THE INSTITUTE OF FINANCE MANAGEMENT

FACULTY OF BUSINESS AND ECONOMICS (FEB)

DEPARTMENT OF ACCOUNTING AND FINANCE

BACHELOR OF ACCOUNTANCY – YEAR III

BACHELOR OF ACCOUNTANCY WITH INFORMATION TECHNOLOGY
– YEAR III

PERFORMANCE MANAGEMENT

SEMESTER ONE ASSIGNMENT

ACADEMIC YEAR 2022/2023

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GENERAL INSTRUCTIONS:
1. This assignment shall be conducted in a group of ten (10) students.
2. All Assignments shall be printed. Soft copies of the main assignment shall be
submitted by the Group Leader (GL) through E-learning and hard copies through
Class Representative (CR).
3. Each of the ten (10) students shall submit their individual hand-written assignments
attached to the printed main assignment to their CRs through their GLs.
4. Submission deadline: 5th June 2023 at 10:00a.m.
QUESTION ONE
The SR Company, located in Igunga, manufactures and sells chemical
compounds that form inputs for the pharmaceutical industry. The company has
been in operation for a number of years and has a reputation as a reliable supplier.
In recent times transport costs to Gauteng have increased significantly as a result
of the increased toll fees on the T23 highway and the increasing cost of fuel. The
company’s management is conservative and have invested considerable past
earnings in government bonds.

Management, however, is worried about the long-term position of

the company as the raw material supply of its compounds is increasingly difficult
to obtain. In recent times the pharmaceutical industry has changed considerably.
New entrants like Genetec have revolutionized research and development
technology to bring a new class of drugs onto the market at much lower levels of
cost. The managing director has suggested that once internal capacity has been
optimized the company should rethink the future.

Interdivisional Trading
The SR Company has four divisions, namely, A, B, C and D. Divisions B, C
and D are organized as profit divisions whilst Division A is classified as a cost
centre. Division A processes a raw material to provide an input to Division B.
Division B further processes these inputs and converts them to a basic chemical
compound called (B4H). Currently there is no intermediate market for B4H but
Division B has been set up as a profit center in order to motivate the divisional
management. Division B sells B4H to Divisions C and D that further process this
input to produce Bayon and Calamite respectively. These products are sold in an
external market in the pharmaceutical sector. Both products are price sensitive.
The variable cost structure for Divisions A and are as follows:

Cost element DIV A (TZS) DIVB (TZS)

Raw Material per Kg 0.05
Direct Cost per Kg: Bought in 0.02
Variable Overhead per Kg 0.05 0.04
Transport cost per Kg 0.02

Division B has a capacity limit of 10,000 kilograms whilst divisions C and D have
capacity limits of 4,000 kilograms and 6,000 kilograms respectively. Given the high
cost of storing B4H, Bayon and Calamite, SR divisions produce no more than the
quantities they plan to sell. Divisions C and D sell Bayon and Calamite in separate
markets.
The total revenues and additional processing costs (excluding the costs of B4H)
for the two divisions are as follows:

DIVISION C:
Kilograms of B4H Processed Total Cost (TZS) Total Revenue (TZS)
1000 1000 1500
2000 1900 2950
3000 3000 4350
4000 4200 5700

DIVISION D:
Kilograms of B4H Processed Total Cost (TZS) Total Revenue (TZS)
1000 2000 2600
2000 3800 5100
3000 5650 7550
4000 7700 9950
5000 9900 12300
6000 12300 14600

REQUIRED:
a] Determine what quantity of B4H Division B should produce in order to
maximize the profitability of the SR Company. Also indicate how this quantity
should be allocated to divisions C and D. If Division A could reduce variable
cost per unit by 40% how would this affect the decisions of Divisions C & D?
b] From a motivation and performance evaluation perspective determine the
range of transfer prices that would motivate divisions C and D to purchase
the required quantities of B4H that would maximize SR profitability
determined in (a) above, as well as motivate Division B. Calculate ranges
for the current cost structure, as well as for where the cost reduction in
Division A has taken place.
c] Discuss some of the options that SR Company could consider with respect
to the optimal long-term positioning of the company in the pharmaceutical
industry.

QUESTION TWO
Using examples, show FOUR (4) similarities and FOUR (4) differences between
the stages in budgeting process in the private sector (manufacturing organization)
and the public sector (central government).