t(A PLAN)V

PUBLISHING

ACCA

Paper F5

Performance ManagementJune 2A13

Final Assessment - Answers

To gain maximum benefit, do not refer to theseanswers until you have ccmpleted the finalassessment questions and submitted them formarking.

ACCA F5 PERFCRMANCE MANAGEMENT

O Kaplan Financial Limited, 2013

The text in this material and any others made available by any Kaplan Group company does

not amount to advice on a particular matter and should not be taken as such. No relianceshould be placed on the content as the basis for any investment or other decision or in

connection with any advice given to third parties. Please consult your appropriate professionaladviser as necessary. Kaplan Publishing Limited and all other Kaplan group companiesexpressiy disciaim all liability to any person in respect of any !osses or other claims, whetherdirect, indirect, incidental, consequential or otherwise arising in relation to the use of such

materials.

All rights reserved. No part of this examlnation may be reprcduced ortransmitted in any formor by any rneans, electronic or mechanical, including phctocopying, recording, or by anyinformation storage and retrieval system, without prio:'permission from Kaplan Publishing.

KAPLAN PUBLISHING

FINAL ASSESSMENT ANSWERS

MULTIPRODUCT

(a) The relevant cost of material A is the replacement cost of S7 per kg and not thehistorical cost of $5 per kg. Material A costs therefore need to be adjusted by a

faclor 7 /5.

It can be seen that materials A and B and labour are variable costs as the costsper unit are the same at each level of production. Overhead is a semi-variablecost and the variable eiement must be extracted in order to calculatecontribution. (Specific fixed overhead should not be inclucied in the calculationof contribution.)

Product

Selling Price (Revenue/u nitsiRelevant costs:Direct Material A (Mat A cost/units x 7/5)Direct Material B (Mat B cost/units)Direct labour (Direct labour/units)Overhead (W1)

Relevant contribution

Relevant ccntribution per'5 of Material B

Workings

(w1)

GHJs$s

10.00 20.00 15.00

K

s

30.00

4.20 5.60 2.10 8.402.00 2.00 4.50 12.002.00 8.00 7.50 3.001.00 3.00 3.00 3.00

9.20 18.60 L7.10 26.40

0.80 1.40 (2.10) 3.50

0.40 0.70 {0.47l. 0.30

(b)

Product

Selling Price (Revenue/units)Relevant contributionC/S ratio (C/S x 100%)

G

5

L0.000.80

8%

H

s

20.001..40

7%

]Kss15.00 30.00(2.10i 3.60(t4%i 12%

Product G

s

ii J

s

K

S

Overhead cost at 5,000 units 8,000 19,CCO 17,000 u,004Overhead cost at 3,000 units 6,000 13,000 L1,000 11,000

Difference in cost 2,000 6,000 6,000 6,000

Difference ln units 2,000 2,000 7,440 2,000

Variable overhead cost per unit 1.00 3.00 3.00 3.00

KAPLAN PUBLISHING

ACCA F5 PERFORMANCE MANAGEMENT

(c) Tutorial note:

To produce a PV char-t you will need to calculate the totai fixed cost. This is thepoint where the graph meets the y axis. Sales revenue and profit must then be

calculated for each pr'oduct using the maximum demand (plus the additionaicontract) given in ihe question since there are no limiting factors. These can thenbe sketched on the chart.

The variable cost per unit was calculated in part (a). To find the fixed cost per unit:

Totalfixed 6s51 = $11-,000 but this includes $1,000 specific cost for each productwhich can be avoidecj each time a product is discontinued. This would not be

incurred until the proCuct is produced so at zero sales there would be a loss ofS7,ooo.

Workings for chart:

Selling products with highest C/S ratios first:

No productsStart K

K onlyStart G

K&GonlyStart H

K,GandHStart J

All

Profit

5

(7,000)(8,ooo)

7,8406,840

10,120

9,12015,56014,5606,580

Soles

)Nil

132,000

173,000

265,000

322,000

See next page for char-t. (While the chart on the next page is drawn

candidates were only required to prepare a sketch.)

to sca le,

Product G

s

H

5

J

.)

