Question 1.(30 marks) The Burger Shack manufactures three types of burgens: lamb, beef and chicken. Each product uses similar quantities of direst materials, but different types. However, the same type of direct labour but in different quantities. For many years, the company has been using traditional costing and absorbing overheads on the basis of direct labour hours. Selling prices are then determined asing cost plus pricing. Management is now contemplating an alhemative costing system to the one currently used. The activity based costing system was proposed by the entity's new management consultant. Budgeted prodaction and sales volumes tor lamb, beet and chacken for the next year are 20,000 units, 16.000 units and 22.000 units respectively. The bedgeted direct costs of the three products are shown below: The Burger Shack also expects to incur indirect production costs of 51,377,400 for the upeoming year which are analyaed as follows: The following additional data is related to each product: The Burger Shack wants to boost sales, profitability, return on investment and enhance its core competencies. In its quest to increase profitk, the finance dirctor has agreed to the method suggested by the management consultant, who bad carlicr saggested the activity based costing (ABC) instead of traditional costing, since this will alter the cost of the products and may therefore enable a different price to be charged Required: (a) Calculate the budgeted full production cost per umit of each burger using the Burger Shack"s curreat method of absorption costing. All workings should be to two decimal places. (6marks) (b) Calculate the budgeted full production cost per unit of each burger using Activiry Based Costing (ABC). All workings should be to two decimal places. (18 marks) (c) Discuss the impact on the selling prices and the sales volumes OF EACH BURGER which a change to activity based costing would be expected to bring about. (6 marks) Qucstion 2 (35 marks) Crary Jim Limited (CJL) manufactures and sells various frozen novelties to customers island-wide since 1975. Currently the entity manufactures ice cream, ice cream cakes, fudges, and a wide variety of other frozen novelties. However, management wants to purchase a new machine that is expected to manufacture 150,000 super duper sandwiches in the first year, after which production is expected to inerease by 10,000 units annually. The super dupers are considered an alternative to fudges and are expected to decrease fudge sales by 50,000 units annually. Each fudge yields a contribution margin of $60 per usit. While, each super-duper is expected to be sold for $300 and incur variable cost of $100 each. To produce the super dupers, the company expects to incur additional fixed costs of $10,000,000 annually. The fixed cost wall not be incurred if the super dupers are not manufactured by Crary Jim Limited. The project is expected to last for only four years. The machine is expected to have a purchase price of Jamaica dollar equivalent $2,500,000 and expects to incur shipping. custom duty and installation of $500,000,$1,200,000 and $1,000,000. The machise is to be bought in West Virgitia, USA. Management thinks the machine will have an expected useful life of four years, after which it can realize a serap value of $200,000. The machine is to be depreciated on a straight line basis based on the company's accounting policy. Additionally, the policy depicts that depreciation is to be charged on all assets in the year of disposal. The entity evaluates all projects using the WACC. All projects consist of 40% leverage with the remainder as equity. To finance the project, the entity floated a bond that has a yield of 12% which is twice the risk free rate of interest. Meanwhile, an average shareholder in the market requires a retum of 18%. The stock's beta is currently 1.50 . The entity's marginal tax rate is 25% All cash flows occur at the end of each year and depreciation is an allowable deduction for income tax purposes. Required: (3) Compute the weighted average cost of eapital. ( 5 marks) (b) As a financial consultant, write a memorandum to the Crazy Jim's CEO advising of the viability of the project. Your analysis should include the following: conputation of the NPV, ARR and payback period. Additionally, the analysis should briefly ontline what these three techniques are, as well as two advantages and two disadvantages of each. ( 30 marks) Question 3 (35 marks) PART A - 10 marks Michacl Backhatus operates Pizm Delight at LOJ Shopping Centre in Montego Bay. A small pizma is sold to customers for $800 and cost $750 to prepare. The total cost to prepare includes direct materials as well as direct labour costs. Unsold pizas are dumped and costs cannot be recovered. Based on past experience, it is expected that the entity operates a 250-day year and the entity will require the following daily quantities of pizas: Required: (a) Prepare a payoff table which should include the probabilities. ( 8 marks) (b) Determine the maximax and the maximin. (2 marks) PART B -16 marks Jamaica Producer Company operates a farm in St Mary that has two operating divisions beaded by two separate managers that report on a decentralized basis to head office in Kingston. The manager of each farm is aceountable for all investments decisions and obtains fiunding for new investments based on the groups WACC. Hence head office typically judges' performance of managers based on division's ROl achieved each year. Required: Compute the following for each division for 2014 : (a) Retum on investment (ROI). ( 2 marks) (b) Residual income (RI) if the desired rate of return is 20 per cent. ( 5 marks) (c) Economic value added (EVA), if the desired rate of return is 20 per cent. (4 marks) (d) Comment on the results of each division using the measures of performance computed in requirements (a-c) above, bearing in mind Head Offices' performance evaluation method. ( 5 marks) Part C9 marks Bearings and Seals L.imited manufactures and sells part XXX123. The part has a selling price for $1,000 and costs $900 to be manufactured by the firm. The entity uses a marginal costing system. Therefore, lotal cost to make the part includes direct material and direct labour. The entify has bodgeted to sell 110,000 units. The actual sales were 100.000 units. The product is made from two different materials: iron and copper. The standard information relating to each units of Part XYZ123 are as follows: During the year ended of December 31, 2014, the entity produces 100,000 parts which used 1,150,000 kilograms of iron and 2,900,000 kilograms of copper Required: (a) Calculate the traditional sales volume variance. (2 marks) (b) Compute the material usage, mix and yield variances. (7 marks) Question 4 (25 marks) Stanley's Patties Limited has been baking beef patties since 1945. Stanley's Patties Limited bakes patties and other pastries, however, patties are its flagship product. The company uses throughput costing to evaluate its performance. Meanwhile, its main competitor, Butterflakes Bakery Limited employs a demand based pricing system for its products. Patties are the most profitable product it bakes which requires three labour hours per unit. Labour hours are limited due to shortage of skilled bakers. The shortage is attributed to the recent migration to the United States of America. Currently the company has 50 employees who work eight hours per day. The entity operates five days per week and fifty weeks per year. Each of Stanley's patties can be sold for $250 and requires baking flour, baking powder and beef which are the only direct materal. Each patty requires quarter kilogram of baking tlour, quarter kilogram of baking powder and quarter kilogram of beef. The average market prices are $120 per kilogram, \$40 per kilogram and $240 per kilogram for baking flour, baking powder and beef respectively. Stanley bakery has been using throughput costing since its inception, but the marketing manager has proposed demand based pricing method as a viable alternative. The total operating expenses are $400,000 per week. As mentioned previously, its competitor uses a demand-based pricing system. Butterflakes Bakery Limited (the competitor) has an annual fixed cost that is half of Stanlcy's annual operating costs. Additionally, its variable cost per units for each patty include direct material and direct labour. Each of Butterflakes's patties requires one hour of direct labour which is on average $30 per hour. While, patties require direct material of $120 per unit. Butterflakes Bakery sells a patty for $10 more than Stanley Patty and at this price, 100,000 units are sold annually. However, if it sells at Stanley's price, demand is expected to increase by 10.000 units. Required: (a) Outline the steps in the method proposed by the marketing manager (4 marks) (b) Calculate the throughput accounting ratio (TPAR) and advise management. ( 6 marks) (c) Calculate Butterflakes Bakery Limited optimal output, optimal price and prepare a marginal costing income statement depicting optimal profit. (15 marks) Question 1.(30 marks) The Burger Shack manufactures three types of burgens: lamb, beef and chicken. Each product uses similar quantities of direst materials, but different types. However, the same type of direct labour but in different quantities. For many years, the company has been using traditional costing and absorbing overheads on the basis of direct labour hours. Selling prices are then determined asing cost plus pricing. Management is now contemplating an alhemative costing system to the one currently used. The activity based costing system was proposed by the entity's new management consultant. Budgeted prodaction and sales volumes tor lamb, beet and chacken for the next year are 20,000 units, 16.000 units and 22.000 units respectively. The bedgeted direct costs of the three products are shown below: The Burger Shack also expects to incur indirect production costs of 51,377,400 for the upeoming year which are analyaed as follows: The following additional data is related to each product: The Burger Shack wants to boost sales, profitability, return on investment and enhance its core competencies. In its quest to increase profitk, the finance dirctor has agreed to the method suggested by the management consultant, who bad carlicr saggested the activity based costing (ABC) instead of traditional costing, since this will alter the cost of the products and may therefore enable a different price to be charged Required: (a) Calculate the budgeted full production cost per umit of each burger using the Burger Shack"s curreat method of absorption costing. All workings should be to two decimal places. (6marks) (b) Calculate the budgeted full production cost per unit of each burger using Activiry Based Costing (ABC). All workings should be to two decimal places. (18 marks) (c) Discuss the impact on the selling prices and the sales volumes OF EACH BURGER which a change to activity based costing would be expected to bring about. (6 marks) Qucstion 2 (35 marks) Crary Jim Limited (CJL) manufactures and sells various frozen novelties to customers island-wide since 1975. Currently the entity manufactures ice cream, ice cream cakes, fudges, and a wide variety of other frozen novelties. However, management wants to purchase a new machine that is expected to manufacture 150,000 super duper sandwiches in the first year, after which production is expected to inerease by 10,000 units annually. The super dupers are considered an alternative to fudges and are expected to decrease fudge sales by 50,000 units annually. Each fudge yields a contribution margin of $60 per usit. While, each super-duper is expected to be sold for $300 and incur variable cost of $100 each. To produce the super dupers, the company expects to incur additional fixed costs of $10,000,000 annually. The fixed cost wall not be incurred if the super dupers are not manufactured by Crary Jim Limited. The project is expected to last for only four years. The machine is expected to have a purchase price of Jamaica dollar equivalent $2,500,000 and