ACC7003 Main exam










Your answers must be submitted by 12:00 noon on the day of the exam. This is a strict deadline which must be adhered to (unless an adjusted time has been communicated to you previously).



Your answers should be submitted via



If you have queries during the test you can email If you have broadband issues and need to use the phone, you can contact the Management School office on 028 9097 4200. If you have technical queries, such as around accessing Canvas, you can contact the

Exams Office at



By submitting the work, I declare that:

  1. I have read and understood the University regulations relating to academic offences, including collusion and plagiarism: ulations/Procedures/ProceduresforDealingwithAcademicOffences/
  2. The submission is my own original work, and no part of it has been submitted for any other assignments, except as otherwise permitted;
  3. I did not use notes or any other material, including online resources, at any stage during the examination;
  4. All sources used, published or unpublished, have been acknowledged;
  5. I give my consent for the work to be scanned using a plagiarism detection software.
  6. I agree to complete an oral assessment if requested to do so.


This paper is worth 60% of the total marks.

Answer any THREE questions ONLY All questions carry equal marks.





  1. a) Fisher Inc is a manufacturing company operating in a very competitive global market. It manufactures electronic products, with two operating divisions, Construction and Energy. Condensed divisional income statements, which involve no intracompany transfers and which include a breakdown of expenses into variable and fixed components, are as follows:


                 Construction Division Energy Division Total
17,000 units  £ 145   per unit  £ 2,465,000   £ 2,465,000
23,000 units  £ 280   per unit    £ 6,440,000 £ 6,440,000
Total    £ 2,465,000  £ 6,440,000 £ 8,905,000  
17,000 units  £ 112   per unit  £ 1,904,000   £ 1,904,000
23,000 units  £ 208   per unit *    £ 4,784,000 £ 4,784,000
Fixed              £ 210,000  £ 540,000 £ 750,000
Total expenses  £ 2,114,000  £ 5,324,000 £ 7,438,000
Income from operations £    351,000  £ 1,116,000 £ 1,467,000


*£172 of the £208 per unit represents materials costs, and the remaining £36 per unit represents other variable conversion expenses incurred within the Energy Division.

The Construction Division is presently producing 17,000 units out of a total capacity of

19,900 units. Materials used in producing the Energy Division’s product are currently purchased from outside suppliers at a price of £172 per unit.

The Construction Division is able to produce the materials used by the Energy Division. Except for the possible transfer of materials between divisions, no changes are expected in sales and expenses.


  1. If the Energy Division purchases 2,900 units from the Construction Division, rather than externally, at a negotiated transfer price of £123 per unit, how much would the income

from operations of each division and the total company income from operations

increase?                                                                                                                                 3 Marks


  1. Prepare condensed divisional income statements for Fisher Inc based on the data in part

(i) above.                                                                                                                                   5 Marks


  • If a transfer price of £135 per unit is negotiated between the divisions, how much would the income from operations of each division and the total company income from

operations increase?                                                                                                                                                                                                    2 Marks


  1. b) Creamy Bakes of Belfast is a well-known producer of bakery items. Among other bakery items, it makes doughnuts using three basic ingredients. The standard cost card for one batch of doughnuts for the month of December was as follows:
Ingredients Weight (kg) Price per Kg


Butter 0.25 9
Flour 0.75 2
Chocolate 0.4 11


The budget for production and sales in December was 145,000 batches, whereas actual production and sales were 160,000 batches.

The actual ingredients used were as follows:

Material Weight (kg)
Butter 40,080
Flour 86,232
Chocolate 61,200


The operations manager is concerned about possible wastage of ingredients and is planning to conduct a variance analysis for the purpose of evaluating the performance of the related sub-unit.


  1. Calculate the material mix variance and the material yield variance for December and

comment on your findings.                                                                                                                                                                                              5 Marks


  1. The operations manager is slightly concerned that there might be some bottlenecks in the facility that could be negatively impacting the optimal production in the related subunit. In this context, explain the Theory of Constraints and discuss steps to manage

bottleneck operations.                                                                                                                                                                                                    5 Marks

    Total 20 Marks





  1. a) Universal Hotels, Inc. operates health spas in Shenzhen, China; Miami, USA; and Lagos, Nigeria. The Shenzhen spa was the company’s first and opened in 1991. The Miami spa opened in 2004, and the Lagos spa opened in 2013. Universal Hotels has previously evaluated divisions based on residual income (RI), but the company is considering changing to an Economic Value Added (EVA ™) approach.

