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For each subquestion, the number points which you can obtain with the question is indicated.
BigScreen
BigScreen Ltd produces a single product: wide-screen televisions of size 80”. The following data are known about the production process of
BigScreen:
Question a (3 points)
What is BigScreen’s break-even sales in units per month?
The market for big televisions is very seasonal. In December, sales increase markedly due to the holiday season, after which it drops in
January. For the months of December 2020 and January 2021, data are as follows:
Question b (5 points)
Calculate the monthly result (profit or loss) for December 2020 and for January 2021 using variable costing.
Question c (8 points)
Calculate the monthly result for December 2020 and for January 2021 using absorption costing.
Question d (3 points)
Explain any differences between the monthly results in question b and question c. Support your answer with a calculation.
During the first months of 2021, the BigScreen design department has worked on a new type of screen with a size of 86”, to replace the
current type. It is scheduled to be introduced to the market at the first of July 2021. The introduction of the 86” is announced on 15 June 2021.
Unfortunately, this results in a complete drop in sales of the 80” screens: all customers are waiting for the new type. BigScreen still has 500
units of the 80” screens in stock, completely finished and ready to be sold.
The 86” screen will be produced using the same facilities, and total fixed costs of BigScreen will not change. Variable costs per unit will be
€1,600, and the selling price is set at € 2,700. The normal production level of the 86” screen will also be 1,000 units per month.
BigScreen management still wants to sell the remaining units of the 80” screens in stock. It wants to achieve this by lowering the price of these
80” screens. Any unsold 80” screens have a scrap value of € 100.
Question e (6 points)
What is the minimum price that BigScreen should charge for the 80” screens to improve its profit? Hint: customers that decide to buy this lower
priced 80” screen will not buy an 86” screen.
[If you cannot see the question text, click 'Show block intro' on the top right of this screen]
Question a (3 points)
What is BigScreen’s break-even sales in units per month?
Grading instruction
Criterion 1 (Number of points: 3)
Fixed cost per month 540,000
Price per unit 2,500
Variable cost per unit 1,500
Contribution margin 1,000
Break-even point 540
Question b (5 points)
Calculate the monthly result (profit or loss) for December 2020 and for January 2021 using variable costing.
Grading instruction
Criterion 1 (Number of points: 5)
Variable costing Dec Jan
Unit sales 2,400 700
Revenues 6,000,000 1,750,000
Cost of goods sold 3,600,000 1,050,000
Fixed costs 540,000 540,000
Total costs 4,140,000 1,590,000
Result 1,860,000 160,000
Question c (8 points)
Calculate the monthly result for December 2020 and for January 2021 using absorption costing.
Grading instruction
Criterion 1 (Number of points: 8)
Absorption costing
Normal production 1,000
Fixed cost per unit 540
Standard unit cost 2,040
Question d (3 points)
Explain any differences between the monthly results in question b and question c. Support your answer with a calculation.
Grading instruction
Criterion 1 (Number of points: 3)
Under absorption costing, inventory includes fixed costs, which means that changes in inventory lead to a different amount of fixed costs accounted for in
this month's results.
In December, 1,000 units are sold out of inventory. This results in an additional 1,000* 540 = 540,000 in costs which are expensed in December.
Consequently, the result under absorpting costing is (1,860,000 - 1,320,000) = 540,000 lower
In January, 200 units are transferred into inventory. This results in 200 * 540 = 108,000 in costs which are transferred to inventory and not expensed in
January
So the result under absorption costing is (160,000 - 268,000) = 108,000 higher.
(Note that the difference is NOT the result of the production volume variance, this makes sure that differences between normal and actual production are
corrected for)
Question e (6 points)
What is the minimum price that BigScreen should charge for the 80” screens to improve its profit? Hint: customers that decide to buy this
lower priced 80” screen will not buy an 86” screen.
Grading instruction
Criterion 1 (Number of points: 6)
Customers that will buy an 80" screen will not buy an 86" screen.
