim? A B C D

ABC uses cost drivers to allocate overhead costs to products by cost pool ABC will improve gives an exact understanding of how overheads were onsumed ABC assigns overheads to each major activity ABC uses volume based cost drivers

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5.25 A company uses an activity based costing system. Three products are manufactured, details of which are given below: Annual production (units) Batch size (uints) Machine set-ups per batch

A 80,000 100 3

B 100,000 50 4

C 50,000 25 6

Annual machine set-up costs are $150,000. The machine set-up cost per unit of Product B (to the nearest $0.01) is: A B C D

$0.46 $0.65 $6.70 $0.54

5.26 Put the following stages of an activity based budgeting system in chronological order. Take action to adjust the capacity of resources to match the projected supply Determine the resources that are required to perform organisational activities Estimate the production and sales volume by individual products and customers Estimate the demands for organisational activities Place EACH of the following options against ONE of the above . 1st, 2nd, 3rd and 4th

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5.27 Classify the following activity based costs incurred in a multi-product manufacturing environment by placing the activities next to the costs below: Unit level activities Batch level activities Product sustaining activities Facility sustaining activities Cost Purchase order processing costs

Classification

Product advertising costs Factory rent and rates Direct labour costs Product redesign costs Material handling costs

5.28 A company uses an activity based costing system to attribute overhead costs to its three products. The following budgeted data relates to this year: Product Production (units) Batch size

X 50,000 250

Y 25,000 100

Z 20,000 400

Material handling costs are determined by the number of batches of each product and have been estimated to be $60,000 for the year. What is the cost driver rate for material handling costs?

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5.29 Details of 2 customers Mr Pink and Mr White and total company sales:

Number of: Packs sold (000) Sales visits to customers Orders placed by customers Normal deliveries to customers Urgent deliveries to customers Activity costs: Sales visits to customers Processing orders placed by customers Normal deliveries to customers Urgent deliveries to customers

Mr Pink

Mr White

Company

50 24 75 45 5

27 12 20 15 0

300 200 700 240 30

$000s 50 70 120 60

Work out the 4 relevant cost drivers. 5.30 Details of 2 customers Mr Pink and Mr White and total company sales:

Number of: Packs sold (000) Sales visits to customers Orders placed by customers Normal deliveries to customers Urgent deliveries to customers Activity Normal delivery Order processing Urgent deliveries Sales visits

B

D

Company

34 30 43 70 25

45 12 30 45 4

300 200 700 240 30

Cost driver rate $700/delivery $400/order $3,000/urgent delivery $500/visit

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Fill in the A statement below:

Costs

B

D

$000

$000

Sales visits Orders processing Normal deliveries Urgent deliveries Total costs

5.31 The main difference (or differences) between how traditional costing and activity based costing treat indirect manufacturing costs is (are) that A

Traditional costing uses only production volume based drivers while activity based costing uses only non production volume based drivers.

B

D amd E

C

Traditional cost allocations are usually based on a plant wide overhead rate, while ABC systems use departmental overhead rates.

D

Traditional costing treats only unit level costs as variable, while ABC systems treat unit level, batch level and product level costs as variable.

E

A and C

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5.32 Indicate which are true or false. Statements

True or False

If products are uniform and customers are similar in their demands, activity based costing may not offer a significant advantage over machine hours when asg overhead. In activity based costing, the manufacturing overhead cost per unit will depend partially on the number of units in a batch. The cost to set up production equipment is best allocated directly to products via machine hours.

5.33 Which would be the most favorable basis for allocating manufacturing overhead for a factory with automated equipment and a significant variation of services by its indirect labour? A B C D

Direct labour hours Machine hours ABC None of the above

5.34 The ABC cost allocation system excludes consideration of which of the following if any? Costs allocated to service departments using the reciprocal costing method Committed fixed costs Direct costs of materials Variable non-manufacturing costs Manufacturing fixed overhead costs

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5.35 Which of the following, if any, is true of an activity based costing system? An activity based costing system will provide a more accurate apportionment of overheads to products than absorption costing An activity based costing system will cost less to ister than an absorption costing system The activity based costing system will be less detailed than an absorption costing system An activity based costing system is easier to ister than an absorption costing system

5.36 Indicate which are true or false. Statements

True or False

Under ABC, indirect manufacturing costs are predominantly assigned on the basis of direct machine hours. Setup cost is an example of a batch-level cost.

.

In ABC the assumption is that prodcuts use resources or cause costs.

5.37 A company has a budgeted level of fixed overheads of £385,000 and the overhead recovery rate is £4.25 per machine hour, what is the number of machine hours we expect to use? A B C D

4,250 385,000 90,600 1,636

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5.38 Which would be the least favorable basis for allocating manufacturing overhead for a factory with automated equipment and a significant variation of services by its indirect labour? A B C D

Direct labour hours Machine hours ABC None of the above

5.39 Which of the following statements is correct? A

Activity based costing uses a number of activity cost pools, each of which is allocated to products on the basis of direct labour hours

B

An activity based costing system is generally easier to implement and maintain than traditional costing system

C

Activity rates in activity based costing are computed by dividing costs from the first-stage allocations by the activity measure for each activity cost pool

D

One of the goals of activity based management is the elimination of waste by allocating costs to products that waste resources

5.40 All of the following are examples of batch level activities except? A B C D

Worker recreational facilities Purchase order processing Setting up equipment Clerical activity associated with processing purchase orders to produce an order for a standard product

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5.41 The estimated total cost and expected activity for a company's activity cost pools are as follows. Total cost £150,000

Hrs for Product A 500

Hrs for Product B 700

The activity rate under the activity based costing system for this activity is closest to: A B C D

£300 £125 £214 £140

5.42 A company uses activity-based costing to compute product costs. The company applies overheads using a predetermined overhead rate for each activity cost pool. Budgeted costs were £20,000 and budgted activity was 1,250. Actual activity for the current year was 3,000. The amount of overhead applied for this activity during the year was closest to: A B C D

£42,000 £26,780 £48,000 £34,190

5.43 All of the following are examples of product level activities except: A B C D

Parts istration Advertising a product Testing a prototype of a new product Human resource management

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5.44 A company has two products, X and Y. The annual production and sales level of product X is 17,000 units. The annual production and sales level of product Y is 13,000. The company uses activity based costing and has prepared the following analysis showing the estimated total cost and expected activity for each of its three activity cost pools. Activity cost pool

Budgeted overhead cost

Alpha Beta Gamma

$15,000 $30,000 $45,000

Hrs for Product X 800 400 100

Hrs for Product Y 300 700 2,300

Total 1,200 1,100 2,400

The ABC overhead absorption rate for Gamma is: $29.32 $19.57 $18.75 $17.66

A B C D 5.45

A company has two products, G and H. The annual production and sales level of product G is 9,000 units. The annual production and sales level of product H is 20,000. The company uses activity based costing and has prepared the following analysis showing the estimated total cost and expected activity for each of its three activity cost pools. Activity cost pool

Budgeted overhead cost

Alpha Beta Gamma

$24,000 $88,000 $12,000

Hrs for Product G 800 400 100

Hrs for Product H 300 700 2,300

Total 1,200 1,100 2,400

The overhead cost per unit of product G under activity based costing is: A B C D

$5.39 $3.56 $10.45 $7.56

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5.46 A company has three activity cost pools and applies overhead using predetermined overhead rates for each activity cost pool. Estimated costs and activities for the current year are presented below for the three activity cost pools: Activity cost pool G H I

Budgeted costs £45,000 £10,000 £25,000

Hrs for product V 6 70 130

The ABC overhead rates for G, H and I to the nearest whole number: A B C D

G = £396, H = £300, I = £450 G = £143, H = £7,500, I = £192 G = £450, H = £261, I = £396 G = £7,500, H = £143, I = £192

5.47 When there are batch level or product level costs, in comparison to a traditional cost system, an activity based costing system ordinarily will shift costs from: A B C D

Standardised to specialised products High volume to low volume products Specialised to standardised products Low volume to high volume products

5.48 The following are steps in ABC: Calculation of cost application rates Identification of cost drivers Assignment of cost to products Identification of cost pools

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5.49 Shah Rukh Khan’s production company writes songs for Indian films. During a recent period, his company wrote 10,000 songs which cost £145,000. If 3,312 of these songs were sad songs and the remainder were happy songs, what would be the costs allocated to the happy songs? A B C D

£96,976 £48,024 £145,000 £10,000

5.50 Which of the following apply if any? ABC systems: Use a single volume based cost driver Assign overheads to products only based on the products' use of labour Often reveal products that were under or overcosted by traditional costing systems Typically use fewer cost drivers than more traditional costing systems Have a tendency to distort product costs 5.51 Which of the following cannot use ABC? Manufacturers Financial-services firms Book publishers Hotels None of the above, as all are able to use this costing system 5.52 Which of the following statements about ABC is false? ABC cannot be used by service businesses ABC can help a company eliminate (or reduce) non-value added costs ABC results in less cost “averaging” of various diversified activities compared to traditional absorption costing ABC results in more costs being classified as direct costs ABC tends to reduce cost distortion among product lines 67 | P a g e

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Chapter 6 - TQM techniques 6.1 A just-in-time (JIT) purchasing system may be defined as: A

A purchasing system in which the purchase of material is contracted so that the receipts and usage of material coincide.

B

A purchasing system which is based on estimated demand for finished products.

C

A purchasing system where the purchase of material is triggered when inventory levels reach a pre-determined re-order level.

D

A purchasing system which minimises the sum of inventory ordering costs and inventory holding costs.

The following data are given for questions 6.2 and 6.3 A company produces three products using three different machines. No other products are made on these particular machines. The following data is available for December 2003. Product Contribution per unit Machine hours required per unit Machine 1 Machine 2 Machine 3 Estimated sales demand (units)

A £36

B £28

C £18

5 5 2.5 50

2 5.5 1 50

1.5 1.5 0.5 60

Maximum machine capacity in December will be 400 hours per machine. 6.2 (a) Calculate the machine utilisation rates for each machine for December 2003. (b) Identify which of the machines is the bottleneck machine. 6.3 (a) State the recommended procedure given by Goldratt in his “Theory of Constraints” for dealing with a bottleneck activity. (b) Calculate the optimum allocation of the bottleneck machine hours to the three products. 69 | P a g e

6.4 An rganization manufactures four products – J, K, L and M. The products use a series of different machines but there is a common machine, X, which causes a bottleneck. The standard selling price and standard cost per unit for each product for the forthcoming year are as follows:

Selling price Cost: Direct materials Labour Variable overheads Fixed overheads Profit Machine X – minutes per unit

J £/unit 2,000

K £/unit 1,500

L £/unit 1,500

M £/unit 1,750

410 300 250 360 680 120

200 200 200 300 600 100

300 360 300 210 330 70

400 275 175 330 570 110

Direct material is the only unit level manufacturing cost. Using a throughput ing approach, how would you rank the products? 6.5 Definition A: “A technique where the primary goal is to maximise throughput while simultaneously maintaining or decreasing inventory and operating costs.” Definition B: “A system whose objective is to produce or procure products or components as they are required by a customer or for use, rather than for inventory.” Which of the following pairs of correctly matches the definitions A and B above?

A B C D

Definition A

Definition B

Manufacturing resource planning Enterprise resource planning Optimised production technology Optimised production technology

Just-in-time Material requirements planning Enterprise resource planning Just-in-time

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6.6 Which of the following statements is/are true? (i) Computer-integrated manufacturing (CIM) brings together advanced manufacturing technology and modern quality control into a single computerised coherent system. (ii) Flexible manufacturing systems (FMS) are simple systems with low levels of automation that offer great flexibility through a skilled workforce working in teams. (iii) Electronic data interchange (EDI) is primarily designed to allow the operating units in an organisation to communicate immediately and automatically with the sales and purchasing functions within the organisation. A B C D

(i) only (i) and (ii) only (i) and (iii) only (ii) and (iii) only

The following data are given for sub-questions 6.7 to 6.9 SM makes two products, Z1 and Z2. Its machines can only work on one product at a time. The two products are worked on in two departments by differing grades of labour. The labour requirements for the two products are as follow: Minutes per unit of product Department 1 Department 2

Z1 12 20

Z2 16 15

There is currently a shortage of labour and the maximum times available each day in Departments 1 and 2 are 480 minutes and 840 minutes, respectively. The current selling prices and costs for the two products are shown below:

Selling price Direct materials Direct labour Variable overheads Fixed overheads Profit per unit

Z1 £ per unit 50.00 10.00 10.40 6.40 12.80 10.40

Z2 £ per unit 65.00 15.00 6.20 9.20 18.40 16.20

As part of the budget-setting process, SM needs to know the optimum output levels. All output is sold. 71 | P a g e

6.7 Calculate the maximum number of each product that could be produced each day, and identify the limiting factor/bottleneck. 6.8 Using traditional contribution analysis, calculate the ‘profit-maximising’ output each day, and the contribution at this level of output. 6.9 Using a throughput approach, calculate the ‘throughput-maximising’ output each day, and the ‘throughput contribution’ at this level of output. 6.10 Definition 1: “A system that converts a production schedule into a listing of materials and components required to meet the schedule so that items are available when needed.” Definition 2: “An ing system that focuses on ways by which the maximum return per unit of bottleneck activity can be achieved.” Which of the following pairs of correctly matches definitions 1 and 2 above?

A B C D

Definition 1

Definition 2

Manufacturing resources planning (MRP2) Material requirements planning (MRP1) Material requirements planning (MRP1) Supply chain management

Backflush ing Throughput ing Theory of constraints Throughput ing

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6.11 Which of the following statements is/are true? (i) Enterprise Resource Planning (ERP) systems use complex computer systems, usually comprehensive databases, to provide plans for every aspect of a business. (ii) Flexible Manufacturing Systems (FMS) are simple systems with low levels of automation that offer great flexibility through a skilled workforce working in teams. (iii) Just-in-time (JIT) purchasing requires the purchasing of large quantities of inventory items so that they are available immediately when they are needed in the production process. A B C D

(i) only (i) and (ii) only (i) and (iii) only (ii) and (iii) only

6.12 Which of the following definitions are correct? (i) Just-in-time (JIT) systems are designed to produce or procure products or components as they are required for a customer or for use, rather than for inventory; (ii) Flexible manufacturing systems (FMS) are integrated, computer-controlled production systems, capable of producing any of a range of parts and of switching quickly and economically between them; (iii) Material requirements planning (MRP) systems are computer based systems that integrate all aspects of a business so that the planning and scheduling of production ensures components are available when needed. A B C D

(i) only (i) and (ii) only (i) and (iii) only (ii) and (iii) only

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6.13 S Ltd manufactures three products, A, B and C. The products use a series of different machines but there is a common machine, P, that is a bottleneck. The selling price and standard cost for each product for the forthcoming year is as follows:

Selling price Direct materials Conversion costs Machine P – minutes

A $ 200 41 55 12

B $ 150 20 40 10

C $ 150 30 66 7

Calculate the return per hour for each of the products. 6.14 Two CIMA definitions follow: 1. A system that converts a production schedule into a listing of the materials and components required to meet that schedule so that adequate stock levels are maintained and items are available when needed. 2. An ing oriented information system, generally software driven, which aids in identifying and planning the enterprise-wide resources needed to resource, make, for and deliver customer orders. Which of the following pairs of matches the definitions? A B C D

Definition 1 Material requirements planning Manufacturing resource planning Material requirements planning Manufacturing resource planning

Definition 2 Enterprise resource planning Material requirements planning Manufacturing resource planning Enterprise resource planning

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The following data are given for sub-questions 6.15 and 6.16 A manufacturing company recorded the following costs in October for Product X: Direct materials Direct labour Variable production overhead Fixed production overhead Variable selling costs Fixed distribution costs Total costs incurred for Product X

$ 20,000 6,300 4,700 19,750 4,500 16,800 72,050

During October 4,000 units of Product X were produced but only 3,600 units were sold. At the beginning of October there was no inventory. 6.15 The value of the inventory of Product X at the end of October using marginal costing was: A B C D

$3,080 $3,100 $3,550 $5,075

6.16 The value of the inventory of Product X at the end of October using throughput ing was: A B C D

$630 $1,080 $1,100 $2,000

6.17 A company can produce many types of product but is currently restricted by the number of labour hours available on a particular machine. At present this limitation is set at 12,000 hours per annum. One type of product requires materials costing $5 which are then converted to a final product which sells for $12. Each unit of this product takes 45 minutes to produce on the machine. The conversion costs for the factory are estimated to be $144,000 per annum. Calculate the throughput ing ratio for this product and state the significance of the result. 75 | P a g e

6.18 The following details relate to Product Z: Selling price Purchased components Labour Variable overhead Fixed overhead

$/unit 45.00 14.00 10.00 8.50 4.50

Time on bottleneck resource 10 minutes Product return per minute is A B C D

$0.80 $1.25 $2.10 $3.10

6.19 In the context of quality costs, customer compensation costs and test equipment running costs would be classified as:

A B C D

Customer compensation costs

Test equipment running costs

Internal Failure Costs Internal Failure Costs External Failure Costs External Failure Costs

Prevention Costs Appraisal Costs Appraisal Costs Prevention Costs

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The following scenario is to be used for questions 6.20 and 6.21 A company manufactures three products: W, X and Y. The products use a series of different machines, but there is a common machine that is a bottleneck. The standard selling price and standard cost per unit for each product for the next period are as follows:

Selling price

W £ 180

X £ 150

Y £ 150

Cost: Direct material Direct labour Variable production overheads Fixed production overheads Profit Time (minutes) on bottleneck machine

41 30 24 36 49 7

20 20 16 24 70 10

30 50 20 30 20 7

The company is trying to plan the best use of its resources. 6.20 Using a traditional limiting factor approach, the rank order (best first) of the products would be A B C D

W, X, Y W, Y, X X, W, Y Y, X, W

6.21 Using a throughput ing approach, the rank order (best first) of the products would be A B C D

W, X, Y W, Y, X X, W, Y Y, X, W

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6.22 Which of the following statements are true? (i) Enterprise Resource Planning (ERP) systems are ing oriented information systems which aid in identifying and planning the enterprise wide resources needed to resource, make, for and deliver customer orders. (ii) Flexible Manufacturing Systems (FMS) are integrated, computer-controlled production systems, capable of producing any of a range of parts and of switching quickly and economically between them. (iii) Just-In-Time (JIT) is a system whose objective is to produce, or to procure, products or components as they are required. A B C D

(i) and (ii) only (i) and (iii) only (ii) and (iii) only (i), (ii) and (iii)

The following data are given for sub-questions 6.23 and 6.24 A company produces three products D, E and F. The statement below shows the selling price and product costs per unit for each product, based on a traditional absorption costing system. Product D Product E Product F $ $ $ Selling price per unit Variable costs per unit Direct material Direct labour Variable overhead Fixed cost per unit Fixed overhead Total product cost Profit per unit Additional information: Demand per period (units) Time in Process A (minutes)

32

28

22

10 6 4

8 4 2

6 4 2

9 29 3

6 20 8

6 18 4

3,000 20

4,000 25

5,000 15

Each of the products is produced using Process A which has a maximum capacity of 2,500 hours per period. 78 | P a g e

6.23 If a traditional contribution approach is used, the ranking of products, in order of priority, for the profit maximising product mix will be: A B C D

D, E, F E, D, F F, D, E D, F, E

6.24 If a throughput ing approach is used, the ranking of products, in order of priority, for the profit maximising product mix will be: A B C D

D, E, F E, D, F F, D, E D, F, E

6.25 Core features of world-class manufacturing involve: A B C D

Competitor benchmarking and an investment in training and development An investment in IT and technical skills Global sourcing networks and an awareness of competitor strategies A strong customer focus and flexibility to meet customer requirements

6.26 Corrective work, the cost of scrap and materials lost are A B C D

Examples of internal failure costs Examples of external failure costs Examples of appraisal costs Examples of preventative costs

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6.27 Economies of scope refers to A B C D

The economic viability of making alterations to systems An organisation becoming economically viable through a process of “rightsizing” Mass production assembly lines achieving economies through volume of output Economically producing small batches of a variety of products with the same machines

6.28 Reck and Long’s strategic positioning tool identifies an organisation’s A B C D

Purchasing approach Sales approach Manufacturing approach Warehousing approach

6.29 Inbound logistics is a A B C D

Secondary activity that refers to price negotiation of incoming raw materials Ssecondary activity that refers to receipt, storage and inward distribution of raw materials Primary activity that refers to inbound enquiries and customer complaints Primary activity that refers to receipt, storage and inward distribution of raw materials

6.30 Which ONE of the following would best describe individuals or departments within an operation that supply products or services to other deparments or individuals within an operation? A B C D

Hierarchy of operations Internal supplier Supply network Internal customer

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6.31 Which ONE of the following statements about Kaizen would NOT be correct? A B C D

Kaizen is similar to TQM Kaizen means continuous improvement Kaizen may use quality circles Kaizen is a measure of quality

6.32 Which ONE of the following would NOT normally be a characteristic of lean production methods? A B C D

Mass production techniques Flexible workforce JIT stock control Continuous improvement

6.33 Which ONE of the following would NOT be an example of an internal failure cost for an organisation? A B C D

Failure analysis and correction of defects found in production Re-inspection of goods after defects have been found in production Scrap of materials and work-in-progress Training staff to reduce defects during the production process

6.34 Which ONE of the following product processes tend to deal with deal with ‘high variety’ and ‘low volumes’? A B C D

Continuous Job Project Mass

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6.35 Which ONE of the following is a key feature of a lean philosophy? A B C D

Quality accreditation Continuous improvement Elimination of waste Service quality improvement

6.36 The following information is relevant to handling customer enquires within a call centre. 1000 customer enquires 30 minutes average duration per customer enquiry The total throughput time for the call centre would be?

minutes

6.37 Which of the following are less likely to be forms of waste to eliminate when using lean production methods? Select THREE only. Services Waiting time Movement Quality Over-production Cost Defects Transport 6.38 Which ONE of the following would describe machine operators and assembly workers which are trained to undertake routine servicing, fault diagnosis and maintenance of their own operating machinery? A B C D

Lean production Total productive maintenance Total quality management Lean synchronisation

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6.39 Which ONE of the following would describe a car manufacturer which is organised into smaller standalone factories with teams in each factory responsible for making a complete product or small range of products? A B C D

Layout and flow Lean synchronisation Focus factories Cellular manufacturing

6.40 Which ONE of the following means ‘the flow of products or services delivered exactly to what customers require and with zero waste in this process? A B C D

Lean synchronisation JIT systems Flexible manufacturing systems Sustainable operations

6.41 A key feature of a lean philosophy within operations is A B C D

removal of waste incremental change official accreditation continuous improvement

6.42 The aim of total productive maintenance is which ONE of the following? A B C D

Inclusivity and empowerment Motivation and teamwork Engagement and commitment Prevention and continuity

6.43 Which ONE of the following does NOT represent a spoke in Cousins' supply wheel? A B C D

Cost benefit analysis Portfolio of relationships Performance measures A firm's infrastructure 83 | P a g e

6.44 Small groups of employees that meet to identify work problems and their solution are known as A B C D

Quality circles Peer counsellors Cellular production teams Teleworkers

6.45 Porter's value system shows the organisation in of A B C D

the value chains of suppliers, channels and the customer primary activities, activities and margin the technostructure, strategic apex and operating core ive, independent, ive and integrative approaches to supply

6.46 Service Level Agreements are normally associated with A B C D

job reductions negotiated with staff groups de-skilling agreed appraisal outcomes outsourcing

6.47 Supplier relationships in a supply network are categorised in which ONE of the following ways? A B C D

Single, multiple, delegated and parallel Primary, secondary and post-purchase Phased, pilot and integrated One-to-one, several to one, 180 degrees and 360 degrees

6.48 Which ONE of the following is NOT a cost of quality? A B C D

Internal failure Appraisal Prevention Transaction 84 | P a g e

6.49 Which of the following characteristics would distinguish ‘traditional purchasing’ from ‘supply chain management’? Select THREE only. Operational Strategic Supplier partnerships More labour intensive Routine Transformational ive 6.50 Which ONE of the following would NOT be a spoke within Cousin’s strategic supply wheel? A B C D

Skills and competences Strategic performance measures Cost-benefit analysis Multiple sourcing

6.51 Which ONE of the following supplier sourcing strategies would include shopping around on the internet in order to find the best price available for ordering? A B C D

Single sourcing Multiple sourcing Delegated sourcing Parallel sourcing

6.52 Which ONE of the following would be a characteristic to explain quality control? A B C D

Feedforward Control Control Continuous improvement Quality assurance procedures and systems

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6.53 Which of the following would be examples of prevention costs for quality? Select THREE only. Rework of work-in-progress Regular inspection and routine servicing of equipment Supplier quality assurance schemes Performance measures to monitor quality Inspection of materials and components Consumer acceptance testing TQM culture of staff 6.54 Which of the following would be examples of external failure costs for quality? Select THREE only. Customer complaint departments Wastage of raw materials Product performance testing Cost of free repairs under gurantee Regular inspection of equipment Poor brand reputation Retraining of staff due to ineffective processes 6.55 Which ONE of the following processes is used commonly in car manuafacturing today? A B C D

Job production Dedicated cell production Focus factory production Batch production

6.56 Supply chain partnerships grow out of A B C D

Quality accreditation Recognising the supply chain and linkages in a value system An expansion of trade Adopting a marketing philosophy

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6.57 Kaizen is a quality improvement technique that involves A B C D

Continuous improvement by small incremental steps A complete revision of all organisational processes and structures Immediate, often radical “right first time” changes to practice A problem solving fishbone technique to identify cause and effect

6.58 According to Porter’s value chain, the final primary activity is referred to as A B C D

Marketing and sales Outbound logistics Procurement Service

6.59 Information systems or software which can provide a list of parts and materials required for the type and number of products entered thus allowing better inventory management, would normally be called? A B C D

Computer aided manufacturing Manufacturing resource planning Materials requirement planning Enterprise resource planning

6.60 Collaborating with its suppliers may bring a company added value because it can A B C D

Strike a harder bargain with its suppliers Work with a supplier to improve quality and reduce costs Avoid transaction costs Introduce price competition amongst suppliers

6.61 Total productive maintenance involves A B C D

Maintaining worker satisfaction and high productivity A cycle of PDCA A prevention of quality failures through equipment faults Eliminating non-value adding activities from a process 87 | P a g e

6.62 A lean approach is associated with which ONE of the following? A B C D

Supply sourcing strategies Demographic profiling Employee selection criteria Removal of waste

6.63 Which ONE of the following is NOT a feature of a service? A B C D

Intangibility Immediate consumption Inventory management Involvement of the consumer

6.64 Reck and Long's strategic positioning tool measures the contribution of which ONE of the following organisational functions? A B C D

Quality control and assurance Purchasing and supply The management of systems The management of human resources

6.65 Loss of goodwill and the expense of product recalls are known as which ONE of the following? A B C D

External failure costs Costs of lean Excess production costs Transaction costs

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Chapter 7 - Long-term decision making 7.1 A project requires an initial investment of $150,000 and has an expected life of five years. The required rate of return on the project is 12% per annum. The project’s estimated cash flows each year are as follows: Sales revenue Variable costs Incremental fixed costs

$000 101 30 5

The selling price, costs and activity levels are expected to remain the same for each year of the project. Ignore taxation and inflation. Calculate the percentage change in the selling price that would result in the project being rejected. 7.2 A company has a real cost of capital of 6% per annum and inflation is 3% per annum. The company’s money cost of capital per annum is: A B C D

9.00% 2.91% 3.00% 9.18%

7.3 An investment project requires an initial investment of $500,000 and has a residual value of $130,000 at the end of five years. The net present value of the project is $140,500 after discounting at the company’s cost of capital of 12% per annum. The profitability index of the project is: A B C D

0.38 0.54 0.28 0.26

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7.4 PQ is purchasing the lease on a property which has an annual lease payment of $300 in perpetuity. The lease payments will be paid annually in advance. PQ has a cost of capital of 12% per annum. The present value of the lease payments is: A B C D

$2,500 $2,800 $3,600 $3,900

7.5 A company is considering investing in a project with an expected life of four years. The project has a positive net present value of $280,000 when cash flows are discounted at 12% per annum. The project’s estimated cash flows include net cash inflows of $320,000 for each of the four years. No tax is payable on projects of this type. The percentage decrease in the estimated annual net cash inflows that would cause the company’s management to reject the project from a financial perspective is, to the nearest 0.1%: A B C D

87.5% 21.9% 3.5% 28.8%

7.6 A company has a money cost of capital of 9%. The rate of inflation is 3%. The company’s real cost of capital is nearest to: A B C D

6.0% 12.0% 12.3% 5.8%

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7.7 A capital investment project has the following estimated cash flows and present values: Year 0 1-5 1-5 5

Initial investment Contribution per annum Fixed costs per annum Residual value

Cash flow $ (200,000) 108,000 (30,000) 30,000

Discount factor Present value @ 12% $ 1.0 (200,000) 3.605 389,340 3.605 (108,150) 0.567 17,010

Calculate the sensitivity of the investment decision to a change in the annual contribution. 7.8 A company’s management is considering investing in a project with an expected life of 4 years. It has a positive net present value of $180,000 when cash flows are discounted at 8% per annum. The project’s cash flows include a cash outflow of $100,000 for each of the four years. No tax is payable on projects of this type. The percentage increase in the annual cash outflow that would cause the company’s management to reject the project from a financial perspective is, to the nearest 0.1%: A B C D

54.3% 45.0% 55.6% 184.0%

7.9 A company is considering investing $50,000 in a project which will yield $5,670 per annum in perpetuity. The company’s cost of capital is 9% per annum. Calculate the net present value of the project. 7.10 A five year project has a net present value of $160,000 when it is discounted at 12%. The project includes an annual cash outflow of $50,000 for each of the five years. No tax is payable on projects of this type. The percentage increase in the value of this annual cash outflow that would make the project no longer financially viable is closest to A B C D

64% 89% 113% 156% 91 | P a g e

7.11 A company has determined that the net present value of an investment project is $12,304 when using a 10% discount rate and $(3,216) when using a discount rate of 15%. Calculate the Internal Rate of Return of the project to the nearest 1%. 7.12 A company has a nominal (money) cost of capital of 18% per annum. If inflation is 6% each year, calculate the company’s real cost of capital to the nearest 0.01%. The following data are to be used when answering questions 7.13 and 7.14 JKL plc has $1 million available for investment. It has identified three possible investments, J, K and L, which each have a life of three years. The three year period coincides with JKL plc’s investment plans. JKL plc uses a 15% cost of capital when appraising investments of this type. Details of these investments are set out below: J $000

K $000

L $000

Initial investment

400

500

300

Net positive cashflows: Year 1 Year 2 Year 3

40 80 510

70 90 630

50 50 380

Net Present Value

31

43

31

7.13 Assuming that each of the investments is divisible, they are not mutually exclusive and cannot be invested in more than once, state the optimum investment plan for JKL plc. 7.14 Calculate the Internal Rate of Return of an investment in project K to the nearest 0.01%.

