Question 1

Cash flow Discount factor Present value Marks

Year 0 Receipt from competitor 600,000 1.000 600,000 1

Year 1 Project net cash flow (350,000) 0.862 (301,700) 1

Year 2 Project net cash flow (250,000) 0.742 (185,500) 1

Year 3 Project net cash flow (100,000) 0.641 (64,100) 1

Net present value 48,700

Decision rule

Accept the proposal if NPV is positive, and reject the proposal if NPV is negative 1

Decision

Accept the offer by the competitor because it gives a positive NPV of $48,700 1

Question 2

Compute the present value of continuing or discontinuing the product Marks

NPV of discontinuing the product

Cash flow Discount fa Present value

Year 0 Sale of old equipment 3,000,000 1.000 3,000,000 1

Year 0 Redundancy costs (800,000) 1.000 (800,000) 1

Year 1 Product net cash flows (1,000,000) 0.847 (847,000) 1

Year 2 Product net cash flows (800,000) 0.718 (574,400) 1

Year 3 Product net cash flows (600,000) 0.609 (365,400) 1

Year 4 Product net cash flows (400,000) 0.516 (206,400) 1

Year 5 Product net cash flows (200,000) 0.437 (87,400) 1

Net present value 119,400

Decision rule

Accept the proposal if NPV is positive, and reject the proposal if NPV 1

is negative

Decision

Accept the proposal to discontinue the product because it gives a positive 1

NPV of $119,400

Question 3

3 a

Expected sales in units Marks

Year 0 Year 1 Year 2 Year 3 Year 4

Probability Projected Expected Projected Expected Projected Expected Projected Expected

Success 0.80 10,000 8,000 15,000 12,000 20,000 16,000 15,000 12,000

Failure 0.20 6,000 1,200 10,000 2,000 8,000 1,600 8,000 1,600

Expected sales in units 9,200 14,000 17,600 13,600 1

Expected sales @ $100/unit 920,000 1,400,000 1,760,000 1,360,000 1

Expected variable cost @ $40 per unit (368,000) (560,000) (704,000) (544,000) 1

Fixed overhead (200,000) (150,000) (150,000) (150,000) 1

Net cash flow (1,500,000) 352,000 690,000 906,000 666,000

Discount factor 1.000 0.833 0.694 0.579 0.482 1

Net Present value 117,662 (1,500,000) 293,216 478,860 524,574 321,012 1

Decision rule

Accept the proposal if NPV is positive, and reject the proposal if NPV

is negative 1

Decision

Accept the proposal to introduce the new product because it gives a positive

NPV of $117,662 1

3 b

Year 0 Year 1 Year 2 Year 3 Year 4

Revised expected volumes 9,200 14,000 8,800 6,800 1

Expected sales @ $100/unit 920,000 1,400,000 880,000 680,000 1

Expected variable cost @ $40 per unit (368,000) (560,000) (352,000) (272,000) 1

Fixed overhead (200,000) (150,000) (150,000) (150,000) 1

Net cash flow (1,500,000) 352,000 690,000 378,000 258,000

Discount factor 1.000 0.833 0.694 0.579 0.482 1

Net Present value (384,706) (1,500,000) 293,216 478,860 218,862 124,356 1

Decision rule

Accept the proposal if NPV is positive, and reject the proposal if NPV

is negative 1

Decision

Reject the proposal to introduce the new product because it gives a positive

NPV of $384.706 1

Question 4 Save Distributors

Marks

a Annual demand = 120000 units 1

Eoq = 2,449 1

b Average weekly demand = 2,308 1

Weekly demand with 50% fluctuation = 3462 1

Demand for six weekls under this scenario = 20,769 1

Thefore required safelty stock is 20769 units

c Reoreder level = 13846 units 1

Question 5

Marks

Physical flow of units Equivalent units

Material P Material Q Conversion Costs Total

WIP b 0

Started 50,000 1

To a/c for 50,000

Completed & trf out 35,000 35,000 35,000 35,000 2

WIP e (Note 1) 15,000 15,000 - 10,000 2

50,000 50,000 35,000 45,000

Cost to a/c for 200,000 70,000 135,000 405,000 1

Cost per equiv unit 4.00 2.00 3.00 9.00 1

a. Cost of goods transferred out (35 0000 equiv units x $9) 315,000.00 1

b. Cost of work in progress ( 15,000 x $4) +(10000 x $3) 90,000.00 1

Total costs accounted for 405,000.00

Note 1

The question does not mention or imply any losses, so we assume that there is none.