Since the 80" screens have already been manufactured there are no opportunity costs of production. If a customer buys an 80" instead of an 86" this
means the following
Lost contribution margin on 86": 1,100
Scrap value of the 80" which is not received: 100
Minimum price required 1,200
BrightPeople Inc is a leading marketing agency, which develops advertising campaigns for big and small clients. It has two main job levels in its
organization: Principal and Associate. Principals are highly epxerienced team leaders, who are responsible for acquisition, client relationships
and project management. Associates provide the creative content such as designing advertisements and writing texts. For planning purposes,
BrighPeople management assumes the following budgeted staff use for an advertising campaign:
So for a standard advertising campaign, the budgeted staff costs are € 32,800
Question a (4 points)
Give a definition of a budget, and give three reasons why firms use budgets with a very brief explanation (one sentence) for each reason.
Many tasks in campaign development, especially with respect to design and copywriting, can be undertaken by all levels, which means that the
actual hours for each staff category may be different in a project. Additionally, some projects turn out to take more or less staff time than
expected.
In the last three months of 2020, BrightPeople completed 10 advertising campaigns. Actual costs and hours in this period were as follows:
Question b (9 points)
Calculate the total flexible budget variance, the labor price variance and the efficiency variance for the Principal staff and for the Associate
staff. Make sure to indicate whether variances are favorable (F) or unfavorable (U)
Question c (9 points)
Calculate the yield variance and the mix variance for the Principal staff and for the Associate staff. Make sure to indicate whether variances
are favorable (F) or unfavorable (U).
Question d (3 points)
Explain how the results of question b and question c are related to each other. How should we interpret the yield and mix variance for
Professional staff, so how can we use it in managing the care process?
[If you cannot see the question text, click 'Show block intro' on the top right of this screen]
Question a (4 points)
Give a definition of a budget, and give three reasons why firms use budgets with a very brief explanation (one sentence) for each reason.
Grading instruction
Criterion 1 (Number of points: 4)
Budget: your plan for the coming period (expressed in euros)
Question b (9 points)
Calculate the total flexible budget variance, the labor price variance and the efficiency variance for the Principal staff and for the Associate
staff. Make sure to indicate whether variances are favorable (F) or unfavorable (U).
Grading instruction
Criterion 1 (Number of points: 9)
Budget per advertising Use in hours Price per hour Costs
campaign
Principals 60 180.00 10800
Associates 440 50.00 22000
Total 500 32,800
Actual clients
Number of budget units 10
Budgeted costs 328,000
Actual costs 350,000
Variance -22,000 U
For 10 campaigns Hours Price per hour Costs Required (budgeted) input volume
Principals 500 220.00 110,000 600
Associates 5,000 48.00 240,000 4,400
Total 5,500 350,000 5,000
Efficiency variances Budgeted price per Required use (hours) Actual use (hours) Variance
hours
Principals 180.00 600 500 18,000 F
Associates 50.00 4,400 5,000 -30,000 U
Total 5,000 5,500 -12,000 U
Price variances Actual use (hours) Budgeted price per Actual price per Variance
hour hour
Principals 500 180.00 220.00 -20,000 U
Associates 5,000 50.00 48.00 10,000 F
Total 5,500 -10,000 U
Question c (9 points)
Calculate the yield variance and the mix variance for the Principal staff and for the Associate staff. Make sure to indicate whether variances
are favorable (F) or unfavorable (U).
Grading instruction
Criterion 1 (Number of points: 9)
Required (budgeted) hours 5,000
Actual hours 5,500
Yield variance in labor use (in hours) -500 Negative yield variance: too much hours used overall
Share in input Budgeted input price Yield variance
Principals 0.12 180.00 -10,800 U
Associates 0.88 50.00 -22,000 U
Total -32,800 U
Mix variance Budgeted share in input Actual share in input Budgeted input price Mix variance
Principals 0.12 0.09 180.00 28,800 F
Associates 0.88 0.91 50.00 -8,000 U
Total 20,800 F
Question d (3 points)
Explain how the results of question b and question c are related to each other. How should we interpret the yield and mix variance for
Professional staff, so how can we use it in managing the advertising campaigns?