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The following data are to be used when answering questions 7.15 to 7.17: M plc is evaluating three possible investment projects and uses a 10% discount rate to determine their net present values. Investment Initial Investment

A £000 400

B £000 450

C £000 350

Incremental cashflows Year 1 Year 2 Year 3 Year 4 Year 5*

100 120 140 120 100

130 130 130 130 150

50 110 130 150 100

Net present value

39

55

48

*includes £20,000 residual value for each investment project. 7.15 Calculate the payback period of investment A. 7.16 Calculate the discounted payback period of investment B. 7.17 Calculate the Internal Rate of Return (IRR) of investment C. 7.18 X is considering the following five investments: Investment Initial investment Net Present Value

J $000 400 125

K $000 350 105

L $000 450 140

M $000 500 160

N $000 600 190

Investments J and L are mutually exclusive, all of the investments are divisible and none of them may be invested in more than once. The optimum investment plan for X assuming that the funding available is limited to $1m is A B C D

$400,000 in J plus $600,000 in N. $400,000 in M plus $600,000 in N. $500,000 in M plus $500,000 in N. $350,000 in K plus $600,000 in N plus $50,000 in M. 93 | P a g e

7.19 A hospital is considering investing $80,000 in a new computer system that will reduce the amount of time taken to process a patient’s records when making an appointment. It is estimated that the cash benefit of the time saved will be $20,000 in the first year, $30,000 in the second year and $50,000 in each of the next three years. At the end of five years the computer system will be obsolete and will need to be replaced. It is not expected to have any residual value. Calculate the payback period to one decimal place of one year. 7.20 An investment company is considering the purchase of a commercial building at a cost of £0.85m. The property would be rented immediately to tenants at an annual rent of £80,000 payable in arrears in perpetuity. Calculate the net present value of the investment assuming that the investment company’s cost of capital is 8% per annum. Ignore taxation and inflation. 7.21 An investment project that requires an initial investment of $500,000 has a residual value of $130,000 at the end of five years. The project’s cash flows have been discounted at the company’s cost of capital of 12% and the resulting net present value is $140,500. The profitability index of the project is closest to: A B C D

0.02 0.54 0.28 0.26

7.22 A project has a net present value of $320,000. The sales revenues for the project have a total pre-discounted value of $900,000 and a total present value of $630,000 after tax. The sensitivity of the investment to changes in the value of sales is closest to: A B C D

$310,000 $580,000 51% 36% 94 | P a g e

The following data are given for sub-questions 7.23 and 7.24: An investment project with no residual value has a net present value of $87,980 when it is discounted using a cost of capital of 10%. The annual cash flows are as follows: Year 0 1 2 3 4 5

$ (200,000) 80,000 90,000 100,000 60,000 40,000

7.23 Calculate the ing Rate of Return of the project using the average investment value basis. 7.24 Calculate the Internal Rate of Return of the project. 7.25 A company has an annual money cost of capital of 20% and inflation is 8% per annum. Calculate the company’s annual real percentage cost of capital to 2 decimal places. 7.26 A project has a net present value of $683,000. The present value of the direct material cost is $825,000. Calculate the sensitivity of the project to changes in the direct material cost to 2 decimal places.

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7.27 A company is considering an investment of $400,000 in new machinery. The machinery is expected to yield incremental profits over the next five years as follows: Year 1 2 3 4 5

Profit ($) 175,000 225,000 340,000 165,000 125,000

Thereafter, no incremental profits are expected and the machinery will be sold. It is company policy to depreciate machinery on a straight line basis over the life of the asset. The machinery is expected to have a value of $50,000 at the end of year 5. Calculate the payback period of the investment in this machinery to the nearest 0.1 years. 7.28 A project has an initial investment of $140,000 and a Net Present Value of $42,500. The present value of the sales revenue generated by the project is $385,000. The sensitivity of the investment to changes in the value of sales revenue is closest to A B C D

36% $342,500 89% 11%

7.29 A company has a real cost of capital of 6.00% per annum and inflation is currently 4.00% per annum. The company’s annual money cost of capital is closest to A B C D

10.24% 10.00% 2.00% 1.92%

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The following data is to be used when answering questions 7.30 and 7.31: A company is considering investing in a new machine. The machine will cost $15,000 and has an expected life of five years with a residual value of $3,000. The machine will increase the operating cashflows of the company as follows: Year 1 2 3 4 5

Increase in operating cashflow $ 2,500 3,000 5,500 4,000 3,000

7.30 Calculate the payback period of the new machine to the nearest 0.1 years. 7.31 Calculate the average Annual ing Rate of Return over the lifetime of the investment in the new machine. 7.32 A company is considering the following investments for the year ending 30 June 2009: Investment W X Y Z

Capital required $ 100,000 150,000 140,000 190,000

NPV $ 56,000 75,000 68,000 91,000

None of the investments are divisible. They cannot be undertaken more than once within each year. The company has only $350,000 available to invest in the year to 30 June 2009. There are no other investments available at this time. Which investments (if any) should the company undertake?

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7.33 A project with an initial outlay of $250,000 has a net present value of $46,000 when discounted at the cost of capital of 8%. The present value of the receipts from sales is $520,000. The sensitivity of the investment decision to changes in the initial outlay is: A B C D

18.4% $204,000 $270,000 8.8%

7.34 A project with a five year life requires an initial investment of $120,000 and generates a net present value (NPV) of $50,000 at a discount rate of 10% per annum. The project cash flows are as follows. Variable material cost Variable labour cost Incremental fixed cost

$000 per annum 30 10 5

The costs and activity levels are expected to remain the same for each year of the project. Ignore taxation and inflation. The sensitivity of the investment decision to changes in the variable costs is: A B C D

131.9% 44.0% 33.0% 29.3%

7.35 PJ is considering building a warehouse on a piece of land which will be leased at anannual cost of $4,000 in perpetuity. The lease payments will be made annually in advance. PJ has a cost of capital of 12% per annum. Calculate the present value of the lease payments.

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7.36 A company has recently carried out a post-completion audit at the end of Year 2 of a project that had an original investment of $100,000. It is concerned that the estimated cash flows are not going to be achieved. The cash flows that were forecast when the investment decision was originally taken were as follows: $ 60,000 80,000 (70,000) 80,000 60,000

Year 1 Year 2 Year 3 Year 4 Year 5

The data from the post-completion audit show that the net cash outflow in Year 3 will be $90,000 and the cash inflows in Years 4 and 5 will be $60,000 and $40,000 respectively. You should assume that all cash flows with the exception of the original investment will arise at the end of the year. The company’s cost of capital is 12% per annum. Demonstrate, using calculations, whether or not the project should be abandoned immediately. You should assume that there will be no additional costs associated with abandoning the project. 7.37 A five year investment project has a positive net present value of $320,000 when discounted at the cost of capital of 10% per annum. The project includes annual net cash inflows of $100,000 which occur at the end of each of the five years. The percentage reduction in the annual net cash inflow that would result in the project not being financially viable is: A B C D

31.25% 118.5% 84.4% 18.5%

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7.38 A company has a maximum of $80 million available for investment and seven independent projects in which it could invest as follows: Project A B C D E F G

Investment $ miilion 10.0 40.0 20.0 40.0 50.0 20.0 20.0

Net present value $million 4.20 6.10 8.50 13.70 3.80 4.90 4.33

None of the projects can be carried out more than once. Each project is divisible therefore investment in part of a project can be undertaken. Prioritise the projects and determine the maximum net present value that can be achieved from the $80 million investment. The following data is to be used when answering questions 7.39 and 7.41: A company is considering a project which requires the purchase of a van to be used to deliver sandwiches to office workers. The van will cost $40,000 and have a maximum life of 3 years. It is difficult to estimate how successful the project is likely to be. The company has the option to abandon the project after 1 or 2 years when the van would still have a resale value. The estimated cash inflows for the project are as follows: Year

Operating net cash inflows

Resale value of van

1 2 3

$ 16,800 18,000 24,000

$ 24,800 16,000 0

The company’s cost of capital is 12% per annum. Ignore tax and inflation. 7.39 Calculate the net present value of the project if operated for 3 years 7.40 Calculate the net present value of the project if abandoned after 2 years 7.41 Calculate the net present value of the project if abandoned after 1 year. 100 | P a g e

7.42 Selecting a project on how quickly it returns the original investment is an example of: A B C D

Payback Internal rate of return Net present value ing rate of return

7.43 Which of these is NOT an advantage of ARR? A B C D

Ignores non-cash items Simple to calculate Simple to understand Deals with costs and revenues over the entire life of the project

7.44 Which of these is a disadvantage of NPV? A B C D

Can have multiple NPVs for a project Cannot deal with non-conventional cashflows Difficulty in choosing an appropriate discount rate Includes non-cash items and therefore can be manipulated

The following information is to be used for 7.45 and 7.46: M Plc is about to invest in a machine with a cost of £30,000 today and a residual value of zero in four years time. The machine will produce 2,000 units at the end of each year for the next fours years, with each unit contributing contribution of £5.50 a unit. The company’s annual cost of capital is 10% and the rate of inflation expected each year will be 5% per annum. 7.45 The net present value of the project (to the nearest £500) is? A B C D

£8,000 £9,000 £10,000 £11,000

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7.46 If the annual inflation rate above was instead 2%, the maximum monetary cost of capital for the project to break-even (to the nearest 1%) would be? A B C D

18% 19% 20% 21%

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Chapter 8 - Performance management and transfer pricing 8.1 JK’s trade receivables outstanding at the end of this year are expected to be 55 days. Credit sales for this year are expected to be $862,860 spread evenly throughout the year. JK is preparing the budget for next year and estimates that credit sales will increase by 5%. The trade receivables amount, in $, outstanding at the end of next year is estimated to be the same as at the end of this year. Calculate the budgeted trade receivable days at the end of next year. Your answer should be rounded to two decimal places of a day. 8.2 It is estimated that at the end of this year AB will have trade payables outstanding of $547,800. This represents 55 days of purchases based on a 365 day year. All purchases are on credit and are spread evenly each year. AB is preparing the budget for next year and estimates that annual purchases will increase by 15%. The trade payables days are expected to change from 55 days to 50 days due to several suppliers offering early settlement discounts. The budgeted trade payables outstanding at the end of next year will be: A B C D

$629,970 $498,000 $692,967 $572,700

8.3 BC had trade receivables of $242,000 at the start of the year. BC forecasts that the sales revenue for the year will be $1,500,000. All sales are on credit. Trade receivable days at the end of the year are expected to be 60 days based on a 365 day year. The expected receipts from customers during the year are closest to: A B C D

$1,495,425 $1,742,000 $ 1,253,425 $ 1,504,575

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8.4 AB’s estimated trade receivables outstanding at the end of this year are the equivalent of 60 days’ credit sales. Credit sales for this year are projected to be $682,000. AB is preparing the budget for next year and estimates that credit sales will increase by 15%. The trade receivables amount, in $, outstanding at the end of next year is anticipated to be the same as at the end of this year. The budgeted trade receivable days at the end of next year, to the nearest day, will be: A B C D

52 days 69 days 51 days 60 days

8.5 An extract from a company’s trial balance at the end of its financial year is given below: Sales revenue (85% on credit) Cost of sales Purchases (90% on credit) Inventory of finished goods Trade receivables Trade payables

$000 2,600 1,800 1,650 220 350 260

Calculate the following working capital ratios: (i) Inventory days (ii) Trade receivables days (iii) Trade payables days 8.6 A flexible budget is a budget that is A B C D

set prior to the control period and not subsequently changed in response to changes in activity, costs or revenues continuously updated by adding a further ing period when the earliest ing period has expired changed in response to changes in the level of activity changed in response to changes in costs

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8.7 Which of the following definitions best describes “Zero-Based Budgeting”? A

A method of budgeting where an attempt is made to make the expenditure under each cost heading as close to zero as possible.

B

A method of budgeting whereby all activities are re-evaluated each time a budget is formulated.

C

A method of budgeting that recognises the difference between the behaviour of fixed and variable costs with respect to changes in output and the budget is designed to change appropriately with such fluctuations.

D

A method of budgeting where the sum of revenues and expenditures in each budget centre must equal zero.

8.8 Which of the following statements are true? (i) A flexible budget can be used to control operational efficiency. (ii) Incremental budgeting can be defined as a system of budgetary planning and control that measures the additional costs that are incurred when there are unplanned extra units of activity. (iii) Rolling budgets review and, if necessary, revise the budget for the next quarter to ensure that budgets remain relevant for the remainder of the ing period. A B C D

(i) and (ii) only (ii) and (iii) only (iii) only (i) only

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8.9 The CIMA definition of zero-based budgeting is set out below, with two blank sections. “Zero-based budgeting: A method of budgeting which requires each cost element ___________, as though the activities to which the budget relates _______________.” Which combination of two phrases correctly completes the definition? Blank 1

Blank 2

A

to be specifically justified

could be out-sourced to an external supplier

B

to be set at zero

could be out-sourced to an external supplier

C

to be specifically justified

were being undertaken for the first time

D

to be set at zero

were being undertaken for the first time

The following data are given for sub-questions 8.10 and 8.11 The summarised financial statements for P Limited, a potential major supplier, are shown below. Before a contract is signed, the financial performance of P Limited is to be reviewed. Summary Balance Sheets for P Limited at year end 2003 2002 £000 £000 Non-current assets 1,600 1,400 Inventories 300 280 Trade receivables 200 210 Cash 50 10 Trade payables (280) (290) Long-term borrowings (900) (800) Net assets 970 810 Share capital Retained earnings

Sales Cost of sales Operating profit

600 370 970 Summary Income Statements for the years 2003 £000 3,000 1,600 600

600 210 810 2002 £000 2,500 1,300 450 106 | P a g e

8.10 Calculate the following financial statistics for P Limited for 2003 (a) Receivables days (b) Payables days (c) Inventory days 8.11 Calculate the following financial statistics for P Limited for 2003 (a) Current ratio (b) Acid test (quick ratio) 8.12 DY had a balance outstanding on trade receivables at 30 September 2006 of $68,000. Forecast credit sales for the next six months are $250,000 and customers are expected toreturn goods with a sales value of $2,500. Based on past experience, within the next six months DY expects to collect $252,100 cash and to write off as bad debts 5% of the balance outstanding at 30 September 2006. Calculate DY’s forecast trade receivables days outstanding at 31 March 2007. 8.13 DY’s trade receivables balance at 1 April 2006 was $22,000. DY’s income statement showed revenue from credit sales of $290,510 during the year ended 31 March 2007. DY’s trade receivables at 31 March 2007 were 49 days. Assume DY’s sales occur evenly throughout the year and that all balances outstanding at 1 April 2006 have been received. Also, it should be assumed all sales are on credit, there were no bad debts and no trade discount was given. How much cash did DY receive from its customers during the year to 31 March 2007? A B C D

$268,510 $273,510 $312,510 $351,510

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8.14 DR has the following balances under current assets and current liabilities: Current assets Inventory Trade receivables Bank

$ 50,000 70,000 10,000

Current liabilities Trade payables Interest payable

$ 88,000 7,000

Required: Calculate DR’s quick ratio. 8.15 EV had inventory days outstanding of 60 days and trade payables outstanding of 50 days at 31 October 2007. EV’s inventory balance at 1 November 2006 was $56,000 and trade payables were $42,000 at that date. EV’s cost of goods sold comprises purchased goods cost only. During the year to 31 October 2007, EV’s cost of goods sold was $350,000. Assume purchases and sales accrue evenly throughout the year and use a 365 day year. Further assume that there were no goods returned to suppliers and EV claimed no discounts. Calculate how much EV paid to its credit suppliers during the year to 31 October 2007. 8.16 DB’s latest estimate for trade payables outstanding at the end of this year is 45 days. Estimated purchases for this year are $474,500. DB is preparing the budget for next year and estimates that purchases will increase by 10%. The trade payables amount, in $, outstanding at the end of next year is estimated to be the same as at the end of this year. Calculate the budgeted trade payable days at the end of next year.

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8.17 RS reviews the financial performance of potential customers before setting a credit limit. The summarised financial statements for PQ, a potential major customer operating in the retail industry, are shown below. Summary Statement of Financial Position for PQ at year end 2011 2010 $000 $000 Non-current assets 6,400 5,600 Inventories 1,200 1,120 Trade receivables 800 840 Cash 200 40 Trade payables (1,120) (1,160) Non-current liabilities (3,600) (3,200) Net assets 3,880 3,240 Share capital Retained earnings

2,400 1,480 3880

2,400 840 3240

Summary Income Statement for PQ for the years 2011 2010 $000 $000 Sales 12,000 10,000 Cost of sales (6,400) (5,200) Operating profit 2,400 1,800 Calculate the following ratios, to the nearest 0.1 days, for PQ for 2011 (i) Receivables days (ii) Payables days (iii) Inventory days

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8.18 Division XP has requested an inside quotation from XA division whose price was £35,000. XA has the spare capacity to make the supply and would incur £5,000 variable cost of their own but would also require purchasing components from two other of the same group. This quote would require XA to purchase components from XB at a price of £8,000; XB is currently at full capacity manufacturing these and other components. The quotation from XA would also require purchasing a component from XC who is at spare capacity, the price to be charged by XC would be £20,000, but XC would also have to purchase a component from XB at a price of £12,000. XC quotes at a 70% mark up on its own cost (the cost excluding purchases from other group companies). The marginal cost to the group of XA making the supply to XP (to the nearest £1) would be? £29,706 £17,706 £36,765 £25,000 8.19 A flexible budget is a budget A B C D

With variable production cost only Which shows costs and revenues at different activity levels Prepared using a spreadsheet package Which shows fixed production cost only

8.20 Which one of the following perspectives, if any, are encomed in the ‘balanced scorecard?’ Supplier perspective Investor perspective Innovation and learning perspective Internal perspective Employee perspective Environment perspective Government perspective Minority shareholder perspective

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8.21 Zero based budgeting is best defined as A B C D

A method of budgeting where every item of expenditure is justified before its inclusion within the budget A budget, which is produced at one single level of activity only A budget, which shows costs and revenues at different activity levels The setting of a budget using costs and revenues for the previous period, adjusted for growth and inflation

8.22 Division A makes and sells a single product. Financial information for the preceding period is: Sales 50,000 units Variable cost per unit £5 Fixed costs £45,000 Depreciation £23,500 Net assets £360,000 Division A is assessed by the residual income it earns, head office uses a 10% cost of capital per period. For division A, what price would have been charged in order to earn a residual income of £64,700? A B C D

£9.56 £8.99 £8.88 £8.38

8.23 Maximum capacity External sales Market price for external sales Variable cost for each unit sold

50,000 40,000 £40 £13

The price this division would need to quote internally if a buyer within the same group requests 15,000 units, based on opportunity costing would be? A B C D

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8.24 Division A and B are part of the same group. Division A makes a component and four of these components are used in the assembly of one unit that Division B manufactures. Division A has no external market for its product. Division A variable cost per unit is £40 and the transfer pricing policy existing currently is variable cost plus 50%. Division B variable cost excluding the variable cost of the components supplied by division A is £45 a unit for labour and material. Division B Units produced Marginal revenue £

8 £300

9 £295

10 £290

11 £285

12 £280

13 £275

The number of units that Division B must sell in order to maximise divisional profit would be? A B C D

9 units 10 units 11 units 12 units

8.25 Division X target return on investment (ROI) is 12%. It also had fixed costs of £400,000 and a variable cost per unit of £5. The net assets of the division forecast for the following period will be £1.5m and the number of units forecast to be sold is 30,000 units. The average contribution for each unit sold in the next period would be? A B C D

£24.33 £19.33 £14.56 £9.50

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8.26 Within a group exists three divisions X, Y and Z each with target return on investments of 40%, 30% and 25% respectively. Three proposals are being considered X is to spend £40,000 implementing and running a new just in time stock control system increasing the net book value of fixed assets, which would increase profits by £13,000 Y is offering a 5% discount for early settlement aiming to reduce debtors by £40,000. Its sales income for the year is forecast to be £1m and 30% of customers are expected to take up this offer. Z is considering selling a factory with a net book value of £0.75m but earns profits each year of £150,000. Which of the above divisions are more likely to reject the forthcoming proposals because of the effect on their return on investment? A B C D

Division X and Z Division Y and Z Division X and Y Division X, Y and Z

8.27 Within the XYZ group, division X transfers to division Z a component incurring its own cost of £30 a unit. The unit cost of this component for division X is as follows: Variable cost Fixed cost absorbed

£20.00 £10.00 £30.00

Division X is at spare capacity making this component and sells each unit of the component to division Z for £70 a unit. Division X also produces other products. Division Z also knows of an alternative supplier of this component that can be purchased for £65 a unit. If this division uses the external supplier the effect on profits would be? A B C D

Division X profit will decrease and the group’s profit would increase Division X profit will increase and the group’s profit would increase Division X profit will increase and the group’s profit would decrease Division X profit will decrease and the group’s profit would decrease

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8.28 A new mobile phone has been launched by AppSung. The costs are as follows: Plastic Metal Variable overheads Labour Fixed costs

£12 £15 £34 £89 £10

What is the selling price if the company use a full cost plus pricing approach and the mark up is 20%? A B C D

£160 £192 £150 £140

8.29 A cheese manufacturing group called DairySpree has 2 divisions, being the cheese division and the milk division. The cheese division needs the milk from the milk divison to make cheese, which it then sells to supermarkets. Milk can be bought externally for £40 a litre. The costs to make a litre of milk are as follows: Whiskey Chicken Flavorings Fixed production costs Variable production costs Labour

£1 £2 £4 £1 £3 £9

Using a dual pricing approach what would be the transfer prices for the milk? A B C D

Cheese division pays £19 Cheese division pays £12 Cheese division pays £40 Cheese division pays £7

Milk sells for £40 Milk sells for £20 Milk sells for £40 Milk sells for £19

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8.30 A new car has been launched. The costs are as follows: Paper Steel Cardboard Labour Variable cost Fixed costs

£23 £53 £81 £35 £45 £55

What is the selling price if the company use a marginal cost plus pricing approach and the mark up is 35%? A B C D

£292 £237 £394 £320

8.31 Ragbir is the manger of Om Shanti Om division. He is able for only the sales generated by the division. Om Shanti Om is what kind of a centre? A B C D

Investment centre Profit centre Revenue centre Cost centre

8.32 Roshan Group Plc uses a separate transfer price for each buying and selling division in a single transaction in the company. What kind of transfer pricing is this? A B C D

Full cost pricing 2 part tariff pricing Dual pricing Market based pricing

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8.33 Vinod division is operating at full capacity and can sell everything produced either internally or externally. What kind of transfer price therefore will it be willing to use? A B C D

Full cost plus a mark-up Variable costing Dual pricing Market price

8.34 Daabang Ltd has 2 divisions, Don and Race. Don makes a component for tablets which it can sell only to Race. It has no other outlet for sales. Current information for the divisions is as follows: Incremental cost for Don division £150 Incremental cost for Race division £250 Transfer price for component £202.50 Final tablet selling price £600 The transfer price is based on a 35% mark up on incremental costs. What is the profit per tablet for Daabang? A B C D

£200 £350 £147.50 £247.50

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8.35 Sholay Ltd has 2 divisions, Rahul and Anjali. Rahul makes a component for sunglasses which it can sell only to Anjali. It has no other outlet for sales. Current information for the divisions is as follows: Incremental cost for Rahul division £200 Incremental cost for Anjali division £400 Transfer price for component £220 Final sunglasses selling price £800 Unit sales 100 The transfer price is based on a 10% mark up on incremental costs. What is the amount of profit recognized by Anjali division? A B C D

£20,000 £18,000 £16,000 £14,000

8.36 Roti Ltd 2 divisions, Bread and Dough. Bread makes a component for ovens which it can sell only to Dough. It has no other outlet for sales. Current information for the divisions is as follows: Incremental cost for Bread division £20 Incremental cost for Dough division £40 Transfer price for component £32 Final oven selling price £500 The transfer price is based on a 60% mark up on incremental costs. Gandoo Ltd has offered to sell Dough division the same component it currently gets from Bread division for £25 per unit. If Dough accepts Gandoo’s offer, Roti will be: A B C D

£7 per unit better off £7 per unit worse off £5 per unit worse off £5 per unit better off

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8.37 JJ Ltd has 2 divisions, BB and DD. BB makes a component for watch which it can sell only to DD. It has no other outlet for sales. Current information for the divisions is as follows: Incremental cost for BB £45 Incremental cost for DD £145 Transfer price for component £90 Final watch selling price £600 The transfer price is based on 200% of incremental costs. ZZ has offered to sell DD the same component it currently gets from BB for £65 per unit. Given this information, what is the minimum amount that BB would be willing to sell to DD? A B C D

£45 per unit £65 per unit £90 per unit £75 per unit

8.38 Dil Ltd uses cost based transfer pricing. Dilkush division has costs of £300 per unit, and Dilwalle division has divisional costs of £250 per unit, what will be Dilwalle’s total cost per unit if the mark-up rate is 60%? A B C D

£550 £880 £730 £700

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8.39 Cleopatra coming at ya Ltd has 2 divisions, Jules and Vernes. Jules makes a component for electric shoes which it can sell only to Vernes. It has no other outlet for sales. Current information for the divisions is as follows: Incremental cost for Jules division £65 Incremental cost for Vernes division £145 A fixed fee to transfer of £100,000 Final electric shoes selling price £800 Unit sales 4,000 What is the transfer price per unit under a 2 part tariff pricing system? A B C D

£210 £90 £65 £25

8.40 AHA Ltd has 2 divisions, Tpau and Erasure. Tpau makes a component for earphones which it can sell to Erasure. The earphone component can be sold externally for £50 each. Current information for the divisions is as follows: Incremental cost for Tpau division £15 Incremental cost for Erasure division £35 A fixed fee to transfer of £300,000 Final earphones selling price Unit sales 6,000 What is the transfer price per unit under a dual pricing system? A B C D

Tpau £15 £50 £65 £35

Erasure £50 £15 £65 £50

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8.41 Allowing suboridnates at a lower level in a company is known as what? A B C D

Control Power Centralisation Decentralisation

8.42 Which of these is not a property of management control system? A B C D

Gathering and using information Guiding manager and employee behaviour ing political actions Making organisation planning and control decisions

8.43 If a manager is in charge of a division which is able for revenues, costs and investments, what kind of centre is this? A B C D

Profit Investment Cost Revenue

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8.44 P Ltd has 2 divisions, Ace and Ventura. Ace makes a chemical for dog shampoo which it can sell to Ventura. The chemical can be sold externally for £20 each. Ace has spare capacity of 4,000 units. Current information for the divisions is as follows: Incremental cost for Ace division £15 Incremental cost for Ventura division £65 Final dog shampoo selling price Unit sales 6,000 What is the transfer price per unit under an opportunity cost approach? A B C D

£15 for 4,000 units and then £20 for 2,000 units £20 for 6,000 units £15 for 6,000 units £35 for 6,000 units

8.45 The divisional manager and the company as a whole make the same decision as their interst are aligned, what is this known as? A B C D

Goal congruence Sub optimal decision Profit minimisation Cost maximisation

8.46 Which of these pricing systems would need head office to adsorb and re-apportion differences as extra overheads to all divsions? A B C D

Dual pricing 2 part tariff pricing Opportunity cost pricing Variable cost plus pricing

8.47 Faster reaction to local markets is a? A B C D

Management drawback Centralisation benefit Decentralisation benefit Decentralisation cost 121 | P a g e

8.48 Which of these pricing systems would need the buying division to accept a fixed fee before transfer? A B C D

Dual pricing 2 part tariff pricing Opportunity cost pricing Variable cost plus pricing

8.49 Which of the statements below are true if any? Rresidual income will result in division managers making decisions that are in their own best interest and not in the best interest of the company as a whole. Residual income incorporates a company’s cost of capital. Residual income is a percentage measure and not an absolute measure.

