Question 1
Cash flow Discount factor Present value Marks
Year 0 Receipt from competitor 600,000 1.000 600,000 1
Year 1 Project net cash flow (350,000) 0.862 (301,700) 1
Year 2 Project net cash flow (250,000) 0.742 (185,500) 1
Year 3 Project net cash flow (100,000) 0.641 (64,100) 1
Net present value 48,700
Decision rule
Accept the proposal if NPV is positive, and reject the proposal if NPV is negative 1
Decision
Accept the offer by the competitor because it gives a positive NPV of $48,700 1
Question 2
Compute the present value of continuing or discontinuing the product Marks
NPV of discontinuing the product
Cash flow Discount fa Present value
Year 0 Sale of old equipment 3,000,000 1.000 3,000,000 1
Year 0 Redundancy costs (800,000) 1.000 (800,000) 1
Year 1 Product net cash flows (1,000,000) 0.847 (847,000) 1
Year 2 Product net cash flows (800,000) 0.718 (574,400) 1
Year 3 Product net cash flows (600,000) 0.609 (365,400) 1
Year 4 Product net cash flows (400,000) 0.516 (206,400) 1
Year 5 Product net cash flows (200,000) 0.437 (87,400) 1
Net present value 119,400
Decision rule
Accept the proposal if NPV is positive, and reject the proposal if NPV 1
is negative
Decision
Accept the proposal to discontinue the product because it gives a positive 1
NPV of $119,400
Question 3
3 a
Expected sales in units Marks
Year 0 Year 1 Year 2 Year 3 Year 4
Probability Projected Expected Projected Expected Projected Expected Projected Expected
Success 0.80 10,000 8,000 15,000 12,000 20,000 16,000 15,000 12,000
Failure 0.20 6,000 1,200 10,000 2,000 8,000 1,600 8,000 1,600
Expected sales in units 9,200 14,000 17,600 13,600 1
Expected sales @ $100/unit 920,000 1,400,000 1,760,000 1,360,000 1
Expected variable cost @ $40 per unit (368,000) (560,000) (704,000) (544,000) 1
Fixed overhead (200,000) (150,000) (150,000) (150,000) 1
Net cash flow (1,500,000) 352,000 690,000 906,000 666,000
Discount factor 1.000 0.833 0.694 0.579 0.482 1
Net Present value 117,662 (1,500,000) 293,216 478,860 524,574 321,012 1
Decision rule
Accept the proposal if NPV is positive, and reject the proposal if NPV
is negative 1
Decision
Accept the proposal to introduce the new product because it gives a positive
NPV of $117,662 1
3 b
Year 0 Year 1 Year 2 Year 3 Year 4
Revised expected volumes 9,200 14,000 8,800 6,800 1
Expected sales @ $100/unit 920,000 1,400,000 880,000 680,000 1
Expected variable cost @ $40 per unit (368,000) (560,000) (352,000) (272,000) 1
Fixed overhead (200,000) (150,000) (150,000) (150,000) 1
Net cash flow (1,500,000) 352,000 690,000 378,000 258,000
Discount factor 1.000 0.833 0.694 0.579 0.482 1
Net Present value (384,706) (1,500,000) 293,216 478,860 218,862 124,356 1
Decision rule
Accept the proposal if NPV is positive, and reject the proposal if NPV
is negative 1
Decision
Reject the proposal to introduce the new product because it gives a positive
NPV of $384.706 1
Question 4 Save Distributors
Marks
a Annual demand = 120000 units 1
Eoq = 2,449 1
b Average weekly demand = 2,308 1
Weekly demand with 50% fluctuation = 3462 1
Demand for six weekls under this scenario = 20,769 1
Thefore required safelty stock is 20769 units
c Reoreder level = 13846 units 1
Question 5
Marks
Physical flow of units Equivalent units
Material P Material Q Conversion Costs Total
WIP b 0
Started 50,000 1
To a/c for 50,000
Completed & trf out 35,000 35,000 35,000 35,000 2
WIP e (Note 1) 15,000 15,000 - 10,000 2
50,000 50,000 35,000 45,000
Cost to a/c for 200,000 70,000 135,000 405,000 1
Cost per equiv unit 4.00 2.00 3.00 9.00 1
a. Cost of goods transferred out (35 0000 equiv units x $9) 315,000.00 1
b. Cost of work in progress ( 15,000 x $4) +(10000 x $3) 90,000.00 1
Total costs accounted for 405,000.00
Note 1
The question does not mention or imply any losses, so we assume that there is none.
