Acca Questions Lrp

‘In the broadest sense, all accounting is management accounting. All financial and cost information generated by accountants is of some interest to management. But, in practice, where management accounting differs from financial accounting … ’ (from An Insight into Management Accounting by John Sizer) Required: (a) (b) Give a brief definition of management accounting. 6 marks) Give a discussion of the major differences between management and financial accounting. (20 marks) (Total: 25 marks) 2 KAPLAN PUBLISHING LECTURER RESOURCE PACK – QUESTIONS A COLLEGE A college offers a range of degree courses.

The college organisation structure consists of three faculties, each with a number of teaching departments. In addition, there is an administrative/management function and a central services function. The following cost information is available for the year ended 30 June 20X7: (1) Occupancy costs Total ? 1,500,000.

Such costs are apportioned on the basis of area used which is: Square feet Faculties 7,500 Teaching departments 20,000 Administration/management 7,000 Central services 3,000 (2) Administration/management costs Direct costs: ? 1,775,000. Indirect costs: an apportionment of occupancy costs. Direct and indirect costs are charged to degree courses on a percentage basis.

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(3) Faculty costs Direct costs: ? 700,000. Indirect costs: an apportionment of occupancy costs and central service costs. Direct and indirect costs are charged to teaching departments. (4) Teaching departments Direct costs: ? ,525,000. Indirect costs: an apportionment of occupancy costs and central service costs plus all faculty costs. Direct and indirect costs are charged to degree courses on a percentage basis. (5) Central services Direct costs: ? 1,000,000. Indirect costs: an apportionment of occupancy costs. Direct and indirect costs of central services have in previous years been charged to users on a percentage basis. A study has now been completed which has estimated what user areas would have paid external suppliers for the same services on an individual basis.

For the year ended 30 June 20X7, the apportionment of the central services cost is to be recalculated in a manner which recognises the cost savings achieved by using the central services facilities instead of using external service companies. This is to be done by apportioning the overall savings to user areas in proportion to their share of the estimated external costs. KAPLAN PUBLISHING 3 PAPER F5 : PERFORMANCE MANAGEMENT The estimated external costs of service provision are as follows: ? 00 Faculties 240 Teaching departments 800 Degree courses: Business studies 32 Mechanical engineering 48 Catering studies 32 All other degrees 448 ____ 1,600 ____ (6) Additional data relating to the degree courses are as follows: Degree course Business Mechanical Studies Engineering Number of graduates 80 50 Apportioned costs (as % of totals) Teaching departments 3% 2. 5% Administration/management 2. 5% 5% Central services are to be apportioned as detailed in (5) above. The total number of graduates from the college in the year to 30 June 20X7 was 2,500.

Required: (a) (b) Prepare a flow diagram which shows the apportionment of costs to user areas. No values need be shown. (5 marks) Calculate the average cost per graduate, for the year ended 30 June 20X7, for the college and for each of the degrees in business studies, mechanical engineering and catering studies, showing all relevant cost analysis. (15 marks) Suggest reasons for any differences in the average cost per graduate from one degree to another, and discuss briefly the relevance of such information to the college management. (5 marks) (Total: 25 marks) Catering Studies 120 7% 4% c) 4 KAPLAN PUBLISHING LECTURER RESOURCE PACK – QUESTIONS ADMER Admer owns several home furnishing stores. In each store, consultations, if needed, are undertaken by specialists, who also visit potential customers in their homes, using specialist software to help customers realise their design objectives. Customers visit the store to make their selections from the wide range of goods offered, after which sales staff collect payment and raise a purchase order. Customers then collect their self-assembly goods from the warehouse, using the purchase order as authority to collect.

