- Chakula Engineering Company Limited (CECL) recently sent their chief designer to the
USA and UK to review developments in the American and British Markets. He has...(Solved)
Chakula Engineering Company Limited (CECL) recently sent their chief designer to the
USA and UK to review developments in the American and British Markets. He has now
returned with details of a new type of food mixer that is being developed over there. CECL
are considering the design and manufacture of a liquidizer gadget attachment to be used as
an extra gadget for the new mixer when it is sold in Kenya. The chief designer‟s notes
show that 10% of the experts he questioned in both the UK and USA believed the new
mixer would reach the Kenyan market in a year‟s time, whereas 30% thought it
would be launched in four year‟s time, and the remainder suggested a five-year delay
before it reached Kenyan.The presents value (PV) of net cash flows form making and selling
the liquidizer are estimated by the company to be sh.8 million, if the market develops one
year from now and sh.3.2 million if it develops five years from now.
CECL have not developed a liquidizer before, and whilst it immediate development would
cost Sh.2 million, they feel they have only a 50% chance of a successful development at
present. A number of alternative courses of action present themselves. The company could
abandon the whole project, or wait for one year to see if the mixer has penetrated the
Kenyan market. They would then abandon or develop the liquidizer at a PV cost of Sh.1.8
million, with a 70% chance of success, but they would be late into the market and the PV of
their receipts they estimate at Sh.4.8 million, including the expenditure of Sh.400,000 on
acquiring extra product data during the second year of delay, and the chance of a successful
development would be 90%. At this point, however, the mixer could only come on the
market at the four or five year point from now.
Required:
Using a decision tree approach, advise the company on the course of action to adopt.
Date posted: May 8, 2021. Answers (1)
- James Ugenya is the Final Director of Ugenya Ltd. He wishes to install an inventory control
system an, in particular, calculate and utilize an optimal order...(Solved)
James Ugenya is the Final Director of Ugenya Ltd. He wishes to install an inventory control
system an, in particular, calculate and utilize an optimal order quantity using the EOQ
model. He has collected the following data about inventory item NPD:
- Purchase price Sh.31.25 per unit
- Inventory insurance and other variable
costs of storage paid at year-end Sh.0.625 per unit
- Annual demand 1,250 units
Ugenya‟s opportunity rate of return is 10 per cent. He anticipates no need for a safety stock.
He is unsure about the cost behaviour associated with ordering inventory. He collected
some data about the most recent 20 orders made for inventory item NPD. He also ran a
regression using the number of units in each order to predict the total cost of the order. The
results are as follows:
Required:
a) Using only the data given above, what optimal order quantity would you recommend?
b) What is the 95% confidence interval of the variable ordering cost per unit ordered?
c) List two regression assumptions that must be maintained in order to answer (b) above.
d) The actual costs of ordering turned out to be Sh.50 per order plus Sh.4.375 per unit ordered.
Date posted: May 8, 2021. Answers (1)
- Katiba Ltd. is changing its current short-term planning approach in an attempt to
incorporate some newer planning techniques that will permit selection of an optimum
production mix.
The...(Solved)
Katiba Ltd. is changing its current short-term planning approach in an attempt to
incorporate some newer planning techniques that will permit selection of an optimum
production mix.
The company‟s director of operations has developed the following price and cost
information per unit of each product.
Assume the total production level of 60,000 units made up of equal amounts of each
product. Required: (Parts (a) and (b) below are independent of each other)
a) All three products use the same direct material which cost Shs. 270 per kilogramme and
direct-labour rate is Shs. 900 per hour. Monthly capacities are 2,000 direct-labour hours
and 20,000 kilogrammes of direct materials. Fixed overhead is assumed to be the same
for each product.
Formulate and clearly label the linear-programming (LP) functions necessary to maximize
Kariba‟s net income. Show supporting computation but do not solve t he linear
programming functions.
b) Katiba‟s management has decided to produce product 3 only. The sales and
marketing director has presented the following results of a price analysis for product 3.
at a selling price of Sh.7200 per unit, the probability distribution of total sales is uniform
between Sh.27,000,000 and Sh.54,000,000. At a selling price lowered to Shs. 6,300 per
unit. The probability distribution of total sales is uniform between Shs. 54,000,000 and
Sh.81,000,000.
i What is the probability of at least breaking even at a selling price of Sh.7,200 per unit
ii Which pricing strategy yields a higher expected profit?
