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.

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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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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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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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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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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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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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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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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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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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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MA – May 2019 – L2 – Q1a – Decision making techniques

Assess the financial impact of purchasing a new machine on a manufacturing company’s profitability.

Hukportie Ltd is a manufacturer of product “Okwada” which is sold for GH¢5 per unit. Variable costs of production are currently GH¢3 per unit, and fixed costs excluding depreciation is GH¢350,000. The current machine which was purchased for GH¢120,000 has a written down value of GH¢20,000 and a resale value of GH¢12,000. This can however be used for the next four years.

A new machine is available which would cost GH¢90,000. This could be used to make product “Okwada” for a variable cost of only GH¢2.50 per unit. Fixed costs, however, would increase by GH¢7,500 per annum as a direct consequence of purchasing the machine. The machine would have an expected life of 4 years and a resale value after that time of GH¢8,000. Sales of product Okwada are estimated to be 75,000 units per annum.

Hukportie limited expects to earn at least 12% per annum from its investments. Taxation and depreciation should be ignored.

Required:

Advise whether Hukportie Ltd should purchase the new machine. (10 marks)

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MA – April 2022 – L2 – Q5a – Decision making techniques

Analyze the profitability of four strategic options for Kuntu Ltd and estimate the required selling price to achieve a target profit.

Kuntu Ltd manufactures one standard product, the standard marginal cost of which is as follows:

Cost Element GH¢
Direct material per unit 10.00
Direct wages per unit 7.50
Variable production overhead 1.25
Total Marginal Cost per Unit 18.75

The budget for the year includes the following:

  • Output (units): 80,000
  • Total fixed Overheads:
    • Production: GH¢1,000,000
    • Advertising: GH¢600,000
    • Marketing: GH¢500,000
  • Contribution: GH¢2,500,000

In reviewing the budget for the coming year, management is dissatisfied with the results likely to arise. An emergency board meeting was held to discuss possible strategies to improve the situation, and the following strategies were proposed:

Strategy 1: The Production Manager suggested reducing the selling price by 10%. This could increase output by 25%. It is estimated that these changes would result in an increase in fixed production overhead by GH¢50,000 and fixed marketing overhead by GH¢25,000.

Strategy 2: The Director of Finance suggested increasing the selling price by 10%. Additionally, with an increase in advertising cost by GH¢400,000, sales units would increase to 90,000 units. It is also estimated that this strategy would increase the fixed production overhead by GH¢25,000 and marketing overhead by GH¢20,000.

Strategy 3: The Marketing Director suggested that with an appropriate increase in advertising expenditure, sales could be increased by 20%, and a profit on turnover of 15% could be obtained. It is estimated that fixed production overhead would increase to GH¢1,040,000 and marketing overhead would increase by GH¢25,000.

Strategy 4: The Managing Director seeks a profit of GH¢600,000. He would like to know at what selling price the target profit could be achieved given the following estimates: An increase in advertising expenditure by GH¢360,000 would result in a 10% increase in sales. However, fixed production and marketing overheads would increase by GH¢25,000 and GH¢17,000 respectively.

Required:

i) Prepare a forecast profit statement for Strategy 1 and Strategy 2. (6 marks)

ii) Estimate the additional expenditure on advertisement to achieve results in Strategy 3. (5 marks)

iii) Estimate the selling price that is required to achieve a profit of GH¢600,000 in Strategy 4. (5 marks)

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MA – May 2017 – L2 – Q4a – Relevant cost and revenue, Decision making techniques

Advise on the selection of a camp meeting venue using relevant costing.

Straight-to-Heaven Church is planning its annual camp meeting in December 2017. The church has four branches, and the annual camp meeting is the first major program after all the head pastors attended a leadership conference on the theme “Blending faith and Science in Church Decision Making.”