Administration staff process purchase orders and also arrange consultations. Each store operates an absorption costing system and costs other than the cost of goods sold are apportioned on the basis of sales floor area. Results for one of Admer’s stores for the last three months are as follows: Department Kitchens $ Sales Cost of goods sold Other costs Profit/(loss) 210,000 63,000 130,250 _______ 16,750 _______ Bathrooms $ 112,500 137,500 81,406 _______ (6,406) _______ Dining Rooms $ 440,000 176,000 113,968 _______ 150,032 _______ Total $ 762,500 276,500 325,624 _______ 160,376 _______

The management accountant of Admer is concerned that the bathrooms department of the store has been showing a loss for some time, and is considering a proposal to close the bathrooms department in order to concentrate on the more profitable kitchens and dining rooms departments. He has found that other costs for this store for the last three months are made up of: $ Employees Sales staff wages Consultation staff wages Warehouse staff wages Administration staff wages General overheads (light, heat, rates, etc. ) 164,800 124,960 130,240 130,624 175,000 _______ 325,624 _______ 12 4 6 4 KAPLAN PUBLISHING 5

PAPER F5 : PERFORMANCE MANAGEMENT He has also collected the following information for the last three months: Department Number of items sold Purchase orders Floor area metres) Number consultations (square of Kitchens 1,000 1,000 16,000 798 Bathrooms 1,500 900 10,000 200 Dining Rooms 4,000 2,500 14,000 250 The management accountant believes that he can use this information to review the store’s performance in the last three months from an activity-based costing (ABC) perspective. Required: (a) (b) Discuss the management accountant’s belief that the information provided can be used in an activity-based costing analysis. 4 marks) Explain and illustrate, using supporting calculations, how an ABC profit statement might be produced from the information provided. Clearly explain the reasons behind your choice of cost drivers. (8 marks) Evaluate and discuss the proposal to close the bathrooms department. (6 marks) (c) (d) Discuss the advantages and disadvantages that may arise for Admer from introducing activity-based costing in its stores. (7 marks) (Total: 25 marks) 6 KAPLAN PUBLISHING LECTURER RESOURCE PACK – QUESTIONS QP PLC QP plc is a food processing company that produces pre-prepared meals for sale to consumers through a number of different supermarkets.

The company specialises in three particular preprepared meals and has invested significantly in modern manufacturing processes to ensure a high quality product. The company is very aware of the importance of training and retaining high quality staff in all areas of the company and, in order to ensure their production employees’ commitment to the company, the employees are guaranteed a weekly salary that is equivalent to their normal 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 are as follows: Meal Selling price Ingredient K (? /kg) Ingredient L (? 10/kg) Ingredient M (? 15/kg) Labour (? 7/hour) Factory costs absorbed Required: (a) (b) State the principles of throughput accounting and the effects of using it for short-term (6 marks) decision making. QP plc is preparing its production plans for the next three months and has estimated the maximum demand from its customers to be as follows: TR PN BE 500 batches 400 batches 350 batches TR ? /batch 340 150 70 30 21 20 PN ? /batch 450 120 90 75 28 80 BE ? /batch 270 90 40 45 42 40 QP plc has adopted throughput accounting for its short-term decisions.

These demand maximums are amended figures because a customer has just delayed its request for a large order and QP has unusually got some spare capacity over the next three months. However, these demand maximums do include a contract for the delivery of 50 batches of each to an important customer. If this minimum contract is not satisfied, then QP plc will have to pay a substantial financial penalty for nondelivery. The Production Director is concerned at hearing news that two of the ingredients used are expected to be in short supply for the next three months. QP plc does not hold inventory f these ingredients and, although there are no supply problems for ingredient K, the supplies of ingredients L and M are expected to be limited to: Ingredient L Ingredient M 7,000 kilos 3,000 kilos The Production Director has researched the problem and found that ingredient V can be used as a direct substitute for ingredient M. It also costs the same as ingredient M. There is an unlimited supply of ingredient V. Required: Prepare calculations to determine the production mix that will maximise the profit of QP plc during the next three months. (10 marks) KAPLAN PUBLISHING 7 PAPER F5 : PERFORMANCE MANAGEMENT c) The World Health Organization has now announced that ingredient V contains dangerously high levels of a chemical that can cause life-threatening illnesses. As a consequence it can no longer be used in the production of food. As a result, the production director has determined the optimal solution to the company’s production mix problem using linear programming. This is set out below: Objective function value TR value PN value BE value TR slack value PN slack value BE slack value L shadow price value M shadow price value Required: Explain the meaning of each of the values contained in the above solution. 9 marks) (Total: 25 marks) 110,714 500 357 71 0 43 279 3 28 8 KAPLAN PUBLISHING LECTURER RESOURCE PACK – QUESTIONS MN LTD MN Ltd manufactures automated industrial trolleys, known as TRLs. Each TRL sells for ? 2,000 and the material cost per unit is ? 600. Labour and variable overhead are ? 5,500 and ? 8,000 per week respectively. Fixed production costs are ? 450,000 per annum and marketing and administrative costs are ? 265,000 per annum. The trolleys are made on three different machines. Machine X makes the four frame panels required for each TRL.

