Topic: Decision making techniques

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PM – Nov 2014 – L2 – Q7 – Decision-Making Techniques

Analyze profit for Omola Industries under various price and demand forecasts for a new product based on market research.

Question

Omola Industries Limited is introducing a new product. The original information, available to the company from its archive, suggests that the product will sell for N190 per unit. Other information from the initial source is as follows:

Variable cost per unit: N100
Fixed cost: N20,000,000
Annual production and sales estimate: 700,000 units

To source credible information, the board inaugurated a market research team to assess sales volume, sales price, and variable cost. The research results are as follows:

Selling Price Regimes: N180, N190, and N200
Sales Demand Forecasts: Provided with pessimistic, most likely, and optimistic forecasts, along with subjective probabilities.

The company also committed to an annual contract cost of N5,000,000.

Required:

(a) Compute the initial profit achievable by the company. (2 Marks)

(b) Calculate the profit achievable under the three price scenarios based on the credible information. (7 Marks)

(d) Identify three other sources of information available to an organization. (3 Marks)

Answer

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Tags: Contribution analysis, Market Research, Probability Forecast, Profit Variance
Level: Level 2

Topic: Decision making techniques

PM – May 2018 – L2 – Q3b – Cost-Volume-Profit (CVP) Analysis

Calculate the relevant cost for a special contract and determine if it should be accepted.

Question

Deban Construction Limited is deciding whether or not to proceed with a one-off special contract for which it would receive a one-off payment of N2,000,000. Details of relevant costs are provided for labor, materials, storage, and overheads. Calculate the relevant cost of the contract and advise whether the contract should be accepted or not on financial grounds.

Answer

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Tags: Incremental Analysis, Labour Costs, Material Costs, Overheads, Relevant Costs, Special Contract
Level: Level 2

Topic: Decision making techniques
Series: MAY 2018

PM – Mar/Jul 2020 – L2 – Q1 – Decision Making and Capacity Constraints for Benco Limited

Evaluate which of two components, K or T, should be produced and sold to maximize profit based on given cost and capacity constraints.

Question

Benco Limited produces two critical components, K and T, both of which are used in petroleum refinery. The components are made by passing each one through two fully automatic computer-controlled machine lines – A and B – with respective maximum capacity of 13,600 hours and 15,360 hours. The following details are available:
(i) Due to production constraints, the company has decided to produce only one of the two components, K or T, for the next period but not both.
(ii) Market demand is limited to 59,200 units of K and 80,000 units of T.
(iii) Products unit data:

(iv) The maximum quantity of material X available is 136,000kg. The material is purchased at ₦50 per kg.
(v) Variable machine overhead for machine line A and line B is estimated at ₦500 and ₦600 per machine hour respectively.
(vi) The company operates a JIT system.

Required:
a. Calculate which of the components, K or T, should be produced and sold in the year in order to maximise profits. You should state the number of units to be produced and sold and the resulting contribution. (10 Marks)
b. Benco Limited wishes to consider additional sales outlets which could earn contribution at the rate of ₦400 and ₦600 per machine hour for machine line A and line B respectively. Such additional sales outlets would be taken up only to utilise any surplus hours not required for the production of the components. Calculate whether Benco Limited should now produce either component K or T and what quantity to be produced and the resulting contribution. (9 Marks)
c. Suggest ways in which the company may overcome the capacity constraints which limit the opportunities available to it in the year, and indicate the types of costs which may be incurred in overcoming each constraint. (10 Marks)

d. Illustrate the use of opportunity cost in the charging of each of material, labour and overhead elements in comparison with historic absorption cost elements. For each element, you should illustrate your answer with figures of your choice.
(11 Marks)

Answer

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Tags: Cost Analysis, Decision Making, Marginal Costs, Profit Maximization, Variable Costs
Level: Level 2

Topic: Decision making techniques
Series: MAR/JULY 2020

MI – Mar-Jul 2020 – L1 – SB – Q3 – Decision-Making Techniques

Determine the optimal production plan and prepare the income statement based on the given production constraints and sales data.

Question

ZUBEY LIMITED manufactures 4 homogeneous products A, B, C, and D with the following projections for the coming year:

The market can only absorb a maximum of 250,000 units of whatever mix in a year.

Assume no opening or closing stocks.

