Question 1

Seans Company produces sound systems for cars and sells them to automotive manufacturers for R1000 each. Full capacity is 20 000 systems per month, but it is currently producing 18 000 systems per month for its regular customers. The company reports the following monthly results:

Per unit

Total

R

R

Revenue

100

1 800 000

Manufacturing costs:

Direct materials

Direct labour

Variable overhead

Fixed overhead

Selling expenses:

Variable

Fixed

25

10

22

3

19

2

450 000

180 000

396 000

54 000

342 000

36 000

Total costs

81

1 458 000

Operating income

19

342 000

Seans manager, Gayton Brookes, receives a call regarding a one-time special order. Toyota Automotive needs 2 000 systems and will pay R65 per system. Seans will incur no selling costs for the special order.

Required:

1.1 Should Brookes accept this one-time special order? How much would the operating income be if Seans did accept Toyotas order?

1.2 Toyotas manager calls again: Theyve run some new calculations, and they really need 2 500 systems at the same R65 price. It will have to be an all-or-nothing deal. Brookes thinks, Now theyre pushing it Toyotas order will displace some of the volume we sell to our regular customers who are a lot more profitable for us. Assuming that Seans regular customer relationships will not suffer due to a small one-time volume reduction, and based on financial considerations alone, what should Brookes do? Provide specific calculations and explain your reasoning.

1.3 Assuming that Seans regular customer relationships will not suffer due to a small one-time volume reduction, up to what volume is Seans better off supplying to Toyota at a selling price of R65?

Question 2

Key information for the Peoria Division (PD) of Barrington Industries for 2022 follows:

Revenues R15 000 000

Operating income R1 800 000

Total assets R10 000 000

PDs managers are evaluated and rewarded on the basis of ROI defined as operating income divided by total assets. Barrington Industries expects its divisions to increase ROI each year.

Next year, 2023, appears to be a difficult year for PD. PD had planned a new investment to improve quality but, in view of poor economic conditions, has postponed the investment. ROI for 2023 was certain to decrease if PD had made the investment.

Management is now considering ways to meets its target ROI of 20% for next year. It anticipates revenues to be steady at R15 000 000 in 2023.

Required:

2.1 Calculate PDs return on sales and ROI for 2022.

2.2

a. By how much would PD need to cut costs in 2023 to achieve a target ROI of 20%, assuming no change in total assets between 2022 and 2023?

b. By how much would PD need to decrease total assets in 2023 to achieve its target ROI of 20%, assuming no change in operating income between 2022 and 2023?

2.3 Calculate PDs RI in 2022 assuming a required return on investment of 15%.

2.4 PD wants to increase RI by 50% in 2023. Assuming it could cut costs by R45 000 in 2023, by how much would PD need to decrease total assets in 2023?

2.5 Barrington Industries is concerned that the focus on cost cutting, asset sales, and no new investments will have an adverse long-term impact on PDs customers. Yet, Barrington wants PD to meet its financial goals. What other measurements, if any, do you recommend that Barrington use? Explain briefly.

Question 3

Omnisport manufactures and sells sports equipment. It currently produces and sells 5 000 pairs (units) of in-line skates each year, operating at maximum machine capacity. Omnisports market research has revealed that it could sell 8 000 pairs of in-line skates annually. Calcott Inc., a nearby supplier, has offered to supply up to 6 000 pairs of in-line skates at a price of R75 per pair. However, Jack Petrone, Omnisports product manager, has noticed the current snowboarding craze and believes that Omnisport could sell up to 12 000 pairs (units) of snowboard bindings annually. Omnisports management accountant summarizes the available data:

Manufactured Inline Skates (pair)

Snowboard Bindings (pair)

Purchased Inline Skates (pair)

Selling price

R98

R60

R98

Cost per unit:

Purchase cost

Direct materials

Variable machine operating cost (R16 per machine hour)

Variable and fixed manufacturing overhead (allocation base: machine hours)

Variable marketing and administrative costs

R0

R20

R24

R18

R9

R0

R20

R8

R6

R8

R75

R0

R0

R0

R4

Fixed manufacturing overhead costs of R30 000 are not affected by the product-mix decision.

Fixed manufacturing overhead costs are allocated to products based on a machine-hour rate, which is calculated by dividing the total manufacturing overhead costs of R30 000 by machine-hour capacity.

Fixed marketing and administrative costs of R60 000 are not affected by the product-mix decision.

Required:

3.1 How many machine-hours does each pair of manufactured in-line skates need? How many machine-hours does each pair of snowboard bindings need? If Omnisport produces only 12 000 pairs of snowboard bindings, what would be the cost of unused manufacturing capacity?

3.2 Calculate the variable manufacturing overhead rate per machine-hour.

3.3 Calculate the contribution margin per unit for manufactured in-line skates, snowboard bindings, and purchased in-line skates. Calculate the contribution margin per machine-hour for the two manufactured products.

Question 4

The balanced scorecard approach aims to provide information to management to assist strategic policy formulation and achievement. It emphasizes the need to provide the user with a set of information which addresses all relevant areas of performance in an objective and unbiased fashion.

Required:

4.1 Discuss in general terms the main types of information which would be required by a manager to implement this approach to measuring performance.

Question 5

Bath Co. is a company specialising in the manufacture and sale of baths. Each bath consists of a main unit plus a set of bath fittings. The company is split into two divisions, A and B. Division A manufactures the bath and Division B manufactures sets of bath fittings. Currently, all of Division As sales are made externally. Division B, however, sells to Division A as well as to external customers. Both of the divisions are profit centres.

The following data are available for both divisions:

Division A

Current selling price of each bath

R450

Costs per bath:

Fittings from Division B

Other materials from external suppliers

Labour costs

R75

R200

R45

Annual fixed overheads

R7 440 000

Annual production and sales of baths (units)

80 000

Maximum annual market demand for baths (units)

80 000

Division B

Current external selling price per set of fittings

R80

Current price for sales to Division A

R75

Costs per set of fittings:

Materials

Labour costs

R5

R15

Annual fixed overheads

R4 400 000

Maximum annual production and sales of sets of fittings (units) (including internal and external sales)

200 000

Maximum annual external demand for sets of fittings (units)

180 000

Maximum annual internal demand for sets of fittings (units)

80 000

The transfer price charged by Division B to Division A was negotiated some years ago between the previous divisional managers, who have now both been replaced by new managers. Head office only allows Division A to purchase its fittings from Division B, although the new manager of Division A believes that he could obtain fittings of the same quality and appearance for R65 per set, if he were given autonomy to purchase from outside the company. Division B makes no cost savings from supplying internally to Division A rather than selling externally.

Required:

5.1 Under the current transfer pricing system, prepare a profit statement showing the profit for each of the divisions and for Bath Co. as a whole. Your sales and costs figures should be split into external sales and interdivisional transfers where appropriate.

5.2 Head Office is considering changing the transfer pricing policy to ensure maximization of company profits without demotivating either of the divisional managers. Division A will be given autonomy to buy from external suppliers and Division B to supply external customers in priority to supplying to Division A. Calculate the maximum profit that could be earned by Bath Co. if transfer pricing is optimized.

5.3 Discuss the issues of encouraging divisional managers to take decisions in the interests of the company as a whole, where transfer pricing is used. Provide a reasoned recommendation of a policy Bath Co. should adopt.