C: ESSAY QUESTION (30 marks) INSTRUCTION: Choose ONE (1) question only. QUESTION 1 a) Orion Bhd has the following information on cost and current production available: Materials Labor RM 100 per unit 60 per unit Direct expenses 20 per unit Administration expense 80,000 Selling and distribution expenses 100,000 Depreciation 10,000 Insurance 5,000 Additional information: 1. Administration expenses is 50% fixed 2. Selling and distribution expenses is 60% fixed 3. Current production makes up 50% from the whole activities are 1,000 units Required CL03 i. Draw up a flexible budget for production at 75% and 100% capacity on the basis of the data for a 50% activity mentioned above. [9 marks] ii. The typical budgetary control system in practice does not encourage goal congruence, contains budgetary slack, ignores the aspiration levels of participants and attempts to control operations by feedback when feedforward is likely to be more effective; in summary the typical budgetary control system is likely to have dysfunctional effects. Briefly explain each of the terms in bold italics. [6 marks] b) Cab Co owns and runs 350 taxis and had sales of RM10 million in the last year. Cab Co is considering introducing a new computerised taxi tracking system. The expected costs and benefits of the new computerised tracking system are as follows: 1. The system would cost RM2,100,000 to implement. 2. Depreciation would be provided at RM420,000 per annum. 3. RM75,000 has already been spent on staff training in order to evaluate the potential of the new system. Further training costs of RM425,000 would be required in the first year if the new system is implemented. 4. Sales are expected to rise to RM11 million in Year 1 if the new system is implemented, thereafter increasing by 5% per annum. If the new system is not implemented, sales would be expected to increase by RM200,000 per annum. 5. Despite increased sales, savings in vehicle running costs are expected as a result of the new system. These are estimated at 1% of total sales. 6. Six new members of staff would be recruited to manage the new system at a total cost of RM120,000 per annum. 7. Cab Co would have to take out a maintenance contract for the new system at a cost of RM75,000 per annum for five years. 8. Interest on money borrowed to finance the project would cost RM150,000 per annum. 9. Cab Co's cost of capital is 10% per annum. CL03 Required: i. State whether each of the following items are relevant or irrelevant cashflows for a net present value (NPV) evaluation of whether to introduce the computerised tracking system. a. Computerised tracking system investment of RM2,100,000; b. Depreciation of RM420,000 in each of the five years; c. Staff training costs of RM425,000; d. New staff total salary of RM120,000 per annum; c. Staff training costs of RM75,000; f. Interest cost of RM150,000 per annum [6 marks] ii. Calculate the following values if the computerised tracking system is implemented a. Incremental sales in Year 1; b. Savings in vehicle running costs in Year 1; c. Present value of the maintenance costs over the life of the contract (annuity factor for 5 years at 10% is 3.791) [6 marks] iii. Cab Co wishes to maximise the wealth of its shareholders. It has correctly calculated the following measures for the proposed computerised tracking system project: -The internal rate of return (IRR) is 14%, -The return on average capital employed (ROCE) is 20% and -The payback period is four years. Based on the information above, do you think it is worthwhile for Cab Co to take up the project? [3 marks]