Question 6

Marks

a Cost of goods manufactured

Opening work in progress 3,600 1

Add direct materials consumed

Opening stock direct materials 16,200 1

Add Direct materials purchased 20,000 1

Less Direct materials closing stock (17,000) 1

Direct materials consumed during the month 19,200

Add Direct labour

3300 hours at $5 per hour 16,500 1

Add Factory overhead

3300 hours at $2.60 per hour 8,580 1

47,880

Less Closing work in progress (8,120) 1

Cost of goods manufactured 39,760

b Cost of goods completed

Completed

Direct materials

WIPb 1,320

Current month consumption 19,200

WIP e (4,320)

16,200 1

Direct labour

WIPb 1,500

Current month charge 16,500

WIP e (2,500)

15,500 1

Factor overhead

WIPb 780

Current month charge 8,580

WIP e (1,300)

8,060

39,760 1

Work in progress

Direct materials 4,320

Direct labour 2,500

Ovehead 1,300

8,120 1

Question 7

Working Flexible budget Working Actual Variances Marks

Production ( units) 6,000 6,000

Direct materials 1 138,000 150,000 (12,000) 2

Direct labour 249,000 5 252,000 (3,000) 2

Variable costs - Manufacturing 2 42,000 6 48,300 (6,300) 2

- Selling & Admin 3 45,400 46,300 (900) 2

Total variable cost 474,400 7 496,600 (22,200) 2

Fixed costs - Manufacturing 110,800 115,100 (4,300) 2

- Selling & Admin 4 24,400 8 23,600 800 2

Total Cost 609,600 635,300 (25,700) 2

All unhighlighted numbers are given

All highlighted numbers are calculated.

We will discuss workings in class, see formulas in the relevant cells

1

Question 8

The Fleer Company Marks

Selling Price 20

Variable costs - Manufacturing 11

- Selling 3

Total variable costs 14

Contribution 6

Contribution margin ratio 0.3

Fixed costs Manufacturing 540,000

Selling 252,000

Total fixed costs 792,000

1 Break-even is $ 792,000/0.3 = 2,640,000 3

2 To earn profit of $60,000

No of units required (792000 + 60000)/6 = 142,000 units 3

3 Let Sales units be = x

Contribution generated = 6x

Required profit = 2x ( 10% of 20x)

6x - 792000 = 2x

4x = 792,000

x = 198,000

198,000 units are required to earn 10% of sales profit 4

I am sure you can prove this on your own!!!!!!

