Topic: Decision making techniques

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  • 16 Marks

MA – Nov 2024 – L2 – Q5a – Limiting Factor Decision and Profit Maximization

Determination of the optimum production plan considering scarce resources.

Manche produces two products from different quantities of the same resources using a just-in-time (JIT) production system. The selling price and resource requirements of each of the products are shown below:

Product C L
Unit Selling Price (GH¢) 130 160
Resources per Unit:
Direct Labour (GH¢8 per hour) 3 hours 5 hours
Material A (GH¢3 per kg) 5 kg 4 kg
Material B (GH¢7 per litre) 2 litres 1 litre
Machine Hours (GH¢10 per hour) 3 hours 4 hours
Fixed Overhead (GH¢8 per hour) 1 hour 1 hour

Market research shows that the maximum demand for products C and L during August 2024 is 500 units and 800 units respectively. This does not include an order that Manche has agreed with a commercial customer for the supply of 250 units of C and 350 units of L at selling prices of GH¢100 and GH¢135 per unit, respectively. Failure by Manche to deliver the order in full by the end of August will cause Manche to incur a GH¢5,000 financial penalty.

At a recent meeting between the Purchasing Manager and Production Manager to discuss the production plans of C and L for August, the following resource restrictions for the year were identified:

  • Direct Labour Hours: 90,000 hours
  • Machine Hours: 90,000 hours

The resource restrictions were evenly distributed throughout the year.

Required:

i) Prepare the optimum production plan for August 2024 using relevant computations. 
ii) Determine the contribution from adopting this plan. 
iii) Using relevant computations, show whether Manche should complete the order from the commercial customer assuming any excess labour hours for not making the contract can be used to produce 300 units of product ‘F’ with a contribution of GH¢55 per unit.

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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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  • 20 Marks

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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  • 20 Marks

MA – Nov 2015 – L2 – Q3 – Decision making techniques | Relevant cost and revenue

Analyze whether to discontinue Double beds and whether to accept a new order for all bed sizes.

Obonku Limited produces Single, Double, and King-size beds for sale to hotels in West Africa. Its manufacturing plant is located in Tema and is currently operating at 100% capacity. Below is the annual output and sales for each product and the associated costs:

Product Single bed Double bed King Size bed
Units sold 5,000 units 3,500 units 4,000 units
Sales (GHS) 2,500,000 2,800,000 3,800,000
Costs:
Material cost 750,000 1,400,000 1,520,000
Labour costs 600,000 1,050,000 1,200,000
Manufacturing O’head 200,000 650,000 300,000
Administrative cost 200,000 100,000 200,000
Total cost 1,750,000 3,200,000 3,220,000
Profit/Loss 750,000 (400,000) 580,000

The Director of Obonku is of the view that the Double bed product line is not doing well and should not be produced any longer. The following additional information has been provided:

  1. 40% of the labor cost for all bed types are fixed costs.
  2. 50% of the manufacturing overhead is variable for all products.
  3. 80% of the administrative cost is fixed.

Alom Hotel Limited, situated in Elmina, has requested 80 units of each bed and is ready to procure them at the current prices. Obonku Ltd can only produce more if they increase production capacity in the short term at an additional cost of GHS 80,000.

Assuming that costs and prices remain the same, you are required to:

a) Advise whether the company should shut down the production of Double beds. (10 marks)
b) Should the company accept the new order assuming Double beds will still be produced? (10 marks)

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  • 7 Marks

MA – May 2016 – L2 – Q2a – Discounted Cash Flow, Decision Making Techniques

Discuss the justifications for the popularity and limitations of Payback Period and ARR as investment appraisal techniques.

It is said that of all the capital investment evaluation approaches, the Payback (PB) and Accounting Rate of Return (ARR) methods are widely used in practice. But these methods are not without limitations.

Required:

i) State TWO justifications of Payback Period and ONE justification of ARR for their popularity in practice as investment appraisal techniques.
(3 marks)

ii) Outline TWO limitations each for Payback Period and ARR as investment appraisal techniques.
(4 marks)

 

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  • 12 Marks

MA – Nov 2016 – L2 – Q3a – Decision making techniques

Advise on whether to further process joint products or sell at split-off based on cost and revenue analysis.

Pinto Company Limited processes materials into finished products. After process one, two main products PEF and CEF are turned out. The production processes allow for 10% normal loss at process one and 5% for each product if it is to be processed further. The scrap at process one can be sold for GH¢6.60 per unit. The standard prices of the products are as follows: PEF to be sold at split-off point for GH¢17 per unit but can be sold for GH¢28 per unit after further processing. A unit of CEF can also be sold for GH¢16 at split-off point or GH¢25 after further processing. Further processing costs are: PEF; direct materials GH¢4 per unit and conversion GH¢3.50 per unit. The materials and conversion costs per unit for CEF are GH¢5 and GH¢4 respectively.

In the month of August 2016, 6,000 units were processed through process one at the following costs: direct materials GH¢40,000, conversion GH¢32,000. The output at the end of process one was 3,000 units for PEF and 2,000 units for CEF.

Required:

Advise management on which of the products should be processed further and which should be sold at split-off point if volume is used to share common cost. (12 marks)

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