Required:

a. Compute the optimal production plan. (9 Marks)

b. Prepare the income statement arising from (a) above. (11 Marks)

Answer

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Tags: Cost Management, Decision Making, Production planning, Profit Optimization
Level: Level 1

Topic: Decision making techniques
Series: MAR/JULY 2020

MA – March 2023 – L2 – Q5 – Cost-volume-profit (CVP) analysis

Prepare a profit statement based on demand and propose an optimal production plan considering resource limitations and price adjustments.

Question

The following data relates to the planned activity of three products of Parlour Plc:

Demand (units):
Tintin: 15,000
Panpan: 10,000
Sonson: 12,500
i) Due to the general rise in prices, the company envisages that labour and variable production overhead costs will rise by 20% while material costs increase by 15%. It is the policy of the firm to maintain at all times the current mark-up (to the nearest whole number) on the total variable cost for each of the three products.

ii) The following resources are available to support the production:

Material: 60,000kgs
Labour hours: 65,000 hours
iii) The three products are complements, and the company envisages that 50% of the demand for all products has to be met for any operating year.

iv) The annual fixed cost, which will not be affected by the price adjustment, is estimated at GH¢42,500.

Required:
a) Prepare a profit statement assuming the company has capacity to meet all demand and considering the needed adjustments to reflect the proposed price changes. (8 marks)

b) Based on the resource limitation and proposed adjustment, what should be the optimal production plan? (10 marks)

c) Determine the associated profit from the optimal production plan. (2 marks)

Answer

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Tags: Contribution, Decision Making, Optimal production, Profit Statement, Resource limitation

Topic: Cash Budgets and Master Budgets, Decision making techniques
Series: MAR 2023

MA – Nov 2019 – L2 – Q2a – Decision-Making Techniques

Explains how profit maximization leads to shareholder wealth maximization and how constraints, satisficing, and optimizing affect decision-making.

Question

a) Management Accountants are often engaged in decision-making processes that would yield optimal results, given a limited amount of resources available. Such decisions are expected to yield to shareholder wealth maximization through the maximization of profits. Unfortunately, however, constraints sometimes lead to satisficing rather than optimizing decision making.

Required:
i) Explain how profit maximization can lead to shareholder wealth maximization. (4 marks)

ii) Explain how constraints, satisficing, and optimizing affect the management accountant’s decision-making. (6 marks)

Answer

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Tags: Constraints, Decision Making, Optimizing, Profit Maximization, Satisficing, Shareholder Wealth Maximization

Topic: Decision making techniques
Series: NOV 2019

MA – Aug 2022 – L2 – Q5b – Decision making techniques

This question calculates the monthly expected profit of running a canteen service using demand and variable cost probabilities

Question

Aunty Dede Caterers runs a canteen service at a University and the following estimated information is available for the sale of lunch packs:

Monthly Demand	Probability	Variable Cost per Pack (GH¢)	Probability
2,000 packs	0.3	GH¢30	0.5
2,500 packs	0.5	GH¢15	0.4
3,000 packs	0.2	GH¢20	0.1

The probabilities of demand and the probabilities of variable cost are mutually exclusive. The selling price of a lunch pack is GH¢50, and the University charges a monthly fee of GH¢1,200 for the usage of the cafeteria.

Required:
Calculate the monthly expected profit of running the canteen.

Answer

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Tags: Costing Techniques, Decision Making, Expected Profit, Probability Analysis
Level: Level 2

Topic: Decision making techniques
Series: AUG 2022

MA – Mar 2024 – L2 – Q5 – Relevant cost and revenue | Decision making techniques

This question determines the optimal units for in-house production versus outsourcing based on machine hour constraints and relevant cost analysis.

Question

Hwerema Technologies produces various components for telecom companies. The demand for these components is increasing. However, Hwerema Technologies’ production facility is restricted to 50,000 machine hours. Therefore, the company is considering whether to import certain components to make up for the shortfall in production to meet market demand. In this respect, the following information has been gathered:

Factory overheads include fixed overheads estimated at GH¢1.50 per machine hour.

Required:
a) Determine the optimal units to be produced in-house and units to be imported. (16 marks)
b) State FOUR (4) qualitative considerations relevant to make-or-buy decisions. (4 marks)

Answer

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Tags: Machine Hours, Make or buy decision, Outsourcing, Production planning, Relevant Costs
Level: Level 2

Topic: Decision making techniques, Relevant Cost and Revenue
Series: MAR 2024

MA – Mar 2024 – L2 – Q4b – Decision making techniques

This question identifies the challenges associated with the implementation of a Just-In-Time (JIT) inventory management system.