4a Absorption costing

Per unit

Selling price 20.00

Variable manufacturin costs 11.00

Fixed Ovehead 3.00

Production cost 14

Gross profit 6.00

Selling costs - Fixed 1.40

Selling costs- variable 3.00

Net Profit 1.60 1

Income statement

Sales 3,000,000 1

Opening stock 140,000 1

Variable manufacturing 1,760,000 1

Fixed factory overhead 480,000 1

Standard cost of production 2,240,000

Variance on variable manufacturing cost 40,000 2

Fixed overhead vulume variance 60,000 2

Adjusted cost of production 2,340,000

Closing stock (280,000) 1

Cost of sales 2,200,000 1

Gross profit 800,000

Selling costs- variable 450,000 1

Selling costs - fixed 210,000 1

Fixed selling costs volume variance 42,000 1

Total selling costs 702,000

Net income 98,000

4b Variable costing

Per unit

Selling price 20.00

Variable manufacturin costs 11.00

Selling costs- variable (non inventoriable) 3.00

Variable cost per unit 14

Contribution 6.00 1

1

Sales 3,000,000

Opening stock 110,000 1

Variable manufacturing 1,760,000 1

Variance on variable manufacturing cost 40,000 1

Adjusted cost of production 1,800,000

Closing stock (220,000) 1

Variable selling expenses 450,000 1

Total variable costs 2,140,000 1

Contribution 860,000

Fixed production cost 540,000 1

Selling costs - fixed 252,000 1

792,000

Net income 68,000

Absorption costing net income 98,000

Variable costing net income 68,000 Difference 30,000

Fixed production cost element in opening stock (30,000) Fixed production cost element in closing stock 60,000

30,000 2

Question 9

LIVE ENGINEERING Marks

Standard Deluxe

Market price 1,500 10,000

Materials 1,000 4,000

Labour 200 2,000

Variable overhead 100 1,000

Total variable costs 1,300 7,000

Contribution 200 3,000 2

Since labour is said to be a limiting factor in Live Engineering, we must

calculate the contribution per labour hour

Labour hours 10 100

Contribution per hour 20 30 1

Ranking 2 1 1

From a production perspective Live Engineering is better off using its available

labour on Deluxe

Cost of producing modified deluxe

Deluxe Modified

Cost of importing from Germany 10,000 per unit 1

Variable cost of production

Materials 4,000 1

Labour 2,200 1

Variable overhead 1,000 1

Total variable costs 7,200

Net benefit of internal manufacturing 2,800 per unit 1

From the company viewpoint it is less costly to produce the modified deluxe at a cost

of $7200 than buying the German radar at $10,000. The company would save $2,800 per unit

Available labour hours 100,000 hours

Deluxe labour hours required for the 500 units army order (50,000) 1

Hours available for additional units to replace the imported radar (50,000) 1

Hours available for Standard 0 1

Question 10

Marks

Alternative 1 Best outcome Worst outcome

Net CF Discount factor Present value Net CF Discount f Present value

Year 0 Modification (12,000) 1.00 (12,000) (12,000) 1.00 (12,000) 2

Year 1 Contribution 80,000 0.80 64,000 80,000 0.80 64,000 2

Year 2 Contribution 80,000 0.60 48,000 60,000 0.60 36,000 2

Net Present value 100,000 88,000

Alternative 2

Year 0 New machine (50,000) 1.00 (50,000) (50,000) 1.00 (50,000) 2

Year 0 Sale of old machine 4,000 1.00 4,000 4,000 1.00 4,000 2

Year 1 Contribution 120,000 0.80 96,000 120,000 0.80 96,000 2

Year 2 Contribution 120,000 0.60 72,000 90,000 0.60 54,000 2

Net Present value 122,000 104,000

Note that the $100,000 tied up in working capital is irrelevant for decision making because it does not change

in either alternative.

Decision rule:

Accept the alternative with positive NPV and reject the one with negative NPV. Where the NPV 1

is both cases is positive accept the one with the higher NPV

Decision:

Accept alternative 2 because it gives a higher NPV in both scenarios. 1

Question 11

Equivalent units Marks

Physical flow of units TRF in Finishing Dept Mats Conversion costs Total

WIP b 10,000

Trf in 40,000

To a/c for 50,000 1

Completed and Trf out

- ex WIPb 10,000 - - 2,500

- ex Trf in 25,000 25,000 25,000 25,000

Abnormal loss 5,000 5,000 5,000 -

WIP e 10,000 10,000 10,000 5,000

50,000 40,000 40,000 32,500 5

Cost to account for

WIP b 140,500 1

Trf in 140,000 70,000 292,000 502,000 1

Total cost to account for 642,500

Cost per equiv unit 3.50 1.75 8.98 14.23 1

a Cost of gewgaws lost in production ( 5000x 3.50 + 5000x1.75) 26,250 1

b. Cost of gewgaws trf to finished goods

WIPb 140,500 1

Cost to complete WIPb (2500x8.98) 22,462 1

Started & completed (25000x 14.23) 355,865 1

518,827

c Cost of WIP e (10000x3.5 + 10000x1.75 + 5000x8.98) 97,423 1

Total cost accounted for 642,500

Question 12, Question 13, Question14, Question 15 and Question 16

Marks

Clear comments that enable one to follow your thought process will be awarded marks