Date posted: May 8, 2021. Answers (1)
- Uganda Ltd. has the following standards for producing an alcoholic beverage:
Every 100 litres of input should yield 80 litres of Chovi, the finished product.
The production...(Solved)
Uganda Ltd. has the following standards for producing an alcoholic beverage:
Every 100 litres of input should yield 80 litres of Chovi, the finished product.
The production manager is supposed to make the largest possible amount of finished
product for the least cost. He has some leeway to alter the combination of materials within
certain wide limits, as long as the finished product meets specified quality standards. Actual
results showed that 400,000 litres of Chovi were produced during last week. The raw
materials used in this production were 280,000 litres of 590N and 240,000 litres of KAG. No
price variances were experienced during the period.
Required:
a) A presentation of yield and mix variances.
b) Comment on the performance of the manager.
Date posted: May 8, 2021. Answers (1)
- FMD Ltd, wishes to study the relationship between the total costs of operating one of its
divisions and to the physical output of that division. It...(Solved)
FMD Ltd, wishes to study the relationship between the total costs of operating one of its
divisions and to the physical output of that division. It decides to begin with a simple linear
probabilistic model relating monthly total operating cost to monthly output, as follows:
Y = K0 + K1 x + Z
Where y is monthly total operating cost, x is monthly unit production, and Z is a random
variable assumed to follow a normal probability distribution with mean U of zero and
standard deviation of o.
Required:
a) Give a precise interpretation of the parameters K0 and K1 of the model above, so that
an accountant would understand what they stand for.
b) Give a brief outline of the role of Z in the model. In a particular, indicate why it is
there.
c) FMD Ltd. obtains the following data on monthly production and costs:
Using these data, compute the coefficient K0 and K1 of the model.
d) Outline how you would go about deciding whether or not the model above fits the
data reasonably well and captures the underlying process generating the monthly
operating costs.
e) Use the model to predict next month‟s operating costs at a production level of 2,000 units.
Date posted: May 8, 2021. Answers (1)
- Computer Ltd., is in the process of deciding how to service a one-year warranty on the 1,000 computers sold to a large international company.
You have...(Solved)
Computer Ltd., is in the process of deciding how to service a one-year warranty on the 1,000 computers sold to a large international company.
You have been presented with three alternatives:
Alternative A
A reputable computer service firm has offered to service the computers, including all parts
and labour for a flat charge of Sh.27,000.
Alternative B
For Sh.22,500 another reputable service firm would provide all necessary parts and up to
1,000 service calls at no charge. Service calls in excess of that number would be Sh.6 each.
The number of calls is likely to be:
Required:
a) For each alternative, compute the standard deviation and the coefficient of variation.
b) Which alternative is most risky? Explain.
c) What alternative would be taken? Explain.
Date posted: May 8, 2021. Answers (1)
- Joy Musa is trying to decide between three capital projects of varying returns and risks as shown below:
Required:
a) What difficulties in the design of control...(Solved)
Joy Musa is trying to decide between three capital projects of varying returns and risks as shown below:
Required:
a) What difficulties in the design of control systems are demonstrated by the above
situation?
b) Compute Joy Musa's expected utility from each capital project.
Date posted: May 8, 2021. Answers (1)
- Kata Leo manages a factory that is currently processing a large order to make hundreds of
newly designed computers. Several serious production problems have been encountered.
Kata...(Solved)
Kata Leo manages a factory that is currently processing a large order to make hundreds of
newly designed computers. Several serious production problems have been encountered.
Kata Leo is concerned whether the units will be of acceptable quality. If they are acceptable,
the factory will have a net profit of Sh.1,000,000. If the units are of an unacceptable quality,
the legal problems, warranty claims and unfavourable publicity will result in a net loss of
Sh.625,000. However, Kata Leo could add an intricate inspection procedure so that all
defective computers could be discovered and repaired before they leave the factory. The cost
of his procedure would be Sh.1,307,500
Required:
a) Formulate Kat Leo‟s problem as a “decision table” or “pay off table showing
actions, events and outcomes.
b) Supposes that both events are equally likely and that Kata Leo bases his decision strictly
on expected monetary return, which action will the management prefer?
c) Suppose that Kata Leo could obtain a consultant‟s special accounting
analysis that would affect his assessments probabilities of acceptable or unacceptable
quality. The consultant is expected to produce one of three possible reports: neutral,
optimistic or pessimistic.