Its maximum output is 180 frame panels per week. Machine X is old and unreliable and it breaks down from time to time. It is estimated that, on average, between 15 and 20 hours of production are lost per month. Machine Y can manufacture parts for 52 TRLs per week and Machine Z, which is old but reasonably reliable, can process and assemble 30 TRLs per week. The company has recently introduced a just-in-time (JIT) system and it is company policy to hold little work-in-progress and no finished goods stock from week to week. The company operates a 40-hour week, 48 weeks a year (12 months ? weeks) but cannot meet demand. The demand for the next year is predicted to be as follows. This is expected to be typical of the demand for the next four years: Units per week January February March April May June 30 30 33 36 39 44 July August September October November December Units per week 48 45 42 40 33 30 The production manager has suggested that the company replaces Machine Z with either Machine F or Machine G. Machine F can process 36 TRLs per week and costs ? 330,000. It is expected that labour costs would increase by ? ,500 per week if Machine F were installed. Machine G can process 45 TRLs per week and costs ? 550,000. It is estimated that the variable overhead cost per week will increase by ? 4,500 if TRLs are made on Machine G. The maintenance manager is keen to spend ? 100,000 on a major overhaul of machine X – he says this will make it 100% reliable. The management of MN Ltd is wondering whether it should now install a full standard costing and variance analysis system. At present, standard costs are calculated only as part of the annual budgeting process.

Management is concerned about implementing so many changes in a short space of time, but feels the system could be very useful. The company’s cost of capital is 10% per annum. It evaluates projects over four years and depreciates its assets over five years. Required: Using the case of MN Ltd in the scenario above: (a) (b) (c) Explain the concept of throughput accounting. (6 marks) To what uses do advocates of throughput accounting suggest that the throughput ratio be put? (6 marks) Explain how the concept of contribution in throughput accounting differs from that in marginal costing. 7 marks) KAPLAN PUBLISHING 9 PAPER F5 : PERFORMANCE MANAGEMENT (d) If MN Ltd has decided to purchase Machine G and spend ? 100,000 on a major overhaul of Machine X, the management accountant and the production manager should collaborate to ensure a new focus for monitoring and reporting production activities. What is the new focus? Explain what should be monitored and reported. 6 marks) (Total: 25 marks) 10 KAPLAN PUBLISHING LECTURER RESOURCE PACK – QUESTIONS BML BML has three product lines: P1, P2 and P3.

Since its creation the company has been using a single direct labour cost percentage to assign overhead costs to products. Despite P3, a relatively new line, attracting additional business, increasing overhead costs and a loss of market share, particularly for P2, a major product, have convinced the management that the costing system is in need of some development. A team, led by the management accountant was established to develop an improved system of costing based on activities. The team spent several weeks collecting data (see tables below) for the different activities and products.

For the accounting period in question, given in the tables below is data on BML’s three product lines and overhead costs: P1 7,500 units ? 4 ? 18 ? 47 4 0. 5 1 30% 1 P2 12,500 units ? 8 ? 25 ? 80 25 0. 5 5 20% 7 P3 4,000 units ? 6. 40 ? 16 ? 68 50 0. 2 10 50% 22 Overhead cost ? 150,000 390,000 18,688 100,000 60,000 ___________ Production volume Direct labour cost per unit Material cost per unit Selling price per unit Materials movements (in total) Machine hours per unit Set-ups (in total) Proportion of engineering work Orders packed (in total) Activities