Question 12 12

Question 13 12

Question 14 10

Question 15 12

Question 16 8

Question 17

Semi automatic Automatic Marks

i Let the min no. of doughnuts be x y

Total annual costs 28,000+ 0.2x 32000+0.14y 1

Cost of outside purchase 0.4x 0.4y 1

Solve these equations 28000+0.2x = 0.4x 32000+0.14y=0.4y

x = 140000 y=123077 1

ii At 25000 doughnuts

Variable cost 50,000 35,000 1

Fixed costs 28,000 32,000 1

Total cost 78,000 67,000

The automatic machine is better for 250000 doughnuts annually 1

iii For 500000 doughnuts

Variable cost 100,000 70,000 1

Fixed costs 28,000 32,000 1

Total cost 128,000 102,000

The automatic machine is better for 250000 doughnuts annually 1

iv Let the volume be x x

Variable costs .20x .14x 1

Fixed cost 28,000 32,000 1

Total costs 28000+0.2x 32000 + 0.14x 1

For the net income to be the same the total cost MUST be the same

Therefore 28000 + 0.2x = 32000 + 0.14x

x = 66,667 doughnuts 1

v No. If the selling price does not change between the alternatives, it is irrelevant. 1

Question 18

Equivalent units Marks

Physical flow of units Materials Conversion cots Total

Started 80,000

To account for 80,000 1

Completed 37,500 37,500 37,500

Normal loss 3,200 - -

Abnormal loss 35,300 35,300 35,300

WIPe 4,000 4,000 3,600

80,000 76,800 76,400 4

Costs to account for 440,000 360,000 800,000 1

Cost per equivalent units 5.73 4.71 10.44 1

Completed (37500x 10.44) 391,545 1

Abnormal loss (35300 X 10.44) 368,575 1

Work in progress (4000x5.73 +3600x4.71) 39,880 1

Costs accounted for 800,000

Question 19

Marks

a Marks will be awarded for clear explanations 4

b

ZZ-1 ZZ-2

Production output in litres 300,000 Per unit 300,000 Per unit

Direct material 375,000 1.250 465,000 1.550

Direct labour 225,000 0.750 225,000 0.750

600,000 2.000 690,000 2.300

Budgeted materials (litres) 306,122 1.020 litres per unit 306,122 1.020 litres per unit

Budgeted material price 1.225 $/litre 1.519 $/litre

Direct labour hours 75,000 0.250 hours per unit 75,000 0.250 hours per unit

Direct labour cost 3.000 $ per hour 3.000 $ per hour

Flex for 285000 units Flex for 329000 units

Production output in litres 285,000 285,000 329,000 329,000

Direct material 356,250 342,000 1.200 509,950 534,250 1.624

Direct labour 213,750 234,000 0.821 246,750 273,000 0.830

Total prime manufacturing cost 570,000 576,000 2.021 756,700 807,250 2.454

Actual materials used (litres) 290,816 296,875 1.042 litres per unit 346,316 1.053 litres per unit

Actual materials price 1.152 $ per litre 1.543 $ per litre

Direct labour hours 356,250 72,000 0.253 hours per unit 84,000 0.255 hours per unit

3.250 $ per hour 3.250 $ per hour

Direct materials price variance 21,672 (8,196) 4

Direct materials usage variance (7,422) (16,104) 4

Direct labour price/rate variance (18,000) (21,000) 4

Direct labour efficiency variance (2,250) (5,250) 4

(6,000) (50,550)

