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cpa 5 management accounting mock 3


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By Omosa


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QUESTIONS NUMBER ONE Nasihu Ltd. has the following standards for producing an alcoholic beverage: Concentrate 590N - 50 litres @ Ug.Sh.100 = Ug.Sh. 5,000 Concentrate KAG - 50 litres @ Ug.Sh.300 = Ug.Sh.15,000 100 litres Ug.Sh.20,000 Every 100 litres of input should yield 80 litres of Chovi, the finished product. The production manager is supposed to make the largest possible amount of finished product for the least cost. He has some leeway to alter the combination of materials within certain wide limits, as long as the finished product meets specified quality standards. Actual results showed that 400,000 litres of Chovi were produced during last week. The raw materials used in this production were 280,000 litres of 590N and 240,000 litres of KAG. No price variances were experienced during the period. Required: a) A presentation of yield and mix variances. (13 marks) b) Comment on the performance of the manager. (7 marks) (Total: 20 marks) NUMBER TWO Mefa Ltd. is changing its current short-term planning approach in an attempt to incorporate some newer planning techniques that will permit selection of an optimum production mix. The company’s director of operations has developed the following price and cost information per unit of each product. PRODUCT 1 2 3 Sh. Sh. Sh. Selling price 4,500 5,400 7,200 Direct labour 1,350 1,800 2,250 Direct materials 1,620 1,080 1,890 Variable overhead 1,080 1,080 1,080 Fixed overhead 180 180 180 Assume the total production level of 60,000 units made up of equal amounts of each product. Required: (Parts (a) and (b) below are independent of each other) a) All three products use the same direct material which cost Shs. 270 per kilogram and direct-labour rate is Shs. 900 per hour. Monthly capacities are 2,000 direct-labour hours and 20,000 kilogram’s of direct materials. Fixed overhead is assumed to be the same for each product. Formulate and clearly label the linear-programming (LP) functions necessary to maximize Mefa’s net income. Show supporting computation but do not solve t he linear programming functions.(11 marks) b) Mefa’s management has decided to produce product 3 only. The sales and marketing director has presented the following results of a price analysis for product 3. at a selling price of Sh.7200 per unit, the probability distribution of total sales is uniform between Sh.27,000,000 and Sh.54,000,000. At a selling price lowered to Shs. 6,300 per unit. The probability distribution of total sales is uniform between Shs. 54,000,000 and Sh.81,000,000. i What is the probability of at least breaking even at a selling price of Sh.7,200 per unit (5 marks) ii Which pricing strategy yields a higher expected profit? (4 marks) (Total: 20 marks) NUMBER THREE Tony Makau is the Financial Director of Bitty Ltd. He wishes to install an inventory control system an, in particular, calculate and utilize an optimal order quantity using the EOQ model. He has collected the following data about inventory item NPD: - Purchase price Sh.31.25 per unit - Inventory insurance and other variable costs of storage paid at year-end Sh.0.625 per unit - Annual demand 1,250 units Bitty’s opportunity rate of return is 10 per cent. He anticipates no need for a safety stock. He is unsure about the cost behaviour associated with ordering inventory. He collected some data about the most recent 20 orders made for inventory item NPD. He also ran a regression using the number of units in each order to predict the total cost of the order. The results are as follows: Total cost in shillings = 55.0 + 3.4125x Standard errors of the coefficients 11.0 0.54 r2 = 0.83 x = number of units ordered Where EOQ ={ 2AP}½ { S } Where: A - Annual inventory requirement P - Ordering cost per order S - Carrying cost per item per annum Required: a) Using only the data given above, what optimal order quantity would you recommend? (4 marks) b) What is the 95% confidence interval of the variable ordering cost per unit ordered? (3 marks) c) List two regression assumptions that must be maintained in order to answer (b) above. (3 marks) d) The actual costs of ordering turned out to be Sh.50 per order plus Sh.4.375 per unit ordered. e) Assuming that the recommendations in (a) above were implemented, what was Bitty’s cost of prediction error! (10 marks) (Total: 20 marks) NUMBER FOUR Chileni Company Limited (CCL) recently sent their chief designer to the USA and UK to review developments in the American and British Markets. He has now returned with details of a new type of food mixer that is being developed over there. CCL are considering the design and manufacture of a liquidizer gadget attachment to be used as an extra gadget for the new mixer when it is sold in Kenya. The chief designer’s notes show that 10% of the experts he questioned in both the UK and USA believed the new mixer would reach the Kenyan market in a year’s time, whereas 30% thought it would be launched in four year’s time, and the remainder suggested a five-year delay before it reached Kenyan. The presents value (PV) of net cash flows form making and selling the liquidizer are estimated by the company to be sh.8 million, if the market develops one year from now and sh.3.2 million if it develops five years from now. CCL have not developed a liquidizer before, and whilst it immediate development would cost Sh.2 million, they feel they have only a 50% chance of a successful development at present. A number of alternative courses of action present themselves. The company could abandon the whole project, or wait for one year to see if the mixer has penetrated the Kenyan market. They would then abandon or develop the liquidizer at a PV cost of Sh.1.8 million, with a 70% chance of success, but they would be late into the market and the PV of their receipts they estimate at Sh.4.8 million, including the expenditure of Sh.400,000 on acquiring extra product data during the second year of delay, and the chance of a successful development would be 90%. At this point, however, the mixer could only come on the market at the four or five year point from now. Required: Using a decision tree approach, advise the company on the course of action to adopt. (20 marks) NUMBER FIVE The AMARK Weapons Ltd. desires to submit a tender for 32 “string-to-surface” rockets required by Skyrock Ltd. it is estimated that each rocket will cost approximately Sh.40,000,000 for material and variable overhead costs. Total fixed costs will amount to approximately Sh.1,600,000 over the two years it will take to build the rockets all of which would have to be recovered against this contract. The company, as a result of past experience, anticipates it could expect a 75 per cent learning curve and that the steady state would not be achieved during this production run. Building the first rocket would require approximately 400,000 hours of direct labour at a direct labour cost of Sh.150 per hour. Variable overhead costs which vary with direct labour amount to Sh.50 per direct labour hour. Eight rockets will be built during the first year of the contract and the remaining 24 will be completed during the second year. The AMARK Weapons Ltd. always adds 25 per cent profit margin to the estimated costs of the contract for which they tender. Required: a) Calculate the total labour hours that will be required to build the 32 rockets. (5 marks) b) Draw up a quotation showing the total price to be quoted, with details of the constituent parts of the cost structure and the profit added. (5 marks) c) Assuming the contract is awarded to the company, and no costs are deferred over the two-year period, draft estimated income statements for the first and second years of the contract life. Revenue is to be recognized on the basis of completed rockets. Fixed costs are incurred equally each year. (5 marks) (Total: 15 marks)
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