The General Overseer of the church wishes to apply the scientific principles learned at the conference in deciding between two major venues for the 2017 annual camp meeting. Hitherto, the General Overseer or his wife would veto where annual camp meetings are held. The following information is relevant for the decision:

  1. Seven pastors will facilitate the camp meeting. ‘Food 4 All’ restaurant will be assigned the responsibility of providing food for the pastors. They have indicated that a meal for a pastor would cost GH¢5. This cost is expected to increase by one-half if a pastor attends the camp with his wife. All pastors will be fed three times daily, but only three pastors plan to attend the conference with their wives. Church members will take care of their own feeding, but all camp expenses of pastors will be borne by church members.
  2. Water to be served at the camp meeting: 100 bags of sachet water at GH¢2 each and 25 boxes of 750ml bottled water at GH¢13 per box.
  3. The church plans to either have the conference at Ahayede (A) or Bonebon (B) camp sites. Accommodation cost per head per day at Ahayede is GH¢2 for the first 400 participants and GH¢1.5 for any additional participant. Bonebon will not charge any fee, but the church will have to show appreciation, which will be in the neighborhood of GH¢2,000 after the camp.
  4. Ahayede Campsite will require the payment of electricity and water bills of GH¢300 and GH¢500, respectively.
  5. It is expected that 96 liters of fuel at GH¢3.12 per liter will be needed at Bonebon campsite.
  6. Transportation cost for chairs and canopies will be GH¢400 if the camp is undertaken at Ahayede and GH¢300 if the camp is sited at Bonebon. Each church member’s transportation cost will be GH¢3 if Ahayede is chosen as the venue, but this figure is expected to double if the camp is taken to Bonebon.
  7. Pastors’ appreciation: Apart from the General Pastor, who will receive GH¢500, each pastor will receive GH¢300 as appreciation support.
  8. The church plans that 700 church members and pastors will take part in the annual camp meeting if it is undertaken at Bonebon, while 500 members will attend the camp if it is held at Ahayede, even though the two camp sites can each take 1,000 people. The camp will last for 5 days.

Required:

i) Using relevant costing, advise management of the church on the site they should hold the annual camp meeting.

(8 marks)

ii) Suggest TWO qualitative factors that should be considered in deciding on the venue. (4 marks)

iii) Explain the term “sunk costs” and identify THREE examples of sunk costs. (3 marks)

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MA – May 2017 – L2 – Q3b – Decision making techniques

Describe the target costing process and outline possible steps to reduce a target cost gap.

Wham Limited assembles and sells many types of android smartphones. It is considering extending its product range to include window phones. These smartphones produce better sound quality than traditional keypad phones and have a large number of potential additional features not possible with the previous technologies (station scanning, more choice, one-touch tuning, station identification text, and song identification text, etc.).

Android smartphones are produced by assembly workers assembling a variety of components. Production overheads are currently absorbed into product costs on an assembly labor hour basis. Wham Limited is considering a target costing approach for its new window phone product.

Required:

i) Briefly describe the target costing process that Wham Limited should undertake in order to successfully introduce its new window phone. (3 marks)

ii) Assuming a cost gap was identified in the process, outline possible steps Wham Limited could take to reduce the target cost gap. (3 marks)

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MA – May 2017 – L2 – Q2a – Decision making techniques

Identify and explain three external and two internal sources from where a company can collect data for adding a new product.

One of the key stages of decision making in organizations is the collection of data on alternative courses of action.

Required:

State and explain THREE external and TWO internal sources from where data can be collected by a company seeking to add a new product to its production line.

(5 marks)

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MA – May 2016 – L2 – Q5c – Decision Making Techniques, Other Aspects of Performance Measurement

Explain contract manufacturing, its recent popularity, and factors ensuring its effectiveness.

Contract manufacturing has grown in popularity in recent years because of its usefulness to companies.