Proof

Budgeted cost 570,000 756,700

Variances (6,000) 50,550

Actual 564,000 807,250

Question 20

Dept IV

1

Dept II 70% =46,200 kilograms Further processing

Alpha $23.660

Selling price $5 per kilogram

Further processing

Dept I 60% =66,000 kilograms $38,000

Delta 30% =19,800 kilograms

Beta(By-product)

Selling expenses= $8100

Rho :110000 kilograms Sellling porice =$1,20 per kilogram

Cost $120,000 40%=44,000 kilograms If processed further

Gamma Additional processing cost $35,000

Additional selling costs $3000

New Selling price $3 per kilogram

90% Good output= 39,600 kilograms

Dept III Selling price = 12 per kilogram

Futher processing 5 marks

$165,000

10% normal loss= 4,400 kilograms

a Beta Alpha

Sales value 46200 x 5 = 231,000

Gross value 19800 kg @1.20 = 23,760 Less further processing cost Dept IV (23,660)

Less selling expenses (8,100) Less value of by product= Beta (15,660)

Value of by-product 15,660 Less Dept II costs (38,000)

2 marks NRV Alpha 153,680 3 marks

Gamma

90 % of 44000lb sold at 12 per lb = 475,200 Allocation of joint costs

Further processing costs (165,000)

NRV 310,200 2 marks Gamma 80,245

Cost of Normall loss is absorbed by the good units produced Alpha 39,755

120,000 2 marks

Total NRV Gamma 310,200

Alpha 153,680

463,880 1 mark

b Beta NRV with Further processing of Beta as a joint -product Evaluation of Beta further processing

Beta Alpha Sub Total Gamma Total NRV Increase in revenue (3 - 1.2)x19800 35,640

Sales 19800 x 3 59,400 231,000 290,400 additional processing costs (35,000)

Further processing costs (35,000) (23,660) (58,660) Additional selling costs (3,000)

Selling expenses (11,100) 0 (11,100) Net result (2,360)

Sub total 13,300 207,340 220,640

Allocated Dept II costs (2,291) (35,709) (38,000) Therefore it is not advisable to process Beta further

NRV of the joint products 11,009 171,631 182,640 310,200 492,840 3 marks

Allocation of Dept I costs (2,681) (41,790) (44,470) (75,530)

2 marks 2 marks 1 mark

Beta full manufacturing cost = (2681+2291+35000) 39,971 2 marks Total marks 25 marks

Question 21

Marks

The calculation are as shown below. However, additional marks will be awarded for (incl commentary)

clear comments on them

i Rate of stock turnover COGS/ average stock

18.18182 times 2

ii Current ration current assets/ current liabilities

2.5 2

iii Acid test ratio liquid assets/current liabilities

1.95 2

iv Debtors turnover debtors/turnover x12 x 30 days

45 2

v Return on assets employed Net profit before tax/ Assets employed

40% 2

vi Return on equity innterest in assets

Question 22

a. Each correct graph 1 mark

Each correct explanation 1 mark

b Calculation of variable cost A B

i Units sold 100,000.00 100,000.00

Total revenue 1,000,000 1,000,000

less fixed cost (300,000) (160,000)

less profit (300,000) (240,000)

Variable cost 400,000 600,000 2 marks

Variable cost per unit 4 6

Selling price 10 10

Variable cost (4) (6)

Contribution margin 6.00 4.00 1 mark

Breakeven units 50,000 40,000

Breakeven sales 500,000 400,000 1 mark

ii Where the two machines are equally profitable

6x-300000 = 4x - 160000

2x = 140000

x = 70000 4 marks

ii Where sales< 70000 units Machine B is more profitable

Where sales> 70000 units Machine A is more profitable 4 marks

Question 23 Equivalent units

a Physical flow of units RM- P RM-Q CC Cost

WIP start 0

Started 50000

To a/c for 50000 1 mark

Completed 35000 35000 35000 35000

Normal loss 2000 0 0 0

WIP end 13000 13000 13000 11700

A/c for 50000 48000 48000 46700

1 mark 3 marks 3 marks 3 marks

Cost 400,000 140,000 270,000 810,000

Cost per equivalent units 8.33 2.92 5.78 17.03

1 mark 1 mark 1 mark

Completed units 596,105 1 mark

WIP end 213,895 1 mark

810,000

b

i Normal spoilage 2 marks

ii Abnormal spoilage 2 marks

Question 24

a Notes on relevance 5 marks

b.

