When Shapes Fitness Club was filing for bankruptcy, Star Fitness Club was expanding to more than 900 clubs in Pakistan with 400,000 members. The secret to Star Fitness' success is its "no frills" approach to exercise. Each club typically has five treadmills, two stationary bikes, five elliptical machines, and weight equipment while bypassing amenities such as on-site child care, juice bars, and showers. Each club is usually staffed only 25-40 hours per week and it charges a membership fee of Rs.35 per month.

To open a new Star Fitness location, each franchise owner has an initial capital outlay of Rs.120, 000 for various types of equipment and a one-time licensing fee of Rs.15, 000. The franchisee also pays Star (the parent company) a royalty fee of Rs.400 per month plus Rs.0.50 for each membership. Star also collects one-time fees of Rs. 5 for each new member's "billing

setup" and Rs. 5 for each security card issued. If a new club attracts 275 members, it can break even in as little as three months.

Required: Marks 10

1.Can you estimate the underlying calculations related to this break-even point?

2.How these underlying calculations may benefit the company to pay more attention to the operations of the business and strategies to introduce more innovative and high earning product/services and that could also surpass the present 400,000 memberships to 600,000 memberships in the coming year. Your analysis must be supported by valid arguments and necessary computations.

Q2.

Companies at times find very difficult to prepare the planning budgets due to the intra- departmental conflicts like marketing head usually presses hard sales team for more sales with lesser cost but sales team had its own objective in mind for setting the budget targets, However, Al- Hilal Company prepared its estimates amid confusion and provided the following information to help prepare the master budget for its first four months of operations:

a.The budgeted selling price per unit is Rs.70. Budgeted unit sales for June, July, August, and

September are 8,400, 10,000, 12,000, and 13,000 units, respectively. All sales are on credit. Forty percent of credit sales are collected in the month of the sale and 60% in the following month.

b.The ending finished goods inventory equals 20% of the following month's unit sales.

c.The ending raw materials inventory equals 10% of the following month's raw materials production needs.

d.Each unit of finished goods requires 5 pounds of raw materials. The raw materials cost Rs. 2.00 per pound.

e.Thirty percent of raw materials purchases are paid for in the month of purchase and 70% in the following month.

f.The direct labor wage rate is Rs.15 per hour. Each unit of finished goods requires two direct labor-hours.

g.The variable selling and administrative expense per unit sold is Rs.1.80.

h.The fixed selling and administrative expense per month is Rs.60,000.

Required: Marks 10

1.From the above company's budgeted related information, do you think company will have some projected profit and how much may it be? If not so, then what would you suggest to make changes in the budgetary estimates?

2.Can you suggest some measures to the management to get rid of the intra departmental or inter departmental conflicts while setting the departmental budgetary targets in terms of revenue and expenses?

Q3.

You have just been appointed vice president of the North Region of the Bank Services Corporation (BSC). The company provides check processing services for small banks. The banks send checks presented for deposit or payment to BSC, which records the data on each check in a computerized database. BSC then sends the data electronically to the nearest Central Bank check-clearing center where the appropriate transfers of funds are made between banks. The North Region has three check processing centers, which are located in A, B, and C areas of the region. Prior to your promotion to vice president, you had been the manager of a check processing center in Central Region. Immediately after assuming your new position, you requested a complete financial report for the just-ended fiscal year from the region's controller. You specified that the financial report should follow the standardized format required by the headquarters for all regional performance reports. That report follows:

Bank Services Corporation (BSC)

North Region

Financial Performance

Check Processing Centers

Total

A

B

C

Rs. In million

Sales

50

20

18

12

Operating expenses:

Direct labor

32

12.5

11

8.5

Variable overhead

0.85

0.35

0.31

0.19

Equipment depreciation

3.9

1.3

1.4

1.2

Facility expense

2.8

0.9

0.8

1.1

Local administrative expense*

0.45

0.14

0.16

0.15

Regional administrative expense

1.5

0.6

0.54

0.36

Corporate administrative expense

4.75

1.9

1.71

1.14

Total operating expense

46.25

17.69

15.92

12.64

Net operating income (loss)

3.75

2.31

2.08

(0.64)

Common allocated fixed cost: Local, regional and corporate administrative expenses.

Required: Marks 10

1. From the standpoint of the company as a whole, should the "C" processing center be shut down and its work redistributed to other processing centers in the region? Explain the situation in the context of information provided above.

2. Do you think your decision to shut down the "C" facility is ethical? Explain.

Q4.

Farooq Company manufactures one product that is sold for Rs. 80 per unit in two geographic regions- the East and West regions. The following information pertains to the company's first year of operations in which it produced 40,000 units and sold 35,000 units.

The company sold 25,000 units in the East region and 10,000 units in the West region. It determined that Rs. 250,000 of its fixed selling and administrative expenses is traceable to the West region, Rs.150,000 is traceable to the East region, and the remaining Rs.96,000 is a common fixed cost. The company will continue to incur the total amount of its fixed manufacturing overhead costs as long as it continues to produce any amount of its only product.

Required: Marks 10

1. What is the amount of the difference between the variable costing and absorption costing net operating incomes? What is the cause of this difference?

2. Farooq is considering eliminating the West region because an internally generated report suggests the region's total gross margin in the first year of operations was Rs.50,000 less than its traceable fixed selling and administrative expenses. Farooq believes that if it drops the West region, the East region's sales will grow by 5% in Year 2. Using the contribution approach

for analyzing segment profitability and assuming all else remains constant in Year 2, what would be the profit impact of dropping the West region in Year 2?