namib I A U n IVERS I TY OF SCIEnCE AnD TECHnOLOGY

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1 namib I A U n IVERS I TY OF SCIEnCE AnD TECHnOLOGY FACULTY OF MANAGEMENT SCIENCES DEPARTMENT OF ACCOUNTING, ECONOMICS AND FINANCE QUALIFICATION: BACHELOR OF ACCOUNTING QUALIFICATION CODE: 07BAC LEVEL: 7 COURSE CODE: GMA711s COURSE NAME: MANAGEMENT ACCOUNTING 310 SESSION: JUNE 2016 PAPER: THEORY AND CALCULATIONS DURATION: 3 HOURS MARKS: 100 SUPPLEMENTARY EXAMINATION QUESTION PAPER EXAMINER(S) T. F. Mashoko, L. Wale, L. Odada and A. Makosa MODERATOR: Z. Stellmacher INSTRUCTIONS 1. Answer ALL the questions. 2. Write clearly and neatly. 3. Number the answers clearly. PERMISSIBLE MATERIALS 1. Scientific calculators THIS QUESTION PAPER CONSISTS OF _5_ PAGES (Including this front page)

2 Question 1 (20 marks) Hifi Limited assembles and sells many types of radios. It is considering extending its product range to include digital radios. These radios produce a better sound quality than traditional radios and have a large number of potential additional features which were not possible with the previous technologies (station scanning, more choice, one touch tuning, station identification text and song identification text etc). A radio is produced by assembly workers assembling a variety of components. Production overheads are currently absorbed into product costs on an assembly labour hour basis. Hifi Limited is considering a target costing approach for its new digital radio product. a) Briefly describe the target costing process that Hifi Limited should undertake. (3 marks) b) Explain the benefits to Hifi Limited of adopting a target costing approach at such an early stage in the product development process. (4 marks) A selling price of N$44 has been set in order to compete with a similar radio on the market that has comparable features to Hifi Limited's intended product. The board have agreed that the acceptable margin (after allowing for all production costs) should be 20%. Cost information for the new radio is as follows: Component 1 (Circuit board)- these are bought in and cost N$4.10 each. They are bought in batches of and additional delivery costs are N$2 400 per batch. Component 2 (Wiring) - in an ideal situation 25cm of wiring is needed for each completed radio. However, there is some waste involved in the process as wire is occasionally cut to the wrong length or is damaged in the assembly process. Hifi Limited estimates that 2% of the purchased wire is lost in the assembly process. Wire costs N$0.50 per metre to buy. Other material- other materials cost N$8.10 per radio. Assembly labour -these are skilled people who are difficult to recruit and retain. Hifi Limited has more staff of this type than needed but is prepared to carry this extra cost in return for the security it gives the business. If workers are 100% productive, it will take 30 minutes to assemble a radio. However, 10% of the time represents idle time. The assembly workers are paid N$12.60 per hour. Production Overheads- recent historic cost analysis has revealed the following production overhead data: Total production overhead Total assembly labour hours Month 1 Month 2 N$ Page 1 of4

3 Fixed production overheads are absorbed on an assembly labour hour basis based on normal annual activity levels. In a typical year assembly labour hours will be worked by Hifi Limited. c) Calculate the expected cost per unit for the radio and identify any cost gap that might exist. (13 marks) Question 2 25 marks Collyer Ltd has a Valve Division that manufactures and sells a standard valve. The following details are given regarding the standard valve: Capacity in units Selling price to outside customers on the intermediate market N$30 Variable costs per unit N$16 Fixed costs per unit (based on capacity) N$ 9 The company has a Pump Division that could use this valve in the manufacture of one of its pumps. The Pump Division is currently purchasing valves per year from an overseas supplier at a cost of N$29 per valve. a) Assume that the Valve Division has ample idle capacity to handle all of the Pump Division's needs. With justification determine the transfer price range between the two divisions? b) Assume that the Valve Division is selling all that it can produce to outside customers on the intermediate market. What should be the transfer price between the two divisions? At this price, will any transfers be made? c) Assume again that the Valve Division is selling all that it can produce to outside customers on the intermediate market. Also assume that N$3 in variable expenses can be avoided on intracompany sales, due to reduced selling costs. What should be the transfer price between the two divisions? d) Refer to the original data. Assume that the Pump Division needs special valves per year that are to be supplied by the Valve division. The valve division's variable costs to manufacture and ship the special valve would be N$20 per unit. To produce these special valves, the Valve Division would have to give up one-half of its production of the regular valves (that is, cut its production of the regular valves from units per year to units per year). You can assume that the Valve division is selling all of the regular valves that it can produce to outside customers on the intermediate market. (10 marks) If the Valve Division decides to produce the special valves for the Pump Division, what transfer price should it charge per valve? Page 2 of 4

4 Question 3 (20 marks) The manager of a retail store that sells electronic goods is deciding which of three credit agreements to offer to its customers. Past experience has shown that there are three possible reactions to each of the agreements. The profit will depend on customers' reaction to the agreement on offer. The profit for each of the possible outcomes is as follows: Customer reaction Agreement A Agreement B Strong Moderate Weak Agreement C Which agreement the manager should select under the following criteria: a) Maximin b) Maximax c) Minmax regret (10 marks) Question 4 (20 marks) Kenny Co. is considering a project which has a useful life of two years. The project requires an initial investment of N$ The cash inflow from the sale of the product is N$ in each of the two years with a selling price of $10 per unit. Tota l variable costs are estimated at N$ for each year. The cost of capital is 8%. a) Measure the sensitivity of the project NPV to change in the following variables: initial investment, sales volume, selling price, variable cost per unit, and cost of capital. (15 marks) b) To which variable NPV is more sensitive i.e. which variable management should monitor closely for the project to remain viable? Page 3 of 4

5 Question 5 (15 marks) Beethoven has a new wonder product, the vylin, of which it expects great things. At the moment the company has two courses of action open to it, to test the product or abandon it. If the company tests market it, the cost will be N$ and the market response could be positive or negative with probabilities of 0.60 and 0.40 respectively. If the response is positive the company could either abandon the product or market it full scale. If it markets the vylin full scale, the outcome might be low, medium or high demand, and the respective net gains/ (losses) would be (200), 200 or in units of N$ 1000 (the result could range from a net loss of N$ to a gain of N$ ). These outcomes have probabilities of 0.20, 0.50 and 0.30 respectively. If the result of the test marketing is negative and the company goes ahead and markets the product, the estimated losses would be N$ If at any point, the company abandons the product, there would be a net gain of N$ from the sale of scrap. All financial values have been discounted to the present value. Using decision tree approach, advise the management of Beethoven on which option to take. (15 marks) END OF EXAMINATION QUESTION PAPER Page 4 of 4

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7 TABLE 8 Present value interest factor of $1 per period at i 0 /o for n periods, PVIF(i,n). Period 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11 % 12% 13% 14% 15% 16% 17% 18% 19%1 20% O.D

8 TABLED Present value interest factor of an (ordinary) annuity of $1 per period at io/o for n periods, PVIFA(i,n). Period 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19%1 20%