The neutral report would not change the original decision in (b) above. The optimistic
report would change Kata Leo‟s assessments of probabilities to 0.7 acceptable
and 0.3 unacceptable. The pessimistic report would have the reverse effect, changing
the probabilities to 0.3 acceptable and 0.7 unacceptable.
Kata Leo assesses probabilities of receiving the various reports as follows:
Neutral report - 0.3
Optimistic report - 0.3
Pessimistic report - 0.4
What is the highest price that Kata Leo should pay for the report?
Date posted: May 8, 2021. Answers (1)
- Miujiza Co. Ltd. manufactures two industrial products: x-100, which sells for Sh.4,500 a unit,
and Y-120 which sells for Sh.4,250 a unit. Each product is processed...(Solved)
Miujiza Co. Ltd. manufactures two industrial products: x-100, which sells for Sh.4,500 a unit,
and Y-120 which sells for Sh.4,250 a unit. Each product is processed through both of the
company‟s manufacturing departments. The limited availability of labour,
materials and equipment capacity has restricted the ability of the firm to meet the demand
for its products. The production department believes that linear programming can be used
to support and systematize the production schedule for the two products.
The following data are available to the production department:
a) Evaluate the accuracy and application of the L.P. equations prepared by the production
department.
b) Formulate and label equations for the L.P. statement of the production problem in line
with your findings in (a) above.
c) Explain how L.P. could help Miujiza Co. determine how large a change in the price of
direct materials would have to be to change the optimum production Mix of X-100 and
Y-120
Date posted: May 8, 2021. Answers (1)
- The Uganda Bank (E.A.) Ltd has only two-branches. The head office branch is in the center
of Kampala and the Kagera branch outside Kampala. The head...(Solved)
The Uganda Bank (E.A.) Ltd has only two-branches. The head office branch is in the center
of Kampala and the Kagera branch outside Kampala. The head office staff consists of the
managing director and finance manager. With minor exceptions, the branch managers are
permitted to conduct their affairs like the heads of two independent banks. The planning
and control system centers on branch income statements prepared by the Finance Manager.
The Kagera branch, on the other hand, is located outside Kampala in a large and growing
retirement community and as primary retail branch. Mr. Obok, the manager, is in his first
year with the Uganda Bank. In his attempts to sell the bank‟s services to the
Kagera residents, he has found that his only success is the area of foreign deposits. Loan
business, on the other hand, is both competitive and scarce.
The interest rate he can charge is constrained by the fact that the manager of the local
competing branch of the other bank while not actively soliciting loan business is apparently
charging rates below the prevailing Kampala prime rate. Additionally, there seems to be
fundamental resistance in the part of the Kagera residents to the idea of borrowing even at
the 12% rate Obok has been offering.
The Kampala branch located in the growing central business district, serves primarily
commercial customers. The manger, Mr. Kamau, has found in recent years that while he
faces a number of vigorous competitors the principal constraint on his ability to generate
new loan business is lack of supporting deposits. The only alternative source of lending
funds is the purchase of Euro currency, which are foreign deposits held in a bank outside
Africa.
This opinion is considered less than acceptable by Kamau, as the 22% interest he would
have to pay for such funds is higher than the rate he is able to charge loan customers
currently at 20%.
In spite of his frequent lectures on the merits of leverage, the best Obok has been able to do
is to generate a few goll-carat installment and social security cheque receivable loans. As a
result, he finds himself with substantial excess savings deposits, which he has to keep in the
vault to satisfy the government‟s 20% cash reserve requirement, the vault
additionally contains excess lendable funds equal to almost 70% of total savings deposits.
The finance manager has suggested that he lends these funds to Kamau at the Kampala
branch. This was acceptable to both managers, although some disagreement arose as to the
interest rate appropriate for such a loan. The argument was finally settled by the finance
manger, who indicated that the theoretically correct rate was the rate Obok was paying on
savings deposits, 10%. It has been further agreed that if Obok could find additional loans,
any or all of the funds lent to Kamau would be returned.
Required:
a) Evaluate the 10% interbranch loan rate and suggest appropriate changes in relation to
the following criteria:
i Motivating managers to act in a manner consistent with the best interests of the
bank as a whole.
ii Evaluating the performance of individual branches.
b) Would your answer change if the Kagera branch loan rate were to rise to 14%, while all
other rates as well as the level of loan demand at Kampala b ranch, remained the same?
c) Would your answer change if all rates were the same as in (a) above except that he cost
of Euro currency dropped to 18%.
d) Based on your answers to the above, what general statements can you make about the
interbranch loan rate appropriate for evaluation of individual managers?
