FMA

Short Term Decision Making

Contents
QUESTION 1 Preparation Question- Limiting Factor
QUESTION 2 Preparation Question- BEP (Single Product)
QUESTION 3 Preparation Question- BEP (Multi Product)
Question 4
Question 5

Prepared & Presented By

Mohammed Farzan

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Question 1

AB Limited has two products (A & B). Following production cost information is
also available.

A (£) B (£)
Direct Materials 1.00 3.00
Direct Labour (£ 3 per hour) 6.00 3.00
Variable OH 1.00 1.00
8.00 7.00

A unit of A is sold for £ 14.00 and the selling price for B is £ 11.00 per unit.
During August, the direct labour availability is limited to 8,000 hours.

The sales demand is limited to 3,000 units of A and 5,000 units of B..

Recommend the best production mix for the Company.

Question 2

Total Fixed Cost 100 000

Selling price per unit $ 50
Variable Cost per unit $ 30

Calculate the Break Even point in sales units

Question 3

Total Fixed Cost 100 000

A B
Selling price per unit $ 50 $ 60
Variable Cost per unit $ 30 $ 50
Budgeted Sales Mix 3000 6000

1. Calculate the weighted Average Contribution

2. Calculate the Break Even point in sales units for each product.

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Question  4    
Alman   plc   manufactures   and   sells   four   products   that   use   the   same   production   facilities.   The  
company  is  facing  tough  competition  and  it  is  essential  that  every  effort  is  made  to  be  efficient  
and  effective.  The  company’s  most  recently  prepared  plan  shows  the  following:  
 
Product   A     L     M     N  
  £     £     £     £  
Selling  price  per  unit   80     70     50     40  
               
Variable  costs  per  unit   40     34     20     12  
Apportioned  fixed  costs  per  unit   25     20     10     10  
Total  costs   65     54     30     22  
               
Profit  per  unit   15     16     20     18  
               
Estimated  sales  –  units   20,000     20,000     20,000     20,000  
Estimated  profit  –  £000   300     320     400     360  
 
When   the   budget   was   prepared,   the   total   fixed   costs   were   expected   to   be   £1,300,000.     Initially   it  
was  expected  that  260,000  direct  labour  hours  would  be  available  and  this  would  allow  for  the  
full   production   of   all   four   products.     On   this   basis   an   overhead   recovery   rate   of   £5   per   direct  
labour   hour   was   used   to   apportion   the   fixed   costs   to   products.   However,   as   a   result   of  
unforeseen   circumstances,   it   is   now   found   that   the   capacity   is   reduced   to   only   210,000   direct  
labour  hours.  The  total  overhead  costs  will  not  be  altered  by  the  change  in  the  output  level.  
 
a)   What   products   should   be   produced   and   sold   to   maximise   the   company’s   profit,   given   the  
limited  number  of  direct  hours  available,  and  what  will  be  the  total  profit  of  the  company?  
The  production  quantity  of  each  product  cannot  exceed  the  estimated  sales.  
  (10  marks)  
   
b)   As  an  alternative  to  turning  away  orders,  it  has  been  suggested  that  the  selling  price  of  all  
four   products   should   be   increased   by   12   per   cent.   It   is   expected   that   this   will   reduce   the  
demand   for   each   product   by   20   per   cent.   This   would   reduce   the   required   direct   labour  
below  the  210,000  hours  that  are  now  available.  Would  this  result  in  a  better  outcome  than  
that  the  one  resulting  from  the  strategy  proposed  in  part  (a)  above?  
  (10  marks)  
   
c)   Short-­‐term  decisions  are  very  important  during  the  preparation  of  the  annual  plan.  Describe  
the  process  of  preparing  a  firm’s  annual  budget  that  is  used  by  most  companies  and  discuss  
the  use  of  short-­‐term  decisions  in  this  process.  
  (13  1/3  marks)  
  (TOTAL  33  1/3  MARKS  

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Question 5
The annual budget of MN0 plc has just been completed and the details are:-

Product P Product Q Product R TOTAL

Sales – units 20 000 40 000 120 000 ---
£000 £000 £000 £000
Sales 2 000 3 200 10 200 15 400

Variable costs 800 2 200 8 400 11 400

Fixed costs 440 720 2 640 3 800
Total costs and expenses 1 240 2 920 11 040 15 200

Profit / (Loss) 760 280 ( 840) 200

The Directors were alarmed at the forecast of the results and asked for the
following alternative courses of action to be assessed:-

(a) What would be the effect of not producing and selling Product R?

(2 marks)

(b) An additional amount of £130 000 is available to advertise one of

the three products. It is expected that the additional advertising
expenditure would increase the sales of the relevant product by
10%. Should the adverting of any of the products be increased by
£130 000?
(5 marks)

(c) The decisions in part (a) and (b) are the typical of the decisions that
are made when the annual budget of an organisation is being
prepared. Describe the process that is most commonly used to
produce a organisation’s annual budget.
(12 marks)

(d) Although many managers consider the production of an annual

budget to be a waste of time, most organisations prepare one.
Discuss the benefits that arise from the preparation of an annual
plan.
(6 marks)
TOTAL 25 marks

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Solutions
Question 5
Product P Product Q Product R
Selling price / unit 100 80 85
Variable cost / unit 40 55 70
Contribution / unit 60 25 15
Fixed costs / unit 22 18 22
Profit / unit 38 7 7

(a) The contribution generated by Product r would be lost. This amounts to

£15 per unit or £1 800 000 in total. The firm’s profit would be reduced to
a loss of £1 600 000 if the sales of Product R do not occur.
Current
(b) P - 60 x 22000 = 1320 000 – 130 000 = 1190 000 - 1200 000 = (10 000)
Q - 25 x 44000 = 1100 000 – 130 000 = 970 000 - 1000 000 = (30 000)
R- 15 x 132000= 1980 000 – 130 000 = 1850 000 - 1800 000 = 50 000
The additional resources should be spent o advertising Product R as this
will increase the profit by £50 000.

(c) Set objectives, set sales budget, set cost and expense budgets, prepare
Forecast profit and loss, balance sheet and cash budget.

(d) Communication, Co-ordination, Control