K

s

Overhead cost at 5,C00 units 8,000 19,000 fl,aao i7,000

Variable overhead cost per unit 1.00 3.00 3.00 3.00

Total variable cost 5,000 15,000 15,G00 15,000

Fixed cost (Total cost - variable cost) 3,000 4.000 2,000 2,000

Product G

S

H

$

J

$ s

Demand 4,100 4,600 3,800 4,400

Sales price 10 20 15 30

Sales revenue 41,000 92,000 57,000 132,000

Contribution per unit 0.80 1.40 (2.1c) 3.60

Total contr!bution 3,280 6,440 (7.e80) 15,840

Less fixed costs 3,000 4,0G0 2,000 2.000

Profit 280 7,440 9,980 13,840

KAPLAN PUBLISHING

FI NAL ASSESSMENT ANSWERS

o

\

I

--)

\

Y

co

ooca

oroN

oo(\

Ora)

o

ooOqJ

at)4)(!a

tct

ooE=6EoL

o

oL

.1===

OOOOO==ooooxxOOOOolf)otr)tr)')c\t--lrI

(3) sso14gor6

KAPLAN PUBLiSHING

ACCA F5 PERFORI',{ANCE MAI.,IAGEM ENT

(d) The chart shows the effect on the breakeven sales values of alternative sales

mixes based on the production plan and using relevant cost. lt assumes that all ofthe products are sold in relation to their contribution to sales ratios, highest first.Any other oi'der of selling tlie units will resuit in a differenr breakeven sales value.The value indicated is the lowest breakeven sales va!ue, the highest will occur ifthe producis were sold in ihe opposlte order, i.e. lowest contribution to sales

ratio first. The chart could be used to find the average C/S ratio and this could be

used to find an average breakeven level,

The chai-t is produced on the assumption that variable cost and sales price per

unii is constant at all levels of sales and that fixed costs do not change over therange of sales being considered.

The rnanagei'can use this information to unCerstand the etfect on profitability ofselliirg the ciifferent products. The higher the gi'adient the greater is the product'scontribution to saies ratio. lt can clearly be seen that sales cf product J are notfinanciaily '-,iable. lt had a negative contribution to sales ratio and its line is

downward sloping. Its continued production needs to be justified on othergrounds. The length of each line indicates the value of sales achieved by thatproduct.

The manager can see that if no products were sold at all the business would make

a loss (due to the general fixeci costs), and that when the production of a productstarts there is a further reduction in profit (increase in loss) due to the product'sspecific fixed cost, but as products that have positive unit contributions are soldthese ccsts are covered by the contribution from the products.

(a)

(b)

(c)

Contribution per S of Material B; 1.5 for each product

Each C/S raiio 0.5 marks each

C/S ratio calculations

Ranking product in order of C/5 ratio (reverse crder OK)

Profit / loss axis

Sales axis

Different gradients for all 4 products

Any valid clmment, max 6

Morks

6

2

2

1

1

1

L

6

20

ACCA markine scheme

a t/Anr AAr nttDtlatltit-

FINAL ASSESSM ENT ANSWERS

ZZ GROUP

(a) lncreasing the transfer price of internal sales from $10 per unit to $20 per unit,results in sales of Division X increasing by S30,000 and variable costs of Division Y

increasing by a corresponding amount. Revised profit is calculated as follows:

Sales

Variable cost

Contribution :

Fixed cost

Profit

RI

ROr

Operating profit rna i'gin

Asset turnover

Ditision X

100,000

50,000

50,000

15,000

35,000

29,000

58.33%

35.40%

1.67

Division Y

210,O00

L44,OAA

126,440

100,0cc

26,O04

15,000

23.64%

9.63%

2.45

(c)

(b) Changing the transfei'price to $20 per component resuits in an improvernent inmany of the perfornrance measures of Division X and a deterioration in theperformance measures of Division Y.

The sales revenue of Division X increases by S30,0C0 with no correspondingchange in costs, so profit increases by the same aniount. This leads to animprovement in all of the profit measures so Rl, ROI and the operating profitmargin all improve. Asset turnover also improves as this measures the level ofsales generated by the capital employed.