Material receiving and handling Machine maintenance and depreciation Set-up labour Engineering Packing Total Required: (a) (b) 718,688 ___________ Calculate the overhead rate and the product unit costs under the existing costing system. (5 marks) Identify for each overhead activity, an appropriate cost driver from the information supplied, and then calculate the product unit costs using a system that assigns overheads on the basis of the use of activities. (11 marks) Comment on the results of the two costing systems in (a) and (b) above. 9 marks) (Total: 25 marks) (c) KAPLAN PUBLISHING 11 PAPER F5 : PERFORMANCE MANAGEMENT ABC PLC ABC plc, a group operating retail stores, is compiling its budget statements for 20X8. In this exercise revenues and costs at each store A, B and C are predicted. Additionally, all central costs of warehousing and a head office are allocated across the three stores in order to arrive at a total cost and net profit of each store operation. In earlier years the central costs were allocated in total based on the total sales value of each store.

But as a result of dissatisfaction expressed by some store managers alternative methods are to be evaluated. The predicted results before any re-allocation of central costs are as follows: A B ? 000 ? 000 Sales 5,000 4,000 Costs of sales 2,800 2,300 ____ ____ Gross margin Local operating expenses Variable Fixed Operating profit The central costs which are to be allocated are: ? 000 Warehouse costs: Depreciation Storage Operating and despatch Delivery Head office: Salaries Advertising Establishment Total 100 80 120 300 200 80 120 2,200 660 700 ___ 840 ___ 1,700 730 600 ___ 370 ___ C ? 00 3,000 1,900 ____ 1,100 310 500 ___ 290 ___ ________ ________ 1,000 The management accountant has carried out discussions with staff at all locations in order to identify more suitable ‘cost drivers’ of some of the central costs. So far the following has been revealed: A B C Number of despatches 550 450 520 Total delivery distances (thousand miles) 70 50 90 Storage space occupied (%) 40 30 30 1 2 3 An analysis of senior management time revealed that 10% of their time was devoted to warehouse issues with the remainder shared equally between the three stores.

It was agreed that the only basis on which to allocate the advertising costs was sales revenue. Establishment costs were mainly occupancy costs of senior management. This analysis has been carried out against a background of developments in the company, for example, automated warehousing and greater integration with suppliers. 12 KAPLAN PUBLISHING LECTURER RESOURCE PACK – QUESTIONS

Required: As the management accountant prepare a report for the management of the group which: (i) computes the budgeted net profit of each store based on the sales value allocation base originally adopted and explains ‘cost driver’, ‘volume’ and ‘complexity’ issues in relation to cost allocation commenting on the possible implications of the dissatisfaction expressed; (7 marks) computes the budgeted net profit of each store using the additional information provided, discusses the extent to which an improvement has been achieved in the information on the costs and profitability of running the stores and comments on the results. 14 marks) (ii) (b) Explain briefly how regression analysis and coefficient of determination (r2) could be used in confirming the delivery mileage allocation method used in (a) above. (4 marks) (Total: 25 marks) KAPLAN PUBLISHING 13 PAPER F5 : PERFORMANCE MANAGEMENT KEY FACTORS AND THROUGHPUT ACCOUNTING Sunglow Estates Company (SEL) has acquired a 600-hectare site comprising the following: Land groups (1) Agricultural land in current use (2) Derelict land formerly occupied by factories (3) Contaminated land formerly used for chemical storage 280 hectares 250 hectares 70 hectares

It is possible for SEL to develop this site with a combination of houses, apartments and shops. The associated development costs per hectare are as follows: Houses Land group (1) (2) (3) $000 370 340 ? Apartments $000 715 640 ? 820. 52 It is not possible to use land group (3) for houses or apartments, but this land can be used for the development of shops without first decontaminating it. Income per hectare generated by the three types of development are: Sale of leases $000 Houses Apartments Shops 230 480 ? Annual ground rent $000 40 70 200 Shops $000 790 698

SEL’s planning consent for the development specifies that no more than 40 hectares of the development should be occupied by shops and no less than 200 hectares should be occupied by houses. Land developed for houses in excess of the minimum specified by the planning consent will qualify for a government subsidy in the form of an interest-free loan of $200,000 per hectare developed, repayable in four annual instalments of $50,000. It is possible to decontaminate all or part of land group (3) at a cost of $80,000 per hectare. Such decontaminated land is, for development purposes, the same as agricultural land.

