ACCA - P5 Study text - Emile Woolf INT

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Practice questions

where

= Price at zero units of demand

= Price at q units of demand

b = relationship between price and demand

q = units of annual demand

Required

(i) Calculate the price at which the Blaze should be sold in order to

maximise profit for the year.

(ii) Calculate the quantity of units that will be sold in the year, if the

marketing director’s forecast is correct.

(iii) Calculate the annual profit that will be made from selling the Blaze.

(b) Since the total cost function is a curved line, there are two break-even points.

One is below the profit-maximising output level and one is above the profit-

maximising output level.

The total profit function can be expressed as a quadratic equation:

y = ax

+ bx + c

The break-even points can be calculated as the values for x that solve the

following equation:

x =

−b +/− b

− 4ac

Required

Calculate the levels of output and the associated selling prices for Blaze at

which the company would break even.

22 MC = MR

A business entity has estimated that it faces the following price/quantity

relationship.

Sales price Quantity demanded

$ Units

50 1,000

30 2,000

10 3,000

Required

(a) Calculate a formula for the demand curve, assuming that the demand curve

can be drawn as a straight line on a graph.

(b) Find the formula for total revenue.

maximised.

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23 Snap Company

Snap Company makes product SP8 in department C. For the year commencing

1st January 20X7 the following budget has been formulated for department C:

$000

Direct costs

Materials 60

Labour 40

100

Production overheads 100

Full production cost 200

Administrative and marketing overheads

Full cost of sale

250

Profit 50

Revenue (see note) 300

Note: From budgeted sales of 20,000 units.

Production overheads are absorbed on the basis of 100% of direct costs. However,

half of these costs are fixed, and the other half are variable. It is assumed that they

vary with the cost of materials.

The administrative and marketing overheads are based on 25% of factory costs and

do not vary within wide ranges of activity. A profit margin of 20% is applied to the

full cost of sale. This also results in a price that appears to be fair to customers.

Halfway through the year to 31st December 20X7, it became clear that actual sales of

SP8 would be 25% below budget. At about the same time that this shortfall in sales

became evident, a customer asked about buying 5,000 units of a simplified version

of product SP8. If Snap Company were to produce this simplified model for the

customer, the direct material and labour costs would be lower. It is estimated that

materials costing $12,000 and direct labour of $8,000 would be required to produce

the 5,000 units. As the production could take place within the firm’s existing

capacity, fixed costs would not be affected.

Required

(a) Calculate the prices that Snap Company should quote to the customer for each

unit of the simplified product, assuming that the following pricing policies are

applied:

(i) Full cost plus pricing, on the current basis.

(ii) A price that would enable the company to achieve its original budgeted

profit.

(b) Give your advice on the price that should be quoted to the customer.

Practice questions

24 Bridge Company

The following costs per unit relate to the production and sale of 20,000 of a product

by Bridge Company, for the financial year that has just ended.

$ per unit

Direct material 30

Direct labour 10

Overheads:

Variable 10

Fixed 10

It has been estimated that major cost increases will apply to the following year,

assuming that production and sales volumes are still 20,000 units.

Increase

Direct material 20%

Direct labour 5%

Variable overhead 5%

Fixed overhead

10%

It would be possible to substitute a cheaper grade of direct material allowing the

cost of direct materials to be $31.25 per unit. However, a rejection rate of 5% will

arise. (There are currently no rejected units.) This would require an additional

annual inspection costs of $30,000.

In the past, the selling price has been set using a mark-up of 50% on full cost and a

price of $90 per unit was charged in the current year. However, the sales manager

has estimated the price/demand relationships as follows:

Price

$80

$84

$88

$90

$92 $96 $100

Demand (000s units) 25

19 17 15

Required

(a) Decide whether the product should use the regular or the cheaper grade of

material.

(b) Calculate the price that should be charged for the product to maximise the

annual profit, and the profit that should be expected.

25 Responsibility

A multinational company established a new operating division in Fenland four

years ago. The operating division has been established as a profit centre. Decisions

relating to the purchase of capital equipment for the division, and borrowing to

finance the capital, have been taken at head office.

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The results for the first four years of operation have been as follows:

Year 1 Year 2 Year 3 Year 4

$000 $000 $000 $000

Sales revenue

172

646

810

1,792

Operating costs

167

620

718

1,490

Depreciation 25

104

187

530

Interest charges

132

240

462

Profit/(loss) (20)

(210)

(335)

(690)

The managing director of the division has been asked to explain its poor

performance and the escalating losses. In response, the managing director has

argued that the performance of the division has improved, and is not getting worse.

Required

(a) Identify a measure of performance that would suggest that the performance of

the division has been improving over the four-year period.

(b)

Suggest how the performance of the division should be assessed, and state

whether you agree or disagree with the view of the managing director that

performance has improved.

