Institute of Technology Tallaght Bachelor of Arts Management ACCS Semester Five January 2011 Management Accounting Internal Examiner Mr. John Clarke External Examiners Dr. Ann Ledwith Mr. Declan Lyons DAY: Thursday DATE: 13th January 2011 TIME: 19.00 21.00 1. Please answer both questions from Section A 2. Answer one question from Section B 3. All questions carry equal marksL Section A Question 1 A processing company, EF, is extremely busy. It has increased its output and sales from 12 900 kg in quarter 1 to 17 300 kg in quarter 2 but, though demand is still rising, it cannot increase its output more than another 5% from its existing labour force which is now at its maximum. Data in quarter 2 for its four products were: Product Product Product Product P Q R s Output (kg) 4,560 6,960 3,480 2,300 Selling price (€ per kg) 16.20 11.64 9.92 13.68 Costs (€ per kg): Direct labour 1.96 1.30 0.99 1.70 (at £6 per hour) Direct materials 6.52 4.90 4.10 5.42 Direct packaging 0.84 0.74 0.56 0.70 Fixed overhead (absorbed on basis of labour cost) 3.92 2.60 1.98 3.40 Total 13.24 9.54 7.63 11.22 ‘The XY Company has offered to supply 2,000 kg of product Q at a delivered price of 90% of EF’s selling price. The company will then be able to produce extra product P in its place up to the plant’s total capacity. ‘You are required to state, with supporting calculations: (@) Whether EF should accept the XY Company's offer; (10 marks) (6) Which would be the most profitable combination of subcontracting 2,000 kg of one product at a price of 90% of its selling price and producing extra quantities of another product up to the plant’s total capacity. Assume that the market can absorb the extra output and that XY’s quality and delivery are acceptable. (15 marks) (©) What other factors should EE take into consideration in deciding whether to take up the offer from company XY (9 marks) (Total 34 Marks)Question 2 Solo Limited makes and sells a single product. The following data relate to periods 1 — 4. € Variable cost per unit 30 Selling Price per unit 55 Fixed costs per period 6,000 ‘Normal activity is 500 units and production and sales for the four periods are as follows: Period 1 units Period 2 units Period 3 units Period 4 units Sales 500 400 550 450 Production 500 500 450 500 There was no opening stock at the start of period 1 Required: a) Prepare operating statements for EACH of the periods 1 to 4, based on marginal costing principles. (10 Marks) b) Prepare operating statements for EACH of the periods 1 to 4, based on absorption costing principles. (12 Marks) ©) Comment briefly on the results obtained in each period AND in total by the two systems (11 Marks) (Total 33 Marks)Section B Question 3 Z Ltd manufactures and sells three products with the following selling prices and variable costs: Product A Product B Product C (€/unit) (€/unit) (€/unit) Selling price 3.00 2.45 4.00 Variable cost 1.20 1.67 2.60 ‘The company is considering expenditure on advertising and promotion of Product A. It is hoped that such expenditure, together with a reduction in the selling price of the product, would increase sales. Existing annual sales volume of the three products Product A 460,000 units Product B 1, 000,000 units Product C 3 80,000 units 1f €60,000 per annum was to be invested in advertising and sales promotion, sales of Product A at reduced selling prices would be expected to be: 590,000 units at €2.75 per unit or 650,000 units at €2.55 per unit Annual fixed costs are currently €1,710,000 per annum. Required: (a) Calculate the current break-even sales revenue of the business. (9 marks) (b) Advise the management of Z Ltd as to whether the expenditure on advertising and promotion, together with selling price reduction, should be introduced on Product A. (9 marks) (©) Calculate the required unit sales of Product A, at a selling price of €2.75 per unit, in order to justify the expenditure on advertising and promotion. (9 marks) (@) Explain the term ‘margin of safety’, with particular reference to the circumstances of Z Ltd. (6 marks) (Total 33 marks)Question 4 ‘A company manufactures and sells a wide range of products. The products are manufactured in various locations and sold in a number of quite separate markets. The company’s operations are organised into five divisions which may supply each other as well as selling on the open market. The following financial information is available concerning the company for the year just ended: (€000) Sales 8,600 Production cost of sales 5,332 Gross profit 3,268 Other expenses 2,532 Net profit 36 An offer to purchase Division 5, which has been performing poorly, has been received by the company. The gross profit percentage of sales, earned by Division 5 in the year, was half that camed by the company as whole. Division 5 sales were 10% of total company sales. Of the production expenses incurred by Division 5, fixed costs were €316 000. Other expenses (Le. other than production expenses) incurred by the division totalled €156,000, all of which can be regarded as fixed. These include €38,000 apportionment of general company expenses which would not be affected by the decision concerning the possible sale of Division 5. In the year ahead, if Division 5 is not sold, fixed costs of the division would be expected to increase by 5% and variable costs to remain at the same percentage of sales. Sales would be expected to increase by 10%. If the division is sold, it is expected that some sales of other divisions would be lost. These would provide a contribution to profits of €20 000 in the year ahead. Also, if the division is sold, the capital sum received could be invested so as to yield a return of €75,000 in the year ahead. Required: (@) Calculate whether it would be in the best interests of the company, based upon the ‘expected situation in the year ahead, to sell Division 5. (15 marks) (6) Discuss other factors that you feel should influence the decision. (10 marks) (©) Calculate the percentage increase in Division 5 sales required in the year ahead (compared with the current year) for the financial viability of the two alternatives to be the same. (You are to assume that all other factors in the above situation will remain as forecast for the year ahead.) (8 marks). (Total 33 marks)