Do question 1 and 2.

ACC211 Examination - January Semester 2014 Advanced Management Accounting Wednesday, 21 May 2014 10:00 am - 12:00 pm ____________________________________________________________________________________ Time allowed: 2 hours ____________________________________________________________________________________ INSTRUCTIONS TO STUDENTS: 1. This examination contains FOUR (4) questions and comprises FOUR (4) printed pages (including cover page). 2. You must answer ALL questions. 3. All answers must be written in the answer book. At the end of the examination Please ensure that you have written your examination number on each answer book used. Failure to do so will mean that your work cannot be identified. If you have used more than one answer book, please tie them together with the string provided. THE UNIVERSITY RESERVES THE RIGHT NOT TO MARK YOUR SCRIPT IF YOU FAIL TO FOLLOW THESE INSTRUCTIONS. ACC211 Copyright 2014 SIM University Examination - January Semester 2014 Page 1 of 4 Question 1 Kevino Ltd, a manufacturer, operates Divisions A and B. Each division produces a different type of product and the following are the past three year's data: Divisions Revenue A Operating Profit 1,875 2,160 1,161 255 219 207 20X1 20X2 20X3 Investment Revenue in $'000 4,575 1,950 4,800 2,250 4,800 960 B Operating Profit Investment 297 234 64 3,834 5,031 3,750 Required: (a) Compute the return on investment (ROI %) using the DuPont method of profitability analysis (the return on sales and investment turnover is required) for each division in each of the years and comment on the results of the two divisions. (12 marks) (b) Assuming the required rate of return of 3%, calculate the residual income for each division in each of the three years and comment on the results of the two divisions. (8 marks) (c) If the company wishes to close a division that has the lowest return on investment or lowest residual income, which division should Kevino Ltd close down? Discuss FOUR (4) factors that should be considered before closing any of the divisions. (5 marks) Question 2 Alpha Company is currently operating at 80% capacity and sells 20,000 units at a selling price of $7.80 per unit. The variable costs per unit are as follows: Direct materials $2 Direct labour $1.50 Variable manufacturing overheads $1.20 Variable selling and administration costs $0.30 The total fixed costs at the current capacity level are: Fixed manufacturing overheads $20,000 Fixed selling and administration costs $10,000. ACC211 Copyright 2014 SIM University Examination - January Semester 2014 Page 2 of 4 The company receives a one-time special order for the supply of 5,000 units at $6 per unit. (a) Should the company accept this special order at the special price of $6 per unit? Analyse and explain the reasons for accepting or not accepting this one-time special order after comparing your calculations on the financial effects of (i) the existing situation (without the special order); (ii) the special order alone; (iii) the existing situation with the special order. (12 marks) (b) Determine the minimum (floor) price of the special order in the short run. Should the company set the price at this minimum level? (3 marks) (c) If Alpha Company originally set prices using a cost-plus pricing policy, what is the mark up percentage? (3 marks) (d) Is the cost-plus pricing policy ideal for setting the prospective selling prices? Include in your answer the advantages and disadvantages of using the cost-plus pricing policy. (7 marks) Question 3 (a) Identify and explain the four perspectives of a balanced scorecard. (4 marks) (b) Develop a Balanced Scorecard of a company of your choice. Specify the type of company you choose, the products or services and the market it operates in. As a guide, the scorecard should include two strategic objectives and the related performance measures for each perspective. (16 marks) (c) List FIVE (5) possible problems of implementing a Balanced Scorecard in an organisation. (5 marks) ACC211 Copyright 2014 SIM University Examination - January Semester 2014 Page 3 of 4 Question 4 Edele Ltd, a wafer manufacturer, has two divisions, Division X and Division Y. Division X produces wafers, which are transferred to Division Y. The wafers are to be further processed by Division Y and sold to external customers at $270 per unit. Division X is currently producing at a full capacity of 20,000 units of wafers per year. Unlimited quantities of wafers can be purchased and sold on the external market at $150 per unit. Division X may also sell to the external market at the price of $150 per unit. The production costs per unit in the Divisions for the year are (in $): Direct materials Direct manufacturing labour Variable overheads Fixed overheads Total costs per unit Division X 27.00 25.50 36.00 24.00 112.50 Division Y 12.00 40.50 18.00 27.00 97.50 Required: (a) Calculate the operating profits for Divisions X and Y for the 20,000 units of wafers transferred under each of the following transfer-pricing methods: (i) 140% of variable costs (ii) 120% of full costs (iii) Market price (18 marks) (b) Edele Ltd pays bonuses to each of the Divisional managers, calculated as 5% of the Division's operating profit (if positive). If the managers were given the autonomy on pricing decisions, which of the three transfer-pricing methods will each of the Divisional managers likely to adopt and explain the reasons behind their selection. (2 marks) (c) If you were the CEO of Edele Ltd, which transfer pricing method listed in Question 4(a) would you recommend to the Divisional managers? Explain why. (5 marks) ----- END OF PAPER ----- ACC211 Copyright 2014 SIM University Examination - January Semester 2014 Page 4 of 4 A. ROI Du Pont Analysis Revenue Operating Profits Division 20X1 20X2 20X3 1875 2160 1161 A Investment 255 219 207 B ROI 4575 4800 4800 Revenue 5.57% 4.56% 4.31% Operating Profits 1950 2250 960 4.82% ROI Investment 297 234 64 3834 5031 3750 7.75% 4.65% 1.71% 4.70% Return on Investment = (Net income / Sales ) * ( Sales / Total investment ) or Net income / Total investment While calculating return on investment using Du Pont Analysis, net income is taken from the income statement and the total assets is taken from the balance sheet. This ratio tells about how efficiently company is using its asset base in order to generate sales. In comparsion to 20X1, 20X2 ,20X3, the performance of Division A and Division B is the bets i..e the Return on investment in Division A and Division B is highest i.e. 5.57% and 7.75%. If we compare, return on investment of Division A and Division B, it can be said that the performance of Disvsion A is better in comparison to Division B. B 20X1 20X2 20X3 Residual income Net operating income - (Required Rate of Return * Operating Assets) Division A B Residual income Residual income Revenue Operating Profits Investment Revenue Operating Profits Investment 117.75 181.98 1875 255 4575 1950 297 3834 75 83.07 2160 219 4800 2250 234 5031 63 -48.5 1161 207 4800 960 64 3750 85.25 72.18 Residual income is the net income that an investment can earn over its minimum required rate of return. If we compare, residual income of Division A and Division B, it can be said that the performance of Disvsion A is better in comparison to Division B. C Four factors which should be considered before making any decision of closing the division are: 1. Return on investment 2. Residual income 3. Net profit margin 4. Return on equity If we take the average of the performance of both the divsions in terms of residual income and return on investment, then it is clear that the performance of Division A is better than Division B, hence Division B should be closed down. Currently selling at 80% capacity 100% Capacity = 20000/.80 = 25000 20000 units 25000 Currently Selling Price 7.8 156000 Variable Cost Direct Material Direct Labour Variable manufacturing overheads Variable selling and administration costs 2 1.5 1.2 0.3 40000 30000 24000 6000 Total fixed costs at current capacity level Fixed manufacturing overheads Fixed Selling and administration costs Profit 20000 10000 26000 A. A. i. Existing Situation without special order The company is earning the profit of $26000 without special order, and will earn extra profit of $5000 if special order is accepted, So Company can accept the special order A. II. Special order alone If the company will sell only 5000 units of special order, then company will have to bear the burden of fixed costs also which will result into loss, hence in that case special order should not be accepted. A. III. Exisiting units with sepcial order will result into increase in the profit by $5000, hence it should be accepted. B. Minimum ( floor) price of the special order in the short run = Total Varaible Cost total Varaible Cost = $5, hence the company can set the price at this minimum level. C If Aplpha Company originally set prices using cost plus pricing policy, the mark up percentage is Total Cost = $130000 Sales = $156000 Mark up = $26000 Mark up Percentage on cost = $26000 / $130000 20% Yes, Cost plus pricing policy is ideal for setting the prospective selling prices. Advatanges of Cost plus pricing strategy Fair method Assured Profits Reduced uncertainity and risks Considers market factors Disadvantages Ignore demand Ignore Competition Arbitrary cost allocation Ignores Opportunity Cost