8.50 What will be maximised in a division under residual income? A B C D

Caplital employed Cash flows Income in excess of a head office imputed interest charge Cost of capital

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8.51 Ryu Ltd as an ROI of 8% and a division of Ryu, which has a 5% ROI and $250,000 of residual income, is considering an ivestment. It will reduce the divisional ROI but produce an extra $120,000 of residual income. From below select all that apply, if the company wants goal congruence, the investment: Should not be acquired because it produces $120,000 of residual income Should be acquired because after the acquisition, the division's ROI and residual income are both positive numbers Should not be acquired because the division's ROI is less than the corporate ROI before the investment is considered Should be acquired because it produces $120,000 of residual income for the division. Should not be acquired because it reduces divisional ROI

8.52 Petrol PLC has income of £60,000 and assets of £500,000. There is a business venture with Alan Sugar which will cost £75,000 and yield a profit of £8,250. The cost of capital for Petrol is 5%, would the business venture be attractive to: Divisional management if ROI is used to evaluate divisional performance? Divisional management if residual income (RI) is used to evaluate divisional performance? The management of Petrol? A B C D

Attractive to division ROI No Yes Yes Yes

Attractive to division RI Yes No No Yes

Attractive to Petrol Yes No Yes Yes

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8.53 Rambo division has a residual income of £200,000 for the year just ended. The division had £8,000,000 of invested capital and £1,000,000 of income. What is the cost of capital? A B C D

2%. Not enough information to work out 12% 10%

8.54 Commando Ltd uses a cost of capital of 7% in the calculation of residual income. Division Cobra had invested capital of $600,000 and an ROI of 13%. What will be Cobra’s residual income? A B C D

£78,000 £36,000 £42,000 £58,000

8.55 Catty division has a negative residual income of £6,000,000. Head office is contemplating an investment opportunity that will reduce this negative amount to $4,000,000. The investment: A B C D

Should be pursued because it is attractive for both Catty and head office. Should be pursued because it is attractive for Catty but not for head office. Should be pursued because it is attractive for head office but not for Catty. Should not be pursued because it is unattractive fof both Catty and head office.

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8.56 Which of the following if any would be classified under innovation and learning perspective from the balanced scorecard? New products launched compared to competitors Percentage of sales which is repeat business Percentage market share Health and safety training days per employee Share price growth Percentage of staff suggestions for improvement used by management Econcomic Value Added

8.57 Holly division reported profit of £80,000 and invested capital of £220,000. Assuming a cost of capital of 25%, which of the following is correct? ROI

RI

A

36%

£25,000

B

36%

£80,000

C

25%

£80,000

D

25%

£25,000

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8.58 Which of the following if any are not classified under financial perspective from the balanced scorecard? Percentage market share Percentage of sales which is repeat business Share price growth Return on investment Econcomic Value Added Staff turnover Number of complaints

8.59 Which of the following best describes goal congruence when setting transfer prices? A B C D

Maximise profits of the buying division Minimize opportunity costs Allow top management to become actively involved Establish incentives for autonomous division managers to make decisions that are in the best interests for the company as a whole

8.60 Which of the following if any are true? Income taxes and import duties are an important consideration when setting a transfer price for companies that pursue international commerce Transfer prices cannot be used by organizations in the service industry Transfer prices are totally cost based in nature not market based

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Chapter 9 - Management control and risk 9.1 A company is considering the launch of a new product which it estimates has a 75% chance of success if no marketing is undertaken. The company believes that if it undertakes a marketing campaign costing $50,000 the probability of success of the product will increase to 90%. If successful, the product will make a profit of $300,000, before marketing costs. However, if it is unsuccessful, the product will make a loss of $80,000 before marketing costs. Calculate whether it is worthwhile for the company to undertake the marketing campaign. 9.2 A company is planning to launch a new product. The price at which it will sell the product will be determined by the level of competition in the market which is currently uncertain. The possible selling prices and variable costs and their respective associated probabilities are as follows: $ 60 64 68 $ 20 24 26

Selling price per unit Probability 0·30 0·25 0·45 Variable cost per unit Probability 0⋅25 0⋅40 0⋅35

Selling price and variable cost per unit are independent of each other. Calculate the probability of the contribution per unit being equal to or greater than $40.

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9.3 EF sells personal computers on which it gives a one year warranty. EF is estimating the cost of warranty claims for next year. If all products under warranty need minor repairs the total cost is estimated to be $2 million. If all products under warranty need major repairs it would cost $6 million. If all products under warranty need to be replaced it would cost $10 million. Based on past experience EF has estimated that 80% of products under warranty will require no repairs, 15% will require minor repairs, 3% will require major repairs and 2% will need to be replaced. Calculate the expected value of the cost of warranty claims for next year. The following information is given for sub-questions 9.4 and 9.5 below A marketing manager is deciding which of four potential selling prices to charge for a new product. The market for the product is uncertain and reaction from competitors may be strong, medium or weak. The manager has prepared a payoff table showing the forecast profit for each of the possible outcomes. Competitor Reaction Strong Medium Weak

Selling price $80 $70,000 $50,000 $90,000

$90 $80,000 $60,000 $100,000

$100 $70,000 $70,000 $90,000

$110 $75,000 $80,000 $80,000

9.4 Identify the selling price that would be chosen if the manager applies the maximin criterion to make the decision. 9.5 Identify, using a regret matrix, the selling price that would be chosen if the manager applies the minimax regret criterion to make the decision.

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9.6 A decision maker who makes decisions using the maximax decision criterion would be described as: A B C D

Pessimistic Optimistic A bad loser Cautious

The following information is given for sub-questions 9.7 and 9.8 below The committee of a new golf club is setting the annual hip fee. The number of depends on the hip fee charged and economic conditions. The forecast annual cash inflows from hip fees are shown below. hip Fee $600 $800 $900 $1,000

hip level Low Average High $000 $000 $000 360 480 540 400 440 480 360 405 495 320 380 420

9.7 If the maximin criterion is applied the fee set by the committee would be: A B C D

$600 $800 $900 $1,000

9.8 If the minimax regret criterion is applied the fee set by the committee would be: A B C D

$600 $800 $900 $1,000

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9.9 A decision maker who makes decisions using the expected value criterion would be classified as: A B C D

Risk averse Risk seeking Risk neutral Risk spreading

9.10 PT provides expert quality assurance services on a consultancy basis. The management of the company is unsure whether to price the services it offers at the Deluxe, High, Standard or Low fee level. There is uncertainty regarding the mix of staff that would be available to provide each of the services. As the staff are on different pay scales the mix of staff would affect the variable costs of each service. Staffing mix X Y Z

Deluxe $135,000 $150,000 $165,000

Fee level High Standard $140,000 $137,500 $160,000 $165,000 $180,000 $192,500

Low $120,000 $160,000 $200,000

The table below details the annual contribution earned from each of the possible outcomes. If PT applies the minimax regret criterion, the fee level it will choose is: A B C D

Deluxe High Standard Low

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9.11 PL currently earns an annual contribution of $2,880,000 from the sale of 90,000 units of product B. Fixed costs are $800,000 per annum. The management of PL is considering reducing the selling price per unit to $48. The estimated levels of demand at the revised selling price and the probabilities of them occurring are as follows: Selling price of $48 Demand 100,000 units 120,000 units

Probability 0·40 0·60

The estimated variable costs per unit at either of the higher levels of demand and the probabilities of them occurring are as follows: Variable cost (per unit) $21 $19

Probability 0·25 0·75

The level of demand and the variable cost per unit are independent of each other. Calculate the probability that the profit will increase from its current level if the selling price is reduced to $48. 9.12 A marketing manager is trying to decide which of four potential selling prices to charge for a new product. The state of the economy is uncertain and may show signs of recession, growth or boom. The manager has prepared a regret matrix showing the regret for each of the possible outcomes depending on the decision made.

State of the economy Boom Growth Recession

Regret Matrix Selling price $40 $45 $50 $10,000 $0 $20,000 $20,000 $10,000 $0 $0 $10,000 $20,000

$55 $30,000 $20,000 $30,000

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If the manager applies the minimax regret criterion to make decisions, which selling price would be chosen? A B C D

$40 $45 $50 $55

9.13 A decision maker that makes decisions using the minimax regret criterion would be classified as: A B C D

Risk averse Risk seeking Risk neutral Risk spreading

9.14 FP can choose from three mutually exclusive projects. The net cash flows from the projects will depend on market demand. All of the projects will last for only one year. The forecast net cash flows and their associated probabilities are given below: Market demand Probability Project A Project B Project C

Weak 0.30 $000 400 300 500

Average 0.50 $000 500 350 450

Good 0.20 $000 600 400 650

(i) Calculate the expected value of the net cash flows from each of the THREE projects. (ii) Calculate the value of perfect information regarding market demand.

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9.15 A company is deciding which of four potential selling prices it should charge for a new product. Market conditions are uncertain and demand may be good, average or poor. The company has calculated the contribution that would be earned for each of the possible outcomes and has produced a regret matrix as follows.

State of the economy Good Average Poor

Regret Matrix Selling price $140 $160 $180 $20,000 $60,000 $0 $50,000 $0 $40,000 $0 $30,000 $20,000

$200 $10,000 $20,000 $30,000

If the company applies the minimax regret criterion to make decisions, which selling price would be chosen? $140 $160 $180 $200

A B C D 9.16

A company is deciding whether to launch a new product. The initial investment required is $40,000. The estimated annual cash flows and their associated probabilities are shown in the table below.

High Medium Low

Probability 0.20 0.50 0.30

Year 1 $20,000 $14,000 $9,000

Year 2 $24,000 $16,000 $12,000

Year 3 $18,000 $15,000 $10,000

The company’s cost of capital is 10% per annum. You should assume that all cash flows other than the initial investment occur at the end of the year. The expected present value of the year 1 cash flows is A B C D

$12,453 $(27,547) $15,070 $13,700 133 | P a g e

9.17 Nile Limited is preparing its sales budget for 2004. The sales manager estimates that sales will be 120,000 units if the Summer is rainy, and 80,000 units if the Summer is dry. The probability of a dry Summer is 0.4. What is the expected value for sales volume for 2004? A B C D

96,000 units 100,000 units 104,000 units 120,000 units

The following data relate to both questions 9.18 and 9.19 TX Ltd can choose from five mutually exclusive projects. The projects will each last for one year only and their net cash inflows will be determined by the prevailing market conditions. The forecast net cash inflows and their associated probabilities are shown below. Market Conditions Probability

Poor 0.20

Good 0.50

Excellent 0.30

Project L Project M Project N Project O Project P

$000 500 400 450 360 600

$000 470 550 400 400 500

$000 550 570 475 420 425

9.18 Based on the expected value of the net cash inflows, which project should be undertaken? 9.19 Calculate the value of perfect information about the state of the market.

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9.20 A company has estimated the selling prices and variable costs of one of its products as follows: Selling price per unit Variable cost per unit $ Probability $ Probability 40 0.30 20 0.55 50 0.45 30 0.25 60 0.25 40 0.20 Given that the company will be able to supply 1,000 units of its product each week irrespective of the selling price, and that selling price and variable cost per unit are independent of each other, calculate the probability that the weekly contribution will exceed $20,000. The following data are to be used when answering questions 9.21 and 9.22 A company expects to sell 1,000 units per month of a new product but there is uncertainty as to both the unit selling price and the unit variable cost of the product. The following estimates of selling price, variable costs and their related probabilities have been made: Selling Price Unit Variable Cost £ per unit Probability £ per unit Probability 20 25% 8 20% 25 40% 10 50% 30 35% 12 30% There are specific fixed costs of £5,000 per month expected for the new product. 9.21 The expected value of monthly contribution is A B C D

£5,890 £10,300 £10,890 £15,300

9.22 The probability of monthly contribution from this new product exceeding £13,500 is A B C D

24.5% 30.5% 63.0% 92.5% 135 | P a g e

9.23 A baker is trying to decide the number of batches of a particular type of bread that he should bake each day. Daily demand ranges from 10 batches to 12 batches. Each batch of bread that is baked and sold yields a positive contribution of £50, but each batch of bread baked that is not sold yields a negative contribution of £20. Assuming the baker adopts the minimax regret decision rule; calculate the number of batches of bread that he should bake each day. You must justify your answer. 9.24 A company has determined its activity level and is now predicting its costs for the quarter ended 31 March 2008. It has made the following predictions: Variable costs $560,000 $780,000 $950,000

Probability 0·3 0·5 0·2

Fixed costs $440,000 $640,000 $760,000

Probability 0·15 0·55 0·30

Calculate the expected value of total cost and its standard deviation. Note: SD =

Σ(x – x) n

2

9.25 A company is considering its costs in respect of a new product. The following tables show the predictions made by the company, together with their associated probabilities: Fixed costs $ 100,000

Probability

130,000

0.45

160,000

0.20

$ 70,000

0.35

Variable costs Probability 0.40

90,000

0.35

110,000

0.25

Calculate the expected value of total costs.

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9.26 The owner of a van selling hot take-away food has to decide how many burgers to purchase for sale at a forthcoming outdoor concert. The number of burgers sold will depend on the weather conditions and any unsold burgers will be thrown away at the end of the day. The table below details the profit that would be earned for each possible outcome: Weather Bad Average Good

Number of burgers purchased 1,000 2,000 3,000 4,000 $1,000 $0 ($1,000) ($3,000) $3,000 $6,000 $7,000 $6,000 $3,000 $6,000 $9,000 $12,000

(i) If the van owner applies the maximin rule how many burgers will he purchase? (ii) If the van owner applies the minimax regret rule how many burgers will he purchase? 9.27 A company is considering investing in a new project. The following table shows the project’s estimated cash inflows and cash outflows, together with their associated probabilities. The cash inflows and cash outflows are totally independent. Cash Inflows $ Probability 120,000 0.30 140,000 0.45 160,000 0.25

Cash Outflows $ Probability 50,000 0.25 60,000 0.35 70,000 0.40

Calculate the probability of net cash flows being $90,000 or greater. 9.28 A company has to choose between three mutually exclusive projects. Market research has shown that customers could react to the projects in three different ways depending on their preferences. There is a 30% chance that customers will exhibit preferences 1, a 20% chance they will exhibit preferences 2 and a 50% chance they will exhibit preferences 3. The company uses expected value to make this type of decision.

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The net present value of each of the possible outcomes is as follows: Probability Preferences 1 Preferences 2 Preferences 3

0.3 0.2 0.5

Project A $000 400 500 700

Project B $000 800 300 200

Project C $000 500 600 400

A market research company believes it can provide perfect information about the preferences of customers in this market. Calculate the maximum amount that should be paid for the information from the market research company. 9.29 A marketing manager is deciding which of four potential selling prices to charge for a new product. Market conditions are uncertain and demand may be good, average or poor. The contribution that would be earned for each of the possible outcomes is shown in the payoff table below: Demand level Good Average Poor

$40 $50,000 $20,000 $30,000

Selling price $60 $80 $60,000 $40,000 $30,000 $30,000 $30,000 $20,000

$100 $30,000 $20,000 $10,000

If the manager applies the maximin criterion to make decisions, which selling price would be chosen? A B C D

$40 $60 $80 $100

9.30 A company is considering whether to develop and market a new product. The cost of developing the product is estimated to be $150,000. There is a 70% probability that the development will succeed and a 30% probability that the development will be unsuccessful.

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If the development is successful the product will be marketed. There is a 50% chance that the marketing will be very successful and the product will make a profit of $250,000. There is a 30% chance that the marketing will be reasonably successful and the product will make a profit of $150,000 and a 20% chance that the marketing will be unsuccessful and the product will make a loss of $80,000. The profit and loss figures stated are after taking of the development costs of $150,000. The expected value of the decision to develop and market the product is: A B C D

$154,000 $4,000 $107,800 $62,800

9.31 A company is considering whether to invest in a new project. The probability distribution of the net present value of the project is as follows: Net present value $2,800 $3,900 $4,900

Probability 0.25 0.40 0.35

Calculate the expected value of the net present value of the project and its standard deviation. Note:

9.32 A decision maker who makes decisions using the maximin criterion would be classified as: A B C D

Risk averse Risk seeking Risk neutral Risk spreading

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9.33 NG is deciding which of four potential venues should be used to stage an entertainment event. Demand for the event may be low, medium or high depending on weather conditions on the day. The management ant has estimated the contribution that would be earned for each of the possible outcomes and has produced the following regret matrix: Regret Matrix Venue Demand Low Medium High

Ayefield $

Beefield $

Ceefield $

Deefield $

0 330,000 810,000

200,000 110,000 590,000

300,000 0 480,000

450,000 150,000 0

If the company applies the minimax regret criterion the venue chosen would be A B C D

Ayefield Beefield Ceefield Deefield

The following data are given for questions 9.34 and 9.35 below XY can choose from four mutually exclusive projects. The projects will each last for one year and their net cash inflows will be determined by market conditions. The forecast net cash inflows for each of the possible outcomes are shown below. Market Conditions Project A Project B Project C Project D

Poor $ 440 400 360 320

Average $ 470 550 400 380

Good $ 560 580 480 420

9.34 If the company applies the maximin criterion the project chosen would be: A B C D

Project A Project B Project C Project D

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9.35 If the company applies the maximax criterion the project chosen would be: A B C D

Project A Project B Project C Project D

9.36 The table below shows the possible outcomes, the probability of their occurrence and the expected value of the net present value for Project A: Net present value $2 million $3 million $4 million

Probability 30% 20% 50%

Expected value $0.6 million $0.6 million $2.0 million $3.2 million

Calculate the standard deviation of the net present value for Project A. Note:

9.37 A risk seeker is an individual who: A B C D

Selects the alternative which has the highest level of risk Selects the option with the lowest level of risk Selects the option with the highest return but with the lowest level of risk Selects the option with the highest return regardless of the level of risk

9.38 Project M has possible results of £3, £10 or £25 with probabilities of 0.3, 0.3, 0.4 respectively. The expected profit is: A B C D

£12.30 £13.90 £15.60 £25

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9.39 Project A will earn £1.5m or £3m with probabilities of 0.4 and 0.6 respectively and project B will earn £0.8m with probability of “g” or alternatively £3.2m. The value of “g” if both projects are equally attractive under expected value is: A B C D

0.256 0.356 0.333 0.312

The following information should be used for 9.40 and 9.41 A famous sports car company is considering whether or not to exhibit their cars at a motor show in Birmingham, which is to held later in the year. The total cost of setting up and holding the show would be £10,000. Sales will be dependent on the turn out of new models by competitors, there is a 0.4 chance competition will be better in comparison and a 0.6 chance that it will be worse. If competition is better, the company expects to sell 4 cars at the exhibition. If the competition is worse, they expect to sell 8 cars at the exhibition. The contribution per car is on average £15,000. If the company does not set up an exhibition at the show, they believe 4 of the above cars would be sold anyway during the year. 9.40 The expected net gain from exhibiting the show would be? A B C D

£26,000 £86,000 £96,000 £109,000

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Chapter 1 Solutions - Classification of costs and maths for budgets 1.1 Answer Future costs Sunk costs Incremental costs Avoidable costs Fixed costs Common costs Differential costs 1.2 Answer is B 400kg in stock – if not used could be sold for (400 x £1.75) 100kg extra required – at current cost (£4.50 x 100)

£700 £450 £1,150

The extra 100kg is an extra or ‘incremental cost’ £450 The 400 kg could have earned £700 and therefore is an ‘opportunity cost’ The past cost for the stock of £1,750 is a ‘sunk cost’ and is irrelevant 1.3 Answer is B 1.4 Answer Head office overheads Depreciation Rent agreement on a building to be confirmed The cost of material bought last year Managers salary of factory Pre-paid elcectric and gas bill Labour costs of staff who are working on a job at full capacity 1.5 Answer is B 1.6 Answer is C 1.7 Answer is A 1.8 Answer is A 1.9 Answer is B

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1.10 Answer is B 2 new employees needed: Recruit (2 x £45,000 = £90,000) Or retrain existing employees (£20,000 + £60,000) = £80,000 The lowest cost option would be to retrain the existing employees therefore the relevant cost is £80,000 Salaries of existing staff and the manager’s apportioned salary cost is irrelevant when decision-making. 1.11 Answer is D The minimum price that ZYP Ltd should accept for the above contract , using relevant costing would be: Variable cost £4,500 Opportunity cost £8,500 Cost to dismantle after use £1,000 Minimum price £14,000 The net book value is an ‘historical cost’ and therefore not relevant when decision making 1.12 Answer is B 1.13 Answer is B 1.14 Answer is $300 Skilled labour can either be obtained by asking staff to do overtime or stop production of another product, because there is no skilled labour available. Cost of overtime = 25hrs x $8p/h x 1.5 = $300 Stop existing production = labour costs + lost contribution = (25hrs x $8p/h) + (25hrs x $13p/h) = $525 Choose the cheapest option which would be paying staff overtime, therefore $300.

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1.15 Answer Incremental costs Committed costs Sunk costs Differential costs Absorbed fixed costs Opportunity costs 1.16 Answer is B 900kg x $3.50 300kg x $4.50 Total

= =

$3,150 $1,350 $4,500

1.17 Answer The common costs of the t process The further processing costs of the product The unit selling price of the product at the point of separation The unit selling price of the product after further processing The percentage losses of further processing the product The actual output of the product from the t process 1.18 Answer Costs used for decision making include only costs that are affected by the decision. Costs used for decision making never include fixed costs. Costs used for decision making do not include past costs. Costs used for decision making include opportunity costs. 1.19 Answer is B Compare the company’s variable costs for each compnonet with supplier’s price to see which is cheaper to buy in. Fixed costs are ignored as they are sunk. 1.20 Answer is B 40% of fixed overheads are relevant and need to be deducted to find the real contrbutions earned. This is because they are specific costs that have to be spent by each divison if they are to manufacture. 40% x 525 = $210 145 | P a g e

Each divison will get an equal share of $210, therefore $70 each. Now work out contribution: Divison W Divison X Divison Z

= = =

$140 - $70 = $70 $420 - $70 = $350 $60 - $70 = ($10)

Therefore only continue with divsinos W and X. 1.21 Answer Tax balancing charge or allowance on the existing asset Net book value of the existing asset Effect on working capital requirements Removal cost of the existing asset 1.22 Answer is B 1.23 Answer is D 1.24 Answer is D 1.25 Answer is D 1.26 Answer is B You take the higher of the scrap value and what you can save in material if you can use it in another project or production. Ignore the histtorical purchase price as this is not relevant. Therfore the answer is £3,500. 1.27 Answer is C 1.28 Answer is $2,000 The machine hire cost is based on 5 days multiplied by a hire charge of $500 per day. However, this is not the relevant cost because there is a lower cost option available. If the machine is hired for an entire month at a cost of $5,000 and then sub hired for $150 per day for 20 days (total $3,000) the net cost of this option is $2,000. Therefore the relevant cost is $2,000.

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1.29 Answer is C The overheads are fixed and therefore ignored, but the machine power costs will be incurred as a result of this job, and so therefore we should include these costs. £0.75 x 10hrs = £7.50. 1.30 Answer is B It is a direct material which is regularly used and therefore we would need to use the replacement cost to value it for the quote. 500m² x $5.50 = $2,750 1.31 Answer is $945 Skilled labour can either be obtained by asking staff to do overtime or stop production of another product, because there is no skilled labour available. Cost of overtime = 35hrs x $18p/h x 1.5 = $945 Stop existing production = labour costs + lost contribution = (35hrs x $18p/h) + (35hrs x $24p/h) = $1,470 Choose the cheapest option which would be paying staff overtime, therefore $945. 1.32 Answer $20 $400 $1,080 $880 $460 $480 $0

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1.33 Answer is M and N only To work out the optimal processing plan we need to also consider the extra benefit compared to the extra cost involved in processing M, N and P further. Products M N P

Extra revenue $8.40 - $6.25 = $2.15 $6.45 – $5.20 = $1.25 $7.45 - $6.80 = $$0.65

Extra cost $1.75 $0.95 $0.85

Net benefit $0.40 $0.30 ($0.20)

The optimal processing plan is to make products M and N further as they yield further profits, but not product P as it yields a further loss. 1.34 Answer is $360 If we were to go ahead with this contract we would need to obtain a replacement coach to cover existing obligations. If this is ignored then we lose contribution and incur significant penalties on existing obligations. Replacement coach costs = $180 x 2 days = $360 or if we don’t honour our current obligations then we would lose contribution of $250 x 2 days = $500. It is cheaper to hire replacement coach for $360. 1.35 Answer is $400 Ronnie only needs his driver for a 1 day bank robbery. All the other days he is not required. Therefore we need to hire a replacement driver for 1 day to cover the bank robbery. Therefore $400 x 1 day = $400. 1.36 Answer is $0 These are to be ignored as they are not relevant to the quote.

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1.37 Answer is make RZ, TZ and S We need to work out the extra benefit of making RZ, SZ and TZ and then compare these to the extra cost involved. We should make those which give a net extra benefit. Product

Extra benefit

RZ SZ TZ

$6.00 - $3.00 = $3.00 $5.75 - $5.00 = $0.75 $6.75 - $3.50 = $3.25

Extra variable cost $1.40 $0.90 £1.00

Extra fixed cost

Net

Nil Nil $600 / 1200 kg = $0.50

$1.60 ($0.15) $1.75

Products R and T should be further processed to produce products RZ and TZ respectively as they provide and extra net benefit of $1.60 and $1.75 per kg respectively. Product S should not be further processed to make product SZ as there is net cost of $0.15 per kg every time an SZ is produced. 1.38 Answer is C Shops that are making contribution losses should be shut down and overheads are sunk and so therefore their apportionment is irrelevant. 1.39 Answer is C BMW = $25,000 + ($500 x 10) - $3,500 = $26,500 Rover 75 = $2,650 x 10 = $26,500 1.40 Answer is B The real benefit gained here will be the elminarion of a loss. This would be the $10,000 less the $19,000 of specific fixed overheads, therefore $9,000 loss which will now not be incurred if shut down. (To get $19,000 remove the $7,000 from the $26,000 of overheads to be left with the specific fixed overheads which is relevant).

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1.41 Answer is B Sales after reworking: 2,000 x $6 = $12,000 The cost to rework: 2,000 x $1 = $2,000 The opportunity cost of not making new units: 2,000 x $2 = $4,000 The net return of reworking: $12,000 - ($2,000 + $4,000) = $6,000 The net return of scrapping: 2,000 x $2 = $4,000 1.42 Answer is C The definition given applies to an incremental cost; an additional cost that will result when a particular course of action is taken. 1.43 Answer is D Sales after reworking: 17,000 x $5 = $85,000 The cost to rework: 17,000 x $3 = $51,000 The opportunity cost of not making new units: 17,000 x $2 = $34,000 The net return of reworking: $85,000 - ($51,000 + $34,000) = $0 The net return of scrapping is 17,000 x $1 = $17,000 1.44 Answer is A The unit cost: Materials = $16,000 / 8,000 = $2 Labour = $8,000 / 8,000 = $1 Fixed overhead = $0 because they are sunk Selling expenses, variable only = $8,000 x 40% = $3,200 / 8,000 = $0.40 Variable cost per unit: $2.00 + $1.00 + $.40 = $3.40 Total variable cost = $3.40 x 500 = $1,700 Selling price = $1,700 + $2,000 = $3,700 / 500 = $7.40

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Chapter 2 Solutions - Learning curve theory 2.1 Answer is D Log 0.9/log 2 = -0.152 Average time for the first 8 units = 50 x 8 –0.152 = 36.45 hours 36.45 hours x 8 units x £5 = £500 x 8 units Specific fixed cost

£1,458 £4,000 £3,500 £8,958

£8,958/8 units = £1,120 2.2 Answer is A Log 0.8/log 2 = -0.3219 44.45 = cost of first unit x 100-0.3219 44.45 = cost of first unit x 0.227 44.45/0.227 = cost of first unit 44.45/0.227 = £196 2.3 Answer is C Log 0.9/log 2 = -0.152 First 400 units 10 x 400-0.152 = 4.02 hours x 400 units = 1608 hours First 200 units 4.47 hours x 200 units = (894) hours Units 201-400 (total) 714 714 hours/200 units = 3.57 hours 2.4 Answer is A Pareto law 2.5 Answer Learning curve theory is the theory that as output doulbes the average time per unit falls by a fixed percentage each time this happens.