26 Crosstreets Hotel

Crosstreets Hotel owns five hotels in the same country, providing accommodation

mainly to business people and tourists. Each hotel has a bar and restaurant open to

residents and non-residents.

The directors of the company work in two offices in the oldest hotel in the southern

region of the country, where the small finance office is also located. Until now the

company has only produced statutory financial accounts, and has not produced

management accounts.

The directors disagree with each other about the profitability of each of the

individual hotels owned and operated by the company. The head of the finance

office has proposed that performance reports should be produced, based on a

system of responsibility accounting for each of the hotels. The performance of all

five hotels should also be amalgamated to prepare performance reports at company

level.

Required

Suggest:

(a)

What periodic reports this management information system should produce,

and,

(b)

what information the reports should contain.

Practice questions

27 Three services

A company provides three types of delivery service to customers: service A, service

B and service C. Customers are a mix of firms with a contract for service with the

company, and non-contract customers.

The following information relates to performance in the year to 31st December

Year 1:

Service A Service B Service C

Number of deliveries made 350,000 250,000 20,000

% of deliveries to contract customers

60%

60% 80%

Price charged per delivery:

Contract customers $9

$15 $300

Premium for non-contract customers

+ 30%

+ 50% + 20%

The premium for non-contract customers is in addition to the rate charged to

contract customers.

All employees in the company were paid $45,000 per year and sundry operating

costs, excluding salaries and fuel costs, were $4,000,000 for the year.

The following operational data for the year relates to deliveries:

Services A and B Service C

Average kilometres per vehicle/day 400 600

Number of vehicles 50

Operating days in the year 300

300

For Year 2, the company has agreed a fixed price contract for fuel. As a result of this

contract, fuel prices will be:

(a)

$0.40 per kilometre for Services A and B

(b)

$0.80 per kilometre for Service C.

Sales prices will be 3% higher in Year 2 than in Year 1, and salaries and operational

expenses will be 5% higher. Sales volume will be exactly the same as in Year 1.

The number of employees will also be the same as in Year 1: 60 employees working

full-time on Services A and B and 25 employees working full-time on Service C.

Required

(a) Prepare a budgeted income statement for the year to 31st December Year 2.

(b)

Comment on vehicle utilisation.

28 Private medical practice

A private medical practice has five full-time doctors, five full-time assistants and

two administrators.

Each doctor treats 18 patients each day on average. The medical centre is open for

five days each week, 46 weeks each year.

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Charges for patients vary according to the age of the patient and the nature of the

treatment provided.

Charges Adults below 65

year of age

Children and individuals aged

65 years old and over

$ $

No treatment: consultation only 50

Minor treatment

200

120

Major treatment

600

280

The patient mix and the treatment mix are as follows:

Patients: Treatment

Adults 45% No treatment 20%

Children 25%

Minor treatment

70%

Over 65 years old 30%

Major treatment

10%

The salary of each doctor is $240,000, assistants earn $100,000 and administrators

earn $80,000. In addition, everyone receives a 5% bonus at the end of the year.

The medical practice expects to pay $414,300 for materials next year and other

(fixed) costs will be $733,600.

Required

Using the information provided, present an income statement for the medical

practice for next year. (Ignore the effects of inflation.)

29 Train times

A railway company has two operating divisions, Northern Region and Southern

Region. Each division runs inter-city train services and suburban (‘commuter’) train

services. Performance figures for the most recent reporting period are as follows:

Northern Region Southern Region

Inter-city

services

Suburban

services

Inter-city

services

Suburban

services

Journeys 1,500 34,000 1,800 42,000

Completed on schedule 1,240

25,100

1,590 38,600

Completed within five minutes of schedule

1,350

29,500

1,690 40,300

Completed within ten minutes of schedule

1,440

33,100

1,730 41,500

Cancelled journeys 16

405

2 220

Target for on-time completion of journeys

90%

95%

90% 95%

The chief executive officer of the railway company is trying to improve standards of

service, and targets have been set for the number of train journeys that should end

with the train arriving at its destination on schedule. It is his intention to raise the

standards still further in the future.

Required

Assess the service performance of the two regions.

Practice questions

30 Non-financial performance measurements

Suggest three non-financial measures of performance that might be helpful to

management in assessing the following aspects of operations in a commercial bank:

(1) service quality

(2) marketing effectiveness

(3) personnel

31 Mission

The managing director of Branded Company, a listed company, has recently

returned from a conference entitled ‘Strategic planning and its context within the

global business environment’. Whilst at the conference she attended a session on

‘corporation mission statements’. She found the session very interesting but it was

rather short. She now has some questions for you.

(1) 'What does “corporate mission” mean? I don’t see how it fits in with our

strategic planning process’.

(2) ‘Where does our mission come from and what areas of corporate life should it

cover’?

(3) ‘Even if we were to develop one of these mission statements, what benefits

would the company get from it’?

Required

Prepare brief answers to the managing director’s questions.