expects to incur shipping. custom duty and installation of $500,000,$1,200,000 and $1,000,000. The machise is to be bought in West Virgitia, USA. Management thinks the machine will have an expected useful life of four years, after which it can realize a serap value of $200,000. The machine is to be depreciated on a straight line basis based on the company's accounting policy. Additionally, the policy depicts that depreciation is to be charged on all assets in the year of disposal. The entity evaluates all projects using the WACC. All projects consist of 40% leverage with the remainder as equity. To finance the project, the entity floated a bond that has a yield of 12% which is twice the risk free rate of interest. Meanwhile, an average shareholder in the market requires a retum of 18%. The stock's beta is currently 1.50 . The entity's marginal tax rate is 25% All cash flows occur at the end of each year and depreciation is an allowable deduction for income tax purposes. Required: (3) Compute the weighted average cost of eapital. ( 5 marks) (b) As a financial consultant, write a memorandum to the Crazy Jim's CEO advising of the viability of the project. Your analysis should include the following: conputation of the NPV, ARR and payback period. Additionally, the analysis should briefly ontline what these three techniques are, as well as two advantages and two disadvantages of each. ( 30 marks) Question 3 (35 marks) PART A - 10 marks Michacl Backhatus operates Pizm Delight at LOJ Shopping Centre in Montego Bay. A small pizma is sold to customers for $800 and cost $750 to prepare. The total cost to prepare includes direct materials as well as direct labour costs. Unsold pizas are dumped and costs cannot be recovered. Based on past experience, it is expected that the entity operates a 250-day year and the entity will require the following daily quantities of pizas: Required: (a) Prepare a payoff table which should include the probabilities. ( 8 marks) (b) Determine the maximax and the maximin. (2 marks) PART B -16 marks Jamaica Producer Company operates a farm in St Mary that has two operating divisions beaded by two separate managers that report on a decentralized basis to head office in Kingston. The manager of each farm is aceountable for all investments decisions and obtains fiunding for new investments based on the groups WACC. Hence head office typically judges' performance of managers based on division's ROl achieved each year. Required: Compute the following for each division for 2014 : (a) Retum on investment (ROI). ( 2 marks) (b) Residual income (RI) if the desired rate of return is 20 per cent. ( 5 marks) (c) Economic value added (EVA), if the desired rate of return is 20 per cent. (4 marks) (d) Comment on the results of each division using the measures of performance computed in requirements (a-c) above, bearing in mind Head Offices' performance evaluation method. ( 5 marks) Part C9 marks Bearings and Seals L.imited manufactures and sells part XXX123. The part has a selling price for $1,000 and costs $900 to be manufactured by the firm. The entity uses a marginal costing system. Therefore, lotal cost to make the part includes direct material and direct labour. The entify has bodgeted to sell 110,000 units. The actual sales were 100.000 units. The product is made from two different materials: iron and copper. The standard information relating to each units of Part XYZ123 are as follows: During the year ended of December 31, 2014, the entity produces 100,000 parts which used 1,150,000 kilograms of iron and 2,900,000 kilograms of copper Required: (a) Calculate the traditional sales volume variance. (2 marks) (b) Compute the material usage, mix and yield variances. (7 marks) Question 4 (25 marks) Stanley's Patties Limited has been baking beef patties since 1945. Stanley's Patties Limited bakes patties and other pastries, however, patties are its flagship product. The company uses throughput costing to evaluate its performance. Meanwhile, its main competitor, Butterflakes Bakery Limited employs a demand based pricing system for its products. Patties are the most profitable product it bakes which requires three labour hours per unit. Labour hours are limited due to shortage of skilled bakers. The shortage is attributed to the recent migration to the United States of America. Currently the company has 50 employees who work eight hours per day. The entity operates five days per week and fifty weeks per year. Each of Stanley's patties can be sold for $250 and requires baking flour, baking powder and beef which are the only direct materal. Each patty requires quarter kilogram of baking tlour, quarter kilogram of baking powder and quarter kilogram of beef. The average market prices are $120 per kilogram, \$40 per kilogram and $240 per kilogram for baking flour, baking powder and beef respectively. Stanley bakery has been using throughput costing since its inception, but the marketing manager has proposed demand based pricing method as a viable alternative. The total operating expenses are $400,000 per week. As mentioned previously, its competitor uses a demand-based pricing system. Butterflakes Bakery Limited (the competitor) has an annual fixed cost that is half of Stanlcy's annual operating costs. Additionally, its variable cost per units for each patty include direct material and direct labour. Each of Butterflakes's patties requires one hour of direct labour which is on average $30 per hour. While, patties require direct material of $120 per unit. Butterflakes Bakery sells a patty for $10 more than Stanley Patty and at this price, 100,000 units are sold annually. However, if it sells at Stanley's price, demand is expected to increase by 10.000 units. Required: (a) Outline the steps in the method proposed by the marketing manager (4 marks) (b) Calculate the throughput accounting ratio (TPAR) and advise management. ( 6 marks) (c) Calculate Butterflakes Bakery Limited optimal output, optimal price and prepare a marginal costing income statement depicting optimal profit. (15 marks)