SEL appraises investments using DCF evaluation, a 10% cost of money for low-risk investments (including development of houses and apartments), a 15% cost of money for high-risk investments (including the development of shops) and an eight-year time horizon. ‘I remember being told about the useful decision-making technique of limiting factor analysis (also known as ‘contribution per unit of the key factor’). If an organisation is prepared to believe that, in the short run, all costs other than direct materials are fixed costs, is this not the same thing that throughput accounting is talking about?

Why rename limiting factor analysis as throughput accounting? ’ 14 KAPLAN PUBLISHING LECTURER RESOURCE PACK – QUESTIONS Required: (a) Explain what a limiting (or ‘key’) factor is and what sort of things can become limiting factors in a business situation. Which of the factors in the scenario could become a limiting factor? (8 marks) Explain the techniques that have been developed to assist in business decision-making when single or multiple limiting factors are encountered. (7 marks) Explain the management idea known as throughput accounting.

State and justify your opinion on whether or not throughput accounting and limiting factor analysis are the same thing. Briefly comment on whether throughput accounting is likely to be of relevance to SEL. (10 marks) (Total: 25 marks) (b) (c) KAPLAN PUBLISHING 15 PAPER F5 : PERFORMANCE MANAGEMENT DECISION MAKING TECHNIQUES JB LTD JB Ltd is a small specialist manufacturer of electronic components and much of its output is used by the makers of aircraft for both civil and military purposes. One of the few aircraft manufacturers has offered a contract to JB Ltd for the supply, over the next 12 months, of 400 identical components.

The data relating to the production of each component is as follows: (1) Material requirements 3 kg material M1 – see note (i) below 2 kg material P2 – see note (ii) below 1 part no. 678 – see note (iii) below Notes: (i) Material M1 is in continuous use by the company. 1,000 kg are currently held in stock at a book value of ? 4. 70/kg but it is known that future purchases will cost ? 5. 50/kg. 1,200 kg of material P2 are held in stock. The original cost of this material was ? 4. 30/kg but, as the material has not been required for the last two years, it has been written down to ? 1. 50/kg scrap value.

The only foreseeable alternative use is as a substitute for material P4 (in current use) but this would involve further processing costs of ? 1. 60/kg. The current cost of material P4 is ? 3. 60/kg. It is estimated that the part no. 678 could be bought for ? 50 each. (ii) (iii) (2) Labour requirements Each component would require five hours of skilled labour and five hours of semiskilled. An employee possessing the necessary skills is available and is currently paid ? 5/hour. A replacement would, however, have to be obtained at a rate of ? 4/hour for the work which would otherwise be done by the skilled employee.

The current rate for semi-skilled work is ? 3/hour and an additional employee could be appointed for this work. (3) Overhead JB Ltd absorbs overhead by a machine hour rate, currently ? 20/hour, of which ? 7 is for variable overhead and ? 13 for fixed overhead. If this contract is undertaken, it is estimated that fixed costs will increase for the duration of the contract by ? 3,200. Spare machine capacity is available and each component would require four machine hours. A price of ? 145 per component has been suggested by the large company which makes aircraft.

Required: (a) (b) State whether or not the contract should be accepted and support your conclusion with (16 marks) appropriate figures for presentation to management; Comment briefly on three factors which management ought to consider and which may influence their decision. (9 marks) (Total: 25 marks) 16 KAPLAN PUBLISHING LECTURER RESOURCE PACK – QUESTIONS EXE AND WYE A firm manufactures two products, EXE and WYE, in departments dedicated exclusively to them. There are also three service departments, stores, maintenance and administration. No stocks are held as the products deteriorate rapidly.