32 Customer profitability

PQR Company sells a range of five products. Budgeted annual data for sales and

costs are as follows:

Product Selling price Variable cost

$ $

A 3.60 2.40

B 2.50 2.00

C 4.00 2.80

D 2.40 1.50

E 6.00 4.00

Budgeted total annual sales are:

Product Annual sales

units

A 100,000

B 150,000

C 120,000

D 180,000

E 80,000

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The products are sold to four different types or category of customer, as follows:

% of annual sales

Category of customer

Product C1 C2 C3 C4

A 10% 20%

20%

50%

B 40% -

30%

C 10% 20%

10%

60%

D 30% 10%

20%

40%

E 20% -

20%

60%

Rebates on sales

At the end of each year, the company will pay rebates to Category 3 and Category 4

customers, as follows:

(c)

Category 3 customers: rebate = 5% of annual sales

(d)

Category 4 customers: rebate = 10% of annual sales.

Fixed costs

Budgeted total fixed costs for the year are $465,000, analysed as follows:

Delivery costs 250,000

Order processing costs 105,000

Cost of promotion events 30,000

385,000

Other fixed costs 80,000

465,000

The company operates an activity based costing system. Relevant budgeted data

relating to activities is as follows:

Category of customer

C1 C2 C3 C4

Number of deliveries 40

50 100

Number of orders 30

50 60

Number of promotion events 0

2 10

Average km per delivery 100

200

300 150

The cost drivers for each activity are:

 Delivery: kilometres (km)

 Order processing: number of orders

 Promotion events: number of promotion events

 The other fixed costs are general fixed costs, and are not allocated to activities,

products or customers.

Required

Using activity based costing, prepare a statement of budgeted customer

profitability, for each category of customer.

Practice questions

33 RTC

Round Table Conferences (RTC) organises scientific conferences. It began trading in

Hereland in Year 1, and in Year 3 it opened a similar operation in a neighbouring

country, Thereland. The divisional managers in Hereland and Thereland have the

authority to make most operational decisions, but decisions relating to acquisitions

and financing are reserved for the board of directors of RTC.

Financial data is shown below for both divisions, for the years ending

31st December Year 4 and Year 5.

Actual results

Year 4

Year 5

Hereland

Thereland

Total

Hereland

Thereland Total

$000

$000 $000

Revenues 4,300

950

5,250

4,500

1,200 5,700

Salaries and fees

1,400

580

1,980

1,500

600 2,100

Other direct costs

1,450

430

1,880

1,480

430 1,910

2,850

1,010

3,860

2,980

1,030 4,010

Marketing 240

310

290

95 385

Depreciation/

amortisation 330 45 380 330 95 425

Interest cost

110

570

115

800

620

190 905

Total costs 3,420

1,125

4,660

3,600

1,220 4,915

Profit/(loss) 880

(175)

590

900

(20) 785

Summary balance sheets

Year 4

Year 5

Non-current assets 2,610

240

2,850

2,600

480 3,080

Net current assets 710

140

850

1,250

190 1,440

3,320

380

3,700

3,850

670 4,520

Loan stoc

1,400

1,200

2,300

3,320

Capital and reserves

2,300

3,320

Required

(a)

Assess the financial performance of RTC in Year 4 and Year 5, and the

contribution of the operations in Hereland and Thereland to the overall

performance.

(b)

Suggest, with reasons, four additional items of information that you would

require in order to provide a more comprehensive financial analysis of

performance.

(c)

Suggest, with reasons four factors that should be taken into consideration

when comparing performance in Hereland and Thereland.

Paper P5: Advanced performance management

34 Value for money

A school teaches children from the age of 11 to the age of 18. The governors of the

school have been concerned that in recent years, the performance of the school has

deteriorated. The chairman of the board of governors has stated his view that

parents of the children at the school have a right to expect more value for money,

and he proposes that a value for money exercise should be carried out.

Required

(i) What aspects of the school and its operations would a value for money

exercise investigate?

(ii) What might be the benefits of a value for money exercise?

35 Decentralisation

(a) Define the following concepts:

(i) Responsibility accounting

(ii) An investment centre

(iii) Return on investment (for a division)

(iv) Residual income (for a division).

(b) The following information available about Divisions M and W, which are

investment centres in LK Group.

Division M Division W

Divisional investment $200,000 $5,000,000

Division profit $20,000

$410,000

The weighted average cost of capital for LK Group is 8%.

Ignore taxation.

Required

(a) Evaluate the performance of Division M and Division W.

(b) Re-evaluate the situation given that the weighted cost of capital is

(1) 6%

(2) 10%.

36 West Division

Large Group has several separate divisions, each operating as an investment centre

within the group. West Division makes and sells three products, A, B and C. All

three products are sold under the Titan brand label, but Product A and Product B

are also sold through a supermarket group as unbranded products.

Budgeted data for the year to 31st December Year 7 is as follows:

ACCA - P5 Study text - Emile Woolf INT - 2010

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