Per unit

Units produced 25,000 30,000

Costs of manufacturing

Direct materials $ 30,000 1.20 36,000 1.20 291,900

Direct labour $ 22,500 0.90 27,000 0.90

Other payroll costs (indirect 6,000 0.24 6,600 0.22

Power 4,000 0.16 4,800 0.16

1,000 0.04 1,000 0.03

Miscellaneous 2,500 0.10 2,500 0.08

Variable costs MONTH MASTER BUDGET

Units sold 20,000 per unit 30,000 per unit 5,000 5,000

Salesmen’s commissions 3,000 0.15 4,500 0.15 750 750 2 marks

Packing costs 4,500 0.23 6,000 0.20 1,125 1,000 2 marks

Direct materials $ 30000 1.2 36000 1.2 6,000 6,000 2 marks

Direct labour $ 22500 0.9 27000 0.9 4,500 4,500 2 marks

Power 4000 0.16 4800 0.16 800 800 2 marks

Relevant cost of 5000 units 2.64 2.61 13,175 13,050

Offer price 1.50 1.50 7,500 7,500

Difference - Loss - 1.14 - 1.11 - 5,675.00 - 5,550.00 2 marks

Negative contribution - 5,675.00 - 5,550.00

Decision rule: accept if positive contribution, reject negative contribution 2 marks

Decision

Reject offer 1 mark

LAST MONTH

MASTER BUDGET

Depreciation and maintenance

Costs of selling and administration:

Question 25

Absorption costing 3 marks

Marginal costing 3 marks

b EXPECTED

i PROBABILITY

50,000 0.30 15,000

100,000 0.40 40,000

150,000 0.20 30,000

200,000 0.10 20,000

105,000 2 marks

A B

Selling price 4.00 4.00

Variable cost 2.78 1.80

Contribution 1.22 2.20 2 marks

Demand 105,000 105,000

Therefore total contribution 128,100 231,000

Fixed costs 100,000 200,000

Profit 28,100 31,000 2 marks

Decision rule: accept the machine which gives a higher profit

Decision : accept machine B 2 marks

ii Let the sales volume in units be x

At that level profits of the two machines are equal

1.22X-100000 = 2.2x-200000

0.98x=100000

x = 102040 units 6 marks

SALES VOLUME (UNITS) DEMAND

Question 26

Trading Accounts for the year ended 31 December 2012

Ace Base Ace Base

$ $ $ $

Stock 1 Jan 2012 48,000 8,000 Sales 360,000 360,000

Purchases 319,000 324,000 52,000 12,000

Gross Profit 45,000 40,000

412,000 372,000 412,000 372,000

Profit and Loss Accounts for the year ended 31 December 2012

Ace Base Ace Base

$ $ $ $

45,000 40,000

Overhead Expenses 16,200 17,600

Net Profit 28,800 22,400

45,000 40,000 45,000 40,000

Balance Sheets

Ace Base Ace Base

$ $ $ $

Issued Share Capital 100,000 100,000 127,800 107,500

Reserves 80,000 16,000 Stock 52,000 12,000

Profit and Loss Account 60,800 24,000 Debtors 40,000 24,000

Creditors 63,000 40,500 Bank 84,000 37,000

303,800 180,500 303,800 180,500

i Stock turn 4.86 25.71 )

ii Debtor ratio (months) 1.33 0.80 )

iii Current ratio 2.79 1.80 ) 1 mark for each of the ratios and 2 marks for each explanation

iv Liquidity ratio 1.97 1.51 )

v Gross profit 0.13 0.11 )

k

Stock 31 Dec 2012

Gross Profit

Fixed Assets

Question 27 Marks

a Marks will be awarded to well reasoned comments 8

b 4