Question

Just-In-Time (JIT) is an inventory management system in which goods are received from suppliers only as they are needed. The main objective of this method is to reduce inventory holding costs and increase inventory turnover. Despite the benefits of JIT, it has some disadvantages.

Required:
Examine THREE (3) challenges associated with the implementation of JIT Inventory Management System.

Answer

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Tags: Inventory Management, JIT, Operational Efficiency, Supply Chain
Level: Level 2

Topic: Decision making techniques
Series: MAR 2024

MA – Mar 2024 – L2 – Q4a – Decision making techniques

This question evaluates two investment proposals using the payback period method and addresses factors affecting the reliability of cash flows.

Question

The following mutually exclusive investment opportunities are being proposed to Kwame, who wants reliable cash receipts on an annual basis:

Proposal A:

Purchase of a commercial vehicle at the cost of GH¢90,000 that will generate weekly sales of GH¢800. The owner will incur the following annual expenses on the vehicle:

Expenses	GH¢
Insurance	1,200
Tyres	10,400
Roadworthy	1,400
Routine maintenance	9,000

Note: Assume 52 weeks in a year.

Proposal B:

The repair of an unoccupied two-bedroom flat at the cost of GH¢90,000. The flat was bought by Kwame for GH¢650,000 three years ago. The monthly rental will be GH¢1,450 subject to 8% rent tax. The owner will also pay property tax of GH¢1,200 per year.

Required:
i) Advise Kwame which of the proposals is acceptable using the payback period method of investment appraisal. (8 marks)
ii) Explain TWO (2) factors that can affect the reliability of the cash flow of the transport business. (2 marks)
iii) State TWO (2) qualitative factors that may influence the decision to opt for proposal B. (2 marks)
iv) Explain TWO (2) reasons the NPV may be a better appraisal technique than the payback period. (3 marks)

Answer

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Tags: Cash Flow, Investment Appraisal, Payback Period, Rental Business, Transport Business
Level: Level 2

Topic: Decision making techniques
Series: MAR 2024

PM – Nov 2014 – L2 – Q7 – Decision-Making Techniques

Analyze profit for Omola Industries under various price and demand forecasts for a new product based on market research.

Question

Variable cost per unit: N100
Fixed cost: N20,000,000
Annual production and sales estimate: 700,000 units

To source credible information, the board inaugurated a market research team to assess sales volume, sales price, and variable cost. The research results are as follows:

Selling Price Regimes: N180, N190, and N200
Sales Demand Forecasts: Provided with pessimistic, most likely, and optimistic forecasts, along with subjective probabilities.

The company also committed to an annual contract cost of N5,000,000.

Required:

(a) Compute the initial profit achievable by the company. (2 Marks)

(b) Calculate the profit achievable under the three price scenarios based on the credible information. (7 Marks)

(d) Identify three other sources of information available to an organization. (3 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Contribution analysis, Market Research, Probability Forecast, Profit Variance
Level: Level 2

Topic: Decision making techniques

PM – May 2018 – L2 – Q3b – Cost-Volume-Profit (CVP) Analysis

Calculate the relevant cost for a special contract and determine if it should be accepted.

Question

Answer

Find Related Questions by Tags, levels, etc.

Tags: Incremental Analysis, Labour Costs, Material Costs, Overheads, Relevant Costs, Special Contract
Level: Level 2

Topic: Decision making techniques
Series: MAY 2018

PM – Mar/Jul 2020 – L2 – Q1 – Decision Making and Capacity Constraints for Benco Limited

Evaluate which of two components, K or T, should be produced and sold to maximize profit based on given cost and capacity constraints.

Question

Answer

Find Related Questions by Tags, levels, etc.

Tags: Cost Analysis, Decision Making, Marginal Costs, Profit Maximization, Variable Costs
Level: Level 2

Topic: Decision making techniques
Series: MAR/JULY 2020

MI – Mar-Jul 2020 – L1 – SB – Q3 – Decision-Making Techniques

Determine the optimal production plan and prepare the income statement based on the given production constraints and sales data.

Question

ZUBEY LIMITED manufactures 4 homogeneous products A, B, C, and D with the following projections for the coming year:

The market can only absorb a maximum of 250,000 units of whatever mix in a year.

Assume no opening or closing stocks.

