Shortly explain three methods that can be used to analyze uncertainty in cost-volume-profit (C-V-P) analysis. (3 marks)
Kandali Company Ltd. is a manufacturing company which produces and sells a single product known as T1 at a price of Sh.10 per unit. The company incurs a variable cost of Sh.6 per unit and fixed costs of Sh.400,000. Sales are normally distributed with a mean of 110,000 units and a standard deviation of 10,000 units. The company is considering producing a second product, T2 to sell at Sh.8 per unit and incur a variable cost of Sh.5 per unit with additional fixed costs of Sh.50,000. The demand for T2 is also normally distributed with a mean of 50,000 units and standard deviation of 5,000 units. If T2 is added to the production schedule, sales of T1 will shift downwards to a mean of 85,000 units and standard deviation of 8,000 units. The correlation coefficient between sales of T1 and T2 is –0.9.
i The company’s break-even point for the current and proposed production schedules. (7 marks)
ii The coefficient of variation for the two proposals. (8 marks)
iii Based on your computation’s in (i) and (ii) above advise the company on whether to add T2 to its production schedule. (2 marks)
(Total: 20 marks)
“It is now fairly and widely accepted that conventional cost accounting, distorts management’s view of business through unrepresentative overhead allocation and inappropriate product costing. This is because the traditional approach usually absorbs overhead costs across products solely on the basis of the direct labour involved in their manufacture. As direct labour cost expressed as a proportion of total manufacturing cost continues to fall, this leads to more an more distortion and misrepresentation of the impact of particular products on total overhead costs” (from Financial Times)
a) Briefly discuss the above statement and state what approaches are being adopted by management accountants to overcome such criticism. (8 marks)
b) Traditional budgeting systems are incremental in nature and tend to focus on cost centers. Activity based budgeting (ABB) links strategic planning to the overall performance measurement aimed at continuous improvement.
i Explain the weakness of traditional incremental budgeting systems. (4 marks)
ii Describe the main feature of activity based budgeting system and comment on its advantages. (8 marks)
(Total: 20 marks)
Cin Noah, an independent movie producer, is negotiating with Jivah Productions Limited on a contract for the production and marketing of her next film, titled “The rise and fall of a cock”. The budget for the film is, Sh.100 million.
Jivah Productions Limited is offering Cin Noah a choice of one of the three contracts.
1. Jivah Productions Limited will pay all the production and marketing costs.
2. Cin Noah will receive a fixed fee of Sh.10 million.
3. Cin Noah will receive 10% of gross revenue from the film in excess of Sh.1 billion (no payment is made for gross revenue up to Sh.1 billion).
1. Jivah Productions Limited will pay 80% of all the production and marketing costs up to Sh.100 million and 30% of production and marketing costs in excess of Sh.100 million
2. Cin Noah will receive 10% of all gross revenue for the film.
1. Jivah Productions Limited will pay 50% of production and marketing costs up to Sh.100 million.
2. Cin Noah will receive 30% of all gross revenue from the film.
Cin Noah estimates the following probabilities for the gross revenues:
P(high demand of Sh.2 billion) 0.1
P(medium demand of Sh.500 million) 0.3
P(low demand of Sh.100 million) 0.6
She estimates the following probabilities for the cost of production:
P(budgeted cost of Sh.100 million) 0.6
P(high cost of Sh.200 million) 0.4
a) The expected monetary value for Cin Noah under each contract for each of the six possible events.
(Hint: The possible events are high demand – budgeted costs, high demand – high costs, medium demand – budgeted costs, medium demand – high costs, low demand – budgeted costs, and low demand – high costs). (15 marks)
b) Cin Noah will choose the contract that maximizes her expected monetary value from the film. Which contract should she choose? (Show calculations). (2 marks)
c) What information might Cin Noah use in assessing the probability distribution for the production and marketing costs of “The rise an fall of cock” film? (3 marks)
(Total: 20 marks)
Contax Engineering Company Limited wishes to set flexible budgets for each of its operating departments. A separate maintenance department performs all routine and major repair works on the company’s equipment and facilities. The company has determined that maintenance department performs all routine and major repair works on the company’s equipment and facilities. The company has determined that maintenance cost is primarily a function of machine hours worked in the various production departments.
The maintenance cost incurred and the actual machine hours worked during the months of January, February, March and April 2003 were as follows:
Machine hours in
a) Determine the cost estimation function using:
i High-low method. (5 marks)
ii Regression analysis (5 marks)
b) Using the regression function estimate:
i The maintenance costs that would have been incurred if the machine hours were expected to be 900 in the month of May 2003. (1 mark)
ii The maximum machine hours that would have been worked If the maintenance cost incurred had been limited to Sh.400,000 for the month of May 2003. (6 marks)
c) Assuming that in the month of May 2003 machine hours were 900, establish a 95% confidence interval for this point estimate. (Assume tc = 2.7764 and standard error of estimate, se = 63.25). (3 marks)
(Total: 20 marks)
a) Construct a flowchart to show the logic solution of a zero-sum game. (6 marks)
b) Two manufacturers compete in a market for a specialized calculator. Company A controls 75% of the market while company B controls 25% of the market. Company A is considering a vigorous annual marketing campaign which will cost Sh.35,000,000. The total market for the specialize calculator is 100,000 units per year. The profit contribution per unit is Sh.3,000.
Company B is debating how much money to invest in research and development every year. It is considering three alternatives: Sh.25,000,000, Sh.50,000,000 and Sh.80,000,000. It is estimated that if company A runs a vigorous annual marketing campaign, its share of the market after one yea will be either 79% or 73%, depending on company B’s investment in research and development (Sh.25,000,000, 50,000,000 and Sh.80,000,000 respectively).
On the other hand, if company A does not run the marketing campaign, company B’s share of the market will decrease by 1% of the total market if it invests Sh.25,000,000 in research and development, increase by 1% if it invests
Sh.50,000,000 in research and development and increase by 3% if Sh.80,000,000 is invested.
i Using the share of the market percentages only, convert the above into a zero sum game, and hence solve for the optimal strategies for both companies. (6 marks)
ii Obtain a pay off table consisting of contribution to profit in monetary terms, and hence solve the game. (8 marks)
(Total: 20 marks)