Swinburne University of Technology Australian Graduate School of Entrepreneurship HGM503 Financial Data and Decision Making Final Exam Information: • Duration of Exam = 2 hours plus 10 minutes reading time. • Answer ALL Three Questions • 25 marks per question • 75 marks in total to be converted to a mark out of 55. • Answers to be provided in an exam booklet Question 1. There is suspicion that product 101 is being sold below cost by competitors in order to increase their share of the market. Product 101 has always been produced in large volumes whilst product 102 has a short shelf life and is produced in smaller batches. Overhead per unit has been traditionally established by using labour hours for assigning the plants overheads. The following date is provided Product 101 Product 102 Production (kilograms) 1 000 000 200 000 Selling price $15.93 $12.00 Overhead per unit* $6.41 $2.89 Prime (direct) cost per kilogram $4.27 $3.13 Number of production runs 100 200 Receiving orders 400 1 000 Machine Hours 125 000 60 000 Direct Labour Hours 250 000 22 500 Engineering hours 5 000 5 000 Material Handling (number of moves) 500 400 * Calculated using a plant wide rate based on direct labour hours, which is the current way of assigning the plant’s overhead to its products $ Overhead Pool Set up Costs 240 000 Machine Costs 1 750 000 Receiving Costs 2 100 000 Engineering Costs 2 000 000 Material handling Costs 900 000 Total 6 990 000 Required: i. Complete the existing per unit gross margin for each product (using the existing overhead per unit) (3 Marks) ii. Recompute the unit cost of each product using activity based costing. (10 Marks) iii. Calculate the per unit gross margin for each product based on answers to (ii) above (3 Marks) iv. Evaluate the concern that product 101 is being sold below cost by competitors (3 Marks) v. Apparently there is a lack of competition for Product 102 and management believes that the price could be increased by 25%. Evaluate. (3 Marks) vi. What are the disadvantages and difficulties of implementing activity based costing. (3 Marks) (3 + 10 +3 +3 +3+3 = 25 Marks) Question 2. X Ltd. produces three different products. The results for the company for the past year are presented as follows A B C TOTAL $ $ $ $ Sales 2 500 000 1 500 000 3 200 000 7 200 000 Cost of Goods Sold 2 100 000 1 550 000 2 500 000 6 150 000 Gross Profit 400 000 (50 000) 700 000 1 050 000 Operating Expenses 550 000 200 000 350 000 1 100 000 Net Profit (150 000) (250 000) 350 000 (50 000) The CEO believes that the company should stop making products A & B. However, before making a final decision he asks the accountant to provide more details about the cost items and these are presented below Product A Product B Product C $ $ $ Cost of Goods Sold • Variable Manufacturing costs 1 250 000 1 000 000 1 700 000 • Fixed Manufacturing costs 850 000 550 000 800 000 Operating Costs • Variable 350 000 130 000 200 000 • Fixed 200 000 70 000 150 000 The fixed operating costs include an allocation of the CEO’s salary of $150 000 and rent of the display room of $50 000. The fixed manufacturing costs include an allocation of factory rent of $300 000 and central lighting of $100 000. The above fixed costs have been allocated on the basis of sales 35% to A, 20% to B, 45% to C. All other costs are directly traceable to each product line. Required: i. Management seeks a reformatted report to assist the decision as to whether or not to discontinue a product. (15 Marks) ii. Based on your revised report, would you recommend the discontinuance of any product? What additional information would you seek, if any? (10 Marks) (15+10 = 25 Marks) Question 3. My Wash Pty. Ltd. makes washing machines and with its existing plant capacity the maximum production possible is 1000 units per year. Fixed costs are estimated at $36 000 per annum and the selling price of each machine is $240. Sales for the next year are expected to drop to 800 units. The rax rate is 30%. The cost of each washing machine is calculated as follows • Direct material cost $40 • Direct labour cost 10 hours at $8 per hour Required: i) Calculate a) The break even point b) The maximum before tax profit c) The before tax profit at an estimated sales level of 800 units (6 Marks) ii) If we assumed that My Wash should be targeted as a profit after tax of $49 000 how many units should be processed (4 Marks) ii) Costs alter by the following proportion: • Direct materials increase by 20 percent • Fixed costs come down by $12 000 • Direct labour costs increase by $2 per hour Calculate a) The new break even point b) The new before tax profit at the estimated sales level of 800 units (6 Marks) iv) Define the terms a) Break even point b) Fixed cost c) Variable cost d) Contribution margin (4 Marks) v) Outline the advantages of constructing a detailed budget (5 Marks) (6+4+6+4+5=25 marks)