Buliisa Oilcom Limited (BOL), an oil company whose accounting date is 30 June,

owns land in Uganda's Albertine region. BOL classifies this land according to the

number of barrels that are expected to be obtained from the oil wells. The

classes are the 500,000 barrel well, 200,000 barrel well, 50,000 barrel well and a

dry well. BOL is currently faced with deciding whether to drill for oil,

unconditionally lease the land or conditionally lease the land at a rate depending

upon oil strike.

The cost of drilling a producing well is Shs 2.5 billion and a dry well is Shs 1.7

billion. For a producing well, the profit per barrel of oil is Shs 23,310 (after

deductions of processing and all other costs except drilling costs).

Under the unconditional lease agreement, BOL receives Shs 45 million for the

land whereas for the conditional lease agreement, BOL receives Shs 670 for each

barrel of oil extracted if it is a 500,000 or 200,000 barrel oil strike and nothing

otherwise.

The probability of striking a 500,000 barrel well is 0.10, probability of striking a

200,000 barrel well is 0.15 and the probability of striking a 50,000 barrel well is

0.25.

Also BOL runs a monthly magazine that gives details of the oil exploration in

Uganda. It has commissioned an advertising campaign to launch the 2018/19

magazine. This will invalidate the previous price and demand relationship. The

price of the 2018/19 magazine has been set at full cost plus a mark-up of 20%

and 50,000 copies are expected to be sold at this price during the month of

October. The management of BOL wishes to calculate the total profit for the

second quarter from the 2018/19 magazine.

The following information is available:

1. BOL expects 90% of October customers to buy the 2018/19 magazine

during November and afterwards retain 85% of the November customers.

2. As the magazine circulation increases, sales to additional new customers in

November and December will be 20% and 30% of October and November

sales respectively.

3. Fixed overhead costs are charged to magazines based on sales volume.

Annual fixed overhead cost of Shs 18 billion is expected to be incurred in

order to produce 12 million copies of the magazine during the year

2018/19.

4. The variable costs per 2018/19 Magazine include:

Item Shs

Paper 830

Ink 1,200

Machine maintenance cost 220

Other variable costs 150

10% of the ink is wasted during printing.

Required:

(a) Prepare profit payoff table for BOL and advise on the best course

of action it should take.

(12 marks)

(b) Explain the following decision rules and advise BOL on the best

course of action to take under each rule:

(i) Maximin. (2 marks)

(ii) Maximax. (2 marks)

(iii) Minimax. (2 marks)

(c) Prepare statement that shows the total profit for the second

quarter of the 2018/19 Magazine.

(9 marks)

(d) Determine the percentage of new customers that need to purchase

the2018/19 magazine for a second consecutive month in order to

get a profit of Shs 100 million in the second quarter.

(5 marks)

(e) Distinguish between the following terms:

(i) 'Price skimming' and 'penetration pricing'. (4 marks)

(ii) 'Objective' and 'subjective' probabilities.

Question 2

Mbale Tourist Club (MTC) is a holiday complex serving both local and foreign

guests. Guests are charged for accommodation, meals and tour guides. The

present economic situation requires companies to have strict financial controls to

generate profits. MTC has three divisions headed by managers where there is

constant monitoring of costs. Division managers are always given annual

budgets which are further broken down into months. Every end of the month

division managers receive statements comparing actual costs against budget

with variance highlights.

The following statement relates to the Restaurant division for the month ended

31 July, 2017:

Performance statement:

Item Actual Budget Variance

Number of guests 13,950 12,000 1,950

Shs '000' Shs '000' Shs '000'

Food expenses 25,625 25,200 (425)

Sanitation expenses 2,790 2,400 (390)

Utilities 2,562.5 3,000 437.5

Wages 10,500 9,000 (1,500)

Fixed overheads 2,325 2,250 (75)

The budget was prepared on basis of 30 days calendar month and fixed

overheads were an apportionment of the annual fixed overheads.

MTC plans to expand its hotel and transport divisions because of the rapid

growth in the tourism industry. Hotel and transport division managers have

authority to plan for their revenues and costs. The transport division manager is

allowed to buy vehicles when they are needed. The expansion of the hotel

division will require an investment of Shs 150 million while the transport division

requires Shs 375 million. This investment will bring additional profits of Shs 27

million from hotel division and Shs 75 million from the transport division.

The following are financial extracts of MTC's divisions for the year ended 30

June, 2017.

Division

Particulars Hotel Transport Restaurant

Shs '000' Shs '000' Shs '000'

Profits for the year 75,550 68,950 32,540

Investments 500,000 300,000 175,000

Required:

(a) (i) Explain how feed-forward control has been applied at MTC.

(2 marks)

(ii) Using flexible budgeting, evaluate the performance of the restaurant

manager.

(6 marks)

(b) (i) Distinguish between a profit centre and investment centre with

examples from MTC.

(4 marks)

(ii) Assess the likely responses of divisional managers and advise MTC

top management on whether it should approve the proposed investments

using return on investment (ROI).

(8 marks)

(Total 20 marks)

Question 3

Kamunye Uganda Limited (KUL) is a renowned car dealer and intends to deal in

assembling of medium petrol engine cars and targets a 40% market share in

Uganda and 20% for export.