Date posted: May 8, 2021. Answers (1)
- Siku Kuu Ltd. Manufactures and distributes a line of Christmas gifts. The company had
neglected to keep its gifts line current. As a result, sales have...(Solved)
Siku Kuu Ltd. Manufactures and distributes a line of Christmas gifts. The company had
neglected to keep its gifts line current. As a result, sales have decreased to approximately 25,000
units per year fro a previous high of 125,000 units. The gifts have been redesigned recently and
is considered by company officials to be comparable to its competitors‟ models.
The company plans to redesign the gifts each year in order to compete effectively. Kama
Kawaida, the Sales Manager, is not sure how many units can be sold next year, but she is willing
to place probabilities on her estimates. Kama Kawaida's estimates of the number of
units that can be sold during the next year and the related probabilities are as follows:
Required:
a) Prepare a payoff table for the different sizes of production runs required to meet the four
sales estimates prepared by Kama Kawaida for Siku Kuu Ltd.
If Siku Kuu Ltd. relied solely on the expected monetary value approach to make
decisions, what size of production run would be selected?
b) Identify the seven basic steps that are taken in any decision process. Explain each step by
reference to the situation presented by Siku Kuu Ltd. and your answer to requirement (a)
Date posted: May 8, 2021. Answers (1)
- A company makes a lotion that is manufactured through two processes, A and B. on the 1 November 1995, work in process consisted of the...(Solved)
A company makes a lotion that is manufactured through two processes, A and B. on the 1 November 1995, work in process consisted of the following:
Process B into finished goods while 4000 units remained in progress, 100% complete as to
direct materials and 50% complete as to direct labour and overheads.
All inventories are valued on the weighted average cost basis and transfers from process A
to Process B are treated as part of direct material cost.
Required:
The cost accounts for both processes for the month of November 1995.
Show all supporting computations including the inventory flow through each process.
Date posted: May 8, 2021. Answers (1)
- The Finance Director of Africa Problems Ltd. is considering developing a flexible-budget
formula for the manufacturing overhead costs.
The accounting staffs have suggested that simple linear regression...(Solved)
The Finance Director of Africa Problems Ltd. is considering developing a flexible-budget
formula for the manufacturing overhead costs.
The accounting staffs have suggested that simple linear regression be used to determine the
cost behaviour pattern of the overhead cost. They consider that this method would provide
a good and quick estimate of the costs that can be expected to be incurred each month. The
actual direct-labour hours and corresponding manufacturing overhead costs for each month
between 1996 and 1999 were used in the linear-regression analysis.
The following occurrences during the period are considered unusual:
1. Production was reduced in one month during 1997 due to wildcat strikes related to
political changes in one of the countries.
2. In 1998, production was reduced in one month because of material shortages and
materially increased (overtime scheduled) during two-months to meet the units
required for one-time sales order.
3. Employee benefits were raised significantly in December 1998 as a result of a labour
agreement.
4. Production during 1999 was not affected by any special circumstances.
The accounting staff raised the following issues:
Some members question whether historical data should be used at all to form the basis
for a flexible-budget formula.
Some members believe that he use of data from all 48 months would provide a more
accurate portrayal of the cost behaviour. While they recognized that any of the monthly
data could include efficiencies, they believed these would tend to balance out over a
long period of time.
Still other members felt that only the most recent 12 months should be used because
they were the most current.
Other members of the accounting staff suggested that only those months that were
considered normal should be used so that the regression would not be distorted.
The accounting department ran two regression analyses of the data, one using the data from
all 48 months and the other using only the data from the last 12 months.
The results were as follows:
a)
i Formulate the flexible-budget equation that can be employed to estimate monthly
manufacturing-overhead costs.
ii Calculate the estimate of overhead costs for a month when 37.500 direct labour
hours are worked.
b) Using only the results of the two regression analysis above, explain which of the two
results is more appropriate as a basis for the flexible-budget formula.
c) Evaluate and explain how each of the four issues raised by the accounting department
staff influence our willingness to use the results of the statistical analyses as the basis for
the flexible-budget formula.
Date posted: May 8, 2021. Answers (1)
- Samaki Ltd., a company based in Mombasa, exports vital fishing hooks to Madagascar.