Question 6
Marks
a Cost of goods manufactured
Opening work in progress 3,600 1
Add direct materials consumed
Opening stock direct materials 16,200 1
Add Direct materials purchased 20,000 1
Less Direct materials closing stock (17,000) 1
Direct materials consumed during the month 19,200
Add Direct labour
3300 hours at $5 per hour 16,500 1
Add Factory overhead
3300 hours at $2.60 per hour 8,580 1
47,880
Less Closing work in progress (8,120) 1
Cost of goods manufactured 39,760
b Cost of goods completed
Completed
Direct materials
WIPb 1,320
Current month consumption 19,200
WIP e (4,320)
16,200 1
Direct labour
WIPb 1,500
Current month charge 16,500
WIP e (2,500)
15,500 1
Factor overhead
WIPb 780
Current month charge 8,580
WIP e (1,300)
8,060
39,760 1
Work in progress
Direct materials 4,320
Direct labour 2,500
Ovehead 1,300
8,120 1
Question 7
Working Flexible budget Working Actual Variances Marks
Production ( units) 6,000 6,000
Direct materials 1 138,000 150,000 (12,000) 2
Direct labour 249,000 5 252,000 (3,000) 2
Variable costs - Manufacturing 2 42,000 6 48,300 (6,300) 2
- Selling & Admin 3 45,400 46,300 (900) 2
Total variable cost 474,400 7 496,600 (22,200) 2
Fixed costs - Manufacturing 110,800 115,100 (4,300) 2
- Selling & Admin 4 24,400 8 23,600 800 2
Total Cost 609,600 635,300 (25,700) 2
All unhighlighted numbers are given
All highlighted numbers are calculated.
We will discuss workings in class, see formulas in the relevant cells
1
Question 8
The Fleer Company Marks
Selling Price 20
Variable costs - Manufacturing 11
- Selling 3
Total variable costs 14
Contribution 6
Contribution margin ratio 0.3
Fixed costs Manufacturing 540,000
Selling 252,000
Total fixed costs 792,000
1 Break-even is $ 792,000/0.3 = 2,640,000 3
2 To earn profit of $60,000
No of units required (792000 + 60000)/6 = 142,000 units 3
3 Let Sales units be = x
Contribution generated = 6x
Required profit = 2x ( 10% of 20x)
6x - 792000 = 2x
4x = 792,000
x = 198,000
198,000 units are required to earn 10% of sales profit 4
I am sure you can prove this on your own!!!!!!
