1 ATMC - ACC701 – ACCOUNTING FOR MANAGERS Task 3 – Take Home Final Exam Submission Due Date: 11.59pm, Monday, October 24, 2016 Total Marks: 50 Instructions 1. Answer all five (4) questions in one MS Word document. 2. Submit your answers in one MS Word document through Blackboard no later than the submission day and time stated above. 3. You have from the day the exam is placed on Blackboard to answer the questions and submit them via Blackboard. 4. You may use Excel if you wish, however, your Excel outputs must be cut and pasted (or imported) into your MS Word document, DO NOT submit multiple documents. 5. Marks will be deducted for late submission in accordance with University policy. 6. Ensure your name and student number are on your submitted paper. Question 1 (12 marks) Juggernaut Holdings is introducing Product H, each of which requires 8 hours in production, 12 hours in assembly and 4 hours in despatch. Product H has direct (materials and labour) costs of $740 per unit. The overhead costs and direct labour hours for the three production departments are: Production Assembly Despatch Overheads $432,000 $220,000 $140,000 Direct labour hours 12,000 10,000 7,000 The overhead costs have been traced to cost pools and cost drivers have been identified for each cost pool. The cost pools and their cost drivers are: Cost pool Cost driver Order processing 100,000 25,000 customer orders Purchasing 200,000 10,000 Purchase orders Operations 450,000 60,000 direct labour hours Distribution 42,000 5,000 deliveries 400 units of Product H are produced. The product causes 1,000 customer orders, 700 purchase orders, 29,000 direct labour hours and 2,000 deliveries.2 a. Calculate the total cost of each Product H using: i. Absorption costing using a business-wide overhead recovery rate (2 MARKS) ii. Absorption costing using departmental overhead rates (2 MARKS) iii. Activity-based costing (2 MARKS) b. Explain the principles underlying the basis of calculation of each of the three above-mentioned methods and the most likely reasons for any similarity or difference between the results in applying the three methods in this case. (3 MARKS) c. Explain the overhead allocation problem. (3 MARKS) Question 2 (14 marks total) Greentown Industries sells its transport services at a range of prices to five different customer groups. The company has fixed costs of $150,000 per year. The average variable costs for each transport service, irrespective of customer group, is $7. The Table below shows the prices charged to each customer group and the quantity of transport services that are currently sold at that price. Customer group Selling price Quantity Multinational $19 13,000 Corporate $20 12,500 Small business $21 12,000 Government $22 11,000 Private $23 10,000 a. If the average selling price is $21, calculate the breakeven point in quantity and money terms and draw a rough sketch of a costvolume-profit (CVP) graph that shows the relationships between the elements of CVP. (7 marks) b. Calculate the optimum selling price for Greentown Industries and identify which customer group is most profitable. (4 marks) Use the following information to answer part (c) Assume that the maximum market demand for each customer group is 20,000 transport services at the same price as currently charged (see Table above). Also assume that Greentown's capacity limitation is 60,000 transport services. c. Based on the calculation of optimum selling prices in (b) above but with the capacity and demand assumptions taken into consideration, calculate the maximum profits that Greentown can earn and the customer mix and quantity by which that profit can be achieved. (3 marks)3 Question 3 (12 marks) Mammoth Computing is considering an investment of $2.3 million in new equipment. The predicted cash inflows and outflows are: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Capital investment -2,300,000 Inflows 800,000 1,000,000 1,200,000 1,100,000 900,000 Outflows -300,000 -250,000 -300,000 -400,000 -500,000 An alternative investment is for $2 million, the predicted cash inflows and outflows being: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Capital investment -2,000,000 Inflows 700,000 900,000 1,100,000 1,000,000 800,000 Outflows -300,000 -250,000 -300,000 -400,000 -500,000 Mammoth depreciates its equipment over 5 years and uses a cost of capital of 12%. a. For each of the investment alternatives, calculate the i. Net present value (2 MARKS) ii. Payback period (2 MARKS) iii. Accounting rate of return (on an average basis, not per year) (2 MARKS), and iv. Recommend, with reasons, which of the investment proposals should be approved. (2 MARKS) b. Compare and contrast net present value, payback and accounting rate of return as methods of capital investment appraisal. What are the strengths and limitations of each method? (4 MARKS) Question 4 (12 marks) Phonic Solutions PLC is considering creating a new division, which will require an investment in computer & telecommunications equipment of $10 million. The company has a cost of capital of 12%. The sales department has forecast sales for each of the next five years as follows: Year 1 $4 million Year 2 $6 million Year 3 $8 million Year 4 $6 million4 Year 5 $4 million Operations staff have predicted the cost of sales as 30% of revenue. Rent and office expenses are $300,000 each year. Selling and administration salaries will be $400,000 in the first year increasing each year by 5%. Repairs & maintenance will be $100,000 in each of years 1 and 2, $200,000 in each of years 3 and 4, and $300,000 in year 5. The company depreciates its equipment over 4 years. a. Produce a i. Profit budget for each of the five years, showing both gross profit and operating profit; (2 MARKS) ii. Cash flow for each of the five years (2 MARKS), and iii. Apply a discounted cash flow technique and use this to recommend whether the new division and capital investment should proceed (2 MARKS). b. What does theory tell us about the strengths and limitations of budgeting and the discounted cash flow technique? (6 MARKS)