All spas are assumed to face similar risks. Data for 2020 are shown below:








 Total        £
 Revenues    4,305,000    4,599,000    3,392,000   12,296,000
 Variable costs    1,680,000    1,711,500    1,003,000     4,394,500
 Fixed costs    1,344,000    1,638,000    1,029,000     4,011,000
 Operating Income    1,281,000    1,249,500    1,360,000     3,890,500
 Interest on long term debt (at 9%)       414,000       468,000       495,000     1,377,000
 Income before taxes       867,000       781,500       865,000     2,513,500
 Tax (at 28%)       242,760       218,820       242,200        703,780
  Net income after tax          624,240          562,680          622,800      1,809,720
 Net book value at 2020 year end         
 Current assets    1,344,000       892,500       630,000     2,866,500
 Non-current assets


   5,119,000    5,736,000    7,177,000   18,032,000
      6,463,000     6,628,500     7,807,000    20,898,500
 Current liabilities       347,000       279,000         89,000        715,000
 Long term debt    4,600,000    5,200,000    5,500,000   15,300,000
 Shareholders’ equity    1,516,000    1,149,500    2,218,000     4,883,500
  Total liability and equity     6,463,000     6,628,500     7,807,000    20,898,500
 Accumulated depreciation on long term assets    2,310,000    1,586,000       231,000 4,127,000


Market value of equity is 1.95 times the book value of equity; however, the market value of debt remains the same as book value. Assume cost of equity capital to be 15%.


  1. Calculate EVA™ for each of the spas, using net book value of long-term assets. 3 Marks


  1. Calculate EVA™ again, this time using gross book value of long-term assets. 3 Marks


  • Comment on the differences between the two methods. How does the selection of asset measurement method affect goal congruence? 4 Marks



  1. b) Comfy Chairs Company (Comfy) serves a niche market of computer gaming and specializes in producing gaming products. Encouraged by the increase in online gaming activities due to Covid-19, it is planning to launch a new kind of gaming chair. It needs to prepare its budget for the coming year and is trying to decide whether to launch the gaming chair at a price of £55 or £60 per unit.

Market research by a consulting firm provides the following probability figures corresponding to sales volume for the chairs, if they are sold at a price of £55:

Probability Sales unit
0.3        220,000
0.45        210,000
0.25        240,000


The same consulting firm provides the following probability and corresponding sales figures if the chairs are sold at a price of £60:

Probability Sales unit
0.35        208,000
0.25        205,000
0.4        174,000


Variable product costs would be £32 per unit for production volumes up to and including 205,000 units each year. However, if production exceeds 205,000 units each year, the variable production cost per unit would fall to £30 for all units produced.

Based on the report provided by the consulting firm, advertising costs would be £1,050,000 per annum at a selling price of £55 and £1,140,000 per annum at a price of £60. Fixed production costs would be £700,000 per annum regardless of the selling price.


  1. Calculate each of the possible profit outcomes which could arise for Comfy in the coming year. 3 Marks


  1. Calculate the expected value of profit for each of the two price options and recommend, on this basis, if Comfy should price the product at £55 or £60.                       3 Marks


  • Briefly explain the maximax and maximin decision rule and identify which price should be chosen by management if they use each of these two rules to decide which price should be charged.                                                                                           4 Marks

                                                                                                                  Total 20 Marks QUESTION 3


  1. a) The Queen Elizabeth Heart Centre (QEHC) carries out two kinds of heart operations on patients; Open Heart operation and Normal operation. Each operation has the following direct costs:
Operation  Normal Open Heart
Surgical time and materials £2,000 £4,100
Anaesthesia time and materials £1,000 £1,920


QEHC calculates overhead cost per operation by taking the overall overhead cost and dividing it by the number of operations. This approach shows that total cost for Operation Normal is £3,561.47; similarly total cost for Operation Open Heart is found to be £6,581.47. The new finance director is keen to find out if the costs could be allocated in a more accurate way.

Based on previous years’ data, the following information is available about the operations:

  Normal Open Heart
 Number of operations        19,100             27,400
 Administrative time per operation (in hours)              1.5                   2.5
 Patient’s stay per operation (hours)            48.0                 96.0
 Average meals per patient per operation              6.0                 12.0


Additional information is shown in the below table:

Cost Cost driver £
Administrative cost Administrative time per operation        2,871,038
Patient support cost Length of stay for patients        8,216,005
Meal costs Number of meals        2,467,405
Other general costs Length of stay for patients      12,554,012
Total        26,108,460



  1. The finance director of QEHC is keen to evaluate the profitability of both of the operations but is not sure if the overhead costs have been correctly assigned to these two operations. In this context, critically appraise the relevance of activity based costing

(ABC) in management control.                                                                                                                                                                                        5 Marks


  1. Using activity based costing (ABC), calculate the full cost per operation and make a recommendation to the finance director if ABC should be adopted at QEHC. 5 Marks


  1. b) Frankfurt Memory Company have produced two new memory storage devices: USB device and SDC cards. Due to limited marketing and distribution resources, they are in a position to launch only one product. As the market for digital memory devices is very competitive, the success or failure of the newly launched product will depend on how competitors react.


There is a 50% chance that competitors will take no action, a 30% chance that they will launch a similar product and a 20% chance that they will launch a better product.

