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. THIS PAPER CONTAINS FOUR QUESTIONS. ANSWER ANY THREE QUESTIONS. Information: 1. Duration of Exam = 2 hours and 30 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 Dearings Publications publish high quality art texts that are sold through a network of independent sales agents throughout Australia. The agents are paid a 20% commission on sales. Dearings Publications used this percentage to prepare the following budgeted profit and loss statement for the year ending 30 June 2003: $ $ Sales (65,000 @ $200) 13,000,000 Cost of goods sold: Variable 5,850,000 Fixed 1,435,000 7,285,000 Gross margin 5,715,000 Marketing and administrative costs: Sales commissions 2,600,000 Fixed marketing costs 375,000 Fixed administrative costs 925,000 3,900,000 Profit (before interest and tax) 1,815,000 Fixed interest costs 325,000 Net profit before tax 1,490,000 Income tax (40%) 596,000 Net profit after tax 894,000 The firm has decided to investigate the possibility of hiring its own sales staff in place of the sales agents network and has gathered information on the costs of this alternative. It is estimated that Dearings Publications will have to hire six salespeople to cover the current market area. The annual payroll cost of each of these employees will average $70,000, including on-costs. Their travel and entertainment costs are expected to total $300,000 for the year, and the annual cost of a sales manager will be $160,000. In addition to their salary, the six salespeople will each earn commission at the rate of 5%. The firm also believes that it should increase its marketing budget by $500,000, if it hires its own sales staff. Required: a) Using the cost and revenue data presented in the budgeted profit and loss statement and assuming Dearings Publications agrees to pay its agents an increase in the commission rate of 5% of sales, calculate: i) the impact on net profit before tax, and ii) the new break-even point (including fixed interest) b) Assume Dearings Publications hires its own sales force and increases its marketing costs, calculate: i) the projected profit before tax, and ii) the break-even point (including fixed interest) c) By how much would sales have to increase in order to achieve the budgeted net profit after tax of $894,000 if Dearings Publications: i) continues with its agent network and pays a commission rate of 25% of sales, ii) or alternatively, hires its own salespeople and increases its marketing costs. d) Which alternative would you recommend? Give reasons for your choice. (5 + 8 + 8 + 4 = 25 marks) Question 1 “The situation is slowly turning around” declared Bill Plaice, owner of Dixon Trading. “This $42,500 loss for September is our smallest yet. If we can just strengthen lines A and C somehow, we’ll soon be making a profit.” Mr. Plaice was referring to the company’s latest monthly income statement, presented below (absorption costing basis): Dixon INC Profit and Loss statement For the month ended September 30 2003 Line A Line B Line C Total Sales 400,000 250,000 350,000 1,000,000 Cost of goods sold 300,000 180,000 262,500 742,500 Gross Margin 100,000 70,000 87,500 257,500 Less operating expenses Selling 60,000 22,500 67,500 150,000 Administration 60,000 37,500 52,500 150,000 Total operating expenses 120,000 60,000 120,000 300,000 Net profit (loss) (20,000) 10,000 (32,500) (42,500) In addition to the above information, Mr Plaice has also been provided with the following information relating to direct and common costs. Line A Line B Line C Variable costs (as a % of sales) Production (materials, labor, variable Overhead) 20% 30% 25% Sales commission 5% 5% 5% Direct Fixed costs Production $100,000 $16,250 $70,000 Selling $20,000 $5,000 $28,125 Of the total selling expenses remaining $46,875 relates to order processing (none of the total selling expenses are common costs) This is an attributable cost: see Section (c) below: Additional information: a) Fixed production costs total $500,000 per month. Part of this amount is traceable directly to the product lines, as shown above. The remainder is common to the product lines b) All administrative costs are common to the three product lines c) During September 200 orders were processed for Line A, 250 for Line B and 175 for Line C. d) Lines A and B each sell for $100 per unit, and Line C sells for $80 per unit. Strong demand exists for all three products. • Dixon has also found out that their supplier of type B4 chips has gone on strike; • The company may be on strike for a month • Stocks of type B4 chips are low; • Production of Line A or Line B will have to be cut back, since that chip is used in both products. (A single B4 chip is used per unit of each product.) On hearing this news the management of the company have decided, using the prepared segmented statements, to cut back production of Line A and concentrate all B4 chip inventory on production of Line B. Required: 1. Prepare a new segmented income statement, segmented by product line, using a format appropriate for management decision making. (15 marks) 2. Do you agree with the decision to cut back production of Line A rather than Line B? Why or why not? (5 marks) 3. Assume that the company’s executive committee is considering the elimination of Line C, due to its poor performance. If you were serving on this committee, what points would you make for or against elimination of the Line? (5 marks) (15 + 5 + 5 = 25 marks) Question 3 Middleton Products is a company in the sporting goods industry. They have been producing Skis for the past thirty years and have recently starting manufacturing snowboards. Due to the designs of the skis they are much easier to produce than the snowboards. Recently the company has become concerned about missing out on winning some very valuable contracts to supply skis to the Australian Olympic team. The company is also concerned that no other company produces the snowboards even though the company is happy with this product because they are able to make good profits on it. However, the company has also found that the demand for snowboards is not as great as the demand for skis. Due to these concerns an investigation of the production costs and comparative efficiency was requested. 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: SKI’s Snowboards 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. 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 the factory’s activities into pools based on common processes, activity levels, and consumption ratios. The costs of these pooled activities follow: Cost Pool Cost Set-ups $240,000 Machining $1,748,250 Receiving $2,100,000 Product Design $1,960,000 Material handling $900,000 In addition you have gathered the following information relating to the production of the two products. SKI’s Snowboards 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 Required: 1. Recompute the unit cost of each product using activity-based costing. Compute the per-unit gross margin for each product. (12 Marks) 2. Explain the apparent lack of competition for Snowboards. Comment also on the whether customers will complain if prices for this product were increased 25% from what the company is currently charging. (4 Marks) 3. Should the company switch its emphasis from the high volume product to the low volume product? Comment on the concerns that the company has regarding not winning the tenders to supply skis to the Olympic team. (3 Marks) 4. Describe what actions you would take based on the information provided by the activity- based unit costs. (5 Marks) (12 + 4 + 3 + 5 = 25 marks) Question 4 Preston Manufacturing Ltd, has a maximum production capacity of 20,000 units of product pear year. A summary of operating results for the year ended 31 March 2003 is as follows: Sales (@$100 each) $1,800,000 18,000 units Variable manufacturing costs 850,000 Variable selling costs 140,000 Contribution margin 810,000 Fixed costs 495,000 Operating profit $ 315,000 A foreign distributor has offered to buy 15,000 units at $90 each during 2004. If the company accepts this offer, they will reject some business from regular customers so as not to exceed capacity. Assume that the costs and rates stay the same and that the domestic demand for 2004 is forecasted to remain at 18,000 units Required: a) Determine the differential revenues and costs of accepting the order. Consider and discuss any opportunity costs of accepting the order. (8marks) b) Should this offer be accepted? (2 marks) c) If the company could negotiate with the foreign distributor to save 5% of the variable selling costs, would this change your decision in part b? Explain. (3 marks) d) If the capacity were increased to30,000 units, at an additional fixed cost of $250,000, should the company accept the order? Why or why not? (6 marks) e) Distinguish between quantitative and qualitative factors in short term decision making. Give examples of factors that the company should consider in making its decision. (6 marks) (8 + 2 + 3 + 6 + 6 = 25 marks)