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AF 302: Advanced Cost and Management Accounting ASSIGNMENT 1 for the year 2009/10 Instructions: Attempt ALL questions in groups of 5 students and submit your work by 8th January 2010. Late submissions will NOT be accepted.

Question ONE
Mangi products sells two different models of equipment, model zingu and model chipu. Fixed costs for the company total TZS 20,000,000. Mangi products must achieve an after-tax profit of TZS 6,000,000. The company is subject to an average corporate tax rate of 25%.

Mod el Zingu Chipu

Selling Unit variable Percentage of price cost sales 70,000 40,000 60% 55,000 30,000 40%

A] Determine the number of each model that the Mangi should sell in order to achieve its profit objective. B] Discuss the limitations of CVP analysis

Question TWO
Dumi manufacturing has received a special order from Sungura Ltd to produce 225 components to be incorporated into Sunguras product. The components have a high cost, due to the expertise required for their manufacture. Dumi produces the components in batches of 15, and as the ones required are to be custom-made to Sunguras specifications, a prototype was manufactured with the following costs:

TZS Materials 4 kg of A @ TZS 7,500 2 kg of B @ TZS 15,000 Labour 20 hours skilled @ TZS 15,000 5 hours semi-skilled @ TZS 8,000 Variable overheads 25 labour hours @ TZS 4,000 Total 30,000 30,000 300,00 0 40,000 100,00 0 500,0 00

Additional information with respect to the workforce is as noted below:

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Skilled: Virtually a permanent workforce that has been employed by Dumi for a long period of time. These workers have a great deal of experience in manufacturing components similar to those required by Sungura, and turnover is virtually non-existent. Semi-skilled Hired by Dumi on an as needed basis. These workers would have had some prior experience, but Dumi management believes the level to be relatively insignificant. Past experience shows turnover rate to be quite high, even for short employment periods. Dumis plans are to exclude the prototype batch from Sunguras order. Management believes that an 80% learning rate effect is experiences in this manufacturing process, and would like a cost estimate for the 225 components prepared on that basis. Required; A] Prepare the cost estimate, assuming an 80% learning rate is experienced B] Briefly discuss some of the factors that can limit the use of learning curve theory in practice

Question THREE
Makuru health centre specializes in the provision of sports/exercise and medical/dietary advice to clients. The service is provided on a residential basis and clients stay for whatever number of days suits their needs. Budgeted estimates for the year ending 31st December 2010 are as follows i] Maximum capacity of the centre is 50 clients per day for 350 days in the year ii] Clients will be invoiced at a fee per day. The budgeted occupancy level will vary with the client fee level per day and is estimated at different percentages of maximum capacity as follows:

Client fee per day (TZS)

Occupancy level

Occupancy as a percentage of maximum capacity

180,000 200,000 220,000 iii] Variable costs are also

High Most likely Low

90% 75% 60%

estimated at one of three levels per client day. The high, most likely and low levels per client day are TZS 95,000, TZS 85,000 and TZS 70,000 respectively. The range of cost levels reflects only the possible effect on the purchase prices of goods and services

Required: A] Prepare a summary which shows the budgeted contribution earned by Makuru health centre for the year ended 31st December 2010 for each of the nine possible outcomes

B] State the client fee strategy for the year to 31st December 2010 which will result
i] ii] iii] from the use of each of the following decision rules: Maximax Maximin Minimax regret

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Your answer should explain the basis of operation of each rule. Use the information from your answer to (a) as relevant and show any additional working calculations as necessary C] The probabilities of variable costs occurring at the high, most likely and low levels provided in the question are estimated as 0.1, 0.6 and 0.3 respectively. Using the information available, determine the client fee strategy which will be chosen where maximization of expected value of contribution is used as the decision basis.

Question FOUR
Tumsifu Co expects annual demand for product X to be 255,380 units. Product X has a selling price of TZS 19,000 per unit and is purchased for TZS 11,000 per unit from a supplier; Mbongo Co. Tumsifu places an order for 50,000 units of product X at regular intervals throughout the year. Because the demand for product X is to some degree uncertain, Tumsifu maintains a safety (buffer) stock of product X which is sufficient to meet demand for 28 working days. The cost of placing an order is TZS 25,000 and the storage cost for Product X is TZS 100 per unit per year. Tumsifu normally pays trade suppliers after 60 days but MKR has offered a discount of 1% for cash settlement within 20 days. Tumsifu Co uses a working year consisting of 365 days. Required: A] Calculate the annual cost of the current ordering policy. B] Calculate the annual saving if the economic order quantity model is used to determine an optimal ordering policy. C] Critically discuss the limitations of the economic order quantity model as a way of managing stock. D] Discuss the advantages and disadvantages of using just-in-time stock management methods.

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