The variable cost of Division Y increases by S:O,OOO. This leads to a fall in allof theprofit measures, but asset turnover remains the same as sales do not change.

lf profit rneasures are used to evaluate managerial performance and rewards,changing the transfer price would be unfair as it appears to impact onperformance whereas in reality overall profit is unchanged.

lf full autonomy was given to Divisional Managers, then the rnanager of Division X

would prefer to satisfy extei'nal demand at a price of S20 than to supply Division Yat a marginal cost of S10. This would result in only 2,000 units being available forinternal transfer and division Y would have to buy externaily or lose sales.

Division X will be reluctant to transfer internally at marginal cost as nocontribution towards fixed costs or profit will be earneC.

Division Y will be relLictant to pay a price above marginal cost as this will have a

detrimentaleffect on existing performance measures as shov;n in (a).

From a g!'oup pei'spective, if Division X charges the external price for allcomponents, then this wii! lead to a reduction in profit for the group as a whole.

Operating the two divisions as profit centres may have the follcwing advantages:

o lmproved decisions d'ue to the local knowledge of the divisicnal managers.

r Decisions can be made more quickly.

(d)

KAPLAN PUBLISHING

ACCA F5 PERFORMANCE I"4ANAGEMENT

. lf realistic iargets are set which are within the manager's control, then

managers may be motivated to improve performance.

. Head office time may be freed up to focus on strategic issues.

" Profit centres may provide a good training ground for senior management

positions.

There could also be disadvantages as follows:

. Loss of control by head office.

. Dysfunctional decision making.

. Duplication of functions such as personnel anC administration.

tVofe; Only TWO advantages and TWO disadvantages are required.

COUNTRY PRESERVES

Original stondqrd Revised stondord Actuol

Fru it Price 50. i.a s0.19 50.18

Quantity 400 kg 400 kg 428 kg

Syrup Price $O.t O 50.12 50-12

Quantity 700 kg 700 kg 742 kg

Pectin Price 50.332 50.332 st.r.:zs

Quantity 99 kg 99 kg 125 kg

Citric Acid Price $2.00 52.00 S'r.95

Quantity 1 kg 1kg - kg

(a) The planning variances relate only to fruit and syrup prices.

Fruii Syrup

S$ft$Q x RSP i-5 84

35Q x SP 64 70

1.2A 14A

Total planning variance = S12 + 514 = $26 A

ACCA markins scheme

(a)

(b)

(c)

(d)

Total

1 mark for the calculation of each performance measure

1 mark for each relevant point

1 mark for each relevant point

1 mark for each advantage/ disadvantage

Morks

8.0

maximum I 4.0

maximum | 4.0

maximum I 4.C

)n

7AD' n N Dt tA' leH,Nl.:

FINAL ASSESSM ENT ANSWERS

{b)

Fruit Syrup Pectin Citric Acid

5S5SAQ x AP 17.A4 89.04 41.00 0.95

AQ x SP 81.32 89.04 41.50 2.00

SQ x SP 16.00 84.00 32.87 2.00

Price variance 4.28 F 0 0.50 F 1.05 F

Usage variance 5.32 A 5.04 A 8.63 A 0

Total price variance = 55.83 F

Total usage variance = $18.99 A

Total ingredients vai'iance = S13.16 A

(c) The main problem with conventional variance analysis for budgetary controlrepofting purposes is that its emphasis on comparison between actual and

pianned performances results in a disregard for changes in these planned results.

Because standards beccme out of date and unrealistic, the traditional accountingmodel does not serve as an opportunity cost system.

The operational variance measures management's operating efficiency by

comparing actual results with a revised standard. This variance reflects

opportunity costs. That is, the gain or loss as a result of actual performance

differing from a realistic standard. Hence operational variances tend to be

controllable. The planning variance compares the original budget with the revised

budget. This variance reflects planning error.

However, it may not be practical to find all possible perfect substitutes for theresources actually used.

It may also be difficult to obtain accurate revised standard costs for the resources

actually used and their substitutes.

!n general, there is a resistance to change. Most companies still use the traditionalapproach.