4a Absorption costing
Per unit
Selling price 20.00
Variable manufacturin costs 11.00
Fixed Ovehead 3.00
Production cost 14
Gross profit 6.00
Selling costs - Fixed 1.40
Selling costs- variable 3.00
Net Profit 1.60 1
Income statement
Sales 3,000,000 1
Opening stock 140,000 1
Variable manufacturing 1,760,000 1
Fixed factory overhead 480,000 1
Standard cost of production 2,240,000
Variance on variable manufacturing cost 40,000 2
Fixed overhead vulume variance 60,000 2
Adjusted cost of production 2,340,000
Closing stock (280,000) 1
Cost of sales 2,200,000 1
Gross profit 800,000
Selling costs- variable 450,000 1
Selling costs - fixed 210,000 1
Fixed selling costs volume variance 42,000 1
Total selling costs 702,000
Net income 98,000
4b Variable costing
Per unit
Selling price 20.00
Variable manufacturin costs 11.00
Selling costs- variable (non inventoriable) 3.00
Variable cost per unit 14
Contribution 6.00 1
1
Sales 3,000,000
Opening stock 110,000 1
Variable manufacturing 1,760,000 1
Variance on variable manufacturing cost 40,000 1
Adjusted cost of production 1,800,000
Closing stock (220,000) 1
Variable selling expenses 450,000 1
Total variable costs 2,140,000 1
Contribution 860,000
Fixed production cost 540,000 1
Selling costs - fixed 252,000 1
792,000
Net income 68,000
Absorption costing net income 98,000
Variable costing net income 68,000 Difference 30,000
Fixed production cost element in opening stock (30,000) Fixed production cost element in closing stock 60,000
30,000 2
Question 9
LIVE ENGINEERING Marks
Standard Deluxe
Market price 1,500 10,000
Materials 1,000 4,000
Labour 200 2,000
Variable overhead 100 1,000
Total variable costs 1,300 7,000
Contribution 200 3,000 2
Since labour is said to be a limiting factor in Live Engineering, we must
calculate the contribution per labour hour
Labour hours 10 100
Contribution per hour 20 30 1
Ranking 2 1 1
From a production perspective Live Engineering is better off using its available
labour on Deluxe
Cost of producing modified deluxe
Deluxe Modified
Cost of importing from Germany 10,000 per unit 1
Variable cost of production
Materials 4,000 1
Labour 2,200 1
Variable overhead 1,000 1
Total variable costs 7,200
Net benefit of internal manufacturing 2,800 per unit 1
From the company viewpoint it is less costly to produce the modified deluxe at a cost
of $7200 than buying the German radar at $10,000. The company would save $2,800 per unit
Available labour hours 100,000 hours
Deluxe labour hours required for the 500 units army order (50,000) 1
Hours available for additional units to replace the imported radar (50,000) 1
Hours available for Standard 0 1
Question 10
Marks
Alternative 1 Best outcome Worst outcome
Net CF Discount factor Present value Net CF Discount f Present value
Year 0 Modification (12,000) 1.00 (12,000) (12,000) 1.00 (12,000) 2
Year 1 Contribution 80,000 0.80 64,000 80,000 0.80 64,000 2
Year 2 Contribution 80,000 0.60 48,000 60,000 0.60 36,000 2
Net Present value 100,000 88,000
Alternative 2
Year 0 New machine (50,000) 1.00 (50,000) (50,000) 1.00 (50,000) 2
Year 0 Sale of old machine 4,000 1.00 4,000 4,000 1.00 4,000 2
Year 1 Contribution 120,000 0.80 96,000 120,000 0.80 96,000 2
Year 2 Contribution 120,000 0.60 72,000 90,000 0.60 54,000 2
Net Present value 122,000 104,000
Note that the $100,000 tied up in working capital is irrelevant for decision making because it does not change
in either alternative.
