Question 8

Olu ltd prepares its accounts to December 31 each year. It is considering investing in a new computer controlled production facility on January 1, 2016 at a cost of GHS50 million. This will enable Olu Ltd to produce a new product which it expects to be able to sell for four years. At the end of this time it been agreed to sell the new production facility for GHS1 million cash.

Sales of the product during the year ended December 31, 2016 and the next three years are expected to be as follows:

Year ended December 31         2016        2017        2018        2019

Sales in units (000)                     100          105           110          108

Selling price, unit variable cost and fixed overhead cost (excluding depreciation) are expected to be as follows during the year ended December 31, 2016.

                                                                                            GHS

Selling price per unit                                                         1,200

Variable production cost per unit                                      750

Variable selling and distribution cost per unit                 100

Fixed production cost for the year                          4,000,000

Fixed selling and distribution cost for the year     2,000,000

Fixed administration cost for the year                    1,000,000

The following rates of annual inflation are expected for each of the years during 2017-2019

                                                                               %

Selling prices                                                        5

Production costs                                                 8

Selling and distribution costs                            6

Administration costs                                           5

The company pays taxation on its profits at the rate of 30% with half of this being payable in the year in which the profit is earned and the remainder being payable in the following year.

Investments of this type qualify for tax depreciation at the rate of 25% per annum on a reducing balance basis. The Board of Director of Olu Ltd has agreed to use a 12% post-tax discount rate to evaluate the investment.

Required:

1. Advise Olu Ltd whether the investment is financially worthwhile.
2. Calculate the internal rate or return of the investment
3. Explain briefly how real rate or return and money rate or return would be applied in calculating the net present value of a project’s cash flow.

Problem 5: Interest Rate Parity The current US Dollar to Yen exchange rate is ?0 = 110. The CCIR US rate is 4% and the CCIR Japanese rate is 2%. Banco Santander is currently willing to offer a one-month forward contract (assuming either the short or long position). The bank’s problem is to set the forward exchange rate ?0, 1/ 12 .

1. If the bank invests $500 M over one month, what is the FV of such investment?

2. Now instead, suppose that the bank takes the $500 M and exchanges that amount into Yen and invest the Yen amount over one month. What is the FV of that investment? 3. If the bank has the option to exchange Yen to USD one month from now at an exchange rate of ?0,? of Yen for 1 USD, what is the value of ?0, 1 /12 that makes the bank indifferent between 1) and 2).

4. Instead of following the “no-arbitrage guidelines” to price an asset, the bank decides to set the forward price at ?0, 1 /12 = 108 (Yen per USD). Michael, once again, decides to trade with the bank and does the following:

i. Borrow an amount $100 over one month. Enter into a one-month contract to sell Yen.

ii. Exchange that amount into Yen at the current rate and the invest the proceeds over one month at the Yen rate. iii. Exchange the Yen into USD at the ?0, 1 /12 = 108 rate set by the bank.

iv. Repay the loan in USD. Compute the payoff from this strategy. Is it positive? Negative? Zero? Compute the reverse strategy:

v. Borrow an amount 100 Yen over one month. Enter into a one-month contract to buy Yen.

vi. Exchange that amount into USD at the current rate and the invest the proceeds over one month at the US rate.

vii. Exchange the USD into Yen at the ?0, 1 /12 = 108 rate set by the bank. i. Repay the loan in Yen.

FunKids Sdn Bhd produces a type of toy which is sold for RM120 per unit. The normal annual production and sales for the toys are 2,800 units, although the company has the capacity to produce up to 3,000 units.

The following data consist of costs incurred during the year ended 2019:

RM
Material (100% variable) 70,000
Labour (70% variable) 80,000
Selling expenses (40% variable) 58,000
Fixed administrative expenses 50,000

The management accountant of the company is proposing the following alternatives to increase sales for the year 2020 and to reduce the idle capacity:

1. Reducing the selling price to RM110 per unit which would lead to an estimated increase in the sales volume by 30%.
2. An increase in sales would result in an increase of variable labour cost per unit by 15%.
3. Fixed selling expenses is also expected to increase to RM32,500 due to an aggressive advertising and marketing campaign planned to boost sales.

Required:

a) Determine the following costs in year 2019:
i. Total variable costs per unit.                                                                       
ii. Total fixed costs.                                                                                       

b) Calculate the following in year 2019:
i. Break-even points in units and in value.                                                      
ii. Margin of safety in units and in value.                                                         
iii. The expected sales value if the company targets for a profit of RM100,000.


c) Advice the management of FunKids Sdn Bhd if the company should implement the proposed alternative for year 2020. (Show profit comparison).                            
(Total: 25 Marks)


Question 2 (Answer)
total variable cost
Material cost =100% variable
Labor cost
selling expenses
fixed administrative expenses
total variable cost per unit

Break even point in units
Break even point in sales
contribution margin ratio

Margin of safety

expected sales value for 100000 profit

Proposed plan
selling price
selling units
variable cost
fixed cost
Income statement
sales
variable cost

Exercise 4-8 Using departmental overhead rates to assess prices LO P2

Way Cool produces two different models of air conditioners. The company produces the mechanical systems in their components department. The mechanical systems are combined with the housing assembly in its finishing department. The activities, costs, and drivers associated with these two manufacturing processes and the production support process follow.

   
Additional production information concerning its two product lines follows.

