Swinburne University of Technology Australian Graduate School of Entrepreneurship HGM 503 Financial Data and Decision Making Student ID: ……………… Student Name: ………………... Final Exam STUDENTS MUST SUBMIT THIS PAPER WITH THE EXAM BOOKLET ANSWER ALL QUESTIONS Information: 1. Duration of Exam = 2 hours plus 10 minutes 2. This paper represents 55% of the final Assessment for this subject 3. Candidates are permitted to bring into the exam the following items:  Non Programmable Calculator  Dictionary Question 1 The River View Co. has a factory capacity of 150,000 units per year. The CEO is looking at possible ways to make operations profitable. The results for the previous year ended are as follows. Statement of Financial Performance Year Ended June 19X1 Sales (90,000 units @$4.00) $360,000 Cost of goods sold: Direct materials $90,000 Direct labor $90,000 Factory overhead: Variable $18,000 Fixed $80,000 $98,000 $278,000 Gross Margin $ 82,000 Marketing costs: Variable: Sales commissions* $18,000 Shipping $ 3,600 $21,600 Fixed: Advertising, salaries, etc. $40,000 $61,600 Administrative costs: Variable $ 4,500 Fixed $20,400 $24,900 $86,500 $(4,500) * Based on sales dollars, not physical units Required: (1) Recast the Financial Performance Statement into a Contribution Format (Sales, Variable Costs, Fixed Costs) (2) Calculate the Contribution Margin per unit (3) The Sales Manager wishes to know the outcome of two different strategies (i) The profit outcome of increasing sales to capacity (150,000 units) by reducing selling prices by 15% (ii) The Profit outcome of increasing prices by 25%, increasing advertising by $150,000 and increasing sales commission to 10% of sales. The volume is expected to increase up to 135,000 units (4) There is an offer to buy 60,000 additional units that will not affect the current 90,000 units sales. There is no inventory on hand. Commission need not be paid on these additional sales. Special packaging will increase manufacturing costs by 10c per unit. What is the minimum price that the firm should not sell below for these additional units? (5 + 4 + 4 + 6 + 6 = 25 marks) Question 2 Part 1 The owner of the Best Drinks store is deciding about shelfspace allocation for four varieties of drinks. Data as follows per case: Drink Types 1 2 3 4 Selling Price Per Case 18.00 19.20 26.40 38.40 Variable Cost Per Case 13.50 15.20 20.10 30.20 Cases sold per foot of shelf space per day 25 24 4 5 The owner wishes to maintain a minimum of 1 foot and a maximum of 6 feet of shelf space for each drink. The total available shelf space is 12 feet. Required: (1) What is the contribution margin per case of each drink? (4 marks) (2) What shelf space allocation would you recommend for each drink? (6 marks) (3) Explain the logic of your answer to question (2) above (5 marks) ( 4 + 6 + 5 = 15 marks) Part 2 A firm can manufacture 10,000 units of part 380 for the following costs Total Per Unit Direct Materials $80,000 $8 Direct Labor 10,000 $1 Variable Overhead 40,000 $4 Fixed Overhead Allocated 50,000 $5 Total 180,000 18 The same component part can be bought for $16 per unit Required: (1) Should the firm make or buy the component? Provide numerical analysis and your reasons (2) What is your recommendation given the additional information below as to making or buying part 380 and the utilization of the capacity. Provide your financial analysis Any free capacity can be utilized to produce 10,000 units of another products which would involve the following costs and revenues Selling Price $10 Variable Costs $ 2 Allocated Fixed $ 5 Profit $ 3 (4 + 6 = 10 marks) (Total Part 1 + Part 2 = 25 marks) Question 3 Part 1 A firm discovers that actual results for the year are well below budget and wishes to do an analysis of performance. The actual results and budget are provided below: Budget Actual Units Sold 12,000 9,800 Revenue (Sales) $2,160,000 $1,850,000 Variable Costs $1,188,000 $1,120,000 Contribution Margin 972,000 730,000 Fixed Costs 710,000 705,000 Operating Income 262,000 25,000 Required: (1) Provide a Flexible Budget for a comparison between actual results and budget (2) Provide logical possible reasons for variances between budget and actual (6 + 4 = 10 marks) Part 2 Matthew Manufacturing is a company that produces clothing for the supporters of football teams. They currently produce clothing for the supporters of two teams, the Tigers and the Saints. The company has been producing Tigers clothing for many years and has only recently started making the Saints clothing. Due to the designs of the clothing the Tigers clothing is much easier to produce than the Saints clothing. The company has been concerned for some time that their competitors appear to be selling supporters clothing for a much lower price. You have been hired to assess the companies performance. After a three-month assessment, you have gained the following information on the factory’s production activities and costs associated with the two products: Tigers Saints Production (Units) 100,000 20,000 Overhead per unit* $63.75 $28.69 Cost of Direct Materials and Labour per unit $16.14 $20.00 Total Cost $79.89 $48.69 Selling Price $111.84 $68.16 *Calculated using a plant-wide rate based on direct labour hours, which is the current way the company allocate factory overhead to products. Number of production runs 100 200 Receiving orders 400 1,000 Machine hours 125,000 60,000 Direct Labour hours 250,000 22,500 Clothing Design hours 5,000 5,000 Materials handling 500 400 You believe that the company would benefit from switching the overhead assignment to an activity-based approach. Since activity-based cost assignment is more accurate and will provide better information for decision-making. To assist the company in accepting this recommendation, you have assigned the factory’s activities into pools. Cost Pool Cost Set-ups $240,000 Machining $1,748,250 Receiving $2,100,000 Product Design $1,960,000 Material handling $900,000 Required: 1. Recompute the unit cost of each product using activity-based costing. (12 Marks) 2. Describe what actions you would take based on the information provided by the activity- based unit costs. (3 Marks) (Total Part 1 & 2 = 25 marks)