The demand for the hooks is constant and Samaki Ltd., is able to...(Solved)
Samaki Ltd., a company based in Mombasa, exports vital fishing hooks to Madagascar.
The demand for the hooks is constant and Samaki Ltd., is able to predict the annual
demand with considerable accuracy. The predicted demand for the next couple of year is
200,000 hooks per year.
Samaki Ltd. purchases its hooks from a manufacturer in Mombasa at a price of Sh.400
per hook. In order to transport the purchases from Mombasa to Madagascar, Samaki Ltd.
must charter a ship. The charter services usually charge Sh.20,000 per trip plus Sh.40 per
hook (this includes the cost of loading the ship). The ships have a capacity of 10,000
hooks. The placing of each order including arranging for the ship requires 5 h ours of
employee time. It takes about a week for an order to arrive at the Samaki Ltd. warehouse
in Madagascar. The warehouse has a capacity of 15,000 hooks.
When a ship arrives at the Samaki warehouse, the hooks can be unloaded at a rate of 25
hooks per hour per employee. The unloading equipment used by each employee is rented
from a local supplier at a rate equivalent to Sh.100 per hour. Supervisory time for each
shipload is about 4 hours. The employees working in the warehouse have several tasks:
i Placing the hooks into storage, after they are unloaded which can be done at the
rate of about 40 per hour.
ii Checking, cleaning etc. of the hooks in inventory requires about one-half hour
per hook per year.
iii Removing a hook from inventory and preparing it for shipments to a customer
requires about one-eighth of an hour.
iv Security guards general maintenance, etc. require about 10,000 hours per year.
The average cost per hour of labour is equivalent to Sh.200 (including fringe benefits).
Samaki Ltd. has developed the following prediction equation for its general overhead
(excluding shipping materials, fringe benefits, and equipment rental):
Predicted overhead for the year = Sh.20,000,000 + (Sh.160 x Total labour hours)
The materials used to ship one hook to a customer costs Sh.20 and the delivery costs
average out to about Sh.40 per hook.
The company requires a before-tax rate of return of 20 per cent on its investment.
The ordering policy from the manufacturers by Samaki Ltd., is based on an EOQ. Model,
which is determined by the demand for hooks in Madagascar.
Required
a) Determine the quantity that should be ordered each time and the re-order level
b) If the true overhead prediction equation is:
Sh.16,000,000 + (Sh.240 x Total labour hours), what is the cost of the prediction error?
Date posted: May 8, 2021. Answers (1)
- Mwito Club is a charitable organization based in Nairobi. For the last 20 years, the
club has held an annual dinner and dance event with the...(Solved)
Mwito Club is a charitable organization based in Nairobi. For the last 20 years, the
club has held an annual dinner and dance event with the primary aim of raising
funds to help the less fortune members of the society.
This year, there is concern that an economic recession may adversely affect the
success of the event with a fall in the number of guests attending and sale of
advertising space in the published events programme.
A study of past experience, current prices and quotations shows that the following
costs and revenues will apply for the event:
Revenue
Dinner and dance
Required:
(i) The expected profit from the event. (Assume one raffle ticket and one
photograph per attendant).
(ii) Describe how cost-volume-profit (C-V-P) analysis can be applied in
absorption costing.
Date posted: May 7, 2021. Answers (1)
- Angels of Mercy Mission Hospital operates on charity basis. The hospital?s board
of directors has recently complained about the increasing size of the cost budget insisting...(Solved)
Angels of Mercy Mission Hospital operates on charity basis. The hospital‟s board
of directors has recently complained about the increasing size of the cost budget insisting that
the management should cut down on costs.
The major concern of the board is the cost of maintaining patients at the intensive care unit
(ICU).
The following information is available on the operations of the hospital:
1. The average cost of maintaining a patient at the ICU per week is Shs. 200,000 compared
to Shs. 100,000 per week incurred in maintaining a patient at the high dependency unit
(HDU) and Shs. 50,000 per week of maintaining a patient at the general ward (GW).
2. Past information on patients indicates that:
(i) 50% of the patients in ICU at the beginning of the week will remain in ICU
at the end of the week and 50% will be transferred to HDU by the end of the
week.
(ii) 10% of the patients in HDU at the beginning of the week will be transferred
to ICU, 50% will remain in HDU, and 40% will be transferred to GW.