Decision rule:
Accept the alternative with positive NPV and reject the one with negative NPV. Where the NPV 1
is both cases is positive accept the one with the higher NPV
Decision:
Accept alternative 2 because it gives a higher NPV in both scenarios. 1
Question 11
Equivalent units Marks
Physical flow of units TRF in Finishing Dept Mats Conversion costs Total
WIP b 10,000
Trf in 40,000
To a/c for 50,000 1
Completed and Trf out
- ex WIPb 10,000 - - 2,500
- ex Trf in 25,000 25,000 25,000 25,000
Abnormal loss 5,000 5,000 5,000 -
WIP e 10,000 10,000 10,000 5,000
50,000 40,000 40,000 32,500 5
Cost to account for
WIP b 140,500 1
Trf in 140,000 70,000 292,000 502,000 1
Total cost to account for 642,500
Cost per equiv unit 3.50 1.75 8.98 14.23 1
a Cost of gewgaws lost in production ( 5000x 3.50 + 5000x1.75) 26,250 1
b. Cost of gewgaws trf to finished goods
WIPb 140,500 1
Cost to complete WIPb (2500x8.98) 22,462 1
Started & completed (25000x 14.23) 355,865 1
518,827
c Cost of WIP e (10000x3.5 + 10000x1.75 + 5000x8.98) 97,423 1
Total cost accounted for 642,500
Question 12, Question 13, Question14, Question 15 and Question 16
Marks
Clear comments that enable one to follow your thought process will be awarded marks
Question 12 12
Question 13 12
Question 14 10
Question 15 12
Question 16 8
Question 17
Semi automatic Automatic Marks
i Let the min no. of doughnuts be x y
Total annual costs 28,000+ 0.2x 32000+0.14y 1
Cost of outside purchase 0.4x 0.4y 1
Solve these equations 28000+0.2x = 0.4x 32000+0.14y=0.4y
x = 140000 y=123077 1
ii At 25000 doughnuts
Variable cost 50,000 35,000 1
Fixed costs 28,000 32,000 1
Total cost 78,000 67,000
The automatic machine is better for 250000 doughnuts annually 1
iii For 500000 doughnuts
Variable cost 100,000 70,000 1
Fixed costs 28,000 32,000 1
Total cost 128,000 102,000
The automatic machine is better for 250000 doughnuts annually 1
iv Let the volume be x x
Variable costs .20x .14x 1
Fixed cost 28,000 32,000 1
Total costs 28000+0.2x 32000 + 0.14x 1
For the net income to be the same the total cost MUST be the same
Therefore 28000 + 0.2x = 32000 + 0.14x
x = 66,667 doughnuts 1
v No. If the selling price does not change between the alternatives, it is irrelevant. 1
Question 18
Equivalent units Marks
Physical flow of units Materials Conversion cots Total
Started 80,000
To account for 80,000 1
Completed 37,500 37,500 37,500
Normal loss 3,200 - -
Abnormal loss 35,300 35,300 35,300
WIPe 4,000 4,000 3,600
80,000 76,800 76,400 4
Costs to account for 440,000 360,000 800,000 1
Cost per equivalent units 5.73 4.71 10.44 1
Completed (37500x 10.44) 391,545 1
Abnormal loss (35300 X 10.44) 368,575 1
Work in progress (4000x5.73 +3600x4.71) 39,880 1
Costs accounted for 800,000
Question 19
Marks
a Marks will be awarded for clear explanations 4
b
ZZ-1 ZZ-2
Production output in litres 300,000 Per unit 300,000 Per unit
Direct material 375,000 1.250 465,000 1.550
Direct labour 225,000 0.750 225,000 0.750
600,000 2.000 690,000 2.300
Budgeted materials (litres) 306,122 1.020 litres per unit 306,122 1.020 litres per unit
Budgeted material price 1.225 $/litre 1.519 $/litre
Direct labour hours 75,000 0.250 hours per unit 75,000 0.250 hours per unit
Direct labour cost 3.000 $ per hour 3.000 $ per hour
Flex for 285000 units Flex for 329000 units
Production output in litres 285,000 285,000 329,000 329,000
Direct material 356,250 342,000 1.200 509,950 534,250 1.624
Direct labour 213,750 234,000 0.821 246,750 273,000 0.830
Total prime manufacturing cost 570,000 576,000 2.021 756,700 807,250 2.454
Actual materials used (litres) 290,816 296,875 1.042 litres per unit 346,316 1.053 litres per unit
Actual materials price 1.152 $ per litre 1.543 $ per litre
Direct labour hours 356,250 72,000 0.253 hours per unit 84,000 0.255 hours per unit
3.250 $ per hour 3.250 $ per hour
Direct materials price variance 21,672 (8,196) 4
Direct materials usage variance (7,422) (16,104) 4