(d)

Workings Fruit Syrup Pectin Citric Acid Totol

AQ x AM 428 747 125 L l,296

AQ x SM 432 756 106.92 1.08 1',296

SQ x SM 400 700 -q9 1 1,16410.91= 1,200

SP (S) 0.19 0.12 0.332 2

Va ria nces:

Mix variance ($) 0.76 F 1.68 F 6.00 A 0.16 F 3.40 A

Yield variance (5) 6.08 A 6.12 A 2.63 A 0.16 A 15.59 A

Check: Mix+Yield = 53.40A+$15.594 = $18.9! A = Usage variance

KAPLAi'i PtJBLlSiiiNG

FI NAL ASS ESSM ENT AI.J SWERS

Oo' f-lOUao

.rl

-oCG'

trCJ

3J

f\,1

-oc(o

Eq.)

!E.=OJ

t/L/I (J]

Ooco

rr)CJ

-oC(o

EuE

.go:tr

Oao

LO

-i

alC

E0)-o

3oJ

oO.-{

ro

-oc(o

E(U-o

E

=qJ

1./t/1/I .ol

OOco

tiCJ

-oCrcEOJ-I]

.qp:E

ooooOco,,J'l

+=oo-

l--

ECro-o=

:OJ

tr-(Utr-o .=-cEbo 0.J

\t/\t/\t/{<l

-(Jz.:)J

=zfJFoz.

a

iU=lj

F

zoo

-IfCro

EOJ-(,

3o

J

-Uz.:f)

iLJZfJFoz.oO

LoillL]

)l4\/)aUJ(JrJ

=U1

LIJ

l(,/'l

oz.

KAPLAN PUBLISHING

ACCA F5 PERFORMAi!CE T,4ANAGEMENT

1 CAZY

(b) EV(A) = {0.7 x $800,000) + (0.1 x $100,000)- (0.2 x s300,000)

EV(A) = 5s10,000

At Decision poirrt D, this is more profitable than the decision not to launch.

EV(B) = (C.1 x $800,000) + (0.3 x $100,000) - (0.6 x-s300,000)

EV(B) = - 570,000

At Decision point E, this is less profitable than the decision not to launch.

Therefore, should the survey indicate that we would not be successful, we should

decide NCT to launch.

EV(C) = (0.5 x $800,000) + (0.2 x $100,000) - (0.3 x-5300,000)

EV(C) = S::O,OOO

At Decision point F, this is more profitable than the decision not to launch.

EV(G) = (0.7 x profit of S510,000).

EV(G) = S:Sz,OOO'

At decision point H, we must choose between:

(i) Commissioning a survey at a cost of 550,000 with an Expected Value of

returns of S357,000. Therefore net returns would amount to S357,000 -SSO,OO0 = S307,000

(2) Launchlng the artist without commissioning a survey, with net expected

returns cf S330,000.

Cozy should therefore launch the artist without commissioning the survey.

(c) EV of returns without the survey = 5330,000

EV of returns with the survey = S357,000

Difference = 527,000

Cozy should parl a maximum of S2Z,0O0 for the survev.

t2 KAPLAN PUBLISHING

FI NAL ASSESSM ENT QUESTIONS

ACCA marking scheme

ia) Decision Tree layoutCost of survey S50,000Probabilities (demand) : 1 each group of 3, 3 timesProbabilities (successfulr'not successful)

Profit columnEV(A) ss10,000EV(B) -570,000Ev{c) s330,000EV(G) s3s7,000Conclusion - SummaryEV of returns wiihout the surveyEV of retui'ns with the surveyDifferenceConclusion

Morks2

2

3

t2

1

1

1

1-

{b)

Total

2

1

1

1

1

20

5 BLA

(a) Financial performance

Summary lncome Statement

Fee income (W1-)

Costs:

Consultants' salaries (W2)

Bonus (W3)

Other operating costs

Su bcontract payments (W4)

Budget

soo06,015

2,025

2,O25

2,5500

2,O25

90

ActuolSooo6,300

7,L1.5

2,80518

4,57 5 4,938

1,362Net profit 1,500

Workings

(W1) Fee income

Budget 40,500 chargeable consultations x S150

Actual 42,0OO chargeable consultations x 51"50

(W2) Consultants' salaries

45 consultants x 545,000

(W3) Bonus

40% of S(6,300,000 - 6,07s,000)

(W4) Sub-contract payments

120 consultations x S150

KAPLAN PUBLISHING 't1

ACCA F5 PERFORMANCE MANAGEMENT

It is clear that BLA has not performed as well as expected during the year to31, October 20X3. Whilst client income is above budget, other operating expenses

reached a level which is more than 10% higher than the budget for the year, andthus it would be extremely usefui to have a more detailed breakdown of otheroperating expenses for the year.