Required:

a. Compute the optimal production plan. (9 Marks)

b. Prepare the income statement arising from (a) above. (11 Marks)

Answer

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Tags: Cost Management, Decision Making, Production planning, Profit Optimization
Level: Level 1

Topic: Decision making techniques
Series: MAR/JULY 2020

MA – March 2023 – L2 – Q5 – Cost-volume-profit (CVP) analysis

Prepare a profit statement based on demand and propose an optimal production plan considering resource limitations and price adjustments.

Question

ii) The following resources are available to support the production:

Material: 60,000kgs
Labour hours: 65,000 hours
iii) The three products are complements, and the company envisages that 50% of the demand for all products has to be met for any operating year.

iv) The annual fixed cost, which will not be affected by the price adjustment, is estimated at GH¢42,500.

Required:
a) Prepare a profit statement assuming the company has capacity to meet all demand and considering the needed adjustments to reflect the proposed price changes. (8 marks)

b) Based on the resource limitation and proposed adjustment, what should be the optimal production plan? (10 marks)

c) Determine the associated profit from the optimal production plan. (2 marks)

Answer

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Tags: Contribution, Decision Making, Optimal production, Profit Statement, Resource limitation

Topic: Cash Budgets and Master Budgets, Decision making techniques
Series: MAR 2023

MA – Nov 2019 – L2 – Q2a – Decision-Making Techniques

Explains how profit maximization leads to shareholder wealth maximization and how constraints, satisficing, and optimizing affect decision-making.

Question

Required:
i) Explain how profit maximization can lead to shareholder wealth maximization. (4 marks)

ii) Explain how constraints, satisficing, and optimizing affect the management accountant’s decision-making. (6 marks)

Answer

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Tags: Constraints, Decision Making, Optimizing, Profit Maximization, Satisficing, Shareholder Wealth Maximization

Topic: Decision making techniques
Series: NOV 2019

MA – Aug 2022 – L2 – Q5b – Decision making techniques

This question calculates the monthly expected profit of running a canteen service using demand and variable cost probabilities

Question

Aunty Dede Caterers runs a canteen service at a University and the following estimated information is available for the sale of lunch packs:

Monthly Demand	Probability	Variable Cost per Pack (GH¢)	Probability
2,000 packs	0.3	GH¢30	0.5
2,500 packs	0.5	GH¢15	0.4
3,000 packs	0.2	GH¢20	0.1

Required:
Calculate the monthly expected profit of running the canteen.

Answer

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Tags: Costing Techniques, Decision Making, Expected Profit, Probability Analysis
Level: Level 2

Topic: Decision making techniques
Series: AUG 2022

MA – Mar 2024 – L2 – Q5 – Relevant cost and revenue | Decision making techniques

This question determines the optimal units for in-house production versus outsourcing based on machine hour constraints and relevant cost analysis.

Question

Factory overheads include fixed overheads estimated at GH¢1.50 per machine hour.

Required:
a) Determine the optimal units to be produced in-house and units to be imported. (16 marks)
b) State FOUR (4) qualitative considerations relevant to make-or-buy decisions. (4 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Machine Hours, Make or buy decision, Outsourcing, Production planning, Relevant Costs
Level: Level 2

Topic: Decision making techniques, Relevant Cost and Revenue
Series: MAR 2024

MA – Mar 2024 – L2 – Q4b – Decision making techniques

This question identifies the challenges associated with the implementation of a Just-In-Time (JIT) inventory management system.

Question

Required:
Examine THREE (3) challenges associated with the implementation of JIT Inventory Management System.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Inventory Management, JIT, Operational Efficiency, Supply Chain
Level: Level 2

Topic: Decision making techniques
Series: MAR 2024

MA – Mar 2024 – L2 – Q4a – Decision making techniques

This question evaluates two investment proposals using the payback period method and addresses factors affecting the reliability of cash flows.

Question

The following mutually exclusive investment opportunities are being proposed to Kwame, who wants reliable cash receipts on an annual basis:

Proposal A:

Purchase of a commercial vehicle at the cost of GH¢90,000 that will generate weekly sales of GH¢800. The owner will incur the following annual expenses on the vehicle:

Expenses	GH¢
Insurance	1,200
Tyres	10,400
Roadworthy	1,400
Routine maintenance	9,000

Note: Assume 52 weeks in a year.

Proposal B:

Answer

Find Related Questions by Tags, levels, etc.

Tags: Cash Flow, Investment Appraisal, Payback Period, Rental Business, Transport Business
Level: Level 2