KUL has enjoyed a successful 50 years of existence and wishes to celebrate this

by assembling a modern double storied mini-bus model. The managing director

(MD), in his inaugural project speech, said that the new model would be sold at

Shs 40 million.

The following information is predicted for the forthcoming year due to expected

inflation in the country and after conducting a customer research to find out

what features will be desirable in the intended model. Based on the research

and knowledge of competitors' products, the chief accountant has advised to

price this model using a cost plus mark up of 20%.

Forecast direct costs per car:

Shs '000'

Labour 17,893

Materials 16,800

Forecast annual overhead costs:

Shs '000'

Assembling costs (note 1) 620,000

Transportation costs (note 2) 240,000

Note 1

Assembling a car of this model requires 8 hours and KUL has only 80,000

assembling hours per annum that are anticipated to be used in assembling other

car models while working at full capacity.

Note 2

Some models of cars are delivered to showrooms using car transporters. 60% of

the transportation costs relate to the number of deliveries made and the balance

relates to distance covered. The car transporters forecast to make a total of 600

deliveries in the year and carry 15 cars per delivery at full capacity.

The annual distance covered by the transporter is expected to be 250,000 km

and 20% of this is for the delivery of the new mini-bus model only. All the 1,500

new assembled mini-buses will be delivered in the same year using the car

transporter.

Required:

(a) Advise management of KUL on whether they should go ahead and charge

the MD's stated price for each double storied mini-bus model.

(12 marks)

(b) Discuss any two methods that can be used to set transfer prices at KUL.

(4 marks)

(c) Describe ways of solving conflicts that arise during the setting of transfer

prices.

(4 marks)

(Total 20 marks)

Question 4

Urejesho wa Kituo cha Africa is a civil society organisation based in Kampala.

Their focus is on rehabilitating homosexuality victims in Africa. It is funded by

the Republic of Ikeland (Donor) with its rehabilitation centre in Gayaza.

The organisation's executive secretary, Ms. Alice Mubali, has always found it hard

to convince the donors about the huge amounts of money spent on transport.

She argues that spending a lot on transport is due to travels made while looking

for victims and additional funding across Africa. The Donor feels that such huge

amounts of money should be spent on core activities like counseling, education,

feeding and starting business enterprises to the victims which are currently

constrained. However, Alice claims, without travelling, there will be no clients

because homosexuality victims live under fear and hiding. At the same time,

donor funds are not enough to sustain the organisation which requires

mobilization for additional funds from elsewhere and it involves transportation.

Alice wants to show the donor that transport is a vital activity for the

organisation's existence before submitting the 2018/19 budget. She feels that by

using a quantitative model, her reasons can easily be justified to the Donor.

The following data relates to transport costs for the year 2017/18:

Month Cost Additional victims Additional funds

Shs '000' Shs '000'

April 10,500 5 2,500

May 7,500 2 8,650

June 15,750 12 6,320

July 12,840 6 3,255

August 5,420 550

September 7,600 1 9,800

October 9,650 15 12,500

November 13,445 4 5,230

December 11,340 9 1,250

January 8,160 3 4,165

February 6,230 235

March 3,235 1 75

The Donor has assigned you to engage Ms Alice Mubali on the quantitative

model.

Required:

(a) Derive a regression equation of the line between transport costs and

additional victims.

(5 marks)

(b) Using coefficient of determination, advise the Executive Secretary on the

effect of transport costs on:

(i) additional victims. (2 marks)

(ii) additional funds. (5 marks)

(c) Using standard error of coefficient, advise the Executive Secretary on the

relationship between transport costs and: Using standard error of

coefficient, advise the Executive Secretary on the relationship between

transport costs and:

(i) additional victims. (2 marks)

(ii) additional funds. (2 marks)

(d) Evaluate the results from parts

(b) and

(c) above and advise the Executive

Secretary on what should be done for transport costs in the 2018/19

budget.

Question 5

Bright Limba is a retired civil servant that has three wholesale business centre in

the municipalities of Kabale (K), Gulu (G) and Fort Portal (F). He trades in maize

grain, irish potatoes and groundnuts which are supplied to various customers.

The following linear programming (LP) model was developed using his business

data to establish the optimal number of customers per business center.

Maximize profits (Z) 15K + 20G + 14F (in million shillings)

Subject to the constraints:

Maize grain 5K + 6G + 4F 210 (in thousand sacks)

Irish potatoes 10K + 8G + 5F 200 (in thousand sacks)

G-nuts 4K + 2G + 5F 170 (in thousand sacks)

Non-negativity K, G, F 0

The following final simplex tableau was derived from the above LP model:

Solution variable Business centres Slack variables Solution quantity

K G F S1 S2 S3

S1 -2

3

/5 0 0 1 -

11/15 -

1

/15 52

G 1 1 0 0

1

/6 -

1

/6 5

F

2

/5 0 1 0 -

1

/15 4

/15 32

Z -103

/5 0 0 0 -2

2

/5 -

2

/5 -548

Where,

S1, S2, and S3 are slack variables to the constraints of maize grain, Irish

potatoes and g-nuts respectively.

K, G, and F are number of customers in the municipalities of Kabale, Gulu and

Fort Portal respectively.

Required:

(a) Interpret the final tableau above.

(8 marks)

(b) Advise Bright Limba, the effect of an additional sack of groundnuts on

business profitability.

(4 marks)

(c) Discuss uses of linear programming to business enterprises.

(8 marks)