BEA2008 MANAGEMENT ACCOUNTING 1 TUTORIAL 9 QUESTIONS Question 1 Abel Ltd is contemplating the lease of a new machine for the

manufacture of the companys single product for the coming year. The company is also in the process of deciding the price to charge for this product in order to maximise profits. In the year just ended, the results of the company were as follows: 000 Sales (220,000 units) Less: Cost of goods sold Production wages fixed piecework Materials Gross profit Less: Royalties (0.60 per unit sold) Less: Administration (fixed cost) Loss 000 660 40 100 140 440 580 80 132 50 182 (102)

The company expects the fixed production wages, fixed administration costs and the royalty rate to remain unchanged. However, the piecework rate will increase to 0.60 per unit. Quality control indicates that the current machine is causing high wastage of materials. A new machine has now become available and it is expected to reduce material usage by 50%. The machine cannot be bought but can be leased for 100,000 per annum. The company estimates that if selling price was reduced by 0.01, demand for the product would increase by 1,000 units per annum. Required: Advise Abel Ltd whether the new machine should be leased for the coming year and the price that should be charged for the companys product in order to maximise profits.

Question 2 Down Ltd manufactures bicycles and operates a JIT manufacturing system. The company produces to order and carries no inventory. The demand function is estimated to be P = 100 0.02Q where P is the selling price in and Q is the quantity demanded. The total costs function is estimated to be C = 0.01Q3 + 0.1Q2 + 0.2Q + 600 where C is the total cost in and Q is the quantity demanded. Required: (a) (b) Calculate the output in units that will maximise total profit, and to calculate the corresponding unit selling price, total profit, and total sales revenue. Calculate the output in units that will maximise total revenue, and to calculate the corresponding unit selling price, total loss, and total sales revenue.

The quadratic equation formula is as follows:

Question 3 Jumbo plc manufactures cereal based foods, including various breakfast cereals under private brand labels. In April, the company had been approached by Kopco plc, a large national supermarket chain, to tender for the manufacture and supply of a crunchy style breakfast cereal made from oats, nuts and raisins. The tender required Jumbo plc to quote prices for a 1.5 kg packet at three different weekly volumes; 50,000, 60,000 and 70,000. Jumbo plc had, at present, excess capacity on some of its machines and could make a maximum of 80,000 packets of cereal a week. Jumbo plcs management accountant is asked to prepare a costing for the Kopco plc tender. The company prepares its tender prices on the basis of full cost plus 15% of cost as a profit margin. The full cost is made up of five elements; raw materials per packet of 0.30, operating wages of 0.12 per packet, manufacturing overheads costed at 200% of operating wages, administration and other corporate overheads at 100% of operating wages, and packaging and transport costing 0.10 per packet. The sales manager has suggested that as an incentive to Kopco plc, the profit margin be cut on the 60,000 and 70,000 tenders by 0.5% and 1% to 14.5% and 14% respectively. The manufacturing and administration overheads are forecast as fixed at 12,500 per week, unless output drops to 50,000 units or below per week, when a saving of 1,000 per week can be made. If no contract is undertaken, then all the manufacturing and administration overheads will be saved except for 600 per week. If the tender is accepted, the volume produced and sold will be determined by the sales achieved by Kopco plc. A week before the Kopco plc tender is to be presented for negotiation, Jumbo plc receives an enquiry from Gunners plc, a rival supermarket chain, to produce, weekly, 60,000 packets of a similar type of breakfast cereal of slightly superior quality at a price of 1.20 per 1.5 kg packet. This product will fill a gap in Gunners plcs private label range of cereals. The estimated variable costs for this contract would be raw materials of 0.40 per packet, operating wages of 0.15 per packet, and packaging and transport of 0.12 per packet. None of the 80,000 weekly capacity could be used for another product if either of these contracts were taken up. Required: (a) (b) (c) (d) Compute the three selling price per packet for the Kopco plc tender using Jumbo plcs normal pricing method. Advise Jumbo plc, giving your financial reasons, on the relative merits of the two contracts. Discuss the merits of full-cost pricing as a method of arriving at selling prices. Provide, with reasons, for each of the two contracts under negotiation, a minimum and a recommended price that Jumbo plc could ask which would ensure the full utilisation of Jumbos weekly capacity of 80,000 packets.

Question 4 A producer of high quality executive motor cars has developed a new model which it knows to be very advanced both technically and in style by comparison with the competition in its market segment. The companys reputation for high quality is well-established and its servicing network in its major markets is excellent. However, its record in timely delivery has not been so good in previous years, though this has been improving considerably. In the past few years it has introduced annual variations and improvements in its major models. When it launched a major new vehicle some six years ago, the recommended retail price was so low in relation to the excellent specification of the car that a tremendous demand built up quickly and a two-year queue for the car developed within six months. Within three months, a second-hand model had been sold at an auction for nearly 50% more than the list price and even after a year of production, a sizeable premium above list price was being obtained. The company considers that, in relation to the competition, the proposed new model will be as attractive as was its predecessor six years ago. Control of costs is very good so that accurate cost data for the new model are to hand. For the previous model, the company assessed the long-term targeted annual production level and calculated its prices on that basis. In the first year, production was 30% of that total. For the present model, the company expects that the relationship between first-year production and longer-term annual production will also be about 30%, though the absolute levels in both cases are expected to be higher than previously. Required: (a) (b) Recommend whether you would adopt a market penetration or price skimming policy. Outline briefly if your chosen pricing strategy in (a) would change if, instead of a high quality executive car, you were pricing a new family model car with some unusual features that the company might introduce.