Direct labour price/rate variance (18,000) (21,000) 4
Direct labour efficiency variance (2,250) (5,250) 4
(6,000) (50,550)
Proof
Budgeted cost 570,000 756,700
Variances (6,000) 50,550
Actual 564,000 807,250
Question 20
Dept IV
1
Dept II 70% =46,200 kilograms Further processing
Alpha $23.660
Selling price $5 per kilogram
Further processing
Dept I 60% =66,000 kilograms $38,000
Delta 30% =19,800 kilograms
Beta(By-product)
Selling expenses= $8100
Rho :110000 kilograms Sellling porice =$1,20 per kilogram
Cost $120,000 40%=44,000 kilograms If processed further
Gamma Additional processing cost $35,000
Additional selling costs $3000
New Selling price $3 per kilogram
90% Good output= 39,600 kilograms
Dept III Selling price = 12 per kilogram
Futher processing 5 marks
$165,000
10% normal loss= 4,400 kilograms
a Beta Alpha
Sales value 46200 x 5 = 231,000
Gross value 19800 kg @1.20 = 23,760 Less further processing cost Dept IV (23,660)
Less selling expenses (8,100) Less value of by product= Beta (15,660)
Value of by-product 15,660 Less Dept II costs (38,000)
2 marks NRV Alpha 153,680 3 marks
Gamma
90 % of 44000lb sold at 12 per lb = 475,200 Allocation of joint costs
Further processing costs (165,000)
NRV 310,200 2 marks Gamma 80,245
Cost of Normall loss is absorbed by the good units produced Alpha 39,755
120,000 2 marks
Total NRV Gamma 310,200
Alpha 153,680
463,880 1 mark
b Beta NRV with Further processing of Beta as a joint -product Evaluation of Beta further processing
Beta Alpha Sub Total Gamma Total NRV Increase in revenue (3 - 1.2)x19800 35,640
Sales 19800 x 3 59,400 231,000 290,400 additional processing costs (35,000)
Further processing costs (35,000) (23,660) (58,660) Additional selling costs (3,000)
Selling expenses (11,100) 0 (11,100) Net result (2,360)
Sub total 13,300 207,340 220,640
Allocated Dept II costs (2,291) (35,709) (38,000) Therefore it is not advisable to process Beta further
NRV of the joint products 11,009 171,631 182,640 310,200 492,840 3 marks
Allocation of Dept I costs (2,681) (41,790) (44,470) (75,530)
2 marks 2 marks 1 mark
Beta full manufacturing cost = (2681+2291+35000) 39,971 2 marks Total marks 25 marks
Question 21
Marks
The calculation are as shown below. However, additional marks will be awarded for (incl commentary)
clear comments on them
i Rate of stock turnover COGS/ average stock
18.18182 times 2
ii Current ration current assets/ current liabilities
2.5 2
iii Acid test ratio liquid assets/current liabilities
1.95 2
iv Debtors turnover debtors/turnover x12 x 30 days
45 2
v Return on assets employed Net profit before tax/ Assets employed
40% 2
vi Return on equity innterest in assets
Question 22
a. Each correct graph 1 mark
Each correct explanation 1 mark
b Calculation of variable cost A B
i Units sold 100,000.00 100,000.00
Total revenue 1,000,000 1,000,000
less fixed cost (300,000) (160,000)
less profit (300,000) (240,000)
Variable cost 400,000 600,000 2 marks
Variable cost per unit 4 6
Selling price 10 10
Variable cost (4) (6)
Contribution margin 6.00 4.00 1 mark
Breakeven units 50,000 40,000
Breakeven sales 500,000 400,000 1 mark
ii Where the two machines are equally profitable
6x-300000 = 4x - 160000
2x = 140000
x = 70000 4 marks
ii Where sales< 70000 units Machine B is more profitable
Where sales> 70000 units Machine A is more profitable 4 marks
Question 23 Equivalent units
a Physical flow of units RM- P RM-Q CC Cost
WIP start 0
Started 50000
To a/c for 50000 1 mark
Completed 35000 35000 35000 35000
Normal loss 2000 0 0 0
WIP end 13000 13000 13000 11700
A/c for 50000 48000 48000 46700
1 mark 3 marks 3 marks 3 marks
Cost 400,000 140,000 270,000 810,000
Cost per equivalent units 8.33 2.92 5.78 17.03
1 mark 1 mark 1 mark
Completed units 596,105 1 mark
WIP end 213,895 1 mark
810,000
b
i Normal spoilage 2 marks
ii Abnormal spoilage 2 marks
Question 24
a Notes on relevance 5 marks
b.
