FACULTY OF ECONOMIC AND MANAGEMENT SCIENCES DEPARTMENT FINANCIAL MANAGEMENT

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1 FACULTY OF ECONOMIC AND MANAGEMENT SCIENCES DEPARTMENT FINANCIAL MANAGEMENT FINANCIAL MANAGEMENT 300 YEAR TEST 1 5 March 014 SUGGESTED SOLUTION INTERNAL F Blom J Visagie J De Wet EXTERNAL G J Plant 60 marks 105 minutes

2 Question 1 a: Calculation of relevant profit Relevant cost for special order (600 units) Marks Reason Marks Relevant cost Description per unit a. Patent cost R0.00 R0.00 Sunk cost. The cost has already been incurred and the special contract will not change it. a. Royalty cost R85.00 R Royalty costs are incurred per unit produced and are thus relevant. b. Metal conductor strip R45.00 R Variable cost incurred per unit produced. Current replacement cost is R45 per unit for the duration of the special order. c. Glass cover (R5 000 ( ) / 1000 ( )) R.50 R As the glass covers are required for the SKA contract and will be used by it the relevant cost is the replacement value of the glass covers. d. Anti-reflective coating: Maximum use: Contract commenced 1 June Dec 014 = 19 months thus square meters for SKA plus 600 square meters for special order. Will only use but square meters available before expiry. R5.00 R As the existing stock of the reflective coating exceeds the square meters required before it expires the relevant cost will be the lost sales amount once it has expired (Best alternative use). e. Metal bases: - Opportunity cost: R1 450 ( ) - R800 ( ) R R Opportunity cost: Riley's is currently making a contribution of R650 per metal base by selling the remaining stock to a competitor (Best alternative use). - Cost per base R R Variable cost: The current replacement cost per metal base. f. Need to be able to produce is 1 00 per month. Will thus need the extra space for per units per month: (R ( ) x 6 ( )) / 600 R R The rent is incremental fixed cost as the company requires additional space for the production of the special order solar panels.

3 g. Water and electricity R R Variable cost per unit produced h. Labour (R15 ( ) x 4 ( ) hours) R60.00 R Variable cost per unit produced i. Engineers 6 x 9 x 0 = ( ). Require 100. Will thus need 10 (6 x 0) or 1 ( ) additional engineer but employed for at least 6 months (6 ( )x R ( )) / 600 R R Engineers are fixed cost to the company. However the existing engineers do not have sufficient capacity to check all the units of the special order. Thus incremental fixed costs j. Additional packaging costs R10.00 R Incremental costs per unit - only incurred for the special order k. Management fees R0.00 R0.00 Irrelevant as it is fixed cost that will be incurred regardless of whether the special order is k. Mr Riley's salary R0.00 R0.00 undertaken or not R R Sales price per unit / for order R R Relevant cost per unit / for order R R Incremental profit per unit / for order R R Total marks 19.00

4 b. Qualitative factors Mr Riley will be appointing 1 extra engineer (fixed cost) for six months even though he will only be requiring his services for three months. The engineer s service could be used elsewhere in the company or could relieve existing engineers and allow them to take leave etc. as they are working at full capacity at the moment. If the special order causes a delay in terms of the SKA order there will be significant losses and a possible law suit against the company. As the company is increasing production by 0% per month this could happen especially as capacity and management will be stretched. The company will enter into a six month lease even-though it only requires the extra space for three months. If no-one is watching or managing the extra space it could be vandalised. The under-utilisation of the capacity is wasteful expenditure after the contract ends during the contract the additional space will also not be fully utilised. On the other hand the special order could lead to more orders if sales are good in which case the company will already have space to produce an extra 500 units per month. Taking the spare base plates away from the competitor could assist in the long-term to eradicate some competition. The company will sell and produce locally and will thus support local employment and production. Even though the order is only for 600 units it has significant potential due to future electricity constraints in South Africa. It could thus lead to many more ordered units. As the SKA order is only going to last three years it is a good time to explore alternative / sustainable markets that will utilise the production / labour of the company especially as the patent costs have already been paid. As solar panels produce environmentally friendly energy the company should ensure that their name is linked and advertised wherever possible as the current trend is to support environmentally friendly companies. Riley s should consider selling their solar panels directly to the public as Voltex will charge a mark-up on their price which will decrease total sales. Question Multiple Choice Questions Question 1 A December 013 R x 100/77 x 7% R January x R 000 x 30% x R % February x R 000 x 30% x R % x R 000 x 70% x R % Total R Question C (R R ) / ( ) R830 variable cost

5 R fixed cost x = R Question 3 D X 15 Y 5000 X 1 Y 8500 X 3 Y 9000 X 18 Y y = balls Question 4 B (Calculation - refer to Question 4) r = r = ( ) x 100 = 8.5% Questions 5 E Learning curve = ( ) / = / 10 = 9% 450 balls / 10 per batch = 45 batches 45 batches / 5 teams = 9 batches per team log(9)/log() log(1)/log() = = average after / 10 Average after = x 9 batches = per team x 5 teams = hours Question 6 A Batting glove Wicket keeper glove Labour per unit 115/1500 = 0.75h 115/115 = 1h Machine per unit 500/1000 = 0.5h 500/150 = 0.4h 0.75Y + 1X = Y + 0.4X = 500 X = Y = 50