Consultants have earned an aggregate bonus of 590,000 in respect of activityabove budgeted levels.

Payments to subcontractors amounted to S18,000. Actual profit amounts to

S1,362,000 against a budget of $1,500,000. lt would be extremely useful to see

the results of the previous twc years in order to assess whether there are arly

discernible trends in revenues and costs.

The budget for the following year should be reviewed in the light of the actualperformance of this year with particular reference to checking the footing of theassumptions upon which it has been prepared.

(b) Service quality

Quality of service is the totalitrT of features and characteristics of the servicepackage that bear upon its abiiitrT to satisfy client needs. To sorne extent theincrease in the number of complaints and non-chargeable consultationsassociated with the remedyring of those complaints is indicative of a qualityproblem that must be addressed.

r Client complaints received during the year were nearly double thebudgeted level.

r Also the number of remedial consultations was 405 against a budgeted

level of only 45, which is exacily nine times higher than budget.

Perhaps BLA should review and, if necessary, limit the amount of remedialconsultancy provided to any one particular client.

Flexibility

Flexibility may relate to the cornpany being able to cope with flexibility of volume,delivery speed or job specification.

It is a deliberate policy of BLA LtC to retain 45 consultants thereby maintainingflexibility to meet increasing dem;nd. The delivery speed will be increased as aconsequence of the retention o, consultants. The fact that links have been

retained with retired consultanis will give an added dimension of flexibiiity in

times of very heavy demand upon its consultants.

Resource utilisation

Resource utilisation measures the:'atio of output achieved from those resources

input. ln this scenario the mean number of consultations per consultant may be

used as a guide.

Average consultations per consultant

BuCget Actual lncreose/(decrease)

Chargeable consultations 900 933 3.7%

Non-chargeable 74 36 50%

(c)

(d)

L4 KAPLAN PUBLISHING

FI NAL ASSESSM ENT QUESTIONS

It is interesting to note that consultants are being utillsed above budgeted levelsfor both chargeable and non-chargeable consultations.

These figures would also suggest that the propoi-tion of chargeable consultationshas decreased indicating a fall in utilisation. BLA has adopted an innovativeapproach that requires consultants to under-take non-chargeable businessdevelopment consultations which have at their heart the intention of generatingnew business. Hence in the immediate sense there is a trade-off betweenresource utilisation and innovation.

(e) lnnovation

lnnovation should be viewed in terms of its impact on financial performance,competitiveness, service-quality, flexibility and resource utilisation in the short,medium and long term.

Certainly the non-chargeable activity in terms of 'business development'is aninnovative feature within the business of BLA, as is the non-chargeable remedialconsultancy provided to clients who experience problems at the commencementof building works.

The acquisition of 'state of the art' business software is by its very natureinnovative. This has probably enabled BLA to differentiate its services from thoseof lts competitors and enhance its reputation.

The management should ensure the introduction of the software has not causedthe increase in the number of complaints received.

(a)

(b)

(c)

(d)

(e)

Total

0.5 marks per calculation and l mark for each relevant point up to a

maximum of:

1 mark for each reievant point up to a maximum of:

L mark for each relevant point up to a maximum of:

1 mark fbr each relevant point up to a maximum of:

1 mark for each relevant point up to a maximum of:

Marks

5.0

4.0

3.0

4.0

4.0

20

KAPLAN PUBLISHING 15

I

PerformanceManagement

2013

ACCA INTTRIM ASSESSMENT

Time allowedReading and planning: 15 minutesWriting: 3 hours

All FIVE questions are compulsory and MUST be attempted.

The formulae are on page 3.

