Topic: Decision making techniques

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  • 15 Marks

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.

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:

  1. Selling Price Regimes: N180, N190, and N200
  2. 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)

(c) Determine the value of the new information obtained from market research. (3 Marks)

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

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  • 8 Marks

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.

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.

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  • 40 Marks

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.

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)

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  • 20 Marks

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.

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)

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  • 20 Marks

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.

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)

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  • 6 Marks

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.

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)

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  • 6 Marks

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

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.

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  • 20 Marks

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.

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)

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  • 5 Marks

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.

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.

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  • 15 Marks

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.

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)

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  • 5 Marks

MA – Mar 2024 – L2 – Q2b – Decision making techniques

This question discusses conditions that empower employees and junior managers to make operational decisions under Business Process Re-engineering (BPR).

Business Process Re-engineering (BPR) is the fundamental redesign of workflows and business processes within an organisation. BPR aims to streamline operations, improve outcomes, cut costs, and drive growth in business processes.

Required:
Explain THREE (3) conditions that may empower employees and junior managers to make operational decisions under BPR.

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  • 20 Marks

MA – Dec 2023 – L2 – Q5 – Relevant cost and revenue | Decision making techniques

This question focuses on relevant costing for a special order and the distinction between marginal and differential costs.

Semenhyia Ltd is involved in the design and manufacture of custom-built factory equipment. The company has just received an enquiry about the supply of 10 machines from one of their regular clients, Kukua Ltd.

Kukua Ltd has informed the company that the maximum price they are willing to pay is GH¢5,200 per machine. The order would need to be completed within two weeks.

The following details relate to the production of the machines:

i) Materials per machine:

  • 10 units of Material A, which is used regularly by the company. The company has 120 units of Material A in stock, which originally cost GH¢120 per unit. The replacement cost of Material A is 20% higher than the original price.
  • 5 units of Material B. The company has 40 units of Material B in stock, as it was purchased a few years ago for use in the production of other equipment, which the company no longer produces. If this material is not used in the production of this order, it would never be used again. The original purchase price for Material B was GH¢190 per unit. The replacement cost is GH¢150 per unit, and the net realizable value is GH¢130 per unit.
  • 3 units of Material C. This material is used regularly and usually costs GH¢85 per unit. However, the earliest delivery time for new stock from the regular supplier is three weeks. An alternative supplier could deliver immediately but would charge GH¢90 per unit. Semenhyia Ltd has 600 units in stock, but 580 units are required to complete other orders over the next two weeks.

ii) Labour hours per machine:

  • 12 skilled labour hours, paid GH¢20 per hour. Skilled workers are part of the permanent workforce, with 125 surplus skilled hours available per month. Skilled workers are paid time and a half for overtime.
  • 22 unskilled labour hours, paid GH¢15 per hour, employed on a casual basis.

iii) Supervision: A supervisor currently paid GH¢56,500 per annum will oversee the project, but a replacement will be hired for the duration of the contract at a cost of GH¢8,500.

iv) Machine hours: Each machine requires 18 hours of processing time on factory equipment. If the order is not accepted, the equipment would be subcontracted to Fimi Ltd for a contribution of GH¢70 per hour.

v) Depreciation: The depreciation charge for using the equipment for this order would be GH¢4,000.

vi) Overheads: Overheads are absorbed at a rate of GH¢35 per skilled labour hour.

vii) Estimate costs: The planning department has incurred costs to date of GH¢600.

Required:

a) Explain relevant cost and state TWO (2) examples of relevant cost in short-term decision-making. (3 marks)

b) Determine, using relevant costing principles, whether or not Semenhyia Ltd should undertake the contract. Your answer must include an explanation for the inclusion or exclusion of each of the above points. (13 marks)

c) Distinguish between “marginal cost” and “differential cost”. (4 marks)

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  • 5 Marks

MA – Dec 2023 – L2 – Q2c – Decision making techniques

This question explains why standard costing may not be appropriate in a Just-In-Time (JIT) and Total Quality Management (TQM) environment.

Explain why a standard costing system may not be considered appropriate for the following modern manufacturing environments listed below:
i) Just-In-Time (JIT).
ii) Total Quality Management (TQM).

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  • 6 Marks

MA – Dec 2023 – L2 – Q2b – Decision making techniques

This question outlines the conditions required for the successful operation of a JIT inventory management system.

Explain THREE (3) conditions that must prevail to make the operation of a Just-In-Time (JIT) inventory management system successful.

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  • 9 Marks

MA – Dec 2023 – L2 – Q2a – Decision making techniques

This question discusses three secondary activities in value chain analysis that enhance service differentiation.

Value creation activities may be classified as either direct (primary) or indirect (secondary). The indirect activities result in differentiation of services that customers are prepared to pay a premium for.

Required:
Explain THREE (3) secondary activities in value chain analysis.

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  • 3 Marks

MA – May 2018 – L2 – Decision Making Techniques

Discuss non-financial factors to consider when deciding whether to outsource.

Explain THREE non-financial factors PieceJoz FM should also consider when making the decision to outsource.

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  • 4 Marks

MA – May 2020 – L2 – Q5c – Decision making techniques

Determine the optimal selling price for a new product by analyzing cost and revenue data.

Blasius Ltd has just decided to produce a new line of item, namely bed, that can be sold in its retail shops throughout the country. It has provided you with the following information concerning the total cost of annual production and the prices at which that production could be sold:

Annual production units Total cost (GH¢000) Selling price (per unit) (GH¢)
2,500 100.3 70.8
5,000 186.3 66.7
7,500 287.8 62.5
10,000 405.0 58.3
12,500 537.8 54.2

Required:
Determine the optimal selling price for the bed. (4 marks)

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  • 6 Marks

MA – May 2020 – L2 – Q5b – Decision making techniques

Explain the concept of shadow price and assess the acceptability of a timber supply offer based on shadow pricing.

b) A timber merchant from Takoradi made a proposal to Blasius Ltd to supply this specialized timber which is in short supply but at the cost of GH¢4.5 per square metre.

Required:

i) Explain the term shadow price. (2 marks)

ii) Identify the shadow price which should be paid per square metre and comment on the acceptability of the offer. (4 marks)

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  • 4 Marks

MA – May 2020 – L2 – Q4c – Decision making techniques, Relevant cost and revenue

Explain how a management accountant can use make or buy analysis and limiting factor principles to solve management problems.

c) Explain how a management accountant can use make or buy analysis and the limiting factor principles to achieve optimal solutions to an internal management problem. (4 marks)

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  • 10 Marks

MA – May 2020 – L2 – Q4a – Introduction to capital budgeting, Decision making techniques

Identify and explain the stages in the capital investment decision-making process.

a) Senchi Ltd is evaluating an investment proposal to manufacture River boat, which has performed well in test marketing trials conducted recently by the company’s research and development division.

Required:

Identify and explain the stages in the capital investment decision-making process. (10 marks)

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