Required:
1. Determine departmental overhead rates and compute the overhead cost per unit for each product line. Base your overhead assignment for the components department on machine hours. Use welding hours to assign overhead costs to the finishing department. Assign costs to the support department based on number of purchase orders.
2. Determine the total cost per unit for each product line if the direct labor and direct materials costs per unit are $270 for Model 145 and $210 for Model 212.
3. If the market price for Model 145 is $1,475 and the market price for Model 212 is $320, determine the profit or loss per unit for each model.

Ellis Animal Health, Inc. produces a generic medication used to treat cats with feline diabetes. The liquid medication is sold in 100 ml vials. The term that Ellis uses for the product sold is a “dose”. Ellis employs a team of sales representatives who are paid varying amounts of commission.

Given the narrow margins in the generic veterinary industry, Ellis relies on tight standards and cost controls to manage its operations. Ellis has the following budgeted standards for the month of April 2017:

                  Budgeted sales for April                                                                                                           700,000 doses

Average selling price per dose                                                                          $8.30 per dose

                  Medicine – 105 ml/dose @ $0.030 / ml                                                                         $3.15 per dose

                  Vials – 1 vial per dose @ $0.45 / vial                                                             $0.45 per dose

                  Direct manufacturing labor cost per hour                                                 $15.00 / hour

                  Average labor productivity rate (doses per hour)                                                      100

                  Sales commission is paid on all sales – average commission     $0.72 per dose

                  Fixed administrative and manufacturing overhead                           $990,000             

Actual results

Because of an accident in the factory, actual results were much different than planned

                  Dose sales and production were 90% of plan.

                  Actual average selling price increased to $8.40 per dose

                  Productivity dropped to 90 doses per hour

Raw material

Medicine – the company used 72,128,483 milliliters of medicine. They paid $0.029 per milliliter

Vials – the company used 702, 450 vials. They paid a total of $365,274 for the vials used

Actual direct manufacturing labor cost was $14.75 per hour

Sales commission – The average commission was $0.70 per dose

Fixed overhead costs were $40,000 above budget

1.a Calculate the budget using the contribution margin income statement approach showing the volume, use and rate components (when appropriate)

1.b Calculate the actual results using the contribution margin income statement approach showing the volume, use and rate components (when appropriate)

Question 18

A large hospital uses a certain intravenous solution that it maintains in inventory. Assume the hospital uses reorder point method to control the inventory of this item. Pertinent data about this item are as follows:

------------------------------------------------------------

Forecast of demand^a = 1,000 units per week

Forecast error^a, std. dev. =100 units per week

Lead time = 4 weeks

Carrying cost = 25 % per year

Purchase price, delivered = $52 per unit

Replenishment order cost = $20 per order

Stockout cost = $10 per unit

In-stock Probability during the lead time =90%

^a Normally distributed

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Due to possible rounding effect, please pick the closest number in the following options.

Question 19

If the hospital orders 400 units each time, what’s the total annual costs (holding cost + ordering cost + stock-out cost) excluding purchasing costs?

Question 19 options:

Use the following information to answer questions 17-20.

A large hospital uses a certain intravenous solution that it maintains in inventory. Assume the hospital uses reorder point method to control the inventory of this item. Pertinent data about this item are as follows:

------------------------------------------------------------

Forecast of demand^a = 1,000 units per week

Forecast error^a, std. dev. =100 units per week

Lead time = 4 weeks

Carrying cost = 25 % per year

Purchase price, delivered = $52 per unit

Replenishment order cost = $20 per order

Stockout cost = $10 per unit

In-stock Probability during the lead time =90%

^a Normally distributed

------------------------------------------------------------

Due to possible rounding effect, please pick the closest number in the following options.

Question 20

If the lead time is normally distributed with a mean of 4 weeks and a standard deviation of 0.5 weeks, what’s the reorder point?

Question 20 options:

1. In 100 words or fewer, explain how managers can use budgets for planning.

2. In 100 words or fewer, explain the differences between participative budgeting and traditional budgeting.

3. In 100 words or fewer, explain when a management would prefer a flexible budget as opposed to a static budget

1.How does unemployment affect economic stability? must be 100 words

2.Discuss the four principles of private enterprise systems? must be 100 words

3.What is required for perfect competition to exist, and what principles must be in place to achieve those conditions? must be 100 words

Consider a list called A:

A = [-6, 10, 100, 5, -20, 1000, 9, -15]

Make a for loop that iterates over A and:

• If number is negative, print the square of the number.
• if number is positive but less than or equal to 100, print the number itself.
• if number is positive but greater than 100, print 0.

Consider the following production function using capital (K) and labor (L) as inputs. Y = 10.K0.5L0.5. The marginal product of labor is (MPL=) 5.K0.5/L0.5, and marginal product of capital (MPK) = 5.L0.5/K0.5.a. If K = 100 and L=100 what is the level of output Y?b. If labor increases to 110 while K=100, what is the level of output?c. If labor increases to 110 while K=100, what is the marginal product of labor?d. If labor increases to 120 while K=100, what is the marginal product of labor?e. What happens to marginal product of labor when labor increases while capital remains unchanged?f.Estimate Marginal Products of Capital in the above cases of (c) and (d) using equation given in the question.g. When labor increases from 100 to 110 and then to 120 while the level of capital does not change, what happens to Marginal Product of Capital?