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2.6 Answer Heavy automation in production and so scope for learning Repetitve work and so speed and accuracy can be improved Consitensy in the workforce and so knowledge is retained Extensive breaks in production so skills and techniques are learned Early stages of production 2.7 Answer is C 2.8 Answer Positive impact on labour costs involved and may have an overall decrease in costs. Higher prices would now be needed to maintain expected profits. Negative impact on labour costs involved and may have an overall increase in costs. Lower prices would now be chargeds to customers as costs are lower. 2.9 Answer Units

Hours

Average hours

1

5

5

2

(2 x 5) x 66% =6.6

3.3

4

(4 x 5) x 66% 66% = 8.7

2.2

8

(8 x 5) x 66% x 66% x 66% = 11.5

1.4

2.10 Answer The company did originally estimate the labour costs for the first batch to be $250,000, however the actual cost for the first batch was $280,000. There is a learning curve rate of 80% which we will apply to the actual cost to obtain the revised expected cumulative labour costs. Number of cumulative batches 1 2 4 8

Average labour cost (‘000s) $280 $280 x 0.8 = $224 $224 x 0.8 = $179 $179 x 0.8 = $143

Total labour costs (‘000s) $280 224 x 2 = $448 179 x 4 = $717 143 x 8 = $1,144

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2.11 Answer Number of cumulative batches 1 2 4 8

Average labour cost (‘000s) $280 $476 / 2 = $238 $809 / 4 = $202 $1,376 / 8 = $172

Learning curve rate $238 / $280 = 0.85 $202 / $238 = 0.85 $172 / $202 = 0.85

Learning curve rate at each output is 85%. 2.12 Answer is 11.5 mins Y = aXb Y = average time for that (X) number of units or the average cost per unit a = time for the first unit or the cost for the first unit X = the number of units you want to calculate an average time or cost for b = the index of learning (log r/log 2) a = 40 mins, b = -0.415 To work out the time taken for the sixth unit of output: Time for the first 6 units = 40 x (6 to the power of –0.415) x 6 = 114.1 mins Time for the first 5 units = 40 x (5 to the power of –0.415) x 5 = 102.6 mins Time for the 6th unit = 114.1 mins – 102.6 mins = 11.5 mins 2.13 Answer This kind of pricing policy is good for high quality products This can only work in a fast growing economy This kind of pricing policy is good for inferior products The economies of scale for the product should be achieved quicker High amounts profit can be earned per unit sold Competition may be discouraged and leave the market

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2.14 Answer is 14.18 hours Y = aXb Y = average time for that (X) number of units or the average cost per unit a = time for the first unit or the cost for the first unit X = the number of units you want to calculate an average time or cost for b = the index of learning (log r/log 2) a = 40 hours, b = log 0.8 / log 2 = -0.3219 To work out the time taken for the 8th batch: Time for the first 8 batches 40 x (8 to the power of –0.3219) x 8 = 163.85 hours Time for the first 7 batches 40 x (7 to the power of –0.3219) x 7 = 149.67 hours Time for the 8th batch = 163.85 hours – 149.67 hours = 14.18 hours 2.15 Answer Labour force is getting quicker Decrease in staff turnover More reworks Increase in staff turnover Staff have become disinterestd and less moticateed Production is in its early stages There is not much more that can be learned now Inferiror materials being used 2.16 Answer is 80% a = 45 hrs, y = 182.25 hrs / 8 batches = 22.78 hrs on average for 8 batches. If we assume that “r” represents the learning rate, then: Batches 1 2 4 8

Average hours per unit 45 45 x r 45 x r x r 45 x r x r x r

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Therefore for 8 batches: 45r = 22.78 r = 22.78 / 45 r = 0.506 r = (0.506) to the power of 1/3 r = 0.797 Therefore learning rate is 80% 2.17 Answer is 52.11 hours Using the learning curve formula: Y = aXb Y = average time for that (X) number of units or the average cost per unit a = time for the first unit or the cost for the first unit X = the number of units you want to calculate an average time or cost for b = the index of learning (log r/log 2) a = 10 hours, b = -0.5146 Work out the average time for 30 batches: Y = 10 x (30 to the power of –0.5146) = 1.737 hours Total time for 30 batches = 1.737 x 30 = 52.11 hours 2.18 Answer is 0.84 hours Work out the average time for 29 batches: Y = 10 x (29 to the power of –0.5146) = 1.768 hours Total time for 29 batches = 1.768 x 29 = 51.27 hours Time for the 30th batch = 52.11 hours – 51.27 hours = 0.84 hours 2.19 Answer is 68.91 hours Total time for 50 batches = 52.11 hours + (20 batches x 0.84 hours) = 68.91 hours

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2.20 Answer Report 1 is better as it is easier to see how costs behave. Report 1 is better as it allows an understanding of how many much should have been spent if we made 60 batches. Report 2 is better as it compares actuals to flexed budget information. Report 1 is better as it shows the real difrence in output. Report 2 is better has it allows us to understand how many hours should have been used if you are making 50 batches. 2.21 Answer is 1,712 hours Using the learning curve formula: Y = aXb Y = average time for that (X) number of units or the average cost per unit a = time for the first unit or the cost for the first unit X = the number of units you want to calculate an average time or cost for b = the index of learning (log r/log 2) a = 8 hours, b = -0.1520 Work out the average time for the first 560 units: Y = 8 x (560 to the power of –0.1520) = 3.057 hours Total time for 560 units = 3.057 x 560 = 1,712 hours 2.22 Answer is 565.64 hours Using the learning curve formula: Y = aXb Y = average time for that (X) number of units or the average cost per unit a = time for the first unit or the cost for the first unit X = the number of units you want to calculate an average time or cost for b = the index of learning (log r/log 2) a = 1500 hours, b = -0.2345 Y = 1500 x (64 to the power of -0.2345) = 565.64 hours 156 | P a g e

2.23 Anseer is 433.65 hours Total time for 64 batches = 565.64 x 64 = 36,200.96 hours Work out the average time for 63 batches: Y = 1500 x (63 to the power of –0.2345) = 567.735 hours Total time for 63 batches = 567.735 x 63 = 35,767.31 hours Time for the 64th batch = 36,200.96 hours – 35,767.31 hours = 433.65 hours 2.24 Answer is $32,400 Using the learning curve formula: Y = aXb Y = average time for that (X) number of units or the average cost per unit a = time for the first unit or the cost for the first unit X = the number of units you want to calculate an average time or cost for b = the index of learning (log r/log 2) a = $40,000, b = -0.152 Y = 40,000 x (4 to the power of -0.152) = $32,400 2.25 Answer is $28,056 Total cost for 4 batches = $32,400 x 4 = $129,600 Work out the average time for 3 batches: Y = 40,000 x (3 to the power of –0.152) = $33,848 Total time for 3 batches = $33,848 x 3 = $101,544 Time for the 4th batch = $129,600 – $101,544 = $28,056 2.26 Answer is $118,176 Revenue (8,000 units x $90) Non- labour related costs (8,000 units x $45) Labour costs $129,600 + (4 x $28,056) Contribution

$ 720,000 (360,000) (241,824) 118,176

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2.27 Answer is 87% In order to achieve a contribution of $150,000 the total labour cost over the products lifetime would have to equal ($720,000 - $360,000 - $150,000) = $210,000. This equals an average batch cost of $210,000 / 8 = $26,250 This represents $26,250 / $40,000 = 65.625% of the cost of the first batch 8 batches represent 3 doublings of output Therefore the rate of learning required is the third root of 0.65625 = 86.9% = 87% 2.28 Answer is 24.5% Using the learning curve formula: Y = aXb Y = average time for that (X) number of units or the average cost per unit a = time for the first unit or the cost for the first unit X = the number of units you want to calculate an average time or cost for b = the index of learning (log r/log 2) a = 225 hours, b = -0.152 Work out the average time for 64 batches: Y = 225 x (64 to the power of –0.152) = 119.58 hours Total time for 64 batches = 119.58 x 64 = 7,653.12 hours The target profit of $75,000 is ‘earned’ by 7,653.12 hours. This represents $9.80 per hour. The hourly rate could rise by $9.80 before the profit is eroded. The sensitivity is therefore (9.80 / 40.00) x 100% = 24.5%

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2.29 Answer is 3.72% Total labour cost of 64 units = 7,653.12 hours x $40 = $306,124.80 The labour cost could rise to $306,124.80 + $75,000 = $381,124.80, before no profit is earned. This equals $381,124.80 / $40 = 9,528.12 hours The cumulative average time for the first 64 units = 9,528.12 / 64 hours per unit = 148.88 hours per unit If we assume that “r” represents the learning rate, then: Units 1 2 4 8 16 32 64

Average hours per unit 225 225 x r 225 x r x r 225 x r x r x r 225 x r x r x r x r 225 x r x r x r x r x r 225 x r x r x r x r x r x r

Therefore for the first 64 units: 225r (to the power of 6) = 148.88 r (to the power of 6) = 148.88 / 225 r (to the power of 6) = 0.66168 r = 0.66168 to the power of 1/6 r = 0.9335 Therefore the learning rate can fall to 93.35%. Sensitivity is 3.35 / 90 = 3.72% 2.30 Answer The process is highly mechanised The process is highly labour intensive The process is complex The process is relatively new Staff turnover is rapid

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Chapter 3 Solutions - Pricing 3.1 Answer is B 3.2 Answer is A 3.3 Answer is B 3.4 Answer is A 3.5 Answer is C 3.6 Answer is C 3.7 Answer is D 3.8 Answer is B ROI (15%) = Desired profit/Current investment (£25m) Therefore 15% £25m = £3.75m desired profit Sales = £350 x 50,000 units = 17.5m Target cost 17.5m – 3.75m = 13.75 13.75m/50,000 units = £275 a unit 3.9 Answer is A At maximum demand the price will be zero Price function P = a- bQ 0 = a- 1/25(75,000) a = £3,000 Therefore P = 3000-0.04Q At 60,000 units P = 3000-0.04(60000) = £600

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3.10 Answer If demand is inelastic If the product has a short product lifecycle If the demand is elastic If the product is very expensive to manufacture If the product is recognised as inferior by customers The firm wants to discourage new entrants in to the industry 3.11 Answer is C 3.12 Answer is A Units

Total variable cost

10 11 12 13

515 580 650 725

Selling price per unit 80 78 76 74

Total sales revenue

Total contribution

800 858 912 962

285 278 262 237

Fixed cost can be ignored as it is the same in every decision, therefore concentrate on maximisation of contribution, P = 100 – 2Q MR = 100 – 4Q An alternative method would be to derive the MR function and equate it to the marginal cost of each number of units being produced (profit is maximised whereby MR = MC). Units 9 10 11 12 13

MR 64 60 56 52 48

MC 55 60 (MR = MC) 65 70 75

3.13 Answer is C % change in price 1/80 = 0.0125 % change in demand 500/10,000 = 0.05 PED = 0.05/0.0125 = 4 3.14 Answer is D 162 | P a g e

3.15 Answer is C 3.16 Answer is B 3.17 Answer is D 3.18 Answer is D 3.19 Answer is B 3.20 Answer is C 3.21 Answer is B Loss leader pricing 3.22 Answer is C High prices normally at an early stage of the product lifecycle 3.23 Answer

Sales

E Introduction

G Growth

A Maturity

F Decline

B Senility

Time

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3.23 Answer Example A retailor offering a sandwich and drink for a combined price

Pricing strategy D Product Bundling

B

A train operator charging different prices according to the time of travel

Price Discrimination

A bar using ‘happy hour’ (low prices) to encourage sales when off peak

Variable Pricing

F

3.25 Answer Greater tangibility More labour intensive Less perishability Easier to brand Existence of inventory Greater homogeneity Difficult to return Greater separability 3.26 Answer D Product bundling. 3.27 Answer D Growth stage.

3.28 Answer B Maturity.

3.29 Answer D Product bundling. 3.30 Answer A Non-price competition.

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3.31 Answer PLC Theory

Characteristics (insert letters A to D)

INTRODUCTION

Customer’s unaware and low consumer adoption, cashflow and profit negative.

GROWTH

Consumer adoption rapidly increases, profitability and cash-flow improve.

MATURITY

High sales volume and economies of scale, profitability and cash-flow positive.

DECLINE

Product obsolescence and over capacity within the industry.

B

C A D

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Chapter 4 Solutions - Beyond budgeting 4.1 Answer is C An example of a control system is a budgetary control system. This would gather information on past performance from the output of the system e.g. actual financial performance, and compare this to a predetermined standard or plan (budget) using any deviations e.g. variances, as a basis of improving future performance through control action taken. contrasted to feed-forward control is like closing the door after the horse has already bolted, in other words there is little you can do about it now, except try and rectify the situation to avoid it happening again. Feed-forward control is more prevention than appraisal, controlling a system by making adjustments now to the system in advance before any exceptions occur. It does this by trying to predict what will happen in the future. can be transformed into feed-forward control by being more proactive and predictive as to what will happen in the future, rather than being reactive or backward looking by historical reflection on the past. Target costing Market price to achieve desired market share

XX

TARGET COST (Balance)

(XX)

Desired profit

XX

Used by Nissan, Sony and Toyota and many other Japanese companies, who sought not what a product ‘does’ cost (which is what most UK companies used as the method of pricing) but rather what it ‘should’ cost. Traditional approaches were to develop a product, determine its cost, add mark up and determine a price. This therefore ignored competition or demand. Target costing combines the use of JIT, TQM, cost reduction, value analysis and benchmarking. The idea is that a product price is determined by the market place, costs are then reduced to enable the product to be sold at that price. 4.2 Answer is C

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4.3 Answer is D Budgetary slack or padding is a term used to describe the difference between the minimum necessary expenditure required and the actual estimate or forecast submitted. It is the intentional over estimation of costs and / or under estimation of revenue in a budget. 4.4 Answer Coordination between sales and production will improve There will be less scope for budget slack Sales staff will be better motivated Coordination and cooperation will increase across the sales department Less time will be spent on budgeting 4.5 Answer Co-ordination Marketing Communication Expansion Resource allocation 4.6 Answer is A 4.7 Answer To allow comparisons between the budge and actual results and then any major differences can be investigated. To allows mangers to be responsible for the management of resources that they have been allocated in the budget, and as a result assessed on the success of resource management. To allow a more efficient production of goods and services because they can be linked with one another. To allow judgements to be made on the performance of the managers by comparing the actual results with the budget. To allow targets to be created for managers that they will want to achieve. To allow everyone to understand what resources are available and how they are to be allocated to different budgets. 168 | P a g e

4.8 Answer How budgets or standards affect people within an organisation How budgets or standards affect costs How budgets or standards affect profits How budgets or standards affect the environment How budgets or standrads affect resource allocation 4.9 Answer Greater motivation of staff Faster process in setting the budget Reduction in busget padding Targets are more likely to be accepted by staff Useful if revenue and costs are stable

4.10 Answer Inexpereinced staff Reduced training costs of staff for budget preparation Targets are less likely to be achived Increased slack in the budget Slower process 4.11 Answer Focus on cost control not cash forecasts Budgets revised more frequently and a longer time horizon when forecasting Using a fixed budget to make comparisons Benchmarking for continuous improvement 4.12 Answer The traditional budget process is too rigid and requires conformance to it with not enough flexibility. With the constantly changing business environment, managers need to be having more up to date information to help them make decisions. The budget process is often too bureaucratic, internally focussed and time consuming. 4.13 Answer Beyond budgeting will allow businesses to react quickly in a dynamic environment giving management the advantage to change and allocate resources. This should result in better innovation, lower costs and improved customer and supply loyalty. 169 | P a g e

4.14 Answer Managers are given less discretion and freedom to make decisions Manager’s targets are linked with the organisations strategy Everyone has undefined areas of responsibility Front line teams are responsible for managing the business relationships with customers and suppliers Information should be transparent and relevant

4.15 Answer Number of complaints Courtsey of staff Nuumber of breakdowns Percentage increase in sales The product range Profit 4.16 Answer No of late deliveries Number of repeat business sales Easy of use of product New internal control system Stock turnover Price elasticity of demand 4.17 Answer Share price growth Strategy developemt Training days per emplyoee Number of machine breakdowns per day Earnings per share Average customer ratings

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4.18 Answer Which of these is an example of a CSF? Net Present Value Percentage of staff suggestions for improvement Number of products launched Return on capital employed The functions of a product Number of defective products 4.19 Answer Which of these relate to control? can be negative (adverse) or positive (favourable) is based on comparing actual to a standard of performance It isa pre-emptive reaction to actual change Examples of control is a rolling budget Control action would be ‘closing the stable door after the horse has bolted’ 4.20 Answer Which of these relate to feedforward control? Forecasting ahead and doing something now before the event occurs They are good for adaptive planning Examples of feedforward control is variance analysis Control action would be ‘closing the stable door before the horse bolts’ Part of the output of a system is measured and returned as input to regulate the systems further output.

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4.21 Answer

High Level Controller (Human)

Effector (Takes control action)

Input (Data)

Comparator (Compares actual to standard)

Process (Calculate, sort, amend)

Sensor (Data collected and measured)

Output (Information)

4.22 Answer Which of these if any describe a double feeback loop system? Select all that apply if any. It is an open loop control system Corrective action is not automatically taken Environmental factors are not considered before any control action It is not a closed loop control sytem It includes human intervention

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4.23 Answer Which if these if any describe a single loop system? Select all that apply if any. It is an open loop control system Corrective action is automatically taken Environmental factors are not considered before any control action It is a closed loop control sytem It includes human intervention 4.24 Answer is D 4.25 Answer is A 4.26 Answer Input

Sales being generated by sales reps

Comparator

Comparisons are made between the target level of sales expected by sales reps and the actual results

Output

The report showing level of sales and commissions earned by different sales reps

Effector

Sales manager takes action over those sales reps that did not meet their sales targets

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4.27 Answer Effector

The sales manager will review the level of sales and production and in conjunction with the production manager and together agree on appropriate action to increase or decrease raw materials levels to ensure that a satisfactory level of production is reached to sales.

Comparator

Comparisons are made between the actual level of sales and actual level of production of finished goods.

Sensor

This is a quality control procedure of the finished product to ensure it meets certain standards.

Output

These are the products themselves which are sold customers.

Process

The raw materials are used in the production process.

Input

Raw materials being delivered to a factory to go into production.

4.28 Answer is B 4.29 Answer is C 4.30 Answer Stifle innovation and creativity. consume large amounts of management time to set Too internal in focus Ceate barriers within departments Too short-term in focus

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Chapter 5 Solutions - Activity based costing 5.1 Answer is £7.50 per unit of product Y Product Production units Batch size Number of set ups required

X 15,000 2,500 15,000 / 2,500 =6

Y 25,000 5,000 25,000 / 5,000 =5

Z 20,000 4,000 20,000 / 4,000 =5

Total number of set ups required = 6 + 5 + 5 = 16 Cost per set up = £600,000 / 16 = £37,500 Machine set up costs attributed to product Y = £37,500 x 5 = £187,500 Set up cost per unit of Y = £187,500 / 25,000 = £7.50 5.2 Answer is C Budgeted production per annum (units) Number of batches Number of machine set-ups Total processing time (minutes)

Product R 80,000 800 2,400 240,000

Product S 60,000 1,200 3,600 300,000

Total 140,000 2,000 6,000 540,000

Cost driver rate = $108,000 / 540,000 = $0.20 Total processing costs = $0.20 x 240,000 = $48,000 Processing costs per unit = $48,000 / 80,000 = $0.60 5.3 Answer is B Cost driver rate = $180,000 / 6,000 = $30 per set up Total set-up costs = $30 x 3,600 = $108,000 Set up cost per unit =$108,000 / 60,000 = $1.80

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5.4 Budgeted number of batches Product D 100,000 ÷ 100 = Product R 100,000 ÷ 50 = Product P 50,000 ÷ 25 =

Budgeted number of machine set-ups Product D 1000 batches x 3 Product R 2000 batches x 4 Product P 2000 batches x 6 Budgeted number of purchase orders Product D 1000 batches x 2 Product R 2000 batches x 1 Product P 2000 batches x 1 Budgeted number of processing minutes Product D 100,000 x 2 = Product R 100,000 x 3 = Product P 50,000 x 3 =

1000 2000 2000 5000

3000 8000 12000 23000 2000 2000 2000 6000 200,000 300,000 150,000 650,000

5.5 Budgeted cost per set up £150,000 ÷ 23000 = £6.52 per set-up Budgeted cost per order £70,000 ÷ 6000 = £11.67 per order Budgeted cost per minute of processing £80,000 ÷ 650,000 = £0.123 per minute Overhead unit cost for product R Set-up Order Processing

(£6.52 x 4 set-ups) ÷ 50 units (£11.67 x 1 order) ÷ 50 units £0.123 x 3 minutes

£ 0.52 0.23 0.37 1.12 176 | P a g e

5.6 Budgeted unit cost for product Z Direct material Direct labour (W1) £16 x 0.3 hours = Fixed overhead absorbed (W2) £11.00 x 0.3 hours =

W1 Labour rate per hour £128,000 ÷ 8,000 hours =

£ 21.50 4.80 3.30 29.60

£16.00

W2 Fixed overhead absorption rate per hour Set-up cost Quality testing cost Other overhead cost

Budgeted direct labour hours Fixed overhead absorbed per labour hour (£88,000 ÷ 8,000 hrs) =

£ 22,000 34,000 32,000 88,000 8000 £11.00

5.7 Budgeted unit cost for product Z Direct material Direct labour £16 x 0.3 hours = Set-up cost (£250 x 2 per batch) ÷ 30 units per batch = Quality testing (£850 per test ÷ 75 units each test) = Other overhead cost (£4 per labour hour x 0.3 hours per unit) =

£ 21.50 4.80 16.67 11.33 1.20 55.50

Cost drivers Set-up cost (£22,000 ÷ 88 set-ups) =

£250 per set-up

Quality testing (£34,000 ÷ 40 tests) =

£850 per test

Other overhead cost (£32,000 ÷ 8,000 labour hours) =

£4 per labour hour

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5.8 Tip: The ABC approach recognises the complexity and diversity of how different products consume different resources and therefore fixed overhead. This gives a better overall understanding of product costing when contrasted to the simple absorption costing approach. Four implications for management of using ABC have been provided below; however the question only requires two. The ABC approach could lead to a higher cost absorbed, if a product consumes far more resources and therefore shares a higher proportion of the cost drivers e.g. set-up, quality testing etc. Rather than just how much labour time each product consumes when contrasted to absorption costing. More efficient management of resources by a greater understanding of what drives fixed overhead to be incurred e.g. increase batch sizes to reduce unit cost. Better costing information for planning, control or decision making. More realistic pricing to cover fixed overhead being incurred by different products. Better profitability analysis of different products. 5.9 Z1

Z2

Department 1

480 minutes ÷ 12 =

40.0

480 minutes ÷ 16 =

30.0

Department 2

840 minutes ÷ 20 =

42.0

840 minutes ÷ 15 =

56.0

Department 1 is the limiting factor/bottleneck. It is the most binding constraint on production due to its limitation of being able to produce less of both products than department 2.

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5.10

Selling price Less: Direct material Direct labour Variable overhead Contribution per unit (£) Department 1 (minutes per unit) Contribution per minute (£) Ranking

Z1 50.00

Z2 65.00

10.00 10.40 6.40 23.20

15.00 6.20 9.20 34.60

12

16

1.93

2.16

2nd

1st

Given there is no maximum sales demand for product Z2 the total of 480 minutes each day for department 1 should be allocated to making this product. The maximum contribution earned would therefore be 480 minutes x £2.16 contribution earned per minute = £1,036.80 contribution per day. 480 minutes would make (480 minutes ÷ 16 minutes) 30 units of product Z2.

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5.11 Tip: Throughput ing aims to maximise contribution whilst minimising conversion e.g. labour and overhead cost. It is essentially the same principle as limiting factor analysis, but assumes the only true variable cost when calculating throughput contribution is the material and component cost only of making a product. Throughput Contribution = sales less material cost only ‘the only true variable cost’

Selling price Less: Direct material Throughput contribution per unit (£) Department 1 (minutes per unit) Throughput contribution per minute (£) Ranking

Z1 50.00

Z2 65.00

10.00 40.00

15.00 50.00

12

16

3.33

3.13

1st

2nd

Given there is no maximum sales demand for product Z1 the total of 480 minutes each day for department 1 should be allocated to making this product. The maximum throughput contribution earned would therefore be 480 minutes x £3.33 throughput contribution earned per minute = £1,598.40 throughput contribution per day. 480 minutes would make (480 minutes ÷ 12 minutes) 40 units of product Z1.

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5.12

Selling price Direct material Direct Labour Contribution Overhead allocated using ABC W1 Receiving/inspecting W (1200 ÷ 10,000 units) x £280 X (1800 ÷ 15,000 units) x £280 Y (2000 ÷ 18,000 units) x £280 W2 Production/machine set up W (240 ÷ 10,000 units) x £1,500 per set up X (260 ÷ 15,000 units) x £1,500 per set up Y (300 ÷ 18,000 units) x £1,500 per set up Profit per unit

W £ 200.0 0 50.00 30.00 120.0 0

X £

Y £

183.00 40.00 35.00

175.00 35.00 30.00

108.00

110.00

33.60 33.60 31.11 36.00 26.00 50.40

48.40

25.00 53.89

W1 Receiving/inspecting £1,400,000 ÷ (1,200 + 1,800 + 2,000) = £280 per requisition W2 Production/machine set up £1,200,000 ÷ (240 + 260 + 300) = £1,500 per set up 5.13 Answer is $102,118 Costs that varied with number of parcels = $194,400 x 70% x 60% = $81,648 Cost per parcel last year = $81,648 /15,120 = $5.40 Parcel related cost for next year = $5.40 x 1.03 x 18,360 = $102,118 5.14 Answer is $59,699 Costs that vary with kilometres travelled = $194,400 x 70% x 40% = $54,432 Cost per km = $54,432 / 120,960 = $0.45 Distance related costs for next year = $0.45 x 1.03 x 128,800 = $59,699 5.15 Answer is B An inventory management method that concentrates effort on the most important items 181 | P a g e

5.16 Answer is D 5.17 Answer is D 5.18 Answer is A 5.19 Answer is A OAR = 5,775/550 = £10.50 per inspection Absorbed (468 x £10.50) Actual overhead Over absorption

4,914 4,500 414

5.20 Answer is D Number of batches (50,000/1,000 = 50) + (30,000/300 = 100) = 150 batches Number of set ups (50 x 7) + (100 x 5) = 850 Therefore £55,250/850 = £65 a set up 5.21 Answer is D Actual salaries Over absorption Overhead absorbed £344,000/16,000 hours

£320,000 £24,000 £344,000 £21.50 OAR

5.22 Answer is B 5.23 Answer is C 5.24 Answer is B

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5.25 Answer is D Total numbe of batches Number of set ups

A 80,000/100 =800

B 100,000/50 =2,000

C 50,000/25 =2,000

800 x 3 =2,400

2,000 x 4 =8,000

2,000 x 6 =12,000

Total number of set ups = 2,400 + 8,000 + 12,000 = 22,400 Machine cost per set up = $150,000 / 22,400 = $6.70 Machine set up cost per batch B = $6.70 x 4 = $26.80 Machine set up cost per unit of B = $26.80 / 50 = $0.54 5.26 Answer 4th

Take action to adjust the capacity of resources to match the projected supply

3rd

Determine the resources that are required to perform organisational activities

1st

Estimate the production and sales volume by individual products and customers

2nd

Estimate the demands for organisational activities

5.27 Answer Cost Purchase order processing costs

Classification Batch level activities

Product advertising costs

Product sustaining activities

Factory rent and rates

Facility sustaining activities

Direct labour costs

Unit level activities

Product redesign costs

Product sustaining activities

Material handling costs

Batch level activities

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5.28 Answer is $120 Number of batches = (50,000 / 250) + (25,000 / 100) + (20,000 / 400) = 500 Material cost per batch = $60,000 / 500 = $120 5.29 Answer Cost per sales visit = $50,000 / 200 = $250 Cost per order = $70,000 / 700 = $100 Cost per normal delivery = $120,000 / 240 = $500 Cost per urgent delivery = $60,000 / 30 = $2,000 5.30 Answer B

D

$000

$000

Sales visits

$500 x 30 = 15

$500 x 12 = 6

Orders processing

$400 x 43 =17.2

$400 x 30 = 12

Normal deliveries

$700 x 70 = 49

$700 x 45 = 31.5

Urgent deliveries

$3,000 x 25 = 75

$3,000 x 4 = 12

156.2

61.5

Costs

Total costs

5.31 Answer is D

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5.32 Answer Statements

True or False

If products are uniform and customers are similar in their demands, activity based costing may not offer a significant advantage over machine hours when asg overhead.

True ABC is most effective when there are variations in batch size, processes, or customer demands.