Per unit
Units produced 25,000 30,000
Costs of manufacturing
Direct materials $ 30,000 1.20 36,000 1.20 291,900
Direct labour $ 22,500 0.90 27,000 0.90
Other payroll costs (indirect 6,000 0.24 6,600 0.22
Power 4,000 0.16 4,800 0.16
1,000 0.04 1,000 0.03
Miscellaneous 2,500 0.10 2,500 0.08
Variable costs MONTH MASTER BUDGET
Units sold 20,000 per unit 30,000 per unit 5,000 5,000
Salesmen’s commissions 3,000 0.15 4,500 0.15 750 750 2 marks
Packing costs 4,500 0.23 6,000 0.20 1,125 1,000 2 marks
Direct materials $ 30000 1.2 36000 1.2 6,000 6,000 2 marks
Direct labour $ 22500 0.9 27000 0.9 4,500 4,500 2 marks
Power 4000 0.16 4800 0.16 800 800 2 marks
Relevant cost of 5000 units 2.64 2.61 13,175 13,050
Offer price 1.50 1.50 7,500 7,500
Difference - Loss - 1.14 - 1.11 - 5,675.00 - 5,550.00 2 marks
Negative contribution - 5,675.00 - 5,550.00
Decision rule: accept if positive contribution, reject negative contribution 2 marks
Decision
Reject offer 1 mark
LAST MONTH
MASTER BUDGET
Depreciation and maintenance
Costs of selling and administration:
Question 25
Absorption costing 3 marks
Marginal costing 3 marks
b EXPECTED
i PROBABILITY
50,000 0.30 15,000
100,000 0.40 40,000
150,000 0.20 30,000
200,000 0.10 20,000
105,000 2 marks
A B
Selling price 4.00 4.00
Variable cost 2.78 1.80
Contribution 1.22 2.20 2 marks
Demand 105,000 105,000
Therefore total contribution 128,100 231,000
Fixed costs 100,000 200,000
Profit 28,100 31,000 2 marks
Decision rule: accept the machine which gives a higher profit
Decision : accept machine B 2 marks
ii Let the sales volume in units be x
At that level profits of the two machines are equal
1.22X-100000 = 2.2x-200000
0.98x=100000
x = 102040 units 6 marks
SALES VOLUME (UNITS) DEMAND
Question 26
Trading Accounts for the year ended 31 December 2012
Ace Base Ace Base
$ $ $ $
Stock 1 Jan 2012 48,000 8,000 Sales 360,000 360,000
Purchases 319,000 324,000 52,000 12,000
Gross Profit 45,000 40,000
412,000 372,000 412,000 372,000
Profit and Loss Accounts for the year ended 31 December 2012
Ace Base Ace Base
$ $ $ $
45,000 40,000
Overhead Expenses 16,200 17,600
Net Profit 28,800 22,400
45,000 40,000 45,000 40,000
Balance Sheets
Ace Base Ace Base
$ $ $ $
Issued Share Capital 100,000 100,000 127,800 107,500
Reserves 80,000 16,000 Stock 52,000 12,000
Profit and Loss Account 60,800 24,000 Debtors 40,000 24,000
Creditors 63,000 40,500 Bank 84,000 37,000
303,800 180,500 303,800 180,500
i Stock turn 4.86 25.71 )
ii Debtor ratio (months) 1.33 0.80 )
iii Current ratio 2.79 1.80 ) 1 mark for each of the ratios and 2 marks for each explanation
iv Liquidity ratio 1.97 1.51 )
v Gross profit 0.13 0.11 )
k
Stock 31 Dec 2012
Gross Profit
Fixed Assets
Question 27 Marks
a Marks will be awarded to well reasoned comments 8
b 4
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