Question1

Buliisa Oilcom Limited (BOL), an oil company whose accounting date is 30 June, owns land in Uganda's Albertine region. BOL classifies this land according to the number of barrels that are expected to be obtained from the oil wells. The classes are the 500,000 barrel well, 200,000 barrel well, 50,000 barrel well and a dry well. BOL is currently faced with deciding whether to drill for oil, unconditionally lease the land or conditionally lease the land at a rate depending upon oil strike.

The cost of drilling a producing well is Shs 2.5 billion and a dry well is Shs 1.7 billion. For a producing well, the profit per barrel of oil is Shs 23,310 (after deductions of processing and all other costs except drilling costs).

Under the unconditional lease agreement, BOL receives Shs 45 million for the land whereas for the conditional lease agreement, BOL receives Shs 670 for each barrel of oil extracted if it is a 500,000 or 200,000 barrel oil strike and nothing otherwise.

The probability of striking a 500,000 barrel well is 0.10, probability of striking a 200,000 barrel well is 0.15 and the probability of striking a 50,000 barrel well is 0.25.

Also BOL runs a monthly magazine that gives details of the oil exploration in Uganda. It has commissioned an advertising campaign to launch the 2018/19 magazine. This will invalidate the previous price and demand relationship. The price of the 2018/19 magazine has been set at full cost plus a mark-up of 20% and 50,000 copies are expected to be sold at this price during the month of October. The management of BOL wishes to calculate the total profit for the second quarter from the 2018/19 magazine.

The following information is available:

1. BOL expects 90% of October customers to buy the 2018/19 magazine during November and afterwards retain 85% of the November customers.
2. As the magazine circulation increases, sales to additional new customers in November and December will be 20% and 30% of October and November sales respectively.

Fixed overhead costs are charged to magazines based on sales volume. Annual fixed overhead cost of Shs 18 billion is expected to be incurred in order to produce 12 million copies of the magazine during the year 2018/19.

4. The variable costs per 2018/19 Magazine include: Item Shs

Paper 830

Ink 1,200

Machine maintenance cost 220 Other variable costs 150

10% of the ink is wasted during printing.

Required:

(a)Prepare profit payoff table for BOL and advise on the best course of action it should take.

(12 marks)

(b)Explain the following decision rules and advise BOL on the best course of action to take under each rule:

(c)Distinguish between the following terms:

'(d)Price skimming' and 'penetration pricing'. 'Objective' and 'subjective' probabilities.

1. (i)Maximin.
2. (ii)Maximax.
3. (iii)Minimax.

(a)Prepare statement that shows the total profit for the second quarter of the 2018/19 Magazine.

(9 marks)

(b)Determine the percentage of new customers that need to purchase the2018/19 magazine for a second consecutive month in order to get a profit of Shs 100 million in the second quarter.

SECTION B

Question 2

Mbale Tourist Club (MTC) is a holiday complex serving both local and foreign guests. Guests are charged for accommodation, meals and tour guides. The present economic situation requires companies to have strict financial controls to generate profits. MTC has three divisions headed by managers where there is constant monitoring of costs. Division managers are always given annual budgets which are further broken down into months. Every end of the month division managers receive statements comparing actual costs against budget with variance highlights.

The following statement relates to the Restaurant division for the month ended 31 July, 2017:

Performance statement:

Item Actual

Budget 12,000 Shs '000' 25,200 2,400 3,000 9,000 2,250

Variance 1,950 Shs '000' (425) (390) 437.5 (1,500) (75)

13,950 Shs '000' 25,625 2,790 Utilities 2,562.5 Wages 10,500 Fixed overheads 2,325

Number of guests

Food expenses Sanitation expenses

The budget was prepared on basis of 30 days calendar month and fixed overheads were an apportionment of the annual fixed overheads.

MTC plans to expand its hotel and transport divisions because of the rapid growth in the tourism industry. Hotel and transport division managers have authority to plan for their revenues and costs. The transport division manager is allowed to buy vehicles when they are needed. The expansion of the hotel division will require an investment of Shs 150 million while the transport division requires Shs 375 million. This investment will bring additional profits of Shs 27 million from hotel division and Shs 75 million from the transport division.

The following are financial extracts of MTC's divisions for the year ended 30 June, 2017.

Particulars

Profits for the year Investments

Division Hotel Transport Shs '000' Shs '000' 75,550 68,950 500,000 300,000

Restaurant Shs '000' 32,540 175,000

Required:

(a)

1. (i)Explain how feed-forward control has been applied at MTC.
2. (2 marks)
3. (ii)Using flexible budgeting, evaluate the performance of the restaurant

manager.

(6 marks)

(b) (i) Distinguish between a profit centre and investment centre with examples from MTC.

(4 marks)

(ii) Assess the likely responses of divisional managers and advise MTC top management on whether it should approve the proposed investments using return on investment (ROI).

(8 marks) (Total 20 marks)

Question 3

Kamunye Uganda Limited (KUL) is a renowned car dealer and intends to deal in assembling of medium petrol engine cars and targets a 40% market share in Uganda and 20% for export.

KUL has enjoyed a successful 50 years of existence and wishes to celebrate this by assembling a modern double storied mini-bus model. The managing director (MD), in his inaugural project speech, said that the new model would be sold at Shs 40 million.

The following information is predicted for the forthcoming year due to expected inflation in the country and after conducting a customer research to find out what features will be desirable in the intended model. Based on the research and knowledge of competitors' products, the chief accountant has advised to price this model using a cost plus mark up of 20%.

Forecast direct costs per car: Shs '000'

Labour 17,893 Materials 16,800

Forecast annual overhead costs:

Shs '000'

Assembling costs (note 1) Transportation costs (note 2)

620,000 240,000

Note 1

Assembling a car of this model requires 8 hours and KUL has only 80,000 assembling hours per annum that are anticipated to be used in assembling other car models while working at full capacity.

Note 2

Some models of cars are delivered to showrooms using car transporters. 60% of the transportation costs relate to the number of deliveries made and the balance relates to distance covered. The car transporters forecast to make a total of 600 deliveries in the year and carry 15 cars per delivery at full capacity.

The annual distance covered by the transporter is expected to be 250,000 km and 20% of this is for the delivery of the new mini-bus model only. All the 1,500 new assembled mini-buses will be delivered in the same year using the car transporter.

Required:

1. (a)Advise management of KUL on whether they should go ahead and charge the MD's stated price for each double storied mini-bus model.
2. (12 marks)
3. (b)Discuss any two methods that can be used to set transfer prices at KUL.
4. (4 marks)
5. (c)Describe ways of solving conflicts that arise during the setting of transfer prices.
6. (4 marks) (Total 20 marks)

Question 4

Urejesho wa Kituo cha Africa is a civil society organisation based in Kampala. Their focus is on rehabilitating homosexuality victims in Africa. It is funded by the Republic of Ikeland (Donor) with its rehabilitation centre in Gayaza.

The organisation's executive secretary, Ms. Alice Mubali, has always found it hard to convince the donors about the huge amounts of money spent on transport. She argues that spending a lot on transport is due to travels made while looking for victims and additional funding across Africa. The Donor feels that such huge amounts of money should be spent on core activities like counseling, education, feeding and starting business enterprises to the victims which are currently constrained. However, Alice claims, without travelling, there will be no clients because homosexuality victims live under fear and hiding. At the same time, donor funds are not enough to sustain the organisation which requires mobilization for additional funds from elsewhere and it involves transportation.

Alice wants to show the donor that transport is a vital activity for the organisation's existence before submitting the 2018/19 budget. She feels that by using a quantitative model, her reasons can easily be justified to the Donor.

The following data relates to transport costs for the year 2017/18:

Month

April

May

June

July

August

September

October

November

December

January 8,160 3 February 6,230

March 3,235 1

Cost Additional Shs '000'

victims

Additional funds Shs '000'

2,500 8,650 6,320 3,255

550 9,800 12,500 5,230 1,250 4,165 235 75

10,500 5 7,500 2 15,750 12 12,840 6

5,420

7,600 1 9,650 15

13,445 4 11,340 9

The Donor has assigned you to engage Ms Alice Mubali on the quantitative model.

Required:

1. (a)Derive a regression equation of the line between transport costs and additional victims.
2. (5 marks)
3. (b)Using coefficient of determination, advise the Executive Secretary on the effect of transport costs on:
4. (i)additional victims. (2 marks)
5. (ii)additional funds. (5 marks)
6. (c)Using standard error of coefficient, advise the Executive Secretary on the relationship between transport costs and: Using standard error of coefficient, advise the Executive Secretary on the relationship between
7. transport costs and:
8. (i)additional victims. (2 marks)
9. (ii)additional funds. (2 marks)
10. (d)Evaluate the results from parts (b) and (c) above and advise the Executive Secretary on what should be done for transport costs in the 2018/19
11. budget.

Question 5

Bright Limba is a retired civil servant that has three wholesale business centre in the municipalities of Kabale (K), Gulu (G) and Fort Portal (F). He trades in maize grain, irish potatoes and groundnuts which are supplied to various customers. The following linear programming (LP) model was developed using his business data to establish the optimal number of customers per business center.

Maximize profits (Z) 15K + 20G + 14F (in million shillings) Subject to the constraints:

Maize grain Irish potatoes G-nuts Non-negativity

5K + 6G + 4F 210 (in thousand sacks) 10K + 8G + 5F 200 (in thousand sacks) 4K + 2G + 5F 170 (in thousand sacks) K, G, F 0

The following final simplex tableau was derived from the above LP model:

Where,

S1, S2, and S3 are slack variables to the constraints of maize grain, Irish potatoes and g-nuts respectively.

K, G, and F are number of customers in the municipalities of Kabale, Gulu and Fort Portal respectively.

Required:

(a) Interpret the final tableau above.

1. (b)Advise Bright Limba, the effect of an additional sack of groundnuts on business profitability.
2. (4 marks)
3. (c)Discuss uses of linear programming to business enterprises.
4. (8 marks)