Alvis Kiptoo has budgeted that output and sales of his single product will be 100,000
units in the coming year. At this level of activity, his...
(Solved)
Alvis Kiptoo has budgeted that output and sales of his single product will be 100,000
units in the coming year. At this level of activity, his unit variable costs are budgeted at
Sh.50 and his unit fixed costs at Sh.25. His sales manager estimates that the demand for
the product would increases by 1000 units for every decreased of Sh.1 in unit selling
price (and vice versa) and that at a unit selling price of Sh.200 demand would be nil.
Information about two price increases has just been received from suppliers: one is for
materials (which are included in Alvis Kiptoo‟s variable costs) and one is for
fuel (which included in his fixed costs). Their effect will be to increase both the variable
and fixed costs by 20% each over the budgeted figures.
Alvis Kiptoo aims at maximizing profits from his business.
Required:
a. Calculate before the cost increases the budgeted contribution and profit at the budgeted levels of 100,000 units.
b. Calculate the level of sales at which profits would be maximized and the amounts of these maximum profits before the cost increases.
c. Show whether and by how much Alvis Kiptoo should adjust his selling price in respect to increases in:
- Fuel costs.
- Material costs.
Date posted:
May 3, 2021
.
Answers (1)
A critic has suggested that budgets should be abolished because they introduce rigidity and hamper creativity. Discuss.
(Solved)
A critic has suggested that budgets should be abolished because they introduce rigidity and hamper creativity. Discuss.
Date posted:
May 3, 2021
.
Answers (1)
In his study of: “the impact of budgets on people” C Argyris reported the following
comment by a financial controller on the practice of participation in...
(Solved)
In his study of: “the impact of budgets on people” C Argyris reported the following
comment by a financial controller on the practice of participation in setting budgets in
his company:
“We bring in the supervisors of budget areas, we tell them that we want their frank
opinion, but most of them just sit there and nod their heads. We know they are not
coming out with exactly what they feel. I guess budget scares them”.
Explain why managers may be reluctant to participate fully in setting budgets, indicating
the negative side effects, which may arise from the imposition of budgets by senior management.
Date posted:
May 3, 2021
.
Answers (1)
Watt Lovell Ltd. (WLL) is trying to decide whether or not to drill for oil on a particular site
in North Eastern Kenya. The Chief Engineer...
(Solved)
Watt Lovell Ltd. (WLL) is trying to decide whether or not to drill for oil on a particular site
in North Eastern Kenya. The Chief Engineer has assessed the probabilities that there will be
oil as follow, based on past experience.
Oil 0.2
No oil 0.8
It is possible for WLL to hire a firm of international consultants to carry out a complete
survey of the site. WLL has used the firm many times before and has made the following
estimates:
1. If there really is oil, then there is a 95% chance that the report will be favourable.
2. If there is no oil then there is only a 10% chance that the report will indicate that there is oil.
The following additional information is also provided:
The cost of drilling is Sh.10 million.
The value of the benefits if oil is found is Sh.70 million
The cost of obtaining information is Sh.3 million.
Required:
a) Advise the company on whether to acquire additional information from the consultants
b) Compute the value of imperfect information.
Date posted:
May 3, 2021
.
Answers (1)
Muthothi Ltd. Operates a conventional stock control system based on re-order levels and
Economic Order Quantities (EOQ). The various control levels were set originally based on
estimates...
(Solved)
Muthothi Ltd. Operates a conventional stock control system based on re-order levels and
Economic Order Quantities (EOQ). The various control levels were set originally based on
estimates which did not allow for any uncertainty and this has caused difficulties because, in
practice, lead times, demands and other factors to vary.
The company works for 360 days per year and it costs Sh.1,000 to place an order. The
holding cost is estimated at Sh.0.025 for storage plus 10% opportunity cost of capital. Each
unit is purchased at Sh.2. The re-order level for this part is currently 150,000 units and it can
be assumed that the demands would apply for the whole of the appropriate lead-time.
Required:
a) Calculate the level of buffer stock implicit in a re-order level of 150,000 units.
b) Calculate the probability of stock-outs.
c) Calculate the expected annual stock-outs in units.
d) Compute the stock-out costs per unit at which it would be worthwhile raising the reorder
level to 175,000 units.
e) Discuss the possible alternatives to a re-order level EOQ inventory system and their
advantages and disadvantages.
Date posted:
May 3, 2021
.
Answers (1)
A manufacturer produces and sells two products, A and B. The unit variable cost is sh.12
and sh.8 for A and B respectively. A review of...
(Solved)
A manufacturer produces and sells two products, A and B. The unit variable cost is sh.12
and sh.8 for A and B respectively. A review of selling prices is in progress and it has
been estimated that, for each product and increase in the selling price would result in a
fall in demand of Sh.500 units per every Sh.1 increase in price and similarly a decrease of
Sh.1 in price would result in an increase in demand of 500 units.
Required:
Calculate the profit-maximizing price for reach product.
Date posted:
May 3, 2021
.
Answers (1)
The Z division of XYZ Ltd., produces a component which it sells externally, and can also
be transferred to other divisions within the organization. The division...
(Solved)
The Z division of XYZ Ltd., produces a component which it sells externally, and can also
be transferred to other divisions within the organization. The division has set a
performance target for the coming financial year of residual income of Shs. 5,000,000.
The following budgeted information relating to Z division has been prepared for the
coming financial year.
1. Maximum production/sales capacity 800,000 units.
2. Sales to external customers: 500,000 units at Sh.37.
3. Variable cost per component Sh.25.
4. Fixed costs directly attributable to the division Sh.1,400,000.
5. Capital employed: Sh.20,000,000 with cost of capital of 13%
The X division of XYZ Ltd has asked Z division to quote a transfer price for units of the
component.
Required:
i Calculate the transfer price per component which Z division should quote to X
division so that its residual income target is achieved.
ii Explain why the transfer price calculated in (i) above may lead to sub -optimal
decision making from the point of view of XYZ Ltd taken as a whole.
Date posted:
May 3, 2021
.
Answers (1)