Answers please.,,,

(a) Explain the applications of the learning curve. (4 marks)

(b) Genit Marine Ltd., a boat construction company, has developed a new

type of speed boat called "Speed Surf."

The following information has been availed to you:

1. Boat construction is a continuous assembling process carried out at

the companys yard.

2. Boat assembling is labour intensive involving the use of two classes

of labour namely:

Skilled labour at a standard rate of $. 1,250 per hour.

Semi-skilled labour at a standard rate of $. 950 per hour.

3. Experience on boat construction from other models indicates that

the use of skilled labour is associated with an 80% learning curve

effect whereas use of semi-skilled labour is associated with a 90%

learning curve effect.

4. Labour usage for the first speed boat assembled was as follows:

Skilled labour - 952 hours.

Semi-skilled labour - 650 hours.

5. In October 2005, the sixth and the seventh speed boats were

assembled from start to finish. During the month, the following

labour usage and costs were recorded:

Skilled labour - 680 hours at a total cost of $. 800,400. Semi-skilled labour - 1,256 hours at a total cost of $

1,281,200.

The management of Genit Marine Ltd. is concerned about the cost

variances and would like to learn more on the composition of the

variances.

Required:

(i) Calculate the standard labour cost of the month of October 2005.

(3 marks)

(ii) Reconcile the standard cost with the actual cost for the month of

October 2005 showing the labour rate and labour efficiency

variances. (5 marks)

(iii) Express the labour efficiency variance in terms of labour mix and

labour output variances. (Value the labour mix variances using

standard rates). (8

marks)

NB: The value of b in the formula for the learning curve is -0.322 for

an 80% learning rate and -0.152 for a 90% learning rate. (Total:

20 marks)

2.

DINTEX Ltd. is a manufacturing company with two divisions; A and B. Division

A manufactures a single standard product X, some of which is sold externally

and the remainder used as an input in division B in the manufacture of product

Y.

The unit production costs of product K are given below:

$

Direct material 40

Direct labour 20

Direct expense 20Variable manufacturing overheads 20

Fixed manufacturing overheads 40

Selling and packaging expenses

(variable)

10

150

Annually, 10,000 units of product X are sold externally at a price of $. 300

per unit and 5,000 units are transferred to division B at an internal transfer

price of $. 290 arrive at by deducting the selling and packaging expense from

the external price of $. 300 which is not incurred for products transferred

internally.

The unit production cost for product Y which uses product X as an input is

given below:

$.

Cost of internally transferred products from division A to

division B

290

Direct material 230

Direct labour 30

Variable overheads 120

Fixed overheads 120

Selling and packaging expenses (variable) 10

800

The manager of division B has disagreed with the basis used in arriving at the

transfer price. He argues that the transfer price should be arrived at by

charging the variable cost plus an agreed mark-up. He also claims that division

A would not be in a position to externally sell the extra units that are

transferred to division B at the price of $. 300.

A survey on the relationship between the selling price and demand for each

division was carried out by the companys Sales Director. The results are

shown in the table below:

Division A Selling price ($.) 200 300 400

Demand (units) 15,000 10,000 5,000

Division B Selling price ($.) 800 900 1,000

Demand (units) 7,200 5,000 2,800The manager of division B suggests that based on the above results, a transfer

price of $. 120 would offer division A a reasonable contribution towards its

fixed cost and earn division B a reasonable profit. This would lead to an

increase in the output and overall profitability of the company.

Required:

(a) Calculate the effect of the existing transfer pricing system on the

companys profits.

(12 marks)

(b) Calculate the effect of adopting the transfer price of $. 120 on the

companys profits. (8

marks)

(NB: use the results of the Sales Directors survey in your calculations).

(Total: 20 marks)