Grading instruction
Criterion 1 (Number of points: 3)
The yield and mix variance explain where the efficiency variance of -12,000 comes from: is this from less efficient use of labor, or (also) due to using labor
in a different mix than expected?
Yield variance: at the organizational level, we used much more labor than expected.
Mix variance: within the staff categories, there was less use of principals than budgeted, since this is the more expensive category this has a positive
effect on the variance.
We need to investigate whether the projects happened to be more difficult, or whether the budget assumptions are not correct anymore.
Stardust Enterprises is a decentralized company manufacturing electronic products. The Components division of Stardust manufactures a
standard cabinet for television sets (the metal box that holds the display and the electronics). The production line for this cabinet has a
capacity of 10,000 cabinets per month. Fixed costs per month are € 300,000, while variable costs per cabinet are € 70.
The cabinets are sold to outside buyers at a market price of € 140, and they are supplied to another division of Stardust called Ziggy, which
produces a TV set under its own brand. Ziggy’s production process has the following characteristics:
Ziggy receives an order of a foreign retail chain for 1,000 TV sets. This retail chain is active in a country where Ziggy does not sell its own
brand, and it has no plans to do so. The retail chain wants to pay only € 340 per set.
Question a (5 points)
Define decentralization, and give two advantages and two disadvantages of decentralization.
Question b (5 points)
Suppose that the Components division has spare capacity. From the standpoint of Stardust as a whole, explain whether the order should be
accepted (just saying yes or no is not sufficient). What (range of) transfer prices would lead to the optimal decision for Stardust as a whole with
respect to accepting the order of the retail chain?
Question c (8 points)
Suppose that the Components division has no spare capacity. From the standpoint of Stardust as a whole, explain whether the order be
accepted (just saying yes or no is not sufficient). What (range of) transfer prices would lead to the optimal decision for Stardust as a whole with
respect to accepting the order of the retail chain?
Question d (3 points)
Which of the three transfer pricing methods discussed in the course (market price, cost-based, negotiations) will lead to the correct decision in
both question b and question c? Explain your answer (only mentioning a method without explanation is not sufficient).
Stardust management evaluates its division managers on the return on investment (ROI) of their divisions. It uses a cost of capital of 25% in
evaluating division performance, and division managers get a bonus if they succeed in improving the return on investment of their division.
One of the other divisions of Stardust is the Bewlay Division, which manufactures bluetooth speakers for outside customers. Currently, the
Bewlay Division generates an operating profit of € 2,100,000 using total assets of € 10 million. Its engineers have come up with a process
adjustment that will lead to a reduction in costs of € 460,000 per year, so profits will increase to € 4,560,000. To achieve these savings,
investment in new machinery is required leading to an increase in total assets of € 2,000,000.
Question e (6 points)
Calculate the current return on investment (ROI) and residual income (RI) for the Bewlay Division, and the ROI and RI after implementing the
process adjustment.
Question f (3 points)
Will the management of the Bewlay Division accept the engineering proposal and implement the process adjustment? Should the proposal be
implemented from the perspective of Stardust?
[If you cannot see the question text, click 'Show block intro' on the top right of this screen]
Question a (5 points)
Define decentralization, and give two advantages and two disadvantages of decentralization.
Grading instruction
Criterion 1 (Number of points: 5)
Decentralization: giving lower-level managers freedom to make decisions (and holding them responsible for these decisions)
Benefits of decentralization
BETTER INFORMATION BY DIRECT CONTACT: More and better information for decision making> Because businuss unit managers have direct contact
with customers and suppliers
QUICK DECISIONS: Quicker decision making, because less layers of management
MOTIVATION BY AUTHORITY: Business unit managers are more motivated > Because they have more authority
MANAGEMENT DEVELOPMENT: In large organizations, it helps in management development > Because more responsibility
RESPONSIVE & FLEXIBLE BY SIZE More flexible and responsive to changing conditions > Because subunit is smaller
Costs of decentralization
CONFLICTING INTERESTS BY LACK OF HARMONY & GUIDANCE: Suboptimal decision making > Because business units pursue their own interests
DUPLICATION: Duplication of (support) activities
DISCONNECT & COMPETITION: Managers focus on their own subunits instead of organisation, become competitive > Because disconnected from
eachother
INFORMATION COSTS BY COORDINATION: Increased information costs > Because extra coordination needed
Question b (5 points)
Suppose that the Components division has spare capacity. From the standpoint of Stardust as a whole, explain whether the order should be
accepted (just saying yes or no is not sufficient). What (range of) transfer prices would lead to the optimal decision for Stardust as a whole
with respect to accepting the order of the retail chain?
