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A newly formed engineering company has just completed its first three months of trading. The company manufactures only one type of product. The external accountant for the company has produced the following statement to present at a meeting to review performance for the first quarter. Performance report for the quarter ending 31 October 2012 Budget Actual Variance Sales units 12,000 13,000 1,000 Production units 14,000 13,500 (500) $000 $000 $000 $000 $000 Sales 360 385 25 Direct materials 70 69 1 Direct labour 140 132 8 Variable production overhead 42 43 (1) Fixed production overhead 84 85 (1) Inventory adjustment (48) (12) (36) Cost of sales 288 317 (29) Gross profit 72 68 (4) The external accountant has stated that he values inventory at the budgeted total production cost per unit. Required: (a) Produce an amended statement for the quarter ending 31 October 2012 that is based on a flexed budget. (6 marks) (b) Explain ONE benefit and ONE limitation of the statement you have produced. (4 marks) (Total for Question Two = 10 marks) Section A continues on the next page TURN OVER Performance Management 4 November 2012 Question Three KL is a transport company that has recently won a five-year government contract to provide rail transport services. The company appointed a new Director to take responsibility for the government contract. She has worked in various positions in other rail transport companies for a number of years. She has put together a team of managers by recruiting some of her former colleagues and some of KL's current managers. The contract stipulates that the company should prepare detailed budgets for its first year of operations to show how it intends to meet the various operating targets that are stated in the contract. The new Director is undecided about whether she should prepare the budgets herself or whether she should involve her management team, including the newly recruited managers, in the process. Required: Produce a report, addressed to the new Director, that discusses participative budgeting. Note: your report must explain TWO potential benefits and TWO potential disadvantages of involving the new and existing managers in the budget setting process. provide a recommendation to the new Director. November 2012 5 Performance Management (10 marks) (Total for Question Three = 10 marks) Question Four A manufacturing company is reviewing its progress towards meeting its objective of having a reputation for producing high quality products. Extracts from the company's records for each of the years ended 30 September 2011 and 2012 are shown below. 2012 2011 % of units rejected by customers 12% 20% % of units rejected before delivery 12% 3% Costs as % of revenue Raw material inspection 8% 3% Direct material 18% 20% Direct labour 13% 12% Training 8% 4% Preventative machine maintenance 8% 2% Machine breakdown maintenance 5% 10% Finished goods inspection 7% 1% Required: (a) Explain each of the four quality cost classifications using examples from the above data. (4 marks) (b) Discuss, using the above data, the relationship between conformance costs and non-conformance costs and its importance for this company. (6 marks) (Total for Question Four = 10 marks) Section A continues on the next page TURN OVER Performance Management 6 November 2012 Question Five CDE has recently won a contract to supply a component to a major car manufacturer that is about to launch a new range of vehicles. This is a great success for the design team of CDE as the component has many unique features and will be an important feature of some of the vehicles in the range. CDE is currently building a specialised factory to produce the component. The factory will start production on 1 January 2013. There is an expected demand for 140,000 units of the component in 2013. Forecast sales and production costs for 2013: Quarter 1 2 3 4 Sales (units) 19,000 34,000 37,000 50,000 $ $ $ $ Variable production cost per unit 60 60 65 70 Fixed production overheads for the factory are expected to be $2.8 million in 2013. A decision has to be made about the production plan. The choices are: Plan 1: Produce at a constant rate of 35,000 units per quarter Inventory would be used to cover fluctuations in quarterly demand. Inventory holding costs will be $13 per unit and will be incurred quarterly based on the average inventory held in each of the four quarters. Plan 2: Use a just-in-time (JIT) production system The factory would be able to produce 36,000 units per quarter in 'normal' time and up to a further 20,000 units in 'overtime'. However, each unit produced in 'overtime' would incur additional costs equal to 40% of the forecast variable production cost per unit for that quarter. Required: (a) Produce calculations using the above data to show which of the two plans would incur the lowest total cost in 2013. (6 marks) (b) Explain TWO reasons why the decision about the production plan should not be based on your answer to part (a) alone. (4 marks) (Total for Question Five = 10 marks) (Total for Section A = 50 marks) End of Section A Section B starts on page 8 November 2012 7 Performance Management This page is blank TURN OVER Performance Management 8 November 2012 SECTION B - 50 MARKS [You are advised to spend no longer than 45 minutes on each question in this section.] ANSWER BOTH QUESTIONS IN THIS SECTION. EACH QUESTION IS WORTH 25 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKS ARE AVAILABLE FOR THE METHOD YOU USE. Question Six Scenario for parts (a) and (b) Company WX manufactures a number of finished products and two components. Three finished products (P1, P2, and P3) and two components (C1 and C2) are made using the same resources (but in different quantities). The components are used internally by the company when producing other products but they are not used in the manufacture of P1, P2 or P3. Budgeted data for December for P1, P2, P3, C1 and C2 are as follows: P1 P2 P3 C1 C2 Units demanded 500 400 600 250 150 $/unit $/unit $/unit $/unit $/unit Selling price 155 125 175 - - Direct labour ($10/hour) 25 15 30 10 15 Direct material ($50/kg) 10 20 20 5 10 Variable production overhead ($40/machine hour) 10 15 20 10 20 Fixed production overhead ($20/labour hour) 50 30 60 20 30 Gross profit 60 45 45 - Further information for December: Direct labour: 4,300 hours are available. Direct material: 420 kgs are available. Machine hours: no restrictions apply. Components: C1 and C2 are readily available from external suppliers for $50 and $80 per unit respectively. The external suppliers are reliable and the quality of the components is similar to that of those manufactured by the company. Required: (a) Produce calculations to determine the optimal production plan for P1, P2, P3, C1 and C2 during December. Note: it is not possible to produce partly finished units or to hold inventory of any of these products or components. (10 marks) November 2012 9 Performance Management (b) There is a possibility that more of the direct material may become available during December. The shadow price per kg of the direct material has been calculated to be $200, $187.50 and $175 depending on how much extra becomes available. Required: Explain the shadow prices of $200, $187.50 and $175 for the direct material. Your answer should show the changes to the resource usage and the production plan for each of the shadow prices. (6 marks) Scenario for parts (c) and (d) Company YZ manufactures products L, M and N. These products are always sold in the ratio 9L:6M:5N. The budgeted sales volume for December is a total of 14,000 units. The budgeted sales volumes, selling price per unit and variable cost per unit for each of the products are shown below: L M N Sales budget (units) 6,300 4,200 3,500 $ $ $ Selling price per unit 300 600 230 Variable cost per unit 100 300 50 The budgeted fixed costs of the company for December are $2.7 million. Required: (c) Calculate the number of units of each product that must be sold for Company YZ to break even in December given the current sales mix ratio. (4 marks) (d) The Sales Manager has now said that to be able to sell 6,300 units of product L in December it will be necessary to reduce the selling price of product L. Calculate the sensitivity of Company YZ's total budgeted profit for December to a change in the selling price per unit of product L. (5 marks) (Total for Question Six = 25 marks) Section B continues on the next page TURN OVER Performance Management 10 November 2012 Question Seven Scenario for part (a) The OB group has two divisions: the Optics Division and the Body Division. The Optics Division produces optical devices, including lenses for cameras. The lenses can be sold directly to external customers or they can be transferred to the Body Division where they are sold with a camera body as a complete camera. Optics Division The relationship between the selling price of a lens and the quantity demanded by external customers is such that at a price of $6,000 there will be no demand but demand will increase by 600 lenses for every $300 decrease in the price. The variable cost of producing a lens is $1,200. The fixed costs of the division are $12 million each year. The Optics Division has the capacity to satisfy the maximum possible demand if required. Body Division After the lens has been included with a body to make a complete camera the relationship between selling price and demand is such that at a price of $8,000 there will be no demand for the complete camera but demand will increase by 300 complete cameras for every $100 decrease in the price. The Body Division has annual fixed costs of $15 million and has the capacity to satisfy the maximum possible demand if required. The total variable costs of a camera body and packaging it with a lens are $1,750 (this does not include the cost of a lens). Note: If P = a - bx then Marginal Revenue (MR) will be given by MR = a - 2bx. Required: (a) Calculate the total revenue that would be generated by the complete cameras if: (i) the Manager of the Optics Division set the transfer price of a lens equal to the selling price which would be set to maximise profits from the sale of lenses to external customers; (ii) the transfer price of a lens was set to maximise the profits of the OB group from the sale of complete cameras. (10 marks) Scenario for parts (b) and (c) The FF group is a divisionalised company that specialises in the production of processed fish. Each division is a profit centre. The Smoke Division (SD) produces smoked fish. The Packaging Division (PD) manufactures boxes for packaging products. Smoke Division (SD) The Manager of SD has just won a fixed price contract to supply 500,000 units of smoked fish to a chain of supermarkets. This will fully utilise the capacity of SD for the next year. Budget details for the next year are: Variable cost per unit $12.00 (excluding the box) Fixed costs $6.0 million Revenue $13.5 million Output 500,000 units of smoked fish Each unit of smoked fish requires one box. November 2012 11 Performance Management Packaging Division (PD) The Packaging Division has agreed to supply 500,000 boxes to Determine the direction of the hypothesis test (one-sided left, one-sided right, bidirectional) Determine the test statistic (z* or t*) and the p-value for each of the following situations and Determine if they would cause the rejection of the null hypothesis if the confidence level was set at 95% in each case. (Hint: be wary of the sample size) [2 points each]: a) Ho: = 50 mL, Ha: 50 mL, sample mean = 48.1 mL, sample standard deviation = 5, n = 40 b) Ho: 8.4 m3, Ha: > 8.4 m3, sample mean = 10 m3, s = 3.5, n = 25 c) Ho: 20oC, Ha: 46 units, sample mean = 50 units, s = 9.5, n = 41 \fDiet 1 Diet 2 Female tail length after 6 weeks Female tail length after 6 (in mm) weeks (in mm) 102 96 101 99 97 104 99 96 103 101 103 102 99 97 100 98 100 99 103 105 100 102 103 102 97 101 100 100 97 100 104 100 99 101 98 98 97 104 98 97 100 103 96 103 101 102 100 97 97 100 100 102 99 101 99 104 97 97 99 102 103 99