Do NOT open this paper until instructed by the supervisor.

During reading and planning time only the question paper may be

=nnotated. You must NOT write in your answer booklet untili;,structed by the supervisor.

fhis question paper must not be removed from the examinationhall.

Kaplan Publishing/Kaplan Financial

LNLI.

r(APLAN)\-----l

PU BLISH INC

1*-(Uo-rUa-

a

A,CCA F5: PERFORMANCE MANAGEMENT

@ Kaplan Financial Limited, 2013

The text in this material and any othei's made available by any Kaplan Group ccmpany doesnot amount to advice on a particular rnatter and should not be taken as such. l'io relianceshould be placed on the content as the basis for any investment or other de:ision or inconnection with any advice given to third parties. Please consult your:,:ppropriateprofessional adviser as necessary. Kaplan Publishing Limited and ali other Kaplan groupcompanies expressly disclaim all liability to any person in respect of any losses or otherclaims, whether direct, indirect, incidental, consequential or otherwise arising in relation tothe use of such materials.

All rights reserved. No part of this e:{amination may be reproduced or transmitted in anyform or by any means, electronic or i-nechanical, including photocopying, r'ecording, or byany information storage and retrievai system, without prior permission from Kaplan

Publishing.

KAPI AN PI IRI ISHING

INTERIM ASSESSMENT QUESTIONS

b-

FORMUTAE

Learning curve

Y=axb

Where Y = average cost per batch

a = cost of first batch

x = total number of batches produced

b = learning factor {log LR/iog 2)

LR = the iearning rate as a decimal

Regression analysis

Y=a+bx

n Xxy- Ix Xy

n xx2 -1Xx12

Iv blxnn

nlxv-fxIvffi

Demand curve

P=a-bQ

Change in price

Change in quantity

a-pricewhenQ=0

MR=a-2bQ

b-

KAPLAN PUSLISHING

ACCA F5: PERFORMANCE MANAGEMENT

ALL FIVE questions are compulsory and F/IUST be attempted

Linacre Co operates an activity-based costing system and has forecast the followinginformation for next year.

Cost Paal Cosi Cost Driver Number of Drivers

Production set-ups 5105,000 Set-ups 300

Pr-oduct testing 5300,000 Tests 1,500

Compcnent supply and storage 525,000 Component orders 500

Customerorders and delivery 5112,500 . Custpmer orders 1,000

Genei-al flxed overheads such as lighting and heating, which cannot be linked to anyspecific actirrity, are expected to be 5900,000 and these overheads are absorbed on adii"ect labour hour basis. Total direct labour hours foi'next year are expected to be

300,00G hours.

Linacre Co expects orders for Product ZT3 next year to be 100 orders of 50 units perorder and 60 orders of 50 units per order. The company holcjs no inventories ofProduct Zf3 and will need to produce the order requirement in production runs of900 units. One order for components is placed prior to each production run. Four testsare made during each production run to ensure that quality standards are maintained.The following additional cost and profit infcrmation relates to product ZT3:

Component cost:

Direcr labour:

Profit mark up:

Selling :;rice

Variabie cost

Sph inx

Pyramid

Mummy

$1.00 per unit

10 minutes per unit at $7.80 per hour

40% of total unit cost

Required:

(r) Calculate the activity-based overhead absorption rates for each cost pool.

tb) Calculate the total unit cost and selling price of Product ZT3.

(4 marks)

(8 marks)

(ci Discuss the reasons why activity-based costing n''ay be preferred to traditionalabsorption costing in the modern manufacturing environment. (8 marks)

(Total:20 marks)

Pharaoi, Ltd manufactures and sells three products wiih the following selling prices

and variable costs:

Sphinx Pyramid Mummyf/unit €/unit f/unit3.00 2.45 4.00

1.20 L.67 2.60

The conipany is considering expenditure on advertising and promotion of the Sphinx.it is hoped that such expenditure, together with a redr.lciion in the selling price of theproduet, would increase sales. Existing annual sales rrolurne of the three products is:

460,000 units

1,000,000 units

380,000 units

ll^Dl At\l Pl !Rl lqHlNlC

INTERIM ASSESSM ENT QUESTIONS

lf f 60,000 per annum was to be invested in advertising and sales promotion, sales ofSphinx at reduced selling prices would be expected to be;

590,000 units at f 2.75 per unit

or 650,000 units at f 2.55 per unlt

Annual fixed costs are currently t1,710,000 per annum.

