|UNIVERSITY OF SURREY©|
|Faculty of Arts & Social Sciences|
|Surrey Business School|
|Postgraduate Programmes in Management|
|MANM401: Strategic Management for Accounting|
|FHEQ Level 7 Examination|
|Time allowed:||24-hour take-home exam||Semester 2 2019/0|
|Instructions to Candidates:
1. This paper contains THREE questions. Candidates should attempt ALL 3 questions.
2. Total marks available are 90 marks. Where appropriate the mark carried by an individual part of a question is indicated in square brackets .
3. Candidates are permitted to use a spreadsheet such as Excel to perform calculations if they wish but should copy and paste their workings from the spreadsheet into a word document answer sheet and indicate clearly which workings it refers to.
4. All answers should be word processed and candidates are reminded to adhere to the word limits of the theoretical questions.
|Calculators are permitted providing they are non-programmable and not wireless enabled|
|Additional materials: None|
|©Please note that this exam paper is copyright of the University of Surrey and may not be reproduced, republished or redistributed without written permission
Maxim Ltd produces and sells two products – X and Y. Budgeted sales for the next five months (April to August 2020) are as follows:
|Sales of Product X (units)||5,000||6,500||4,800||5,600||6,000|
|Sales of Product Y (units)||3,600||3,000||4,000||4,200||5,000|
The standard selling prices and variable costs of production of each product is provided in the table below.
|Product X||Product Y|
|£ per unit||£ per unit|
|Variable Costs of production|
|Direct Material A (£0.50 per kg)||£3.00||£4.00|
|Direct Material B (£1 per kg)||£2.00||£1.00|
|Direct labour (£10 per hour)||£2.50||£3.00|
|Variable production overhead (£4 per direct labour hour)||£1.00||£1.20|
The cost accountant of the company has provided the following additional information.
- All sales are on account and the collection pattern are 70% collected in the month of sale; 25% collected in the month following the sale and 5% is uncollectable. The March 31st accounts receivable balance of £30,000 will be collected in full.
- Company policy is for closing inventory of finished goods to be equal to 20% of the following month’s budgeted sales. On March 31st, there were 1,000 units of X and 720 units of Y on hand.
- Management wants both materials A and B on hand at the end of each month to be equal to 10% of the following month’s production requirements (usage). On March 31st, there were 5,964 kg of material A and 1,408 kg of material B on hand. One-half of a month’s purchases are paid for in the month of purchase and the other half is paid in the following month. The March 31st accounts payable balance is £12,000.
- Maxim Ltd has a ‘no layoff’ policy and all employees are paid for 40 hours of work each week. However, all workers agreed to a wage rate of £10 per hour regardless of the hours worked (no overtime pay). For the months April to August 2020, the direct labour workforce will be paid for a minimum of 2,500 hours per month. Labour is paid at the end of the month for their work.
- Variable production overhead is charged to finished goods at the rate of £4 per direct labour hour worked.
- Fixed manufacturing overhead is £20,000 per month, including depreciation charges of £5,000.
- Variable selling and administrative expenses are £0.50 per unit of X sold and £0.50 per unit of Y sold while total fixed selling and administrative costs are £15,000 per month. All these costs are cash-based.
- All the overheads (fixed and variable) are paid for in the month the costs are incurred.
- Maxim Ltd maintains a 12% open line of credit for £100,000 and maintains a minimum cash balance of £30,000 per month. All borrowings requirements are made on the first day of the month and repayments are made on the last day of the month.
- The company will pay a cash dividend of £52,100 in April as well as purchasing equipment for £68,029 in cash. The cash balance at 1st of April is £40,000.
- Prepare Maxim Ltd.’s Cash Budget for the months of April, May and June 2020 and for the quarter ending 30th of June 2020 as a whole. [25 marks]
- Using relevant examples to illustrate, critically discuss the use of budgeting as a performance management system in organisations. (maximum of 800 words). [15 marks]
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Sycamore Ltd is evaluating the purchase of a new machine to produce product X, which will have a 4-year product life-cycle. Production and sales of product X are forecast to be as follows:
|Production and Sales units||40,000||50,000||70,000||32,000|
The selling price of product X in current price terms will be £50 per unit, while the variable cost of the product in current price terms will be £40 per unit. Selling price inflation is expected to be 5% per year and variable cost inflation is expected to be 6% per year. No increase in existing fixed costs is expected since Sycamore Ltd has enough spare capacity in both space and labour terms to undertake this project.
However, producing and selling product X will require working capital investment equal to 10% of the expected sales revenue. This investment must be in place at the start of each year. Hence, working capital requirement for year 1 should be in place in year zero and so forth. At the end of the project, any remaining investment in working capital is no longer required and will be recovered.
The cost of the machinery, payable at the start of the first year (end of year zero) will be £1 million and will attract capital allowances (tax-allowable depreciation) of 40% on a reducing balance basis. At the end of the 4-year period, the machinery will be sold for £200,000.
Sycamore Ltd pays tax on profits at an annual rate of 30%. One half of the tax payable in a year is paid during the year and the remainder is paid the following year. The company uses a nominal (money terms) after tax cost of capital of 20% for investment appraisal purposes.
- Calculate the net present value (NPV) of the proposed investment in product X and advise on the acceptability of the project. [15 marks]
- Using relevant examples, discuss the limitations of the evaluations you have carried out in part (a) above. (maximum of 500 words). [10 marks]
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Dolby Ltd has 2 divisions, Division A and Division B. Division A manufactures a specialised electronic component which is supplied to both Division B and to external customers. The variable cost of producing the component is as follows:
|£ per unit|
Division A has the capacity to manufacture 50,000 components monthly without incurring any increase in fixed costs. The maximum external demand for the component is 30,000 units monthly, and Division A sells this quantity externally at £100 per unit. It also sells the component to Division B at the same selling price based on its exact requirements.
Division B uses two of these components to produce product P, which it sells at £900 per unit externally. At this selling price, monthly demand is 7,000 units. The variable costs of producing product P are as follows:
|£ per unit|
|Components transferred from A||200|
An analysis of demand for product P indicates that for every £10 increase in price, demand would fall by 400 units and for every reduction of £10 in price, demand would increase by 400 units.
- Calculate the selling price per unit of product P that would maximise the profits generated by the product for Division B.
- Calculate, based on the selling price you calculated in part (a) above, the monthly contribution that product P would generate for:
- Dolby Ltd as a whole
- Division A
- Division B
- Dolby Ltd has now reviewed its transfer pricing policy and has decided that all transfer prices should be set to lead to optimal decision-making for the company. If the transfer price for the component is changed to reflect this new policy, calculate the selling price per unit of product P that would maximise the profits earned by Dolby Ltd as a whole.
- Using suitable examples, critically discuss the objectives that a transfer pricing policy should seek to achieve. (maximum of 500 words)
End of Exam paper
Examiner: Atish Soonucksing
External Examiner: Aly Ibrahim Salama
[SEE NEXT PAGE FOR HANDOUTS]
Present Value Table
Discount rate (r)
Discount rate (r)
The Fischer Formula
The Internal Rate of Return
L = lower discount rate %
H = higher discount rate %
= NPV at lower discount rate
= NPV at higher discount rate