Direct costs of the products, which are variable in the context of the whole business, are identified to each department. The step-wise apportionment of service department costs to the manufacturing departments is based on estimates of the usage of the service provided. These are expressed as percentages and assumed to be reliable over the current capacity range. The general factory overheads of ? 3. 6m, which are fixed, are apportioned based on floor space occupied. The company establishes product costs based on budgeted volume and marks up these costs by 25% in order to set target selling prices.

Extracts from the budgets for 20X8 are provided below: Annual volume (units) EXE WYE 200,000 100,000 150,000 70,000 EXE Costs (? m) Material costs Other variable costs Departmental usage (%) Maintenance Administration Stores Floor space (sq m) Required: Workings may be ? 000 with unit prices to the nearest penny. (a) (b) Calculate the budgeted selling price of one unit of EXE and WYE based on the usual mark up. (6 marks) Discuss how the company may respond to each of the following independent events, which represent additional business opportunities: (i) (ii) an enquiry from an overseas customer for 3,000 units only of WYE where a price of ? 5 per unit is offered an enquiry for 50,000 units of WYE to be supplied in full at regular intervals during 20X8 at a price which is equivalent to full cost plus 10%. 1. 8 0. 8 50 40 60 640 WYE 0. 7 0. 5 25 30 40 480 Stores 0. 1 0. 1 25 20 240 Maintenance 0. 1 0. 2 Admin – 0. 2 Maximum capacity Budget 10 80 160 In both cases support your discussion with calculations and comment on any assumptions or matters on which you would seek clarification. (13 marks) (c) Explain the implications of preparing product full costs based on maximum capacity rather than annual budget volume. (6 marks) (Total: 25 marks) KAPLAN PUBLISHING 7 PAPER F5 : PERFORMANCE MANAGEMENT PLASTIC TOOLS A small company is engaged in the production of plastic tools for the garden. Sub-totals on the spreadsheet of budgeted overheads for a year reveal the following: Moulding department 1,600 2,500 0,800 1,200 Finishing department 500 850 600 800 General factory overhead 1,050 1,750 Variable overhead ? 000s Fixed overhead ? 000s Budgeted activity Machine hours (000s) Practical capacity Machine hours (000s) For the purposes of reallocation of general factory overhead it is agreed that the variable overheads accrue in line with the machine hours worked in each department.

General factory fixed overhead is to be reallocated on the basis of the practical machine hour capacity of the two departments. It has been a long-standing company practice to establish selling prices by applying a mark-up on full manufacturing cost of between 25% and 35%. A possible price is sought for one new product which is in a final development stage. The total market for this product is estimated at 200,000 units per annum. Market research indicates that the company could expect to obtain and hold about 10% of the market.

It is hoped the product will offer some improvement over competitors’ products, which are currently marketed at between ? 90 and ? 100 each. The product development department have determined that the direct material content is ? 9 per unit. Each unit of the product will take two labour hours (four machine hours) in the moulding department and three labour hours (three machine hours) in finishing. Hourly labour rates are ? 5. 00 and ? 5. 50 respectively. Management estimate that the annual fixed costs which would be specifically incurred in relation to the product are: supervision ? 20,000, depreciation of a recently acquired machine ? 20,000 and advertising ? 27,000. It may be assumed that these costs are included in the budget given above. Given the state of development of this new product, management do not consider it necessary to make revisions, to the budgeted activity levels given above, for any possible extra machine hours involved in its manufacture. Required: (a) (b) (c) Briefly explain the role of costs in pricing. (8 marks) Prepare full cost and marginal cost information which may help with the pricing decision. (10 marks) Comment on the cost information and suggest a price range which should be considered. marks) (Total: 25 marks) 18 KAPLAN PUBLISHING LECTURER RESOURCE PACK – QUESTIONS BIL MOTOR COMPONENTS PLC (a) In an attempt to win over key customers in the motor industry and to increase its market share, BIL Motor Components plc have decided to charge a price lower than their normal price for component TD463 when selling to the key customers who are being targeted. Details of component TD463’s standard costs are as follows: Standard cost data Machine Group 1 ? Materials (per unit) 26. 00 Labour (per unit) 2. 00 Variable overheads (per unit) 0. 65 Fixed overheads (per unit) 3. 00 _____ 31. 5 _____ Setting-up costs per batch of 200 units Required: Compute the lowest selling price at which one batch of 200 units could be offered, (9 marks) and critically evaluate the adoption of such a pricing policy. (b) The company is also considering the launch of a new product, component TDX489, and have provided you with the following information. Product TDX489 Standard cost per box ? 6. 20 1. 60 ____ 7. 80 ____ Market research ? forecast of demand Selling price (? ) 13 12 11 10 9 Demand (boxes) 5,000 6,000 7,200 11,200 13,400 The company only has enough production capacity to make 7,000 boxes.