True In activity based costing, the For example, a setup cost of £900 is associated with manufacturing overhead cost per the batch of items that will be processed. A large unit will depend partially on the quantity of items processed will mean a low setup cost number of units in a batch. per unit. A small quantity of items being processed will mean a high setup cost per unit. The cost to set up production equipment is best allocated directly to products via machine hours.

False Setup costs should not be allocated directly to products via machine hours. Setup costs should be allocated to the batch of products that will be run after the setup occurs.

5.33 Answer is C It is highly unlikely that machine hours will correlate with the indirect labor cost. It is highly unlikely that direct labor hours will correlate with the indirect labor cost. 5.34 Answer Costs allocated to service departments using the reciprocal costing method Committed fixed costs Direct costs of materials Variable non-manufacturing costs Manufacturing fixed overhead costs ABC cost allocation systems can be used to allocate either variable or fixed manufacturing overhead, to allocate t costs, or to reallocate service department costs to outputs. Direct costs of materials and labour do not need to be allocated to specific cost objects. 185 | P a g e

5.35 Answer Which of the following, if any, is true of an activity based costing system? An activity based costing system will provide a more accurate apportionment of overheads to products than absorption costing An activity based costing system will cost less to ister than an absorption costing system The activity based costing system will be less detailed than an absorption costing system An activity based costing system is easier to ister than an absorption costing system

5.36 Answer Statements

True or False

Under ABC, indirect manufacturing costs are predominantly assigned on the basis of direct machine hours.

False

Setup cost is an example of a batch-level cost.

In ABC the assumption is that prodcuts use resources or cause costs.

True Setting up a machine is directly associated with the batch of items that will be processed after the setup occurs.

False It is activities and not products.

5.37 Answer is C £385,000 / £4.25 = £90,588, therefore £90,560

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5.38 Answer is A Since the equipment is automated, direct labour hours would be the least favorable basis. ABC is the most favorable basis for allocating a variety of services provided by indirect labour. 5.39 Answer is C Rather than using a single allocation base (such as direct labor hours), activity based costing uses a number of allocation bases for asg costs to products (thus statement A is false). Generally, an activity based costing system is harder (rather than easier) to implement and maintain than a traditional costing system (thus statement B is false). Rather than eliminating waste by allocating costs to products that waste resources, activity based management is a management approach that focuses on managing activities as a way of eliminating waste and reducing delays and defects (thus statement D is false). Statement C is true. 5.40 Anwer is A Batch level activities are activities that are performed each time a batch of goods is handled or processed, regardless of how many units are in a batch. Further, the amount of resources consumed depends on the number of batches run rather than on the number of units in the batch. Worker recreational facilities relate to the organization as a whole rather than to specific batches and, as such, would not be considered a batch level activity. On the other hand, purchase order processing, setting up equipment, and the clerical activities described are activities that are performed each time a batch of goods is handled or processed, and, as such, are batch level activities. 5.41 Answer is B £150,000 / (500 + 700) = £125

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5.42 Answer is C Determine the budgeted activity rate Activity rate = £20,000 / 1,250 = £16.00 Determine the amount of overhead applied to actual activity of 3,000 Actual amount of overhead applied = 3,000 x $16.00 = £48,000 5.43 Answer is D Product level activities are activities that relate to specific products that must be carried out regardless of how many units are produced and sold or batches run. Human resource management activities relate to the organization as a whole rather than to specific products and, as such, would not be considered a product level activity. On the other hand, advertising, testing of prototypes and parts istration are activities that relate to specific products, and, as such, are product level activities. 5.44 Answer is C $45,000 / 2,400 = $18.75 5.45 Answer is B Alpha = ($24,000 / 1,200) x 800 Beta = ($88,000 / 1,100) x 400 Gamma = ($12,000 / 2,400) x 100

= = =

$16,000 $32,000 $500

Total overhead cost of product G = $16,000 + $32,000 + $500 = $48,500 Cost per unit of prduct G = $48,500 / 9,000 = $5.39 5.46 Answer is D G = £45,000 / 6 = £7,500 H = £10,000 / 70 = £143 I = £25,000 / 130 = £192

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5.47 Answer is B Under traditional costing methods, overhead costs are allocated to products on the basis of some measure of volume such as direct labour hours or machine hours. This results in most of the overhead cost being allocated to high volume products. In contrast, under activity based costing, some overhead costs are allocated on the basis of batch level or product level activities. This change in allocation bases results in shifting overhead costs from the high volume products to low volume products. 5.48 Answer 3 2 4 1

Calculation of cost application rates Identification of cost drivers Assignment of cost to products Identification of cost pools

5.49 Answer is A OAR = £145,000 / 10,000 = £14.50 per song Happy songs = 10,000 – 3,312 = 6,688 Total cost for happy songs = £14.50 x 6,688 = £96,976 5.50 Answer Use a single volume based cost driver Assign overheads to products only based on the products' use of labour Often reveal products that were under or overcosted by traditional costing systems Typically use fewer cost drivers than more traditional costing systems Have a tendency to distort product costs 5.51 Answer Manufacturers Financial-services firms Book publishers Hotels None of the above, as all are able to use this costing system

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5.52 Answer ABC cannot be used by service businesses ABC can help a company eliminate (or reduce) non-value added costs ABC results in less cost “averaging” of various diversified activities compared to traditional absorption costing ABC results in more costs being classified as direct costs ABC tends to reduce cost distortion among product lines

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Chapter 6 Solutions - TQM techniques 6.1 Answer is A 6.2 Part (a)

Product A

Machine 1 50 units x 5.0 hrs

Product B Product C

Capacity Utilisation

250

Machine 2 50 units x 5.0 hrs

250

Machine 3 50 units x 2.5 hrs

125

50 units x 2.0 hrs

100

50 units x 5.5 hrs

275

50 units x 1.0 hrs

50

60 units x 1.5 hrs

90

60 units x 1.5 hrs

90

60 units x 0.5 hrs

30

440

615

205

400

400

400

110%

154%

51%

Part (b) The bottleneck machine (or limiting factor) would be machine 2. It is the most binding constraint on production e.g. the most restricting of all machines to meet the estimated sales demand given. It has the highest utilisation rate of all three machines of 154%. 6.3 Part (a) 1) Identify a systems bottleneck or most limiting factor that restricts the flow of throughput. 2) Focus attention on achieving higher throughput from the bottleneck e.g. exploit or alleviate it. 3) Subordinate all other resources to this bottleneck e.g. operate the bottleneck resource at 100% capacity, whilst running non-bottleneck resources at a speed that matches this which may not be 100%. 4) Elevate the bottleneck e.g. try and increase throughput from it either by improving its efficiency or procuring more of it if possible. 5) Repeat steps 1-4 as once the bottleneck is eliminated another will become apparent and take its place. 191 | P a g e

Part (b) Product A

Product B

Product C

36.00

28.00

18.00

Machine hours per unit

5.00

5.50

1.50

Contribution per hour

7.20

5.09

12.00

Ranking Machine 2 hours used Product C Product A

2nd

3rd

1st

Contribution per unit (£)

60 units x 1.5 hrs 50 units x 5.0 hrs

= =

90.00 250.00 340.00 400.00 60.00

Capacity of machine 2 Remaining hours

The remaining 60 hours for machine 2 will be used to produce product B given the maximum sales demand of the other two products have been satisfied. 60 hours ÷ 5.5 hours = 10.9 units of product B that would be produced (or 10 whole units). 6.4 Answer is L, J, K, M (in rank order)

SP Material cost Throughput contribution Minutes on Machine X Contribution per unit of LF Ranking

J £ 2,000 (410) 1,590

K £ 1,500 (200) 1,300

L £ 1,500 (300) 1,200

M £ 1,750 (400) 1,350

120

100

70

110

1,590/120 =£13.25

1,300/100 = £13

1,200/70 = £17.14

1,350/110 = £12.27

2

3

1

4

6.5 Answer is D

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6.6 Answer is A . Tip: Computer-integrated manufacturing (CIM) is manufacturing ed by computers. The total integration of computer aided design, manufacturing and other business operations and databases e.g. quality control and purchasing. Tip: Flexible manufacturing system (FMS) consists of several machines along with part and tool handling devices such as robots, arranged so that it can handle any family of products or parts for which the system has been designed and developed. Such systems aim to achieve greater economies of scope for the manufacturer, the capability of economic production of small batches of a variety of products or parts with minimal set up time. These systems are computerised and highly integrated. Tip: EDI is a computer-to-computer data interchange (fixed point to point system). An agreed format for parties, for the sending and receiving of information, this would require investment from both parties and can be very costly. EDI is the electronic invoicing, billing and payment of transactions between the organisation and its suppliers or customers. An extranet is a form of internet based EDI. Both aim to achieve a paperless system of information exchange.

FMS- an example of technology and an alternative layout The idea of an FMS was proposed in England (1960s) under the name “System 24”, a flexible machining system that could operate without human operators 24 hours a day under computer control. From the beginning the emphasis was on automation rather than the “reorganization of workflow”. Early FMSs were large and very complex, consisting of dozens of Computer Numerical Controlled machines (CNC) and sophisticate material handling systems. They were very automated, very expensive and controlled by incredibly complex software. There were only a limited number of industries that could afford investing in a traditional FMS as described above. Currently, the trend in FMS is toward small versions of the traditional FMS, called flexible manufacturing cells (FMC). Today two or more CNC machines are considered a flexible cell and two ore more cells are considered a flexible manufacturing system.

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6.7 Z1

Z2

Department 1

480 minutes ÷ 12 =

40.0

480 minutes ÷ 16 =

30.0

Department 2

840 minutes ÷ 20 =

42.0

840 minutes ÷ 15 =

56.0

Department 1 is the limiting factor/bottleneck. It is the most binding constraint on production due to its limitation of being able to produce less of both products than department 2. 6.8

Selling price Less: Direct material Direct labour Variable overhead Contribution per unit (£) Department 1 (minutes per unit) Contribution per minute (£) Ranking

Z1 50.00

Z2 65.00

10.00 10.40 6.40 23.20

15.00 6.20 9.20 34.60

12

16

1.93

2.16

2nd

1st

Given there is no maximum sales demand for product Z2 the total of 480 minutes each day for department 1 should be allocated to making this product. The maximum contribution earned would therefore be 480 minutes x £2.16 contribution earned per minute = £1,036.80 contribution per day. 480 minutes would make (480 minutes ÷ 16 minutes) 30 units of product Z2.

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6.9 Tip: Throughput ing aims to maximise contribution whilst minimising conversion e.g. labour and overhead cost. It is essentially the same principle as limiting factor analysis, but assumes the only true variable cost when calculating throughput contribution is the material and component cost only of making a product. Throughput Contribution = sales less material cost only ‘the only true variable cost’

Selling price Less: Direct material Throughput contribution per unit (£) Department 1 (minutes per unit) Throughput contribution per minute (£)

Z1 50.00

Z2 65.00

10.00 40.00

15.00 50.00

12

16

3.33

3.13

Ranking 1st 2nd Given there is no maximum sales demand for product Z1 the total of 480 minutes each day for department 1 should be allocated to making this product. The maximum throughput contribution earned would therefore be 480 minutes x £3.33 throughput contribution earned per minute = £1,598.40 throughput contribution per day. 480 minutes would make (480 minutes ÷ 12 minutes) 40 units of product Z1. 6.10 Answer is B 6.11 Answer is A

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6.12 Answer is B Tip: The JIT philosophy requires that products should only be produced if there is an internal or external customer waiting for them. Traditionally manufacturers stockpiled. JIT aims ideally for zero stock e.g. raw materials delivered immediately at the time they are needed, no build up of work-in-progress during production and finished goods only produced if there is a customer waiting for them. 1. 2. 3. 4.

Closer relationships with suppliers need to be maintained Smaller more frequent deliveries need to be managed Higher quality machines with regular maintenance required to avoid delays Involvement and training of staff to maintain flexibility e.g. empowerment and multi-skilling

Tip: Flexible manufacturing system (FMS) consists of several machines along with part and tool handling devices such as robots, arranged so that it can handle any family of products or parts for which the system has been designed and developed. Such systems aim to achieve greater economies of scope for the manufacturer, the capability of economic production of small batches of a variety of products or parts with minimal set up time. These systems are computerised and highly integrated. Tip: Materials requirement planning (MRP I) is an information system which provides an automated list of components and materials required for the type and number of products entered. This allows better production planning and stock management.

6.13 Tip: Throughput ing aims to maximise contribution whilst minimising conversion e.g. labour and overhead cost. It is essentially the same principle as limiting factor analysis, but assumes the only true variable cost when calculating throughput contribution is the material and component cost only of making a product. Throughput contribution = sales less material cost only ‘the only true variable cost’ Return per factory hour is similar to the concept of contribution maximisation; you should notice the following calculation is similar to the contribution per unit of a limiting factor used in short-term decision-making Return per factory hour =

Sales less material cost only Usage (in hours) of the bottleneck resource

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Selling price Direct materials Throughput contribution per unit

A £ 200 41 159

B £ 150 20 130

C £ 150 30 120

Bottleneck (minutes)

12

10

7

159 / 12 = £13.25

130 / 10 = £13.00

120 / 7 = £17.14

£795

£780

£1,028

Return per factory minute Return per factory hour (x 60mins) 6.14 Answer is A 6.15 Answer is B

A marginal costing system would value inventory at variable production cost only not full production cost. Variable production costs = $20,000 + $6,300 + $4,700 = $31,000 Closing inventory = 400 units Closing inventory should be valued as a proportion of variable production cots. Therefore: Value of closing inventory = $31,000 x (400 units / 4,000 units) = $3,100 6.16 Answer is D The throughput ing approach is essentially the same principle as marginal costing, but values inventory at material cost only. Direct materials = $20,000 Value of closing inventory = $20,000 x (400 units / 4,000 units) = $2,000 6.17 Return per factory hour is similar to the concept of contribution maximisation; you should notice the following calculation is similar to the contribution per unit of a limiting factor used in short-term decision-making 197 | P a g e

Return per factory hour =

Sales less material cost only Usage (in hours) of the bottleneck resource

= ($12 - $5) / 0.75 hours = $9.33 per hour Throughput ing (TA) ratio demonstrates how much benefit or contribution per hour we are receiving compared to our costs per hour when we manufacture a product. A ratio of less than 1 means that costs per hour is greater than contribution per hour. A ratio of greater than 1 means that contribution per hour is greater than costs per hour. TA ratio =

Contribution (sales less material cost only) per hour Conversion cost per hour (or cost per factory hour)

= $9.33 / ($144,000 / 12,000 hours) = $9.33 / $12 = 0.78 The TA ratio is less than 1 and so costs per hour are greater than contribution per hour and therefore should not be produced. 6.18 Answer is D This a throughput ing question as indicated by reference to “bottleneck resource” and “product return per minute”. We need to work out the “throughput contribution” first and then “throughput contribution per bottleneck resource” or “product return per minute” in this case. Throughput contribution = selling price less material costs only Throughput contribution = $45 - $14 = $31 Product return per minute = throughput contribution / time on bottleneck resource Product return per minute = $31 / 10 mins = $3.10 6.19 Answer is C Customer compensation costs are costs that have been incurred after the product has left the company, and so therefore is an external failure cost. Test equipment running costs are costs to do with the assessment of quality and so therefore an appraisal cost.

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6.20 Answer is A Selling price Less: Direct material Direct labour Variable production overheads Contribution per unit (£) Bottleneck machine (minutes per unit)

Contribution per minute (£) Ranking

W 180

X 150

Y 150

41 30 24 85

20 20 16 94

30 50 20 50

7

10

7

85/7 = 12.14

94/10 = 9.4

50/7 = 7.14

1st

2nd

3rd

W 180

X 150

Y 150

41 139

20 130

30 120

7

10

7

139/7 = 19.86

130/10 = 13

120/7 = 17.14

1st

3rd

2nd

6.21 Answer is B Selling price Less: Direct material Throughput contribution per unit (£) Bottleneck machine (minutes per unit)

Throughput contribution per minute (£) Ranking 6.22 Answer is D

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6.23 Answer is C Product D

Product E

Product F

12.00

14.00

10.00

20

25

15

12 / 20 = 0.60

14 / 25 = 0.56

10 / 15 = 0.667

2nd

3rd

1st

Product D

Product E

Product F

22.00

20.00

16.00

20

25

15

22 / 20 = 1.10

20 / 25 = 0.80

16 / 15 = 1.07

1st

3rd

2nd

Contribution per unit ($) Time in Process A (mins per unit) Contribution per min ($) Ranking 6.24 Answer is D

Throughput contribution per unit ($) Time in Process A (mins per unit) Throughput contribution per min ($) Ranking 6.25 Answer is D

A strong customer focus and flexibility to meet customer requirements 6.26 Answer is A Examples of internal failure costs 6.27 Answer is D Economically producing small batches of a variety of products with the same machines 6.28 Answer is A Purchasing approach 200 | P a g e

6.29 Answer is D A primary activity that refers to receipt, storage and inward distribution of raw materials 6.30 Answer is B Internal supplier 6.31 Answer is D Kaizen is a measure of quality 6.32 Answer is A Mass production techniques 6.33 Answer is D Training staff to reduce defects during the production process 6.34 Answer is B Job 6.35 Answer is C Elimination of waste 6.36 Answer is 3,000 minutes Throughput time = work-in-process (1,000 customer enquires) x cycle time (30 minutes average duration) = 30,000 minutes total throughput time 6.37 Answer is services, qualtity and cost 6.38 Answer is B Total productive maintenance 6.39 Answer is C Focus factories 201 | P a g e

6.40 Answer is A Lean synchronisation 6.41 Answer is A Removal of waste 6.42 Answer is D Prevention and continuity 6.43 Answer is D A firm's infrastructure 6.44 Answer is A Quality circles 6.45 Answer is A The value chains of suppliers, channels and the customer 6.46 Answer is D Outsourcing 6.47 Answer is A Single, multiple, delegated and parallel 6.48 Answer is D Transaction 6.49 Answer is operational, routine and ive 6.50 Answer is D Multiple sourcing 6.51 Answer is B Multiple sourcing 202 | P a g e

6.52 Answer B Control 6.53 Answer is regular inspection and routine servicing of equipment, supplier quality assurance schemes, TQM culture of staff. 6.54 Answer is customer complaint departments, poor brand reputation, cost of free repairs under gurantee. 6.55 Answer is C Focus factory production 6.56 Answer is B Recognising the supply chain and linkages in a value system 6.57 Answer is A Continuous improvement by small incremental steps 6.58 Answer is D Service 6.59 Answer is C Materials requirement planning 6.60 Answer is B Work with a supplier to improve quality and reduce costs 6.61 Answer is C A prevention of quality failures through equipment faults 6.62 Answer is D Removal of waste 6.63 Answer is C Inventory management 203 | P a g e

6.64 Answer is B Purchasing and supply 6.65 Answer is A External failure costs

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Chapter 7 Solutions - Long-term decision making 7.1 Answer is 24.15% The cashflows are the same each year for 5 years. Net cash flows per annum = $101,000 - $30,000 - $5,000 = $66,000 Look up in the tables the cumulative discount factort for 5 years at 12%. This is 3.605. PV of net cash flows = $66,000 x 3.605 = $237,930 Net present value = $237,930 - $150,000 = $87,930 The PV of the sales revenue = $101,000 x 3.605 = $364,105 The percentage change in the selling price that will result in the project being rejected is: $87,930 / $364,105 = 24.15% 7.2 Answer is D (1 + M) = (1 + R) x (1 + I) (1 + M) = (1 + 0.06) x (1 + 0.03) (1 + M) = 1.0918 M = 0.0918 M = 9.18% 7.3 Answer is C The profitability index = net present value of the investment / initial investment = $140,500 / $500,000 = 0.281 7.4 Answer is B The first lease payment is paid in advance i.e. today in year 0 therefore the present value of $300 is $300. Then work out the perpetuity of the rest of the lease payments. PV of perpetuity = (1 / cost of capital) x amount £80,000 / 0.12 = £2,500 NPV = $300 + $2,500 = $2,800

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7.5 Answer is D Net Present Value of the project = $280,000 Present value of the annual cash inflow = $320,000 x 3.037 = $971,840 Sensitivity = $280,000/$971,840 = 28.8% 7.6 Answer is D (1 + M) = (1 + R) x (1 + I) (1 + 0.09) = (1 + R) x (1 + 0.03) (1 + 0.09) / (1 + 0.03) = (1 + R) 1.0583 = (1 + R) 0.0583 = R R = 5.83% 7.7 Answer is 25.2% Sensitivity = NPV / PV of thr cashflow x 100% Sensitivity = $98,200 / $389,340 = 25.2% If the present value of the contribution was to decrease by more than $98,200 then the project would cease to be viable. As a percentage this is: Which represents a decrease in the annual contribution of $108,000 x 0.252 = $27,216 7.8 Answer is A Net Present Value of the project = $180,000 Present value of the annual cash outflow = $100,000 x 3.312 = $331,200 Sensitivity = $180,000/$331,200 = 54.3% 7.9 Answer is $13,000 PV of perpetuity = (1 / cost of capital) x amount $5,670 / 0.09 = $63,000 NPV = -$50,000 + $63,000 = $13,000

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7.10 Answer is B Sensitivity measures the percentage change in a key input needed to make a project break even, in other words to have a project with a zero NPV. In this question we are looking at the sensitivity of annual cash outflows. We need to compare this to the project’s NPV. Whatever key factor we are looking at we always need to work out its PV when comparing it to the projects NPV. PV = annual cash outflow x annuity factor at 12% for 5 years PV = $50,000 x 3.605 = $180,250 Sensitivity = ($160,000 / $180,250) x 100% = 89% (nearest whole number) 7.11 Answer is 14% We know that at a cost of capital of 15% the project has a negative NPV of $3,216, and at 10% a positive NPV of $12,304. The internal rate of return (IRR) is that cost of capital where the NPV of a project is zero. This is achieved through trial and error and then interpolation. If we have a cost of capital which yields a positive NPV, then we need to find a cost of capital when applied to the project that will give a negative NPV. In this question they have given us this already. We simply need to interpolate. Using interpolation formula: A + ( a a–b

x

[B - A] )

A = lower DF rate B = higher DF rate a = NPV of A b = NPV of B

IRR = 10% + ( (12,304 / (12,304 - - 3,216) x [15% - 10%] ) = 14% (nearest 1%)

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7.12 Answer is 11.32% (1 + M) = (1 + R) x (1 + I) M = Money cost of capital R = Real cost of capital I = General rate of inflation 1.18 = (1 + R) (1.06) 1.18/1.06 = 1 + R 1.1132 = 1 + R 1.1132 – 1 = R 0.1132 = R R = 11.32% (nearest 0.01%) 7.13 Answer is invest $300,000 in L, $500,000 in K and $200,000 in J. We need to work out £NPV per £1 initially invested in the project, giving the NPV per limiting factor (money) or profitability index. Funds will be allocated to those projects that create the most NPV per £1 spent thus maximising the wealth of the company given the level of funds available. The question states that funds are divisible therefore we will be to fully invest all our funds and have partial investments in those projects where we don’t have enough to fully invest. Investment J K L

Initial investment $400,000 $500,000 $300,000

NPV $31,000 $43,000 $31,000

Profitability Index 31/400 = 0.0775 43/500 = 0.086 31/300 = 0.103

Rank 3rd 2nd 1st

We only have available $1m so therefore invest as much as possible in L first then K and then J if any monies remaining. Therefore invest $300,000 in L, $500,000 in K and then $200,000 in J. 7.14 Answer is 18.74% We know that at a cost of capital of 15% project K has an NPV of $43,000. The internal rate of return (IRR) is that cost of capital where the NPV of a project is zero. This is achieved through trial and error and then interpolation. If we have a cost of capital which yields a positive NPV then we need to find a cost of capital when applied to project K will give a negative NPV.

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In order to achieve a negative NPV we must select a higher cost of capital than 15% because this effectively increases the discounting effect on the cashflows and therefore giving a negative NPV. Choose the largest cost of capital given to you in the formulae sheet in the exam. This is 20% and will hopefully give a negative NPV. You do not have to choose a 20% you can choose another cost of capital, for example 17% but it may not be large enough to give you a negative NPV, and therefore you would have do the calculation again for a higher cost of capital. Year

Cashflow

0 1 2 3

($500,000) $70,000 $90,000 $630,000

Discount factor at 20% 1.000 0.833 0.694 0.579 NPV

Present value ($500,000) $58,310 $62,460 $364,770 $14,460

Using interpolation formula: A + ( a a–b

x

[B - A] )

A = lower DF rate B = higher DF rate a = NPV of A b = NPV of B

IRR = 15% + ( (43,000 / (43,000 - - 14,460) x [20% - 15%] ) = 18.74% 7.15 Answer is 3 years and 4 months Year 0 1 2 3 4 5

Cashflow (£400,000) £100,000 £120,000 £140,000 £120,000 £100,000

Cumulative (£400,000) (£300,000) (£180,000) (£40,000) £80,000 £180,000

Payback period = 3 years + (12 months x 40,000/(40,000 + 80,000)) = 3 years and 4 months.

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7.16 Answer is 4 years and 5 months Year

Cashflow

DF @ 10%

PV

0 1 2 3 4 5

(£450,000) £130,000 £130,000 £130,000 £130,000 £150,000

1 0.909 0.826 0.751 0.683 0.621

(£450,000) £118,170 £107,380 £97,630 £88,790 £93,150

Cumulative PV (£450,000) (£331,830) (£224,450) (£126,820) (£38,030) £55,120

Discounted payback period = 4 years + (12 months x 38,030/(38,030 + 55,120)) = 4 years and 5 months. 7.17 Answer is 15.28% We know that at a cost of capital of 10% investment C has an NPV of $48,000. The internal rate of return (IRR) is that cost of capital where the NPV of a project is zero. This is achieved through trial and error and then interpolation. If we have a cost of capital which yields a positive NPV then we need to find a cost of capital when applied to investment C will give a negative NPV. In order to achieve a negative NPV we must select a higher cost of capital than 10% because this effectively increases the discounting effect on the cashflows and therefore giving a negative NPV. Choose the largest cost of capital given to you in the formulae sheet in the exam. This is 20% and will hopefully give a negative NPV. You do not have to choose a 20% you can choose another cost of capital, for example 17% but it may not be large enough to give you a negative NPV, and therefore you would have do the calculation again for a higher cost of capital. Year Cashflow DF @ 20% PV

0 £ (350,000) x1 (350,000)

1 £ 50,000 x 0.833 41.650

2 £ 110,000 x 0.694 76,340

3 £ 130,000 x 0.579 75,270

4 £ 150,000 x 0.482 72,300

5 £ 100,000 x 0.402 40,200

NPV = (£44,240)

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Using interpolation formula: A + ( a a–b

x

[B - A] )

A = lower DF rate B = higher DF rate a = NPV of A b = NPV of B

IRR = 10% + ( (48,000 / (48,000 - - 44,240) x [20% - 10%] ) = 15.20% 7.18 Answer is C We need to work out £NPV per £1 initially invested in the project, giving the NPV per limiting factor (money) or profitability index. Funds will be allocated to those projects that create the most NPV per £1 spent thus maximising the wealth of the company given the level of funds available. The question states that funds are divisible therefore we will be to fully invest all our funds and have partial investments in those projects where we don’t have enough to fully invest. Furthermore J and L are mutually exclusive meaning we can only select one or the other of these two projects, and so therefore we shall select the one with the higher profitably index. Investment J K L M N

Initial investment $400,000 $350,000 $450,000 $500,000 $600,000

NPV $125,000 $105,000 $140,000 $160,000 $190,000

Profitability Index 125/400 = 0.313 105/350 = 0.300 140/450 = 0.311 160/500 = 0.320 190/600 = 0.317

Rank 3rd 5th 4th 1st 2nd

We only have available $1m to invest so therefore invest as much as possible in M first then N and then J if any monies remaining. Therefore invest $500,000 in M, $500,000 in N.