Grading instruction
Criterion 1 (Number of points: 5)
Relevant costs of the order
Variable costs Ziggy: 210
Components division variable costs of cabinet: 70
Total variable costs: 280
Ziggy has capacity available, revenues are higher than variable costs, it's a one-time only order, so it should be accepted.
Question c (8 points)
Suppose that the Components division has no spare capacity. From the standpoint of Stardust as a whole, explain whether the order should
be accepted (just saying yes or no is not sufficient). What (range of) transfer prices would lead to the optimal decision for Stardust as a
whole with respect to accepting the order of the retail chain?
Grading instruction
Criterion 1 (Number of points: 8)
Total contribution margin of the order = 340-280: 60
Contribution margin when Components sells to market = 140 – 70: 70
Stardust is better off when Components uses its capacity to sell to the market rather than engage in an internal transfer for this order, since selling to the
market generates a higher contribution margin. The correct transfer price is 140, the market price. If the transfer price is set below the market price,
internal transfers may lead to external clients not being served, and this would mean that the company as a whole is worse off.
Question d (3 points)
Which of the three transfer pricing methods discussed in the course (market price, cost-based, negotiations) will lead to the correct decision
in both question b and question c? Explain your answer (only mentioning a method without explanation is not sufficient).
Grading instruction
Criterion 1 (Number of points: 3)
Negotiation is the method which works in both cases, since the ranges in b and c do not overlap.
The market price will lead to not accepting the order in question b: Ziggy will not make a profit if it has to pay the market price to the components division
A cost based transfer price will lead to Ziggy taking up cabinets which could be sold directly to the market resulting in a higher contribution margin for
Stardust as a whole.
Stardust management evaluates its division managers on the return on investment (ROI) of their divisions. It uses a cost of capital of 25% in
evaluating division performance, and division managers get a bonus if they succeed in improving the return on investment of their division.
One of the other divisions of Stardust is the Bewlay Division, which manufactures bluetooth speakers for outside customers. Currently, the
Bewlay Division generates an operating profit of € 2,100,000 using total assets of € 10 million. Its engineers have come up with a process
adjustment that will lead to a reduction in costs of € 460,000 per year, so profits will increase to € 4,560,000. To achieve these savings,
investment in new machinery is required leading to an increase in total assets of € 2,000,000.
Question e (6 points)
Calculate the current return on investment (ROI) and residual income (RI) for the Bewlay Division, and the ROI and RI after implementing the
process adjustment.
Grading instruction
Criterion 1 (Number of points: 6)
Stardust management evaluates its division managers on the return on investment (ROI) of their divisions. It uses a cost of capital of 25% in
evaluating division performance, and division managers get a bonus if they succeed in improving the return on investment of their division.
One of the other divisions of Stardust is the Bewlay Division, which manufactures bluetooth speakers for outside customers. Currently, the
Bewlay Division generates an operating profit of € 2,100,000 using total assets of € 10 million. Its engineers have come up with a process
adjustment that will lead to a reduction in costs of € 460,000 per year, so profits will increase to € 4,560,000. To achieve these savings,
investment in new machinery is required leading to an increase in total assets of € 2,000,000.
Question f (3 points)
Will the management of the Bewlay Division accept the engineering proposal and implement the process adjustment? Should the proposal
be implemented from the perspective of Stardust?
Grading instruction
Criterion 1 (Number of points: 3)
The division's ROI will increase slightly, so the proposal will be accepted
However, the project ROI is still below the cost of capital, at 460,000 / 2,000,000 = 23%
As a result, the RI drops when implementing, so it should not be accepted