However, it would be possible to purchase product TDX489 from a sub-contractor at ? 7. 75 per box for orders up to 5,000 boxes, and ? 7 per box if the orders exceed 5,000 boxes. Required: Prepare and present a computation which illustrates which price should be selected in order to maximise profits. (10 marks) (c) Where production capacity is the limiting factor, explain briefly the ways in which management can increase it without having to acquire more plant and machinery. (6 marks) (Total: 25 marks) ? 10 Component TD463 Batch size 200 units Machine Group 7 ? 17. 00 1. 60 0. 72 2. 50 _____ 21. 82 _____ ? 6 Machine Group 29 ? 0. 75 0. 80 1. 50 ____ 3. 05 ____ ? 4 Assembly ? 3. 00 1. 20 0. 36 0. 84 ____ 5. 40 ____ ? Variable cost Fixed cost KAPLAN PUBLISHING 19 PAPER F5 : PERFORMANCE MANAGEMENT MOV COMPANY MOV Company produces custom-built sensors. Each sensor has a standard circuit board (SCB) in it. The current average contribution from a sensor is ? 400. MOV Company’s business is steadily expanding and in the year just ending (2001/2002), the company will have produced 55,000 sensors. The demand for MOV Company’s sensors is predicted to grow over the next three years: Year 2008/09 2009/10 2010/11 Units 58,000 62,000 65,000

The production of sensors is limited by the number of SCBs the company can produce. The present production level of 55,000 SCBs is the maximum that can be produced without overtime working. Overtime could increase annual output to 60,500, allowing production of sensors to also increase to 60,500. However, the variable cost of SCBs produced in overtime would increase by ? 75 per unit. Because of the pressure on capacity, the company is considering having the SCBs manufactured by another company, CIR Company. This company is very reliable and produces products of good quality. CIR Company has quoted a price of ? 16 per SCB, for orders greater than 50,000 units a year. MOV Company’s own costs per SCB are predicted to be: Direct material Direct labour Variable overhead Fixed overhead Total cost ? 28 40 20 24 112 (based on labour cost) (based on labour cost and output of 55,000 units) The fixed overheads directly attributable to SCBs are ? 250,000 a year; these costs will be avoided if SCBs are not produced. If more than 59,000 units are produced, SCBs’ fixed overheads will increase by ? 130,000. In addition to the above overheads, MOV Company’s fixed overheads are predicted to be: Sensor production in units: Fixed overhead: 54,001 to 59,000 ? ,600,000 59,001 to 64,000 ? 2,900,000 64,001 to 70,000 ? 3,100,000 MOV Company currently holds a stock of 3,500 SCBs but the production manager feels that a stock of 8,000 should be held if they are bought-in; this would increase stockholding costs by ? 10,000 a year. A purchasing officer, who is paid ? 20,000 a year, spends 50% of her time on SCB duties. If the SCBs are bought-in, a liaison officer will have to be employed at a salary of ? 30,000 in order to liaise with CIR Company and monitor the quality and supply of SCBs. At present, 88 staff are involved in the production of SCBs at an average salary of ? 5,000 a year: if the SCBs were purchased, 72 of these staff would be made redundant at an average cost of ? 4,000 per employee. The SCB department, which occupies an area of 240 ? 120 square metres at the far end of the factory, could be rented out, at a rent of ? 45 per square metre a year. However, if the SCBs were to be bought-in, for the first year only MOV Company would need the space to store the increased stock caused by outsourcing, until the main stockroom had been reorganised and refurbished. From 2009/10, the space could be rented out; this would limit the annual production of