Required;

(a) Caiculate the current breakeven sales revenue of the business.

(b) Draw a multi-product profit/volume graph, assuming that thesales promotion does not go ahead.

(c) Advise the management of Pharaoh

advertising and promotion, togetherintroduced on Sphinx.

(4 marks)

advertising and(10 marks)

Ltd as to whether the expenditure on

with selling price reduction, should be(6 marks)

{Total: 20 marks}

MOC makes and sells two types of executive games,'Meti'opolis'and'Hedge Your

Bets'. The company currently has a monopoly for both games. This factor combinedwith the high quality of the games and the luxury brand image has resulted in MOC

being able to charge high prices for each of the games.

The management accountant is considering increasing the price for the Metropolisgame and has produced ihe following information:

At the current selling pi'ice of 555 per game, weekly sales of the Metropolis are

900 units.

lf the price is increased to $70 per game, weekly demand for the Metropolis will fall to750 units.

The Hedge Your Bets game is sold !n two distinct markets. The management

accountant believes that there should be price discrimination. The price is currently

$AO per game in either nrarket.

Required:

(a) Explain the term 'p;ice-discrimination' and discuss the conditions that are

necessary for the sureessful operation of this pricing strategy. (4 marks)

(b) Find the linear reiat:onship between price (P) and quantity demanried (Q) forthe Metropolis garne. (3 marks)

(c) Calculate the price elasticity of demand (PED) for the Metrcpolis and

comment on wheth:r the revenue will increase or decrease if the price isincreased from S55 tc 570 per game. (3 marks)

(d) Write a report ta the management accountant to explain haw ihe pricing

strategy may change if new competitors enter the market. lnclude, as part ofyour answer, a ciiscussion of the different pricing strategies that may be

implemented by MOC or its competitors. (1O marks)

(Totai: 20 marks)

KAPLAN PUBLISHING

ACCA F5: PERFORT,4ANCE MANAGEMiNT

You are the management accountant of a publishing and printing company which has

been asked to quote for the production of a programme for the local village fair. The

workwould be carried out in addition to the normalwork of the company. Because ofexisting commitments, some ,weekend working would be required to complete theprinting of the programme. A trainee accountant has produced the following costestimate based upon the resources required as specified by the production manager:

- paper (book valuei

- inks (purchase pricei

- skilled

- unskilled

Variable overhead

Printing press depreciation

Fixed production costs

Estimating department costs

Totai 13,L50

You are aware that considerable publicity could be obtained for the company if you

are abie to win this order, and the price quoted must be very competitive.

The following notes are relevant to the cost estimate above:

(1) The paper to be used is currently in stock at a value of 55,000. lt is of an unusual

colour which has not been used for some time. The replacement price of thepaper is 58,000, v,rhiist the scrap value of that in stock is 52,500. The production

manager does not foresee any alternative use for the paper if it is not used forthe village fair programmes.

(2) The inks required are not held in stock. They would have to be purchased in

bulk at a cost of S3,OOO. 80% of the ink purchased would be used in pi'inting theprogrammes. No other use is foreseen for the remainder.

/a\ .|.:lt- J -r: -- -r l-L tl., ^t !..11 ^^.^^^:!.. L..r ^JJ:+:^^^l l^L^.'- ^^- l-^tji )(iiieO OiaeCI iaOOijf iS CUfferltiy <it iUii ecipdLlty uut duurLrurrdr rduuur Ldlr uc

hired. To accommodate the printing of the programmes, 50% ct the timerequired would be worked at weekends, for which a premium of 25% above thenormal hourly rate is paid. The normal hourly rate is 54.00 per hour'.

(4) Unskilled labour is presently under-utilised, and at present 2G0 hours per week

are recorded as idle time. lf the printing work is carried out at a weekend,

25 unskilled hours would have to occur at this time, but the employees

concerned would be given two hours time off (for which they woulci be paid) in

lieu of each hour worked.