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7.19 Answer is 2.6 years Year 0 1 2 3

Cashflow ($80,000) $20,000 $30,000 $50,000

Cumulative ($80,000) ($60,000) ($30,000) $20,000

Payback period = 2 years + (12 months x 30,000/(30,000 + 20,000)) = 2.6 years. 7.20 Answer is £150,000 A perpetuity is a constant amount received or paid forever. (1 / r) x amount = PV of perpetuity r = cost of capital £80,000 / 0.08 = £1,000,000 NPV = - £850,000 + £1,000,000 = £150,000 7.21 Answer is C The profitability index = NPV / initial investment Therefore: $140,500 / $500,000 = 0.281 or 0.28 7.22 Answer is C Sensitivity = (NPV / PV of key input) x 100% Therefore: ($320,000 / $630,000) x 100% = 50.79% or 51% 7.23 Answer is 34% ARR % =

Average profit over the life of the project Average investment

x 100

[where “average investment” = (Opening Investment + Closing Investment)/2]

Cashflows Depreciation Profit Average profit ARR

($’000s) 80 + 90 + 100 + 60 + 40 =

($’000s) 370 (200) 170

170 / 5 =

34

(34 / 100) x 100%

34% 212 | P a g e

7.24 Answer is 26% We know that at a cost of capital of 10% the investment has an NPV of $87,980. The internal rate of return (IRR) is that cost of capital where the NPV of a project is zero. This is achieved through trial and error and then interpolation. If we have a cost of capital which yields a positive NPV then we need to find a cost of capital when applied to the investment will give a negative NPV. In order to achieve a negative NPV we must select a higher cost of capital than 10% because this effectively increases the discounting effect on the cashflows and therefore giving a negative NPV. Choose the largest cost of capital given to you in the formulae sheet in the exam. This is 20% and will hopefully give a negative NPV. You do not have to choose a 20% you can choose another cost of capital, for example 17% but it may not be large enough to give you a negative NPV, and therefore you would have do the calculation again for a higher cost of capital. Year Cashflow DF @ 20% PV

0 $ (200,000) x1 (200,000)

1 $ 80,000 x 0.833 66,640

2 $ 90,000 x 0.694 62,460

3 $ 100,000 x 0.579 57,900

4 $ 60,000 x 0.482 28,920

5 $ 40,000 x 0.402 16,080

NPV = $32,000 In this case we still have a positive NPV even at a cost of capital of 20%. This means that our IRR lies beyond 20%. Ideally we would recalculate at a higher cost of capital to obtain a negative NPV, however the examiner has deemed this not necessary and you need only make a sensible attempt to obtain an appropriate NPV. Furthermore you should get a close enough approximation to the IRR when you use the interpolation formula. We now use the interpolation formulae as normal. Using interpolation formula: A + ( a a–b

x

[B - A] )

A = lower DF rate B = higher DF rate a = NPV of A b = NPV of B

IRR = 10% + ( (87,980 / (87,980 – 32,000) x [20% - 10%] ) = 26%

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7.25 Answer is 11.11% (1 + M) = (1 + R)(1 + I) M = Money cost of capital R = Real cost of capital I = General rate of inflation (1 + 0.2) = (1 + R)(1 + 0.08) 1.2 / 1.08 = 1+ R 1.1111 = 1 + R 0.1111 = R Real cost of capital = 11.11% 7.26 Answer is 82.79% Sensitivity measures the percentage change in a key input needed to make a project break even, in other words to have a project with a zero NPV. In this question we are looking at the sensitivity of direct material cost. We need to compare this to the project’s NPV. Whatever key factor we are looking at we always need to work out its PV when comparing it to the projects NPV. We are given the PV of direct material cost being $825,000. Sensitivity = ($683,000 / $825,000) x 100% = 82.79% (2 decimal places) 7.27 Answer is 1.5 years We need to add back annual depreciation to profit to obtain the annual cash flow to calculate payback. Annual depreciation = ($400,000 - $50,000) / 5 = $70,000 0 1 2

Profit ($400,000) $175,000 $225,000

Depreciation

Cash flow

$70,000 $70,000

$245,000 $295,000

Cumulative cash flow (400,000) ($155,000) $140,000

Payback occurs between years 1 and 2. Payback = 1 year + (155,000 / (155,000 + 140,000)) = 1.5 years (nearest 0.1 years)

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7.28 Answer is D Sensitivity = (NPV / PV of key input) x 100% Therefore: ($42,500 / $385,000) x 100% = 11.04% or 11% 7.29 Answer is A (1 + M) = (1 + R) x (1 + I) M = Money cost of capital R = Real cost of capital I = General rate of inflation (1 + M) = (1.06) (1.04) 1 + M = 1.1024 M = 0.1024 M = 10.24% 7.30 Answer is 4 years Year 0 1 2 3 4

Cashflow ($) (15,000) 2,500 3,000 5,500 4,000

Cumulative ($) (15,000) (12,500) (9,500) (4,000) 0

Payback period = 4 years 7.31 Answer is 13.33% ARR % =

Average profit over the life of the project Average investment

x 100

[where “average investment” = (Opening Investment + Closing Investment)/2]

Cash flows Depreciation Profit Average profit Average investment ARR

($) 2,500 + 3,000 + 5,500 + 4,000 + 3,000 = 15,000 – 3,000 =

($) 18,000 (12,000) 6,000

6,000 / 5 =

1,200

(15,000 + 3,000) / 2 =

9,000

(1,200 / 9,000) x 100% =

13.33% 215 | P a g e

7.32 Answer is investments X and Z Investments are not divisible therefore we need to select the combination of investments that will give us the most NPV. Any combination of 2 investments chosen will not exceed our cash available to invest of $350,000. Therefore the answer must be that two investments with the most NPV. Therefore: Investments X and Z giving an NPV of $75,000 + $91,000 = $166,000 7.33 Answer is A Sensitivity measures the percentage change in a key input (for example initial outlay, direct material, direct labour, residual value) needed to make a project break even, in other words to have a project with a zero NPV. Whatever key factor we are looking at we always need to work out its PV when comparing it to the projects NPV.

Sensitivity = NPV / PV of key input

In this question we are looking at the sensitivity of initial outlay which is $250,000. Therefore: Sensitivity = ($46,000 / $250,000) x 100% = 18.4% 7.34 Answer is C Sensitivity measures the percentage change in a key input (for example initial outlay, direct material, direct labour, residual value) needed to make a project break even, in other words to have a project with a zero NPV. Whatever key factor we are looking at we always need to work out its PV when comparing it to the projects NPV.

Sensitivity = NPV / PV of key input

In this question we are looking at the sensitivity of variable costs which is $40,000 per annum being material and labour costs combined. This cost is the same amount being incurred every year for the life of the project (being 5 years), therefore we can use cumulative or discount factors (CDF) to work this out. The CDF for 5 years at 10% is 3.791 according to the tables. 216 | P a g e

Therefore: NPV of variable costs = $40,000 x 3.791 = $151,640 Sensitivity = ($50,000 / $151,640) x 100% = 32.97% or 33% 7.35 Answer is $111.10 A perpetuity is a constant amount received or paid forever. Amount r r = cost of capital n = time period The first lease payment is made in advance i.e. paid today $4,000 PV of rest of lease in perpetuity $4,000 / 0.12 = $33,333 NPV of lease payments = $4,000 + $33,333 = $37,333 7.36 Answer is abandon project. Year 1 2 3

$ (90,000) 60,000 40,000

DF 12% 0.893 0.797 0.712 NPV

PV (80,370) 47,820 28,480 (4,070)

Project should be abandoned as it gives a negative NPV.

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7.37 Answer is C Sensitivity measures the percentage change in a key input (for example initial outlay, direct material, direct labour, residual value) needed to make a project break even, in other words to have a project with a zero NPV. Whatever key factor we are looking at we always need to work out its PV when comparing it to the projects NPV.

Sensitivity = NPV / PV of key input

In this question we are looking at the sensitivity of annual net cash inflow which is $100,000 for 5 years. We need to discount this to bring this back to its present value today. Therefore: Sensitivity = ($320,000 / $100,000 x 3.791) x 100% = 84.4% 7.38 Answer is the maximum NPV = $28.85m Project

Investment

A B C D E F G

$m 10.0 40.0 20.0 40.0 50.0 20.0 20.0

Net present value $m 4.20 6.10 8.50 13.70 3.80 4.90 4.33

Project

Investment

C A D F

$m 20.0 10.0 40.0 10.0 80.0

Profitability index

Ranking

0.4200 0.1525 0.4250 0.3425 0.0760 0.2450 0.2165

2 6 1 3 7 4 5

Net present value $m 8.50 4.20 13.70 2.45 28.85

Ranking 1 2 3 4

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7.39 Year 0 1 2 3

Cash flow $ (40,000) 16,800 18,000 24,000 NPV

Discount factors

Cash flow $ (40,000) 16,800 34,000 NPV

Discount factors

Cash flow $ (40,000) 41,600 NPV

Discount factors

1.000 0.893 0.797 0.712

Present value $ (40,000) 15,002 14,346 17,088 6,436

7.40 Year 0 1 2

1.000 0.893 0.797

Present value $ (40,000) 15,002 27,098 2,100

7.41 Year 0 1

1.000 0.893

Present value $ (40,000) 37,149 (2,851)

7.42 Answer is A 7.43 Answer is A 7.44 Answer is C 7.45 Answer is B £5.50 x 2000 = £11,000 contribution per annum T1 to T4 (1 + M) = (1 + i) (1 + r) (1 + 0.1) = (1 + 0.05) (1 + r) (1 + 0.1) = (1 + r) = 1.0476 (1 + 0.05) Therefore the real rate of return is 4.76%, we can use this to discount cash flows and therefore ignore inflation. 219 | P a g e

T1 1/1.0476 = T2 1/(1.0476)2 = T3 1/(1.0476)3 = T41/(1.0476)4 =

0.955 0.912 0.870 0.830 3.567 x £11,000 = £39,237-£30,000 T1 = + £9,237

Alternative method Use money rate of 10% and inflate cash flows £11,000 x 1.05 £11,000 x (1.05)2 £11,000 x (1.05)3 £11,000 x (1.05)4

= = = =

10% DF £11,550 x 0.909 T1 £12,128 x 0.826 T2 £12,734 x 0.751 T3 £13,371 x 0.683 T4

= = = =

£10,499 £10,018 £9,563 £9,132 £39,212 (£30,000) T1 +£9,212

7.46 Answer is C Real cost of capital to break-even 30,000 = 11,000 x 4yr annuity 30,000/11,000 = 2.727 This represents a 4yr annuity of between 17% and 18% (2.743 to 2.690) Therefore 17% + (1% x ((2.743-2.727)/(2.743-2.690)) = 17.3% (1 + M) = (1 + i) (1 + r) (1 + M) = (1 + 0.02) (1 + 0.173) = 1.196 or 19.6%

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Alternative method Use money cost of capital, inflate cash flows and find the internal rate of return 10% DF £11,550 x 0.909 T1 £12,128 x 0.826 T2 £12,734 x 0.751 T3 £13,371 x 0.683 T4

= = = =

£10,499 £10,018 £9,563 £9,132 £39,212 (£30,000) T1 +£9,212

20% DF £11,550 x 0.833 T1 £12,128 x 0.694 T2 £12,734 x 0.579 T3 £13,371 x 0.482 T4

= = = =

£9,346 £7,942 £6,759 £5,739 £29,786 (£30,000) T1 (£124)

IRR = 10% + (10% x (9212/(9212 + 214)) = 19.8%

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Chapter 8 Solutions - Performance management and transfer pricing 8.1 Answer is 52.38 days Trade receivable at the end of this year = $862,860 x 55/365 = $130,020 Credit sales for next year = $862,860 x 1.05 = $906,003 Trade receivable days at end of next year = $130,020 / $906,003 x 365 = 52.38 days 8.2 Answer is D Annual purchases this year = $547,800/55 x 365 =$3,635,400 Annual purchases next year = $3,635,400 x 1.15 = $4,180,710 Trade payables outstanding = $4,180,710 x 50/365 = $572,700 8.3 Answer is A Sales revenue for the year Plus cash received from last year Less trade receivables at end of year ($1,500,000/365 x 60) Cash received from customers

$1,500,000 $242,000 ($246,575) $1,495,425

8.4 Answer is A [$682,000/365] x 60 = $112,110 [$112,110 / (682,000 x 1.15)] x 365 = 52.17 days 8.5 Answer is (i) 44.6 days (ii) 57.8 days (iii) 63.9 days Working capital ratio Inventory days Receivables days Payables days

Calculation 220/1800 x 365 350/(0.85 x 2,600) x 365 260/(0.90 x 1,650) x 365

Days 44.6 57.8 63.9

8.6 Answer is C Flexible budgets are amended or flexed if the actual level of activity turns out to be different from the budgeted level of activity. A flexible budget is therefore flexed to correspond to the actual activity level for a period. When a budget is flexed it would give an appropriate level of revenue and cost as a yardstick to compare on a like for like basis to actual results, meaningful variances or exceptions to the budget, can then be highlighted for management attention.

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8.7 Answer is B A method of budgeting whereby all activities are re-evaluated each time a budget is formulated. 8.8 Answer is D 8.9 Answer is C 8.10 Tip: Trade receivable days Year end trade receivables Sales (or turnover)

x

365 days

This is the average length of time taken by customers to pay. Interpretation of trade receivable days A long average collection means poor credit control and hence cash flow problems may occur. The normal stated credit period is 30 days for most industries. Changes in the ratio may be due to improving or worsening credit control.

(200 ÷ 3,000) x 365 = 24 days Tip: Trade payable days Year end trade payables x Purchases (or cost of sales)

365 days

This is the length of time taken to pay suppliers. The ratio can also be calculated using cost of sales, as purchases are not usually stated in the financial statements. Interpretation of trade payable days High trade payable days can be good for an organisation, as credit from suppliers represents free credit. If it’s too high there is a risk of suppliers not extending credit in the future and goodwill maybe lost. High trade payable days may also indicate that the business has no cash to pay suppliers which could indicate insolvency problems.

(280 ÷ 1,600) x 365 = 64 days 224 | P a g e

Tip: Inventory days Inventory Cost of sales

x

365 days

This ratio shows how long the inventory stays with the company before it is sold. The lower the ratio the more efficient the company is trading, but this may result in low levels of inventory to meet demand. A lengthening inventory period may indicate a slow down in trade and an excessive build up of inventories, resulting in additional cost e.g. obsolesce and storage.

(300 ÷ 1,600) x 365 = 68 days 8.11 Tip: Current or (working capital) ratio Current Assets Current Liabilities

(times)

The current ratio measures short term solvency or liquidity; it shows the extent to which the claims of short-term creditors are covered by current assets. The normal is around 2:1 but does vary within different industries. A low ratio may indicate insolvency.

(550 ÷ 280) = 1.96 times Tip: Quick (or acid test) ratio Current assets less inventory Current liabilities

(times)

This ratio measures the immediate solvency of a business as it removes inventory out of the equation. Inventory is the item within current assets least representing cash, it needs to be sold to be liquidated. The normal ratio is around 1: 1 but does vary within different industries.

(250 ÷ 280) = 0.89 times 225 | P a g e

8.12 Answer is 44.24 days Forecast trade receivable days = forecast trade receivables as at 31/03/07 / forecast sales x 182.5 days (6 months) Forecast trade receivables $ 68,000 250,000 (2,500) (3,400) (252,100) 60,000

Bal b/f 30/09/06 Forecast sales Less returns Less bad debts – 5% x 68,000 Less cash collected Bal c/f 31/03/07

Forecast trade receivable days = $60,000 / ($250,000 - $2,500) x 182.5 days = 44.24 days 8.13 Answer is B Revision - trade receivable days (turnover) Year end trade receivables Credit sales

x

365 days

Therefore year end trade receivables = Trade receivable days / 365 x credit sales

DY’s trade receivables at the beginning of the period

$22,000

DY’s trade receivables at the end of the period – 49 days / 365 days x $290,510

$39,000

Bal b/f Credit sales

Total

Trade receivables control $ 22,000 Bal c/f 290,510 Cash received (bal fig) 312,510

Total

$ 39,000 273,510 312,510

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8.14 Answer is 0.84:1 Quick ratio

= = =

(current assets – inventory) / current liabilities (70,000 + 10,000) / (88,000 + 7,000) 0.84

8.15 Answer is $345,379 Step 1 Step 2 Step 3 Step 4

Calculate year end inventories using inventory day ratio Calculate purchases using “T” for inventory Use the purchases figure from step 2 to find year end trade payables Do trade payables “T” to calculate cash paid

Working 1

Inventory in $ on 31/10/07

Inventory days Inventory

= Inventory / cost of sales x 365 days = Inventory days x cost of sales / 365 days = 60 x $350,000 / 365 = $57,534 Inventory $ 56,000 Bal c/f (W1)

Bal b/f Purchases (bal fig)

Working 2

351,534 Income statement – COS

350,000

407,534

407,534

Trade payables in $ on 31/10/07

Trade payable days Trade payables

Bal c/f (W2) Cash paid (bal fig) Total

$ 57,534

= Trade payables / purchases x 365 days = Trade payable days x purchases / 365 days = 50 x $351,534 / 365 = $48,155 Trade payable $’000 48,155 Bal b/f Purchases 345,379

$’000 42,000 351,534

393,534

393,534

Total

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8.16 Answer is 40.9 days We can use the trade payable days ratio to work out the amount of trade payables at the year end. Therefore: Trade payables at year end = ($474,500 / 365) x 45 days = $58,500 Purchases will increase by 10% next year. Therefore: $474,500 x 1.1 = $521,950 Trade payable days at the end of next year = $58,500 / $521,950 x 365 = 40.9 days 8.17 (i) The answer is 24.3 days Trade receivable days = Trade receivables / sales x 365 = 800 / 12,000 x 365 = 24.3 days (ii) The answer is 63.1 days Opening stock + Purchases – Closing stock = Cost of sales 1,120 + Purchases – 1,200 = 6,400 Purchases = 6,480 Trade payable days

= Trade payables / purchases x 365 = 1,120 / (6,480) x 365 = 63.1 days

(iii) The answer is 68.4 days Inventory days = Inventories / cost of sales x 365 = 1,200 / (6,400) x 365 = 68.4 days

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8.18 Answer is A Marginal cost to the group XA (spare capacity therefore at marginal cost) XB (Full capacity therefore cost to the group is the market price) XC (spare capacity therefore at marginal cost) Price quoted £20,000 XC purchases (included in this price) from XB (£12,000) Cost of own work for XC (including mark up of 70%) £8,000

£5,000 £8,000

XC variable cost £8,000/170% x 100% =

£4,706

XB (Full capacity therefore cost to the group is the market price) Supply of component from XB to XC Marginal cost to the group

£12,000 £29,706

8.19 Answer is B 8.20 Answer Supplier perspective Investor perspective Innovation and learning perspective Internal perspective Employee perspective Environment perspective Government perspective Minority shareholder perspective 8.21 Answer is A 8.22 Answer is D HO charge £360,000 x 10% = Residual income Profit Depreciation and fixed cost (23.5k + 45k) Contribution

£ 36,000 64,700 100,700 68,500 169,200

£169,200/50,000 units = £3.38 + variable cost per unit £5 = £8.38

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8.23 Answer is B The first 10,000 units are spare capacity therefore the minimum price to the seller would be the marginal cost of £13. Thereafter the last 5,000 units would have to be supplied by turning away existing customers and this would cost the company £40 a unit (or when at full capacity £13 marginal cost + lost contribution per unit if not sold to external customers (£40-£13 =£27) = £40 external price). 8.24 Answer is C Marginal cost of Division B Transfer price (4 x £40) + 50% = Division B own variable cost Total marginal cost

£240 £45 £285

Profit will be maximised where MR = MC, this will be at 11 units. 8.25 Answer is B ROI =

Profit Capital employed

12% (0.12) =

Profit £1,500,000

Profit therefore was 12% £1,500,000 = £180,000 Add back fixed overhead of £400,000 = £580,000 total contribution £580,000 total contribution/30,000 units = £19.33 a unit 8.26 Answer is C X £13,000/£40,000 = 32.5% ROI REJECT as it does not meet the target of 40% Y 5% discount will lose profit of 5% x £1m x 30% = £15,000 but eliminate £40,000 of debtors. £15,000/£40,000 = 37.5% higher than the target of 30% REJECT as this would cause a fall in the average ROI Z £150,000/£750,000 = 20% ACCEPT as it is lower than the target of 25% so would improve the average ROI by selling the building.

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8.27 Answer is D Division X would lose contribution of £70 - £20 = £50 a unit therefore profits decline It would cost the group an extra £65-£20* = £45 a unit therefore profits decline * the group saves £20 a unit but pays £65 a unit instead. 8.28 Answer is B Add up all the costs and then mark up by 20%. Therefore: £12 + £15 + £34 + £89 + £10 = £160 x 1.2 = £192 8.29 Answer is A Under dual pricing the seller will get what they want which is the market price, and the buyer will get what they want, to buy at marginal cost. 8.30 Answer is D Add up all the variable costs and then mark up by 35%. Therefore: £23 + £53 + £81 + £35 + £45 = £237 x 1.35 = £319.95 8.31 Answer is C 8.32 Answer is C 8.33 Answer is D Vinod can sell everything externmally and so has no incentive to accept anything lower. 8.34 Answer is A Selling price less incremental costs = £600 - £150 - £250 = £200 8.35 Answer is B £800 - £400 - £220 = £180 x 100 units = £18,000 8.36 Answer is D Roti current cost to make is £20 per unit versus £25 to buy, so this will cost Roti an extra £5 per unit to buy in, meaning it will be £5 worse off.

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8.37 Answer is A The minimum price that BB will sell for is the incremental cost of £45. Since the division has no outside market, there is no opportunity cost to consider. 8.38 Answer is C Transfer price = £300 x 1.6 = £480 Total cost in Dilwalle = £480 + £250 = £730 8.39 Answer is C The transfer price under a 2 part tariff pricing system is the marginal cost to manufacture. 8.40 Answer is B Under dual pricing you give the selling division the market price and the buying divison marginal cost to manufacturtre. Therefore Tpau = £50 and Erasure = £15. 8.41 Answer is D 8.42 Answer is C 8.43 Answer is B 8.44 Answer is A The marginal cost to manufacture of £15 perunit for the first 4,000 units and then for the next 2,000 units at the market price of £20 as Ace would then be at full capacity. 8.45 Answer is A 8.46 Answer is A 8.47 Answer is C 8.48 Answer is B

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8.49 Answer Rresidual income will result in division managers making decisions that are in their own best interest and not in the best interest of the company as a whole. Residual income incorporates a company’s cost of capital. Residual income is a percentage measure and not an absolute measure.

8.50 Answer is C 8.51 Answer Should not be acquired because it produces $120,000 of residual income Should be acquired because after the acquisition, the division's ROI and residual income are both positive numbers Should not be acquired because the division's ROI is less than the corporate ROI before the investment is considered Should be acquired because it produces $120,000 of residual income for the division. Should not be acquired because it reduces divisional ROI

8.52 Answer is A ROI of Petrol = (£60,000 / £500,000) x 100% = 12% ROI of investment = (£8,250 / £75,000) x 100% = 11% RI = £8,250 – (5% of £75,000) = £4,500 8.53 Answer is D 1,000,000 - (% x 8,000,000) = 200,000 - (% x 8,000,000) = -800,000 % x 8,000,000 = 800,000 % = 800,000 / 8,000,000 % = 0.1 Therefore 10%

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8.54 Answer is B Profit = 13% of £600,000 = £78,000 RI = £78,000 – (7% of £600,000) = £36,000 8.55 Answer is A 8.56 Answer New products launched compared to competitors Percentage of sales which is repeat business Percentage market share Health and safety training days per employee Share price growth Percentage of staff suggestions for improvement used by management Econcomic Value Added

8.57 Answer is A ROI = (80,000 / 220,000) x 100% = 36% RI = 80,000 - (220,000 x 25%) = £25,000

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8.58 Answer Percentage market share Dividend per share Share price growth Return on investment Econcomic Value Added Staff turnover Number of complaints

8.59 Answer is D 8.60 Answer Income taxes and import duties are an important consideration when setting a transfer price for companies that pursue international commerce Transfer prices cannot be used by organizations in the service industry Transfer prices are totally cost based in nature not market based

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Chapter 9 Solutions - Management control and risk 9.1 Answer is $7,000 Expected value of profit with marketing campaign ($300,000 x 0.90) + (-$80,000 x 0.1) = $262,000 - $50,000 = $212,000 Expected value of profit without marketing campaign ($300,000 x 0.75) + (-$80,000 x 0.25) = $205,000 It is therefore worthwhile for the company to undertake the marketing campaign as the increase in the expected value of profit is $7,000 9.2 Answer is 68.75% We need to work out the probability of earning more than or equal to a contribution of $40. Therefore we need to select those outcomes which will yield this and select their respective probabilities to multiply to make the combined probabilities. The following combinations comply with our requirements: Selling price $60 $64 $64 $68 $68 $68 Total

Variable cost $20 $20 $24 $20 $24 $26

Contribution $40 $44 $40 $48 $44 $42

Selling probability 0.30 0.25 0.25 0.45 0.45 0.45

Variable cost probability 0.25 0.25 0.40 0.25 0.40 0.35

Combined probability 0.0750 0.0625 0.1000 0.1125 0.1800 0.1575 0.6875

P(earning more than or equal to $40 contribution) = 0.6875 or 68.75% 9.3 Answer is $680,000 The expected value of cost of the warranty claims is: $2,000,000 x 15% $6,000,000 x 3% $10,000,000 x 2% Total

= = =

$300,000 $180,000 $200,000 $680,000

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9.4 Answer is $110 The minimum profit at a selling price of $80 is $50,000 The minimum profit at a selling price of $90 is $60,000 The minimum profit at a selling price of $100 is $70,000 The minimum profit at a selling price of $110 is $75,000 Therefore if the manager wants to maximise the minimum profit a selling price of $110 would be chosen. 9.5 Answer is $100 A regret matrix can be produced as follows: Competitor Reaction Strong Medium Weak

Selling price $80 $10,000 $30,000 $10,000

$90 $0 $20,000 $0

$100 $10,000 $10,000 $10,000

$110 $5,000 $0 $20,000

The maximum regret for: $80 is $30,000 $90 is $20,000 $100 is $10,000 $110 is $20,000 Therefore if the manager wants to minimise the maximum regret a selling price of $100 would be chosen. 9.6 Answer is B 9.7 Answer is B This is looking at the best of the worst case scenairios. The minimum outcome for a fee of $600 is $360k The minimum outcome for a fee of $800 is $400k The minimum outcome for a fee of $900 is $360k The minimum outcome for a fee of $1,000 is $320k Therefore if the committee wants to maximise the minimum cash inflow it will set a fee of $800. 238 | P a g e

9.8 Answer is A A regret matrix can be produced as follows:

hip Fee $600 $800 $900 $1,000

hip level Low Average High $000 $000 $000 40 0 0 0 40 60 40 75 45 80 100 120

The maximum regret for: $600 is $40k $800 is $60k $900 is $75k $1,000 is $120k Therefore if the manager wants to minimise the maximum regret a fee of $600 a selling price of $100 would be set. 9.9 Answer is C 9.10 Answer is C A regret matrix can be produced as follows: Staffing mix X Y Z

Deluxe $5,000 $15,000 $35,000

Fee level High Standard $0 $2,500 $5,000 $0 $20,000 $7,500

Low $20,000 $5,000 $0

The maximum regret for: Deluxe is $35,000 High is $20,000 Standard is $7,500 Low is $20,000 Therefore the standard fee strategy minimises the maximum regret. 239 | P a g e

9.11 Answer is 90% The fixed costs will remain the same therefore the contribution has to exceed $2,880,000. The outcomes that comply with this and the probability of them occurring are given below: 100,000 x ($48 - $19) = $2,900,000 t probability is 0.40 x 0.75 = 120,000 x ($48 - $21) = $3,240,000 t probability is 0.60 x 0.25 = 120,000 x ($48 - $19) = $3,480,000 t probability is 0.60 x 0.75 =

0.30 0.15 0.45 0.90

The probability therefore that the contribution will exceed $2,880,000 is 90%. 9.12 Answer is B The maximum regret at selling price: $40 is $20,000 $45 is $10,000 $50 is $20,000 $55 is $30,000 Therefore if the manager wants to minimise the maximum regret, a selling price of $45 will be selected. 9.13 Answer is A 9.14 Ansswer is (i) $490,000, $345,000, $505,000 (ii) Value of PI = $25 (i) Expected values ($000) Project A ($400 x 0.3) + ($500 x 0.5) + ($600 x 0.2) = $490 Project B ($300 x 0.3) + ($350 x 0.5) + ($400 x 0.2) = $345 Project C ($500 x 0.3) + ($450 x 0.5) + ($650 x 0.2) = $505 (ii) Value of perfect information ($000) If weak select Project C = ($500 x 0.3) = $150 If average select Project A = ($500 x 0.5) = $250 If good select Project C = ($650 x 0.2) = $130 Value of perfect information is ($530 – $505) = $25

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9.15 Answer is D The maximum regret at a selling price $140 is $50,000 $160 is $60,000 $180 is $40,000 $200 is $30,000 Therefore if AP wants to minimise the maximum regret it will select a selling price of $200 9.16 Answer is A Year 1 cash flows

Probability

$20,000 $14,000 $9,000

0.20 0.50 0.30

High Medium Low

Expected value Year 1 $4,000 $7,000 $2,700 $13,700

Discount the expected value at 10%: $13,700 x 0.909 = $12,453 9.17 Answer is C (120,000 units x 0.6*) + (80,000 units x 0.4) = 104,000 units * The probability of being dry is 0.4 therefore the probability of being rainy is (1.0 – 0.4) = 0.6. The sum of your probabilities must always come to 1.0. Tip: An expected value works out a long-run average based upon a decision repeated over and over again, based upon the values forecast and probability assigned to each value. Example An ice cream sales van if it is hot will earn £10,000 a day in sales and if it is cold only £2,000 a day in sales, the probability of the weather cycle all year round is 10% hot and 90% cold.

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Solution An expected value calculates a long-run average value assuming the decision is repeated over and over again e.g. the ice cream van does not just go once but many times over and over again. Long-term expected value (£10,000 a day x 1 day) + (£2,000 a day x 9 days) = £28,000 total sales over 10 days £28,000/10 days = average sales or expected value of £2,800 a day in sales or (£10,000 x 0.1) + (£2,000 x 0.9) = £2,800 expected value a day in sales 9.18 Project L M N O P

(500 x 0.2) + (470 x 0.5) + (550 x 0.3) = (400 x 0.2) + (550 x 0.5) + (570 x 0.3) = (450 x 0.2) + (400 x 0.5) + (475 x 0.3) = (360 x 0.2) + (400 x 0.5) + (420 x 0.3) = (600 x 0.2) + (500 x 0.5) + (425 x 0.3) =

EV $500,000 $526,000 $432,500 $398,000 $497,500

Project M should be undertaken as it has the highest expected value. 9.19 Market conditions Poor Good Excellent EV with perfect information EV without perfect information Value of perfect information

Best projects in market condition P M M

Probability

Net cash inflows

EV

0.20 0.50 0.30

$600,000 $550,000 $570,000

$120,000 $275,000 $171,000 $566,000 ($526,000) $40,000

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9.20 Answer is 45% We need to work out the probability of earning more than a weekly contribution of $20,000. Therefore we need to select those outcomes which will yield this and select their respective probabilities. We are producing 1,000 units per week so therefore contribution must be greater than $20 per unit, in order for us to earn more than $20,000 per week. Selling price $50 $60 $60 Total

Selling probability 0.45 0.25 0.25

Variable cost $20 $30 $20

Variable cost probability 0.55 0.25 0.55

Combined probability 0.25 0.06 0.14 0.45

P(earning more than $20,000 contribution per week) = 0.45 or 45% 9.21 Answer is D To find the monthly expected value we must multiply the probabilities by their respective unit sales values or unit variable cost values. This will give us our expected unit sales and variable cost values. Expected unit sales value = (£20 x 0.25) + (£25 x 0.40) + (£30 x 0.35) = £25.50 Expected unit variable cost value = (£8 x 0.20) + (£10 x 0.50) + (£12 x 0.30) = £10.20 Subtract the expected variable cost value from the sales value which would result in the monthly unit contribution. Expected unit contribution = £25.50 - £10.20 = £15.30 Total expected monthly contribution = 1,000 units x £15.30 = £15,300

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9.22 Answer is C In order to achieve a monthly contribution of greater than £13,500 and we expect to sell 1,000 units then each unit must sell for more than £13.50. We should select the combinations which offer us that and then add up their respective probabilities. Selling price £20 £20 £20 £25 £25 £25 £30 £30 £30

Variable cost £8 £10 £12 £8 £10 £12 £8 £10 £12

Contribution £12 £10 £8 £17 £15 £13 £22 £20 £18

Select No No No Yes Yes No Yes Yes Yes

Probability

0.4 x 0.2 = 0.08 0.4 x 0.5 = 0.20 0.35 x 0.2 = 0.07 0.35 x 0.5 = 0.175 0.35 x 0.3 = 0.105

P(Monthly contribution exceeds £13,500) = 0.08 + 0.20 + 0.07 + 0.175 + 0.105 = 0.63 9.23 Answer is make 12 batches The key point to understand here is that you need to find the solution that will minimise the maximum opportunity cost or if you like regret. We need to first find what contributions can be earned by the different combinations. Sold Made 10 11 12

10 500 500 – 20 = 480 500 – 40 = 460

11 500 550 550 – 20 = 530

12 500 550 600

Now we work out how much contribution we would lose for those items we did not make. Please note this is the £50 contribution per batch and the £20 negative contribution per batch. Sold Made 10 11 12

10 0 20 40

11 50 0 20

12 100 50 0

Compare the best outcomes in the first table with the maximum opportunity cost or regret in the second for each batch of bread made. Select the batch with the most amount of contribution left. 244 | P a g e

10 batches = 500 – 100 = 400 11 batches = 550 – 50 = 500 12 batches = 600 – 40 = 540 Therefore the answer is to make 12 batches as this will minimise the opportunity cost or regret. 9.24 Answer is expected value = $1,394,000, S.D. = $171,930 Variable costs ($000) 560 560 560 780 780 780 950 950 950

Fixed costs ($000) 440 640 760 440 640 760 440 640 760

Total cost (x) ($000) 1,000 1,200 1,320 1,220 1,420 1,540 1,390 1,590 1,710

Probability (p)

Expected value (px) 45 198 118.8 91.5 390.5 231 41.7 174.9 102.6

(000’s) _ (x - x) 155,236 37,636 5,476 30,276 676 21,316 16 38,416 99,856

0.3 x 0.15 = 0.045 0.3 x 0.55 = 0.165 0.3 x 0.3 = 0.090 0.5 x 0.15 = 0.075 0.5 x 0.55 = 0.275 0.5 x 0.3 = 0.150 0.2 x 0.15 = 0.03 0.2 x 0.55 = 0.110 0.2 x 0.3 = 0.060 _ Expected value or arithmetic mean = x = Σ (px) = $1,394,000 _ Therfore to work out (x – x) for the first row in table = (1,000 - 1,394) = 155,236 _ Σ p(x - x) = 29,560,000,000

(000’s) _ p(x - x) 6,986 6,210 493 2,271 186 3,197 0 4,226 5,991

Σp=1 _ Standard deviation or S.D. = √ Σ p(x - x) / Σ p = √29,560,000,000 / 1= $171,930 9.25 Answer is $212,500 Fixed costs ($) 100,000 130,000 160,000

Probability 0.35 0.45 0.20 Total EV

Expected value ($) 35,000 58,500 32,000 125,500

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Variable costs ($) 70,000 90,000 110,000

Probability 0.40 0.35 0.25 Total EV

Expected value ($) 28,000 31,500 27,500 87,000

Expected value for total costs = $125,500 + $87,000 = $212,500 9.26 Part (i) The maximin rule states that we should consider the worst consequence of each possible course of action and choose the one that has the least bad consequence. Therefore in the scenario the worst consequence is having bad weather and the least bad consequence would be to purchase 1,000 burgers as this gives the most profit being $1,000. Part (ii) The key point to understand here is that you need to find the solution that will minimise the maximum opportunity cost or if you like regret. We work out how much contribution we would lose for those burgers we did not sell. For example if we have actual bad weather then we would sell 1,000 burgers and had we purchased 1,000 burgers then the profit earned would be $1,000 (according to the table in question) with no regret or cost of unsold burgers, net regret being $0. If however the actual weather was bad then again we would sell 1,000 burgers but this time we had purchased 2,000 burgers then the profit earned would be $0 but regret or cost would $1,000, net regret being $1,000. We can apply the same logic if we had purchased 3,000 or 4,000 burgers. See table below: No of burgers purchased If actual weather is: Bad Average Good

1,000 $0 ($4,000) ($9,000)

2,000 ($1,000) ($1,000) ($6,000)

3,000 (£2,000) $0 ($3,000)

4,000 ($4,000) ($1,000) $0

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The maximum regret for: 1,000 burgers is $9,000 2,000 burgers is $6,000 3,000 burgers is $3,000 4,000 burgers is $4,000 Therefore to minimise the maximum regret he should purchase 3,000 burgers. 9.27 Answer is 36.25% We need to work out the probability of earning net cash flows $90,000 or more. Therefore we need to select those outcomes which will yield this and select their respective probabilities. The combinations which will comply are: Cash inflows $140,000 $160,000 $160,000 $160,000 Total

Probability 0.45 0.25 0.25 0.25

Cash outflows $50,000 $50,000 $60,000 $70,000

Probability

Combined probability 0.45 x 0.25 = 0.1125 0.25 x 0.25 = 0.0625 0.25 x 0.35 = 0.0875 0.25 x 0.40 = 0.1 0.3625

0.25 0.25 0.35 0.40

P(earning net cash flows of $90,000 or more) = 0.3625 or 36.25% 9.28 Answer is $140,000 Project A B C

(400 x 0.3) + (500 x 0.2) + (700 x 0.5) = (800 x 0.3) + (300 x 0.2) + (200 x 0.5) = (500 x 0.3) + (600 x 0.2) + (400 x 0.5) =

EV $570,000 $400,000 $470,000

Project A has the highest expected value being £$70,000. To calculate the value of perfect information with respect to the preferences: Preferences 1 2 3 EV with perfect information EV without perfect information Value of perfect information

Best projects in preferences B C A

Probability

Net cash inflows

EV

0.3 0.2 0.5

$800,000 $600,000 $700,000

$240,000 $120,000 $350,000 $710,000 ($570,000) $140,000 247 | P a g e

9.29 Answer is B Risk averse managers (maximin managers or “pessimist”) assume always the worse outcome will arise, therefore aim to maximise the returns from the worst outcomes. Therefore, the marketing manager would choose selling price of $60 as the worst case scenario is $30,000 contribution being earned which is the best of all the worst case scenarios. 9.30 Answer is D The expected value of the decision: EV of development succeeding + EV of development not succeeding If development is successful then the company will market the product and therefore we need to work out the EV of marketing success. Marketing success rate Very Reasonably Unsuccessful

EV $87,500 $31,500 -$11,200 $107,800

(250,000 x 0.7 x 0.5) = (150,000 x 0.7 x 0.3) = (-80,000 x 0.7 x 0.2) = Total EV of marketing

If development is unsuccessful then we need to work out the EV of development costs only. This is because there will be no expenditure on marketing for an unsuccessful development. The expected value of the development costs = -$150,000 x 0.3 = -$45,000 The EV of the decision = $107,800 + -$45,000 = $62,800 9.31 Answer is EV = $3,975 and standard deviation = $804.29 This is a probability distribution and therefore the squared deviations (column 5 below) have to be weighted by the probabilities. We cannot do the usual operation of dividing the squared deviations by the number of data items (being 3 in this case) as the three NPV’s do not have equal chance of occurrence and therefore must be reflected in the calculation.

NPV($) 2,800 3,900 4,900

Probability 0.25 0.40 0.35

_ EV or x ($) 700 1,560 1,715 3,975

_ x-x -1,175 -75 925

_ (x – x)² 1,380,625 5,625 855,625

Weighted Deviations 345,156.25 2,250 299,468.75 646,875

The expected value = $3,975 Standard deviation = √646,875 = $804.29 248 | P a g e

9.32 Answer is A Manager’s attitude to risk Risk averse managers (maximin managers or “pessimist”) assume always the worse outcome will arise, therefore aim to maximise the returns from the worst outcomes. Risk seeking managers (maximax managers or “optimist”) go for the best outcome ignoring the probability of actually attaining it, when making decisions, therefore aim to maximise the maximum or best return from a decision. Risk neutral managers go for the most likely return and will use expected values in order to make a decision. Risk spreading is not a manager’s attitude to risk. 9.33 Answer is Deefield The minimax regret criterion is to find the solution that will minimise the maximum opportunity cost or regret of decisions made. The question gives us the regret or opportunity cost we would suffer if we chose any of the venues. For each venue we need to select the most regret that we would suffer, and then from this select the venue with the lowest of these maximum regrets, i.e. minimise the maximum regrets. Ayefield maximum regret = $810,000 Beefield maximum regret = $590,000 Ceefield maximum regret = $480,000 Deefield maximum regret = $450,000 Deefield should be picked as the venue to stage the event as it minimises the maximum regrets. 9.34 Answer is A The maximin rule states that we should consider the worst consequence of each possible course of action and choose the one that has the least bad consequence. Therefore in the scenario the worst consequence is having a poor market condition and the outcomes are: Project A Project B Project C Project D

$440,000 $400,000 $360,000 $320,000

The best of the worst outcomes is project A.

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9.35 Answer is B The maximax rule states go for the best outcome ignoring the probability of actually attaining it, when making decisions, therefore aim to maximise the maximum or best return from a decision. Therefore go for project B as it gives the highest possible return of $580,000. 9.36 Answer is $871,780 NPV

Probability

2 3 4

30% 20% 50%

Deviation from expected value $m -1.2 -0.2 0.8

Squared deviation $m 1.44 0.04 0.64

Weighted amounts $m 0.432 0.008 0.320

Total weighted amounts = $0.432m + $0.008m + $0.320m = $0.760m Standard deviation = √$0.760m = $0.871780m or $871,780 9.37 Answer is D 9.38 Answer is B 9.39 Answer is C Expected value of project A is (£1.5m x 0.4) + (£3m x 0.6) = £2.4m Expected value of project B is the same as project A therefore the expected value of Project B is: (£0.8m x g) + (£3.2m x (1 – g)) = £2.4m £0.8g +£3.2m - £3.2g = 2.4 -2.4g + 3.2 = 2.4 -2.4g = -0.8 g = 0.333

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9.40 Answer is A 4 x £15k = 60k 0.4 A (10k) £96k

£86k

N

0.6

8 x £15k = 120k

4 x £15k = £60k

A = Attend show N = Not attend show The decision to go to the show yields contribution after the £10,000 running cost of £86,000, compared to the contribution of selling 4 cars without going to the show generating £60,000 contribution. The expected net gain therefore would be £86,000 £60,000 = £26,000.

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Mock Exam 1 M1.1 An opportunity cost is the cost of A B C D

Unplanned new business Obtaining new business opportunities Lost business The next best alternative course of action

M1.2 Which of the following costs is not relevant when considering the closure of a department within a factory? A B C D

Variable overheads Fixed overheads Direct materials Direct labour

M1.3 Which of the following may form the basis for the price a company (working at full capacity) should charge for a one-off order? A B C D

Variable costs Direct and indirect costs Opportunity costs plus marginal costs Direct labour plus materials costs

M1.4 In a make versus buy decision which of the following factors is not relevant? A B C D

Opportunity cost of alternative activities Reliability of supplier Reliability of bought-in products Fixed production costs

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M1.5 A department makes a product whose contribution per unit is £1,000, and which takes 20 hours machine time. A component used in this product with a marginal cost of £300 (taking 5 hours of machine time) could be purchased from an external supplier. The department is working at full capacity. What is the maximum price that the company may pay to buy the component from an external supplier? A B C D

£550 £600 £575 £500

M1.6 Jermery Sparkson makes cars. It took him 1,200 hours to make his first car. He estimates that there is a learning curve of 80% to be had here. What is the average time that he would take to make 25 cars? State your answer to 1 decimal place. M1.7 James Hamilton makes electronic sheep. It took him 17 hours to make the first one and he estimates that the learning curve is 75%. He has had an order in for 500 sheep. James says that will not be able to make them any quicker by the time he has made the 150 th sheep. How much time is needed to make the 500 sheep? M1.8 What does the “y” represent in the learning curve formula y=axᵇ Select ALL that apply The average time for “x” units Total time for “x” number of untis Index of learning The average index of learning Time taken for the first unit

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The following information relates to M1.9 and M1.10 Tom and Jerry make ice cream and have set up in London to mass produce tutti fruitti ice cream. 20 staff who will work a standard 60 hrs a week will make this ice cream. Production has only just started but the workforces are keen to learn quickly. The first ice cream was made but in their excitement of eating it they forgot to write down how long it took. The fifth ice cream however was recorded and the average time for all units up to this point was 20 hours. Tom and Jerry reckon that there is a 70% learning rate for staff. M1.9 Calculate the time taken for the first ice cream made (round your answer to the neares hour). M1.10 Calculate the total time for the 10th to the 14th ice cream only. M1.11 A rival company Tomsang plc has also launched an uncannily similar product to Pear plc but it is a mobile phone that can be inserted under your hairline next to your skull which gives you direct axccess to all special offers by Tomsang plc! The marginal cost for each device is £35 and the amount that can be sold at £100 is 1,000 units. The quantity demanded will increase by 100 units for every £50 decrease and the likewise a £50 increase will result in a decrease in quantity demanded by 100 units. Calculate the optimum selling price.

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M1.12 A new cycle has been developed which has ability to transform into a car! Market research has told the company that even though it has this fantastic facility no one will be willing to buy at a prince of £700. Every £40 reduction however will sell 100 more cycles. Marginal cost is £60. The profit maximising output is: A B C D E F G

600 units 750 units 850 units 925 units 950 units 975 units None of the options

M1.13 Which of the following best describes the difference between penetration pricing and loss leader pricing? A

Penetration pricing is suitable only for consumer products whereas loss leader pricing can be used for consumer and commercial products.

B

Loss leader pricing is suitable only for consumer products whereas penetration pricing can be used for consumer and commercial products.

C

Loss leader pricing is likely to be used in the short term whereas penetration pricing may be used in the long term.

D

Penetration pricing is likely to be used in the short term whereas loss leader pricing may be used in the long term.

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M1.14 DVDs are often sold with a region code attached. This means that the DVD can be played on players that have been designed for that region. For example, DVDs carrying region code 1 can be played in only in America and those with code 2 can be played only in Europe. This is intended to prevent a consumer from buying a DVD in, say, America and playing it in Europe. Film producers often stagger the launch of new DVDs, with most being sold in America before they go on sale elsewhere. Initial sales in each region are at a relatively high price; this is reduced once interest in the film diminishes. Which pricing strategy is most consistent with the use of codes to ensure high prices in new markets? A B C D

Discount pricing Market skimming Penetration pricing pricing

M1.15 A company is deciding whether to develop a new product. The development of the product would require an investment of $2 million, on which the company would require an annual return of 15%. Market research anticipates an annual demand of 55,000 units if the unit selling price is $18. Calculate the target cost per unit.

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M1.16 Which types of budget is described in each of the following? A budget that is set prior to the control period and not subsequently changed in response to changes in activity, costs or revenues A budget that is continuously updated by adding a further ing period when the earliest ing period has expired A budget that is changed in response to changes in the level of activity A budget that is based on the previous budget or actual results for changes in the activity and inflation Place each of the following options against ONE of the above Rolling, Flexible, Incremental, Fixed M1.17 Which of the following sentences is the best representation of the behavioural aspects of budgeting? A B C D

If budget targets are unrealistic there may be a negative reaction from individuals It is seldom necessary to involve employees in the budgetary process Budgets will always improve motivation Budgets will always improve participation

M1.18 Which of the following sentences is the best description of zero-base budgeting? A

Zero-base budgeting starts with the figures of the previous period and assumes a zero rate of change

B

Zero-base budgeting requires a completely clean sheet of paper every year, on which each part of the organisation must justify the budget it requires

C

Zero-base budgeting is a technique applied in government budgeting in order to have a neutral effect on policy issues

D

Zero-base budgeting is a short-term planning technique targeted at zero profit or loss 258 | P a g e

M1.19 The salaries of the finance department staff in a manufacturing company are from: A B C D

Unit level activity Facility level activity Product sustaining activity Batch level activity

M1.20 Place the following costs in the correct coulumn for batch level activity and facility level activity, select all that apply. Shipping Plant depreciation Inspection Quality assurance Plant maintenance Direct materials Material handling Property taxes Insurance Batch Level Activity

Facility Level Activity

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The following information applies to M1.21 and M1.22: Battersea tyres uses an activity based costing system to compute the cost of making tyres and delivering the tyres to garages. Staff costs are £80,000 and make and deliver the tyre. Other general overheads are £70,000. These costs are allocated as follows: Staff costs General overheads

Tyre manufacture 70% 50%

Delivery 20% 30%

Other 10% 20%

There will be 40,000 tyres and 6,000 deliveries in the year. M1.21 What is the staff costs and general overheads that would be charged to each tyre? A B C D

£0.88 £1.40 £2.28 Some other amount

M1.22 What is the staff costs and general overheads that would be charged to each delivery? A B C D

£6.17 £2.67 £3.50 Some other amount

M1.23 SRK combines all manufacturing overheads into one single cost pool and allocates this overhead to products based on machine hours. Activity based costing would show that with SRK’s current procedures: A B C D

The low volume products have too much overheads in them The high volume products have too much overheads in them All products have too much overheads in them The high volume products do not have enough overheads in them

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M1.24 JJB is changing from a traditional costing system to an activity based system. Which of the following costs would change from indirect to direct? A B C D

Direct materials Factory supplies Production setup Production setup, finished-goods inspection, and product shipping

M1.25 A hospital is in the process of implementing an activity-based-costing system. Which of the following tasks would not be part of this process? A B C D

Identification of cost pools Calculation of cost application rates Assignment of cost to services provided None of the above

M1.26 Consider the following; all figures are in £’000s: Direct materials = £4,120 Plant rent = £1,734 New technology design engineering = £3,111 Materials receiving = £400 Manufacturing set up = £150 Machinery depreciation = £56 General management salaries = £2,563 Determine the cost of unit level, batch level, product sustaining, and facility level activities. M1.27 A bottleneck is described as a: A B C D

Limited resource Unlimited resource Expensive resource Inferior resource

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M1.28 The TA ratio is described as: A B C D

Throughput contribution per hour / conversion cost per hour Conversion cost per hour / throughput contribution per hour Throughput contribution per hour / bottleneck resource usage Bottleneck resource usage / throughput contribution per hour

M1.29 Throughput contribution is: A B C D

Sales less variable costs Sales less material costs Sales less fixed costs Sales labour costs

M1.30 Which of the following is a primary activity according to Porters value chain analysis? A B C D

Infrastructure Procurement Technology Inbound logistics

M1.31 Which of these is NOT a primary activity according to Porter’s value chain analysis? A B C D

Procurement Marketing and sales Service Operations

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M1.32 Company A has entered into a contract with company B to provide them with 17,000 handmade leather bound calculators. The contract stipulates that if B manages to end up charging A below what was originally quoted then savings would be split 30:70 to wards company B. This is an example of: A B C D

Outsourcing Supplier chain management A gain sharing arrangement Product differentiation

M1.33 In the context of quality costs, free replacements to customers and training costs are classified as: A B C D

Free replacements External failure cost External failure cost Internal failure cost Internal failure cost

Training costs Appraisal cost Prevention cost Appraisal cost Prevention cost

M1.34 A company operates a throughput ing system. The details per unit of Product C are: Selling price Material cost Labour cost Overhead costs Time on bottleneck resource

$28.50 $9.25 $6.75 $6.00 7.8 minutes

The throughput contribution per hour for Product C is: A B C D

$50.00 $122.85 $121.15 $148.08

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M1.35 JJ Ltd manufactures three products: W, X and Y. The products use a series of different machines but there is a common machine that is a bottleneck. The standard selling price and standard cost per unit for each product for the forthcoming period are as follows:

Selling price

W £ 200

X £ 150

Y £ 150

Cost Direct materials Labour Overheads Profit

41 30 60 69

20 20 40 70

30 36 50 34

Bottleneck machine – minutes per unit

9

10

7

40% of the overhead cost is classified as variable Using a throughput ing approach, what would be the ranking of the products for best use of the bottleneck? M1.36 Which of the following is not a likely example of a bottleneck when planning for production capacity A B C D

Resources available Physical space Lead time to organise expansion Sales demand

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M1.37 Complete the following missing activities for the value chain digram below. Select FOUR answers (A to G) from the information below the table.

Margin

A

Activities

Secondary

Technology Infrastructure

B Procurement

Inbound Logistics

C

Outbound Logistics

D

After Sales Service

Margin Primary Marketing and Sales

Human Resource Management

Finance

Information Technology

Operations

Innovation

Infrastructure

M1.38 Which ONE of the following would NOT be considered part of the lean philosophy approach? A B C D

Centralisation of management decision making Elimination of waste Involvement of staff in the operation The drive for continuous improvement

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M1.39 Which of the following are NOT likely to be factors that can restrict productive capacity of a firm? Select THREE only. Physical space JIT systems Efficiency Waste Over-production Outsourcing Defects Resource availability M1.40 According to Cousin’s strategic supply wheel, which one of the following is NOT an interconnected component of this model? A B C D

Good relationships with suppliers Performance measures Cost-benefit analysis Vertical integration

M1.41 According to Rock and Long an organisation can take a position in of how it strategically places its purchasing department, which of the following is NOT a view of this strategic positioning tool? A B C D

ive Independent Ignored Integrative

M1.42 When the supplier sourcing strategy of an organisation is to outsource purchasing decisions to an external third party organisation, this strategy would be best described as? A B C D

Single sourcing strategies Multiple sourcing strategies Delegated sourcing strategies Parallel sourcing strategies

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M1.43 Optimised production technologies (OPT) is an operations management system which aims to A B C D

improve distribution networks improve supply sourcing alternatives integrate operations and quality assurance reduce production bottlenecks

M1.44 CIMA's definition of just-in-time (JIT) production is: A

A system which is driven by demand for finished products, whereby each component on a production line is produced only when needed for the next stage.

B

A system in which material purchases are contracted so that the receipt and usage of material, to the maximum extent possible, coincide.

C

A system where the primary goal is to maximise throughput while simultaneously maintaining or decreasing inventory and operating costs.

D

A system that converts a production schedule into a listing of the materials and components required to meet that schedule, so that adequate stock levels are maintained and items are available when needed.

M1.45 An example of a soft capital rationing issue is: A B C D

Head office imposed restrictions on next year’s budget The bank is unwilling to extend the overdraft A drop in the share price has meant that a rights issue was not widely taken up. A company cannot issue debentures because it is not listed

M1.46 Discounted payback involves: A B C D

Applying a discount rate to cashflows Finding when the project has an NPV of zero Only considering conventional cashflows Creating a relative figure rather than an absolute figure

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M1.47 Replacement theory seeks to: A B C D

Compare two projects with different timescales Compare two projects with initial cash outflows Compare two projects that are discounted at different rates Compare two projects that no cash inflows

M1.48 When the cost of capital is increased which one of the following about NPV and payback is true? A B C D

The NPV will increase and the payback period will increase The NPV will decrease and the payback period will increase The NPV will decrease and the payback period will decrease The NPV will decrease and the payback period will remain constant

M1.49 For investment appraisal decisions the calculation of payback period A B C D

Considers that all cash flows received over the projects life have equal value Considers that all cash flows received in earlier years have more value Considers that all cash flows received in later years have more value Considers that all cash flows received in earlier years have less value

M1.50 The following information exists about a project: NPV at 10% +$8,900 NPV at 15% - $1,600 What would be the internal rate of return for the project (to 1 decimal place)?

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M1.51 A company in the next period needs to make 1,000 units of products A and 3,000 units of product B and C. All three products are made using the same machines; machine capacity next period will be a maximum of 20,000 hours. Internal if product made in house ($) Machine hours if made in house Market price if purchased from a supplier ($)

A 10 5 20

B 15 5 32

C 5 7 9

In order to minimise internal cost how many units of product C should be purchased from an external supplier? A B C D

None 1,167 units 2,800 units 3,000 units

M1.52 When the cost of capital is decreased which one of the following about NPV, IRR and payback is true? A B C D

The NPV will increase, the payback period will increase and IRR will increase The NPV will decrease, the payback period will increase and IRR will decrease The NPV will increase, the payback period will decrease and IRR will increase The NPV will increase, payback will remain constant and IRR will remain constant

M1.53 ROI is most appropriately used to evaluate the performance of: A B C D

Revenue centre managers Both profit centre managers and investment centre managers Investment centre managers Profit centre managers

M1.54 Which of the following is not used in the calculation of divisional ROI? A B C D

Divisional income Sales margin Earnings per share Sales revenue 269 | P a g e

M1.55 What does the ROI show? A B C D

The percentage of each £ in sales that is invested in assets The £ sales generated from each £ of profit How effectively a company used its invested capital The invested capital from each £ of income

M1.56 Champion had sales and costs of £1,000,000 and £350,000 respectively. If total capital was £7,000,000, what is the ROI? A B C D

14.3% 5% 9.3% 12%

M1.57 King Khan Ltd had a sales margin of 10%, sales of £20,000, and invested capital of £100,000. The company's ROI was: A B C D

5% 2% 20% 6%

M1.58 Marketers have to wrestle with the “Big Data” problem when trying to exploit new and innovative forms of information processing to gain enhanced insight and decision making within marketing decisions. According to Gartner which ONE of the following would NOT be a definition of the “Big Data” problem? A B C D

Volume Velocity Veracity Variety

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M1.59 A company can choose from three mutually exclusive projects. The net cash flows from the projects will depend on market demand. All of the projects will last only for one year. The forecast net cash flows, their associated probabilities and the expected value of the projects are given below: Market demand Probability

Weak 0.3

Average 0.5

Good 0.2

Expected value 1

Project A Project B Project C

$400 $300 $500

$500 $350 $450

$600 $400 $650

$490 $345 $505

The maximum amount that should be paid for perfect information regarding market demand is $ M1.60 A decision maker using the maximin decision criterion will: A

Assume that risk can be ignored and will choose the outcome with the highest expected value.

B

Assume that he will regret not having chosen another alternative and will therefore minimise the possible loss under this assumption.

C

Assume that the worst outcome will always occur and will select the largest payoff under this assumption.

D

Assume that the best payoff will always occur and will therefore select the option with the maximum payoff.

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Mock Exam 1 - Answers M1.1 Answer is D M1.2 Answer is B M1.3 Answer is C M1.4 Answer is D M1.5 Answer is A The maximum price is the material cost of buying in the material and the machine time taken to process. This machine time will result in lost contribution of the the current products being made as the company is at full capacity. Each machine hour is worth 1,000 / 20 = £50 of lost contribution Therefore the maximum price to pay to buy in the component: £300 + (£50 x 5 hours) = £550 M1.6 Answer is 425.8 hrs r = 0.8, therefore b = log 0.8 / log 2 = -0.3219 y = 1,200 (25) (to the power of -0.3219) y = 425.8 hrs M1.7 Answer is 749.7 hrs The learning curves ceases at 150 sheep and after that every sheep takes the same time to make. b = log 0.75 / log 2 = -0.4150 Average time to make 150 sheep = 17 (150) (to the power of -0.4150) = 2.125 hrs Total time to make 150 sheep = 2.125 x 150 = 318.75 hrs Average time to make 149 sheep = 17 (149) (to the power of -0.4150) = 2.131 hrs Total time to make 149 sheep = 2.131 x 149 = 317.519 hrs Time taken for the 150th sheep = 318.75 – 317.519 = 1.231 hrs Total time for 500 sheep = 318.85 + (350 sheep x 1.231 hrs) = 749.7 hrs 273 | P a g e

M1.8 Answer The average time for “x” units Total time for “x” number of untis Index of learning The average index of learning Time taken for the first unit M1.9 Answer is 46 hours Log 0.7/log 2 = -0.5146 20 hours = a x 5 (to the power of –0.5146) 20 = a x 0.4368 a = 20 / 0.4368 a = 46 hours M1.10 Answer is 24.95 hours Time for the first 14 units (46 x 14 (to the power of –0.5146) x 14 = 165.61 hours Time for the first 10 units (46 x 10 (to the power of –0.5146) x 10 = (140.66) hours Time for the 14th to 10th unit 24.95 hours M1.11 Answer is £317.50 P = 100 Q = 1,000 b = 50/100 = 0.5 a=? Use the price function to solve for “a”: P = a - bQ 100 = a – 0.5(1,000) 100 = a – 500 600 = a Therfore price function: P = 600 – 0.5Q

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Profit max positon is when MR = MC MR = 600 – 2(0.5)Q MR = 600 – Q MC = 35 Therfore: 600 – Q = 35 -Q = 35 - 600 -Q = -565 Q = 565 Optimal quatity demanded is 565 Selling price: P = 600 – 0.5Q P = 600 – 0.5 (565) P = 600 – 282.5 P = 317.5 Optimal selling price is £317.50

M1.12 Answer is G We have been given the value of “a” being maximum price which in this case is £700 b = 40/100 = 0.4 Therfore price function: P = 700 – 0.4Q MR = 700 – 2(0.4)Q MR = 700 – 0.8 Q MC = 60 Profit max is when MR = MC 700 – 0.8 Q = 60 -0.8 Q = -640 Q = 800 Profit max quantiy is therefore 800 units 275 | P a g e

M1.13 Answer is D M1.14 Answer is B M1.15 Answer is $12.54 15% of $2,000,000 = $300,000 required annual return Annual return per unit = $300,000 / 55,000 units = $5.45 Therefore target cost per unit = $18 - $5.45 = $12.54 M1.16 Answer Fixed

A budget that is set prior to the control period and not subsequently changed in response to changes in activity, costs or revenues

Rolling

A budget that is continuously updated by adding a further ing period when the earliest ing period has expired

Flexible

A budget that is changed in response to changes in the level of activity

Incremental

A budget that is based on the previous budget or actual results for changes in the activity and inflation

M1.17 Answer is A M1.18 Answer is B M1.19 Answer is D M1.20 Answer Batch Level Activity Shipping Inspection Quality assurance Material handling

Facility Level Activity Property taxes Insurance Plant depreciation Plant maintenance

Direct materials is a unit level activity and therefore not included in the above.

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M1.21 Answer is C Staff costs = £80,000 x 70% = £56,000 General overheads = £70,000 x 50% = £35,000 Total cost for tyres = £56,000 + £35,000 = £91,000 Cost per tyre = £91,000 / 40,000 = £2.28 M1.22 Answer is A Staff costs = £80,000 x 20% = £16,000 General overheads = £70,000 x 30% = £21,000 Total cost for delivery = £16,000 + £21,000 = £37,000 Cost per delivery = £37,000 / 6,000 = £6.17 M1.23 Answer is B M1.24 Answer is D M1.25 Answer is D M1.26 Answer Unit level costs = direct materials = £4,120 Batch level costs = materials reciving + manufacturing set up = £550 Product sustaining costs = new technology design engineering = £3,111 Facility level costs = plant rent + machinery depreciation + general management salaries = £4,353 M1.27 Answer is A M1.28 Answer is A M1.29 Answer is B M1.30 Answer is D M1.31 Answer is A M1.32 Answer is C M1.33 Answer is B

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M1.34 Answer is D Throughput contrbution = $28.50 - $9.25 = $19.25 Return per hour = ($19.25 / 7.8) x 60 = $148.08 M1.35 Answer Tip: The throughput ing approach aims to maximise contribution whilst minimising conversion e.g. labour and overhead cost. It is essentially the same principle as marginal costing, but assumes the only true variable cost when calculating throughput contribution is the material and component cost only of making a product. This system also values inventory at material cost only. Throughput contribution = sales less material cost only ‘the only true variable cost’

Selling price Direct materials Throughput contribution per unit Bottleneck (minutes) Throughput contribution per minute Ranking

W £ 200 41 159

X £ 150 20 130

Y £ 150 30 120

9

10

7

£17.67

£13.00

£17.14

First

Third

Second

M1.36 Answer is A M1.37 Answer A = Infrastructure B = Human Resource Management C = Operations D = Marketing and Sales M1.38 Answer is A Centralisation of management decision making 278 | P a g e

M1.39 Answer JIT systems Over-production Outsourcing M1.40 Answer is D Vertical integration M1.41 Answer is C Ignored M1.42 Answer is C Delegated sourcing strategies M1.43 Answer is D Reduce production bottlenecks M1.44 Answer is A M1.45 Answer is A M1.46 Answer is A M1.47 Answer is A M1.48 Answer is D M1.49 Answer is B

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M1.50 Answer is 14.2% The IRR method This is achieved through trial, error and interpolation. If we have a cost of capital which yields a positive NPV then we need to find a cost of capital when applied that will give a negative NPV. Using interpolation formula: IRR = A + ( a a–b

x

[B - A] )

A = lower DF rate B = higher DF rate a = NPV of A b = NPV of B

IRR = 10% + ($8,900 ÷ ($8,900 + $1,600)) x (15% - 10%) IRR = 10% + 4.2% IRR = 14.2%

M1.51 Answer is D Clearly each product would be cheaper to make internally but there is a shortage of machine hours, therefore this problem is like limiting factor analysis but rather than attempting to maximise contribution, you are instead attempting to minimise cost.

External cost per unit Hours required per unit External per hour Ranking

A £20.00

B £32.00

C £9.00

5

5

7

£4.00

£6.40

£1.29

Second

First

Third

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The external cost per hour of making product B is highest, so to minimise cost use all machine hours on this product first, then product A and then product C. B 3,000 units x 5 hours = 15,000 hours Hours left 20,000 hours less 15,000 hours = 5,000 hours! Given product A is the second most expensive you make these products next. Product A made = 5,000 hours ÷ 5 hours per product = 1,000 units made. You have now run out of machine hours therefore would have to buy all of product C from a supplier but this would minimise cost! M1.52 Answer is D M1.53 Answer is C M1.54 Answer is D M1.55 Answer is C M1.56 Answer is C £1,000,000 - £350,000 / £7,000,000 = 9.3% M1.57 Answer is B 10% of £20,000 = £2,000 / £100,000 = 2% M1.58 Answer is C M1.59 Answer is $25 If we had perfiect information then expected value is: Market conditions Weak Average Good EV with perfect information EV without perfect information Value of perfect information

Best projects in market condition C A C

Probability

Net cash inflows

0.3 0.5 0.2

$500 $500 $650

EV $150 $250 $130 $530 ($505) $25

M1.60 Answer is C 281 | P a g e

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Mock Exam 2 M2.1 Which of the following if any is a relvant cost? The cost of inventory when looking at selling it or retaining it The cost of a speciasl gas installation for an asset when looking at its purchase The salary of a manager who will be transferred to the West Nottingham branch after the closure of the East Nottingham branch M2.2 Which of the following if any best describes a relevant cost? A past cost that is the same compared to other alternatives A past cost that is different from alternatives A future cost that is the same compared to other alternatives A future cost that is different from alternatives A cost that is based on past experience M2.3 In the short-term decision-making which of the following if any would be a relevant cost? The original cost of materials already in the store which will be used on the project Depreciation of existing fixed assets Specific development costs incurred General expenditure already incurred Cost of specific materials which will be purchased M2.4 The decision-making process requires: A B C D

The use of large amounts of historical data A disregard of non-relevant costs A disregard of forecasts Analysis of the most recent income statement of the business

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M2.5 Which of the following costs is relevant in decision-making? A B C D

Ccommitted costs ing costs Cash costs Historical costs

M2.6 The total time taken to produce the first sixteen batches was 200 hours. Calculate the cumulative learning rate if the first batch took 45 hours. M2.7 Month 1 2 3 4

Total batches produced to date 1 2 4 8

Actual learning rate 75% 85% 90%

From months 3 to 4, state possible reasons why the actual learning rate has changed? Select ALL that apply Decrease in staff turnover Gradual reduction in how much more that can be learned Superior materials being introduced Production is no longer in its early stages Motivation and enthusiasm of the existing staff has increased M2.8 What does the “b” represent in the learning curve formula y=axᵇ Select ALL that apply Index of learning It is the percentage fall required in average time if output doubles Log r / log 2 It is the percentage amount of average time needed if output doubles It is the time needed for the first item

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M2.9 If it took 35 hrs to make the first 4 sandwiches in a shop and the learning rate is 95%, how long did the first sandwich take? State your answer to 1 decimal place. M2.10 What does the “a” represent in the learning curve formula y=axᵇ Select ALL that apply The learning rate Average number oif units It is the time needed for the first item It is the percentage amount of average time needed if output doubles Log r / log 2 M2.11 Which ONE of the following consists of dividing a market into distinct groups of buyers on the basis of their needs, characteristics or behaviour? A B C D

Market research Market segmentation Market targeting Market positioning

M2.12 Expensive perfume manufacturers have often used extensive advertising, high profile celebrity endorsement and slogans such as ‘because you are worth it’. This enables a high price to be charged and give the perception to a customer that it is a superior product. Which ONE of the following pricing strategies would this type of example ? A B C D

Market skimming pricing Psychological pricing Price discrimination

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M2.13 Retailers often deliberately sell certain products at a low price and commonly at a loss, but through this promotional awareness it attracts more customers who in turn may buy other items during their visit to a website or store. Such a marketing strategy is commonly referred to as a? A B C D

Loss leader strategy Multi channel strategy Price discrimination strategy Variable pricing strategy

M2.14 Z incurs costs in total of £30: Variable prodcution costs £12, variable selling costs £6, fixed production costs £9, fixed selling and costs £3. The demand function is P = 3,000 – 0.5Q Where P = price, Q = qustity demanded Calculate the profit maximising selling price and quatity for Z M2.15 A new implant mobile phone is being launched by Pear plc which can be inserted under the sklin of your wrist and therefore you can never be lost! It’s variable costs is £14 per unit and after conducting market research it turns out that if they were to charge £25 then demand would be 1,000 units. Every £1 increase in the selling price would reduce demand by 100 units and every £1 decrease in the selling pricee would increase demand by 100 units. Calculate the optimum selling price.

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M2.16 Which if these relate to Beyond Budgeting? Select all if any. Variance analysis Fixed budgets Zero based budgeting Activity based costing control Incremetnal budgeting Flexed budgets Benchmarking M2.17 Which of the following if any are examples of control? Variance analysis Cash flow forecasting Target costing Budget setting process M2.18 In the context of budgeting and control, the term 'goal congruence' refers to: A B C D

The setting of a budget which does not include budgetary slack The alignment of the budget with the company's strategic objectives The setting of a budget that challenges managers The alignment of the company's objectives with the personal objectives of the manager

M2.19 Which of the following is not normally associated with ABC? A B C D

Calculation of cost application rates Minimising the use of cost drivers Identification of cost drivers Assignment of cost to products

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M2.20 Which of the following is not a broad cost classification category typically used in activity based costing? A B C D

Unit level Batch level Product sustaining level Operational level

M2.21 In an activity based costing system, direct labour used would typically be classified as a: A B C D

Product sustaining cost Batch level cost Unit level cost Facility level cost

M2.22 Which of the following is least likely to be classified as a batch level activity in an activity based costing system? A B C D

Dispatching Receiving and inspection Income tax Quality assurance

M2.23 In an activity based costing system materials receiving would typically be classified as a: A B C D

Unit level activity Facility level activity Product sustaining activity Batch level activity

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M2.24 Tyson is developing a new range of vacuum cleaners that use turbine power technology. The research costs for this technology are said to come from: A B C D

Unit level activity Facility level activity Product sustaining activity Batch level activity

M2.25 Which of the statements if any are true regarding product sustaining activities? They must be done for each batch of product that is made They must be done for each unit of product that is made They are needed to an entire product line M2.26 Which of the following is least likely to be classified as a facility level activity in an activity based costing system? A B C D

Machine processing cost Property taxes Plant maintenance Plant management salaries

M2.27 Most supply chains involve which ONE of the following? A B C D

A number of different companies An organisation’s infrastructure After sales service A strategic apex

M2.28 Which ONE of the following is NOT a category featured in Porter's Value Chain? A B C D

Procurement Operations Marketing and sales Gross profit 289 | P a g e

M2.29 Which ONE of the following strategies is less likely to achieve greater integration within an organisations supply chain? A B C D

Divestment of activities Vertical integration Strategic alliances t ventures

M2.30 Quality failure costs incurred before the good or service has been transferred to the customer would normally be described as? A B C D

Prevention costs Appraisal costs Internal failure costs External failure costs

M2.31 Which of the following technologies facilitates a virtual supply chain? i. ii. iii. A B C D

Electronic data interchange Extranets E-commerce

i only i and ii only iii only All of the above

M2.32 Supply chain partnerships grow out of A B C D

Quality accreditation Recognising the supply chain and linkages in a value system An expansion of trade Adopting a marketing philosophy

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M2.33 In purchasing, the “Reck and Long” positioning tool is by nature A B C D

Strategic Independent ive ive

M2.34 A necessary product/service requirement to meet the Japanese interpretation of ‘quality’ is to A B C D

Comply with all safety standards Cost no more than necessary Meet a design brief Meet customer expectations

M2.35 An approach of producing goods or purchasing stock only when required is referred to as A B C D

Just-in-time Ad hoc Level capacity strategy Plan-do-check-act (PDCA) quality

M2.36 Which ONE of the following would be defined as ‘the philosophy that recommends the redesign of processes to fulfill defined external customer needs’? A B C D

TQM JIT BPR 5S

M2.37 Which of the following is normally accepted as a requirement of JIT to be successful? A B C D

Bulk buying from suppliers High levels of demand from customers Training and involvement of staff Mass automation 291 | P a g e

M2.38 Which of the following is not associated with TQM? A B C D

Get it right first time philosophy Zero defects Redesign of existing processes Continuous improvement is the aim

M2.39 Which of these is NOT an external failure cost of quality? A B C D

istration of customer complaints istration of customer service Inspection of processes Repairs and replacements

M2.40 Which of these is a prevention cost of quality? A B C D

Failure analysis e.g. reasons why and faults Training and development of quality culture Losses/scrap of materials and finished goods Lost goodwill/reputation

M2.41 A bundle of machines that can be programmed to switch from one production run to another is an example of? A B C D

Flexible manufacturing system Computer aided manufacturing Manufacturing resource planning Enterprise resource planning

M2.42 An information systems which provides a list of parts and materials required for the type and number of products entered, allowing for better stock management is an example of? A B C D

Materials requirement planning Computer aided manufacturing Enterprise resource planning Optimised production technology 292 | P a g e

M2.43 Which of these is NOT true about Kaizen costing? A B C D

Similar to TQM Focussing on small incremental improvements Focuses on reducing fixed costs of future periods below that of prior periods Underpins empowerment of employees

M2.44 Which of these is NOT an aspect of value in value analysis? A B C D

Utility value Esteem value Cost value Sale value

M2.45 The IRR: A B C D

Discounts cashflows Is when the NPV of a project is negative Selects projects based return of profit Is when the NPV of a project is positive

M2.46 Which one of the following would be included in the analysis of relevant costs when completing a net present value of a project? A B C D

Sunk cost Future cash-flow Apportioned fixed cost Committed cost

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The following information is to be used for M2.47 and M2.48: The following data exists for Company B, who manufacture units of a product that has a selling price of £250 and a variable cost per unit of £110. Specific fixed cost for a project they are investigating will be £80,000 a year and a net present value for a new machine has been calculated using the above information. T0 T1 to T5

Machine outlay Annual cash-flow profit

Cash-flow £600,000 £280,000

8% D.F 1.0 3.993

£000s (600) 1,118 +518

M2.47 What would be the percentage change in selling price (to the nearest 1%), using the above data that would give a net present value of zero? A B C D

18% 19% 20% 21%

M2.48 How many units sold per annum would achieve break-even (to the nearest 100 units)? A B C D

1,000 units 1,200 units 1,400 units 1,600 units

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M2.49 The following data exists for a company: Machine paid for now is £200,000 and provides cash-flows each year for the next 4 years of £40,000. Corporation tax is 30% and is paid in equal instalments in the seventh and tenth months of the year in which the profit is earned and the first and fourth months of the following year. The company’s cost of capital is 8%. Writing down allowance of 25% on a reducing balance basis can be claimed each year. You are to assume the company’s investment in the machine occurs on the first day of the tax year. The present value of cash flow occurring in the second year (to the nearest £1) would be? A B C D

£35,224 £35,675 £36,769 £38,124

M2.50 If a company has a money cost of capital of 17% and the inflation rate is 2.5% what s the real cost of capital rate? A B C D

14% 13% 12% 11%

M2.51 A project has an NPV of £2,500 and discount rate of 3%, also an NPV of (£1,500) at a discount rate of 13%. What is the IRR? A B C D

9.25% 3% 13% 7.45%

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M2.52 When abandoning a project which of the following factors is not normally a factor that is considered? A B C D

Future inflows and cashflows of existing project Future inflows and outflows of alternative project Scrap value of existing project Total costs and revenues to date of existing project

M2.53 Which of these is not an advantage of a functional structure company? A B C D

Reduction in costs Higher quality service Improved customer satisfaction Duplciation of functions in a division

M2.54 The divisional manager’s decision is different to the decision that head office would have made and would only benefit the division and not the company as a whole. This is known as? A B C D

Goal congruence Sub optimal decision Profit minimisation Cost maximisation

M2.55 Rusty Ltd has net assets of £2,450,000; net profit of £750,000 and sales of £1,850,000. What is the return on investment for the current period? A B C D

25.2% 75.5% 44.9% 30.6%

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M2.56 Kaalia Ltd has a cost of capital of 15%. If the assets value for one of its divisions is £600,000 and the divisional income was £100,000, what was the residual income for the division? A B C D

£100,000 £90,000 £10,000 £190,000

M2.57 If an intermediate market exists, then the optimal transfer price is usually the: A B C D

None of these options Market price Opportunity cost of not selling to the outside market Variable costs associated with producing the product

M2.58 The owner can pay for a specialist car marketing company that claims that 70% of the time it can accurately predict whether or not the competition will be better or worse. The maximum amount that would be paid to the firm of consultants, compared with not purchasing it and not attending the exhibition would be? A B C D

£89,600 £59,800 £29,200 £19,800

M2.59 K Plc is about to launch a new training centre in London the cost of doing so will be £20,000. There is a 60% chance it will be successful and a 40% chance it will be unsuccessful. If it is successful it is estimated that there is a 50% chance it will be very successful and generate contribution of £60,000 and a 50% chance that it will be moderately successful and generate contribution of £30,000. What is the expected value of the new centre launch? A B C D

£27,000 £15,000 £7,000 £42,000 297 | P a g e

M2.60 A risk seeking decision maker will: A B C D

Accept risk Ignore risk Avoid risk Seek risk

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Mock Exam 2 - Answers M2.1 Answer The cost of inventory when looking at selling it or retaining it The cost of a speciasl gas installation for an asset when looking at its purchase The salary of a manager who will be transferred to the West Nottingham branch after the closure of the East Nottingham branch M2.2 Answer A past cost that is the same compared to other alternatives A past cost that is different from alternatives A future cost that is the same compared to other alternatives A future cost that is different from alternatives A cost that is based on past experience M2.3 Answer The original cost of materials already in the store which will be used on the project Depreciation of existing fixed assets Specific development costs incurred General expenditure already incurred Cost of specific materials which will be purchased M2.4 Answer is B M2.5 Answer is C M2.6 Answer is 84% a = 45 hrs, y = 200 hrs / 16 batches = 12.5 hrs on average for 16 batches If we assume that “r” represents the learning rate, then: Batches 1 2 4 8 16

Average hours per unit 45 45 x r 45 x r x r 45 x r x r x r 45 x r x r x r x r 299 | P a g e

Therefore for 8 batches: 45 r (^4) = 22.78 r (^4) = 22.78 / 45 r (^4) = 0.506 r = 0.506 (^1/4) r = 0.843 Therefore learning rate is 84% M2.7 Answer Decrease in staff turnover Gradual reduction in how much more that can be learned Superior materials being introduced Production is no longer in its early stages Motivation and enthusiasm of the existing staff has increased M2.8 Answer Index of learning It is the percentage fall required in average time if output doubles Log r / log 2 It is the percentage amount of average time needed if output doubles It is the time needed for the first item M2.9 Answer is 9.7 hrs Using the formula y=axᵇ r = 0.95 therfore the value of b = log 0.95 / log 2 = -0.0740 y = 35 / 4 = 8.75 8.75 = a (4) (to the power of -0.0740) 8.75 = a (0.90250) a = 9.7 hrs

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M2.10 Answer The learning rate Average number oif units It is the time needed for the first item It is the percentage amount of average time needed if output doubles Log r / log 2 M2.11 Answer B Market segmentation M2.12 Answer is B pricing M2.13 Answer is A Loss leader strategy M2.14 Answer is £1,509 and 2,982 units Profit max positon is when MR = MC MR = 3,000 – Q MC = £12 + £6 = £18 Therfore: 3,000 – Q = 18 -Q = -2,982 Q = 2,982 Quatity demanded of Z is 2,982 units at the profit max position Selling price: P = 3,000 – 0.5Q P = 3,000 – 0.5 (2,982) P = 3,000 – 1,491 P = 1,509 Selling price of Z at the profit max position is £1,509

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M2.15 Answer is £24.50 P = 25 Q = 1,000 b = 1/100 = 0.01 a=? Use the price function to solve for “a”: P = a - bQ 25 = a – 0.01(1,000) 25 = a – 10 35 = a Therfore price function: P = 35 – 0.01Q Profit max positon is when MR = MC MR = 35 – 2(0.01)Q MR = 35 – 0.02Q MC =14 Therfore: 35 – 0.02Q = 14 -0.02Q = 14 - 35 -0.02Q = -21 Q = -21 / -0.02 Q = 1,050 Optimal quatity demanded is 1,050. Selling price: P = 35 – 0.01Q P = 35 – 0.01 (1,050) P = 35 – 10.5 P = 24.5 Optimal selling price is £24.50.

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M2.16 Answer Variance analysis Fixed budgets Zero based budgeting Activity based costing control Incremetnal budgeting Flexed budgets Benchmarking M2.17 Answer Variance analysis Cash flow forecasting Target costing Budget setting process M2.18 Answer is D M2.19 Answer is B M2.20 Answer is D M2.21 Answer is C M2.22 Answer is C M2.23 Answer is D M2.24 Answer is C M2.25 Answer They must be done for each batch of product that is made They must be done for each unit of product that is made They are needed to an entire product line M2.26 Answer is A M2.27 Answer is A A number of different companies

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M2.28 Answer is D Gross profit M2.29 Answer is A Divestment of activities M2.30 Answer is C Internal failure costs M2.31 Answer is D All of the above M2.32 Answer is B Recognising the supply chain and linkages in a value system M2.33 Answer is A Strategic M2.34 Answer is D To meet customer expectations M2.35 Answer is A Just-in-time (JIT) M2.36 Answer is C Business process reengineering (BPR) M2.37 Answer is C M2.38 Answer is C M2.39 Answer is C M2.40 Answer is B M2.41 Answer is A 304 | P a g e

M2.42 Answer is A M2.43 Answer is C M2.44 Answer is D M2.45 Answer is A M2.46 Answer is B M2.47 Answer is C Contribution £280,000 + £80,000 fixed overhead = £360,000 Contribution per unit = £360,000/(£250 - £110) contribution per unit = 2,571 units sold per annum. PV of sales £250 x 2,571 units p.a. x 3.993 = £2,566,500 In order for the project to break-even the PV of sales would be compared to the NPV of the project. NPV 518k/PV Sales 2567k = 20.1% M2.48 Answer is D BE Units x (£250 - £110) x 5 year annuity (8%) = PV outflow BE Units x £140 x 3.993 = T0 (£600,000) + T1 to T5 (£80,000 p.a. x 3.993) BE Units x 559 = 919,440 BE Units = 919,440/559 BE Units = 1,645 units Alternative method PV Contribution £360,000 x 3.993 = £1,437,480 NPV 518k/PV Contribution 1437k = 36% Volume would have to fall by 36% for the project to break-even therefore 2,571 units x 0.64 (for a fall in 0.36 volume) = 1,645 units

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M2.49 Answer is A WDAs T1 WDA 25% T2 WDA 25%

200,000 (50,000) x 30% 150,000 (37,500) x 30%

T1

T2

7,500

7,500 5,625 13,125

T3

5,625

Therefore PV C/F T2 (£13,125 + £40,000 – (0.3 x £40,000)) x 0.857 = £35,224 M2.50 Answer is A (1 + r) = (1+m) / (1+i) (1 + r) = (1 + 0.17) / (1 + 0.025) (1 + r) = 1.17 / 1.025 1+ r = 1.14 r = 14% M2.51 Answer is A 3% + (2500 / (2500 - - 1500) x [13% - 3%]) = 9.25% M2.52 Answer is D M2.53 Answer is D M2.54 Answer is B M2.55 Answer is D (£750,000 / £2,450,000,000) x 100% = 30.6% M2.56 Answer is C £100,000 – (£600,000 x 15%) = £10,000 M2.57 Answer is B

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M2.58 Answer is D A = Attend show and pay for market research N = Not attend show and do not pay for market research 4 x £15k = 60k 0.4

4 x £15k = 60k

N Right 0.7 £90k

£90k

0.6

8 x £15k = 120k -10k = 110k

A 0.4 £90k

Wrong 0.3

4 x £15k = 60k -10k = 50k

8 x £15k = 60k £90k

0.6

Therefore the most you will pay for the market research with imperfect information would be £90,000 – £60,000 = £30,000. Other decision trees could have represented the decision differently e.g. could have shown better or worse first and then right or wrong for the market research company last on the decision tree Evaluation: The market research company is right (0.7) and the competition is going to be better (0.4) you therefore do not go as you will sell 4 cars anyway. The market research is right and the competition is worse (0.6) you therefore do go and sell 8 cars but will have to incur 10k exhibition costs. The market research is wrong (0.3) and the competition you find is better (0.4), you would not have gone had you been told this, but you would go because they were wrong so you would sell 4 cars and incurred 10k exhibition costs for doing so. The market research is wrong (0.3) and the competition is worse (0.6), you would have gone but seeing as they predicted the competition would be better, you would have stayed away, sold 4 cars anyway, but incurred no exhibition costs. 307 | P a g e

In the above decision you would have always sold 4 cars any way so you could have excluded the 4 cars sold at every stage of the decision process. The decision tree is the same as above but ignores 4 cars sold (earning £60k contribution, every stage of each decision. This would also allow you to calculate the answer quicker. £0 0.4

£0

N Right 0.7

£30k

0.6

£50k

A £19.8

-£10k 0.4 £19.8

Wrong 0.3 -£4k

0.6

£0

Probability of attending the show and finding competition is worse than you = 0.7 x 0.6 = 0.42. Incremental contribution 8 cars – 4 cars sold anyway = £60k -£10k cost = £50k. Probability of attending the show and finding the competition is better than you = 0.3 x 0.4 = 0.12. Incremental contribution 4 cars – 4 cars sold anyway = £0k –10k cost = -£10k. (0.42 x 50k) + (0.12 x –10k) = 19.8k

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M2.59 Answer is C

£0 0.4 £60k -20k £7k

£27k

0.5

0.6 £45k

0.5

£30k

M2.60 Answer is B

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