Required:

i) Explain contract manufacturing.
(2 marks)

ii) Outline THREE main reasons for the recent surge in contract manufacturing.
(3 marks)

iii) Explain TWO factors that will ensure effective contract manufacturing.
(3 marks)

 

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MA – May 2016 – L2 – Q5b – Decision Making Techniques, Relevant Cost and Revenue, Divisional Performance

Decision Making Techniques, Relevant Cost and Revenue, Divisional Performance

Unity Company Ltd is preparing for next season’s operations. The company has provided the following information relating to its three products:

TO GE DA
Selling Price GH¢18.5 GH¢16.2 GH¢12.6
Material Cost (@ GH¢1.75 per kg) GH¢8.75 GH¢10.5 GH¢3.5
Labour Cost (@ GH¢2.2 per labour hour) GH¢7.7 GH¢4.4 GH¢7.7
Annual Demand 2,150 units 3,235 units 1,556 units

The company can only make available a total of 18,560 hours in the short run.

Required:

i) Provide the optimal production plan for Unity Ltd for the ensuing period.
(5 marks)

ii) What is the total incremental benefit of producing DA instead of GE, assuming available resources can only meet the demand for DA?
(3 marks)

iii) Indicate the shadow price of the production plan and state the basic assumption under which this price will apply.
(2 marks)

 

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MA – May 2016 – L2 – Q5a – Decision Making Techniques, Relevant Cost and Revenue

Explain the concept of shadow price in decision making.

Explain the term shadow price.

(2 marks)

 

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MA – May 2016 – L2 – Q4b – Decision Making Techniques,Relevant Cost and Revenue,

Evaluate a supplier's offer based on Economic Order Quantity and differentiate between a bin card and a store ledger card.

MM Company Ltd., a manufacturer of groundnut paste, wishes to know whether it is advisable to stick to its economic orders or accept a special order from a foreign supplier for the supply of groundnuts. The following information has been provided:

  • Purchase price per bag of groundnut: GH¢360
  • Holding cost per annum is 10% of the cost of a bag of groundnut
  • Ordering cost per annum: GH¢7.7
  • Annual demand of groundnut paste: 6,000 bags
  • Normal usage per month: 520 bags
  • Minimum usage per month: 500 bags
  • Maximum usage per month: 700 bags

Required:

i) The foreign supplier promises a reduction in the price of a bag of groundnut by 8% if MM Company is willing to order 3,000 units each time it wants to order. Advise MM.
(10 marks)

ii) What is the difference between a bin card and a store ledger card?
(3 marks)

 

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MA – May 2016 – L2 – Q3 – Transfer Pricing, Divisional Performance, Relevant Cost and Revenue, Decision Making Techniques

Calculate profitability under different costing methods and evaluate an outsourcing offer, including additional decision factors.

Anim Shoes Ltd produces and sells Ghana-made shoes with two main departments: production/sales and repairs departments. The production and sales department produces and sells 10,000 pairs of shoes each year. Due to the low quality of raw materials available in the country, the company includes an additional GH¢11 in the cost of a pair of shoes sold to cater for one-year after-sales repairs. On average, it is expected that a quarter of the total pairs of shoes sold would come back for repairs a year after sale. Repair works on a pair of shoes take 2 labour hours, and it is estimated that total repair cost on the quarter of shoes will be GH¢27,500.

In addition to providing repair services to the production and sales department, the repair department sometimes picks up offers from outside the company. Such external offers are billed at full cost and a margin on sales of 20%. The following is the breakdown of the average repair cost of a pair of shoes:

Cost Item Cost (GH¢)
Material 2.50
Labour (1.5 per hour) 3.00
Variable Overheads 1.00
Fixed Overheads 2.30

Required:

i) Calculate the individual profits of the Production/Sales department, Repairs department, and Anim Ventures if repairs are done by the repairs department of Anim Ventures at either full cost plus 20% margin on sales or at marginal cost.
(8 marks)

ii) Pee Shoe Repairs has offered to repair each pair of shoes for Anim Ventures at GH¢10.00, a price which is cheaper than what the repairs department is offering. Should Anim Ventures accept this offer?
(5 marks)

iii) Identify THREE other factors Anim Ventures should consider in finalizing the decision in (ii) above.
(3 marks)

iv) Explain TWO principles of a good transfer pricing method.
(4 marks)

 

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