(5) Variable overhead i-epi'esents the cost of operating the printing press and

binding machines.

(6) When not being useci by ihe company, the printing press is hired to outside

companies for $6.00 per nour. This earns a contribution of 53.00 per hour.

There is unlimited demar-rd for this facility.

Direct materials

Direct labour

s

5,000

2,400

250 hours @ $4.00 1,000

100 hours @ 53.50 350

350 hours @ 54.00 1,400

200 hours @ 52.50 500

350 hours @ S0.OO 2,100

400

rn Dl Anl Dl lR! lQlllr\l.:

INTERIM ASSESSMENT QUESTIONS

(7) Fixed production costs are those incurred by and absorbed into production,uSing an hourly rate based on budgeted activity.

(8) The cost of the estimating depariment represents time spent in discussions withthe village fair committee concerning the printing of its programme.

Required:

(a) Pi"epare a revised cost estirnate using a relevant cash flow approach, showingclearly ihe minimum price that ihe company should accept for the order. Givereasons for each resource valuation in your cost estimate. (15 marks)

(b) - Explain the relevance of opportunity costs in decision making. (4 marksi

{Total:20 marks)

QP is a food processing company that produces pre-prepared meals for sale toconsumers through a number of different supermarkets. The company specialises inthree particular pre-prepared meals and has invested significantly In modernmanufacturing processes to ensure a high quality product. The company is very awareof the importance of training and retaining high quality staff in all areas of thecompany and, in order to ensure their production employees'commitment to thecompanrv, the employees are guaranteed a,weekly salary that is equivalent to theirnormal working hours paid at their normal hourly rate of $7 per hour.

The meals are produced in batches of 100 units. Costs and selling prices per batch areas follours:

Meol

Selling price

Costs:

lngredient r {$s/kg) 150 L20 90

rngredient L (s10iks) 70 90 40

lngredient [/l (s15/kc) 30 75 45

Labour ($7/hour) 21 28 42

Factory costs absorbed 20 80 40

QP has adopted throughput accounting for its short-term decisions.

RequireC:

(a) State the principles of throughput acccunting and the effects of using it forshort-term decision making. (5 marksi

QP is preparing its production plans for the next three months and has estimated themaximum demand from its customers to be as follows:

TR PN BE

S/batcfr $/batch S/batch340 450 270

TR

PN

BE

500 batches

400 batches

350 batches

KAPLAN PUBLISHING

ACCA F5: PERFORMANCE MANAGEMENT

These demand maximums are amended figures because a customer has just delayedits request for a large order and QP has unusually got some spare capacity over thenext three months. However, these demand maximums do include a contract for thedeiivery of 50 batches of each to an important customer. lf this minimum contract is

not satisfied, then QP will have to pay a substantial financial penalty for non-delivery.

The Production Director is concerned at hearing news that two of the ingredients usedare expected to be in short supply for the next three months. QP does not holdinventory of these ingredients and, although there are no supply problems foringredient K, the supplies of ingredients L and M are expected to be limited to:

lngredient L

lngredient M

Cbjective function value

TR value

PN value

BE value

TR slack value

PN slack value

BE slack value

L shaCow price value

M shadow price value

Required:

7,000 kilos

5,000 kilos

The Production Director has researched the probiem and found that ingredient V canbe used as a direct substitute for ingredient M. lt also costs the same as ingredient M.There is an unlimited supply of ingredient V.

Required:

(b) Prepare calculations to determine ihe production mix that will maximise theprofit of QP during the next three months and calculate the total throughputat this profit maximising point. (9 rnarks)

The Wcrld Health Organisation has nov.r announced that ingredient V containsdangerously high levels of a chemical that can cause life-threatening illnesses. As a

consequence it can no longer be used in the prcduction offood.

As a result, the production director has deternrined the optimai solution to thecompany's production mix problem using linear programming. This is set out below:

LL0,71"4

5C0

357

ta

0

43

z /:1

3

(c) Briefly explain the meaning of each of ihe values contained in the abovesaiution. (5 marks)

(Total: 20 marks)

rlADr ANt Di rAt teHtNtr: