Semi-skilled labour 1,256 hours at a total cost of Shs. 1,281,200. The management of Swaff Marine Ltd. is concerned about the cost variances and would like to learn more on the composition of the variances. Required: Calculate the standard labour cost of the month of October 2005. (3 marks) () Reconcile the standard cost with the actual cost for the month of October 2005 showing the labour rate and labour efficiency variances. (5 marks) Express the labour efficiency variance in terms of labour mix and labour output variances. (Value the labour mix variances using standard rates). marks) (8 NB: The value of b in the formula for the learning curve is -0.322 for an 80% learning rate and -0.152 for a 90% learning rate. (Total: 20 marks) The manager of division B suggests that based on the above results, a transfer price of Shs. 120 would offer division A a reasonable contribution towards its fixed cost and earn division B a reasonable profit. This would lead to an increase in the output and overall profitability of the company. Required: (a) Calculate the effect of the existing transfer pricing system on the company's profits. (12 marks) (b) Calculate the effect of adopting the transfer price of Shs. 120 on the company's profits. marks) (8 (NB: use the results of the Sales Director's survey in your calculations). NUMBER THREE (a) Explain the applications of the learning curve. (Total: 20 marks) (4 marks) (b) Swaff Marine Ltd., a boat construction company, has developed a new type of speed boat called "Speed Surf." The following information has been availed to you: 1. Boat construction is a continuous assembling process carried out at the company's yard. 2. Boat assembling is labour intensive involving the use of two classes of labour namely: Skilled labour at a standard rate of Shs. 1,250 per hour. Semi-skilled labour at a standard rate of Shs. 950 per hour. 3. Experience on boat construction from other models indicates that the use of skilled labour is associated with an 80% learning curve effect whereas use of semi-skilled labour is associated with a 90% learning curve effect. 4. Labour usage for the first speed boat assembled was as follows: Skilled labour-952 hours. Semi-skilled labour - 650 hours. 5. In October 2005, the sixth and the seventh speed boats were assembled from start to finish. During the month, the following labour usage and costs were recorded: Skilled labour-680 hours at a total cost of Shs. 800,400. Variable manufacturing overheads Fixed manufacturing overheads 20 40 Selling and packaging expenses 10 (variable) 150 Annually, 10,000 units of product X are sold externally at a price of Shs. 300 per unit and 5,000 units are transferred to division B at an internal transfer price of Shs. 290 arrive at by deducting the selling and packaging expense from the external price of Shs. 300 which is not incurred for products transferred internally. The unit production cost for product Y which uses product X as an input is given below: Shs. Cost of internally transferred products from division A to 290 division B Direct material Direct labour Variable overheads Fixed overheads Selling and packaging expenses (variable) 230 30 120 120 10 800 The manager of division B has disagreed with the basis used in arriving at the transfer price. He argues that the transfer price should be arrived at by charging the variable cost plus an agreed mark-up. He also claims that division A would not be in a position to externally sell the extra units that are transferred to division B at the price of Shs. 300. A survey on the relationship between the selling price and demand for each division was carried out by the company's Sales Director. The results are shown in the table below: Division A Selling price (Shs.) 200 300 400 Demand (units) 15,000 10,000 5,000 Division B Selling price (Shs.) 800 900 1,000 Demand (units) 7,200 5,000 2,800 2,000 0.25 2,500 3,000 0.15 0.40 Required: Calculate the daily expected profit of the company. (5 marks) (ii) Simulate the company's profit for 10 days using the following random numbers: 58, 71, 96, 30, 24, 18, 46, 23, 34, 27, 85, 13, 99, 24, 44, 49, 18, 09, 79, 49, 74, 16, 32, 23, 02, 56, 88, 87, 59, 41, 06 marks) (8 (b) Trienen Manufacturers Ltd. produces component X on machine Y at a rate of 4,000 units per month. Machine Z uses component X at the rate of 1,000 units per month, the remainder being put into stock. It costs Shs. 2,000 to set up machine Y while the stock holding cost is estimated at Shs. 2.50 per unit per annum plus a 20% opportunity cost of capital per annum. Each component costs Shs. 25 to produce. Required: Compute the optimal batch size that should be produced using machine Y. (3 marks) Assume that the actual set-up cost of machine Y is Shs. 1,000 instead of Shs. 2,000. Calculate the cost of prediction error. (4 marks) (Total: 20 marks) NUMBER TWO Ditox Ltd. is a manufacturing company with two divisions; A and B. Division A manufactures a single standard product X, some of which is sold externally and the remainder used as an input in division B in the manufacture of product Y. The unit production costs of product K are given below: Direct material Direct labour Direct expense Shs. 40 20 188 20 NUMBER ONE (a) Marwyck Ltd. produces a designer perfume called "Hint of Elegance." Production of the perfume involves the use of two ingredients, X, and X, represented by the production function given below: Y = x,x, Where Y x = Number of bottles of designer perfume produced. Units of ingredient 1. Units of ingredient 2. Currently, the company is operating at a level where the daily usage of X, and X, is set at 250 units and 360 units respectively. The price of the designer perfume and the cost of ingredients X, and X2 are random variables. The data below relate to the three random variables. Selling price of Y (per Probabilities bottle) Shs. 4,000 0.15 4,500 0.35 5,000 0.20 5,500 0.30 Cost of ingredient X, Probabilities Shs. 1,000 0.10 1,500 0.05 2,000 0.35 2,500 0.50 Cost of ingredient X2 Probabilities Shs. 1,500 0.20