(iii) 85% of the patients in the GW at the beginning of the week will remain in
GW at the end of the week, 10% will be transferred to HDU and 5% to ICU.
3. The board of directors believe that the criteria for maintaining patients in the ICU is too
strict and should be relaxed so that only 40% of the patients in ICU at the beginning of
the week remain there at the end of the week while 60% are transferred to HDU.
4. The staff at the hospital insist that if the proposed criterion is adopted:
(i) 20% of patients in HDU at the beginning of the week will be transferred to
ICU, 50% will remain in HDU while only 30% will be transferred to GW.
(ii) No changes will be expected in the GW.
5. Past hospital records indicate that the hospital serves an average of 4,000 patients
weekly.
Required:
(a) The steady state weekly costs under the current policy.
(b) The steady state weekly costs under the proposed policy.
(c) Advise the board on the best policy.
(d) State the assumptions of the quantitative technique used in solving problems (a) and
(b) above.
Date posted: May 7, 2021. Answers (1)
- Pwani Marine Ltd., a boat construction company, has developed a new type
of speed boat called “Speed Surf.”
The following information has been availed to you:
1. Boat...(Solved)
Pwani Marine Ltd., a boat construction company, has developed a new type
of speed boat called “Speed Surf.”
The following information has been availed to you:
1. Boat construction is a continuous assembling process carried out at
the company‟s yard.
2. Boat assembling is labour intensive involving the use of two classes of
labour namely:
Skilled labour at a standard rate of Shs. 1,250 per hour.
Semi-skilled labour at a standard rate of Shs. 950 per hour.
3. Experience on boat construction from other models indicates that the use of
skilled labour is associated with an 80% learning curve effect whereas use of
semi-skilled labour is associated with a 90% learning curve effect.
4. Labour usage for the first speed boat assembled was as follows:
Skilled labour – 952 hours.
Semi-skilled labour – 650 hours.
5. In October 2005, the sixth and the seventh speed boats were assembled
from start to finish. During the month, the following labour usage and costs
were recorded:
Skilled labour – 680 hours at a total cost of Shs. 800,400.
Semi-skilled labour – 1,256 hours at a total cost of Shs. 1,281,200.
The management of Pwani Marine Ltd. is concerned about the cost variances and
would like to learn more on the composition of the variances.
Required:
(i) Calculate the standard labour cost of the month of October 2005.
(ii) Reconcile the standard cost with the actual cost for the month of October
2005 showing the labour rate and labour efficiency variances.
(iii) Express the labour efficiency variance in terms of labour mix and labour
output variances. (Value the labour mix variances using standard rates).
Date posted: May 7, 2021. Answers (1)
- Explain the applications of the learning curve.(Solved)
Explain the applications of the learning curve.
Date posted: May 7, 2021. Answers (1)
- Kutwa Ltd. is a manufacturing company with two divisions; A and B. Division A
manufactures a single standard product K, some of which is sold externally...(Solved)
Kutwa Ltd. is a manufacturing company with two divisions; A and B. Division A
manufactures a single standard product K, some of which is sold externally and the
remainder used as an input in division B in the manufacture of product M.
The unit production costs of product K are given below:
The manager of division B suggests that based on the above results, a transfer price of Shs.
120 would offer division A a reasonable contribution towards its fixed cost and earn
division B a reasonable profit. This would lead to an increase in the output and overall
profitability of the company.
Required:
( a) Calculate the effect of the existing transfer pricing system on the company‟s profits.
( b) Calculate the effect of adopting the transfer price of Shs. 120 on the company‟s
profits.
Date posted: May 7, 2021. Answers (1)
- Nairobi Manufacturers Ltd. produces component X on machine Y at a rate of 4,000
units per month. Machine Z uses component X at the rate of...(Solved)
Nairobi Manufacturers Ltd. produces component X on machine Y at a rate of 4,000
units per month. Machine Z uses component X at the rate of 1,000 units per month,
the remainder being put into stock. It costs Shs. 2,000 to set up machine Y while the
stock holding cost is estimated at Shs. 2.50 per unit per annum plus a 20% opportunity
cost of capital per annum. Each component costs Shs. 25 to produce.
Required:
(i) Compute the optimal batch size that should be produced using machine Y.
(ii) Assume that the actual set-up cost of machine Y is Shs. 1,000 instead of
Shs. 2,000. Calculate the cost of prediction error.
Date posted: May 7, 2021. Answers (1)