The profit/loss that will be earned by each product, depending on how the competitors react, is shown in the following table:

Competitor’s reaction   USB   SDC
No action   £550,000   £650,000
Launch a similar storage device   £395,000   £425,000
Launch a better storage device   (£140,000)   (£160,000)

Frankfurt Memory Company also have the option of not launching any new storage devices. If this is the case, there is a 60% chance that the competitors will take no action and there will not be any impact on company’s profit. There is a 40% chance, however, that competitors will launch a new kind of digital memory storage device anyway; and this has the potential to reduce Frankfurt’s profits by £180,000.


  1. The CFO of the firm has approached you to provide a recommendation on how to proceed. Using a decision tree and based on expected value, identify the best course of

action for the company, and write a memo to the CFO of Frankfurt Memory Company

recommending a course of action.                                                                                                                                                                   5 Marks



  1. If Frankfurt Memory Company decides to launch any of the storage devices, the CFO is planning to launch the product in three variants: Value, Basic, and Premium.


The expected selling price and variable cost for the three types of storage device is shown below:

Product Selling Price Variable cost
Value (V) £28 £13
Basic (B) £37 £24
Premium (P) £53 £32


The following production requirements (in hours) for each product are shown along with departmental capacity:

Department Value Basic Premium Department capacity 
Production 1 3 2       35,000
Assembling 4 2 3       38,000
Finishing & Packaging 1 2 4       28,000


Due to the multiple constraints mentioned above, the CFO is not sure on how many units of each of the products to produce. He has heard that linear programming can be used to deal with issues when there are multiple constraints.


State the optimization function, constraints, and also state any related assumptions to assist the production manager.                                                                              5 Marks

                                                                                                                  Total 20 Marks QUESTION 4


  1. a) SpaceZ Co. operates in the USA and its CFO Harry Brown provides you with a summary report of its cost estimates of a new proposed product for year 2021 as follows:
  Estimated Fixed

Cost ($)



Variable Cost ($ per unit sold)


Production costs:    
Direct materials                          –      48.00
Direct labour                          –         35.00
Factory overhead         400,000.00             9.00
Selling expenses:     
Sales, salaries, and commissions           385,000.00           3.00
Advertising           140,000.00              –
Travel             10,500.00              –
Miscellaneous selling expenses               4,100.00             1.00
Administrative expenses:    
Office and officers’ salaries           579,000.00              –
Supplies             18,500.00           6.00
Miscellaneous administrative expenses      11,000.00             2.00
Total      1,548,100.00     104.00


It is expected that 14,500 units of the new product will be sold at a price of $236 a unit. Maximum sales within the relevant range are 18,000 units. The level of inventory at the beginning of the year is expected to be the same as at the end of the year.

Harry is concerned about the profitability of this new product and wants to find out the breakeven point in units and dollar amount to assess the feasibility of the project and is seeking your assistance.


  1. Showing clear calculations, find the expected income from operations for the proposed new product and determine the break even point (in units and revenue).          5 Marks


  1. Harry is not sure if the break even point calculated in (i) above can be achieved and wants to figure out how much ‘flexibility’ there is in terms of achieving the target.

Calculate the safety margin and explain the implications to Harry.                                  3 Marks


  • Determine the operating leverage for the project.                                    2 Marks


  1. b) Beijing Gaming Company manufactures gaming tables: Basics and Premiums. Due to an increasing focus on video games during the Covid-19 lockdown, the company has been experiencing an increased demand for its products. Two of its newer products can only be processed on machines that were recently purchased for this purpose.


The machines have a maximum capacity of 15,000 machine hours, and no other products that the company makes use these machines.

Charlie Zhang, the company’s operations manager, is preparing the production schedule for the coming month and can’t seem to find enough machine time to produce enough units to meet the customer demand that the marketing department has included in the sales budget.

Katie Johnson, the company’s controller, has gathered the following information about the two products:


  Basic Premium
Selling price per unit £250 £304
Direct materials £90 £75
Direct labour £26 £50
Variable overhead £22 £39
Fixed overhead £45 £60
Profit per unit              £67              £80
Unit sales demand 10,000 16,000
Machine hours per unit 0.5 0.9



  1. How should Charlie allocate the 15,000 available machine hours between the two products so that Beijing Gaming Company maximizes its profits?          2 Marks


  1. Charlie has talked with the marketing department about the situation and suggested that the company raise the sales price on the Premium to £380 to reduce customer demand. The marketing department believes that at the higher price, demand for Premium will drop to 13,600 units.  How should Charlie allocate the 15,000 machine hours based on

this new information?                                                                                                                                        3 Marks


  • Charlie is in a discussion with the production manager Angela and the company’s controller Katie to explore ideas on introducing a new product with improved features, which is to be named Deluxe. All of them agree, based on available information, that the overall cost of producing one unit of Deluxe would be £445 whereas customers would be willing to pay only up to £455 for such product. To improve the profit margin on Deluxe products, all three remain committed to bringing the potential cost of the Deluxe product below £400.


In this context, critically assess the relevance of target costing with reference to a

product’s life cycle.                                                                                                                                             5 Marks

                                                                                                                    Total 20 Marks