6 Question 3 5 Marks (a) Calculate variances for January Marks Budget Actual Difference Mark Standard Suite Number of guests (10 x 65% x 10 x ) Average actual rate per guest ( / 155) Average catering cost per guest / 175 Average guest utilities cost per guest / 175 Contribution per guest Standard mix (130/16) Actual guests in budgeted quantities x ( ) Master suite Number of guests (10 x 40% x 4 x ) Average rate per guest ( / 0) Average catering cost per guest Average guest utilities cost per guest Contribution per guest Standard mix (3/16) Actual guests in budgeted quantities x ( ) Sales price variance -3, Standard suite [155 x (R R7 500)] Unfavourabl e -3, Master suite [0 x (R R10 500)] - Sales mix variance -1, Standard suite [( )x R8 300] Favourable 10, Master suite [( )x R9 800] Unfavourabl e -14, Sales quantity variance 111, Standard suite [( )x R8 300] Favourable 86,

7 Master suite [( )x R9 800] Favourable 5, Total variance -14, Fuel price variance Unfavourabl e -5, (8448 litres x (R ) Budgeted translated cost per litre (7P x 1.16) Actual translated cost per litre (R / 8 448) Option (budget not flexed) Fuel consumption variances Favourable 9,354.4 (or marks) ( ) x 8.1 Budgeted fuel per cruise (4 engines x 4hrs x 10litres ) Budgeted fuel (litres) 9600 (4 engines x 4hrs x 10litres x 10 cruises) Saving due to two cancelled cruises Favourable 15, [(10-8) x 960 x R8.1 Saving due to less usage of engines Favourable 5, (4 hrs - hrs) x 4 engines x 8 cruises x 10litres x R8.1 Saving due to more / less economical use of engines [(8448 litres - (8 x 10litres x hrs x 4engines)] x R8.1 Unfavourabl e -11, (b) Memorandum to the CEO of African Indulgence (Pty) Ltd To: CEO of African Indulgence (Pty) Ltd From: FBS consultant Date: 5 March 014 Subject: The financial performance of the Chobe Princess Segment Dear Sir / Madam Regarding your request for a detailed analysis of the performance of the Chobe Princess Segment, please find attached to this Memorandum, my findings from the analysis:

8 Attachment A: The financial impact of the pricing decisions regarding the Standard Suites and Master suites during January 014 Decrease in standard suite rates increased standard suite guest numbers by 5, but the increased contribution due to increased guest volumes of R (R R86 586) was not sufficient to offset the loss in revenue of R There was also a decrease in revenue from guests opting for Master suite accommodation due to Master suite guest volumes decreasing from a budgeted number of 3 guests to 0 guests. This resulted in a decrease in contribution of R (R R5 165) Identification of other factors that resulted in the actual contribution per guest deviating from the actual contribution per guest in January 014 The contribution from both Master suite and Standard suite guests was also R6 15 a lower than budget due to increased prices paid for these variable costs. The increase in cost can be ascribed to the depreciation of the Rand against the Pula. The Rand depreciated by 5% [( ) / 1.16] and this percentage increase can also be seen in the costs of catering [( ) / 600] and guest utilities [( )/100] The contribution from beverage sales increased by R b due to increased guest volumes and an increase in the average beverage revenue of R80 per guest. The cost of beverages remained unchanged during the month, indicating that the depreciation of the Rand was offset by savings incurred when the beverage inventory was purchased. The financial impact of the two cruises that were cancelled during January 014 No guest accommodation revenue was lost due to the cancellation of two cruises as these guests were accommodated on other cruises during the same month. Average guest occupation rates increased from the budgeted percentage of 65% for standard suite guests to 97% [155 / (10 rooms x x 8 cruises)]. This increase in occupation rate can largely be attributed to the reduction in the number of cruises, since the recalculated actual guest occupation rate would have been 77.5% [155 / (10 rooms x x 10 cruises)] if the number of cruises had not decreased during the month. The actual Master suite guest occupation rate was 31% [0 / (4 rooms x x 8 cruises)], which is significantly lower than the budgeted rate of 40%. The reduction in the number of cruises did lead to savings in fuel costs of R as well as a saving in other direct operational expenses of R ( cruises x R30 000) as these costs are variable with regards to the number of cruises taken during the month. Available Marks Maximum Marks 1 6

9 Communication skills presentation and lay-out 1 If you have any further queries, please contact me at XXX XXX XXXX. Yours sincerely FBS Consultant Supporting calculations a) Catering price variance [175 x ( )] 5,50.00 Guest utilities price variance [175 x ( )] Total variance - unfavourable R6 15 b) Beverage sales price variance 175 x ( ) 14, Beverage sales volume variance [( ) x (175-16)] 3, Total variance - favourable R17 900