EX (6) B292 Revision Part 2 My Tablet Inc. specializes in Tablets. The results of the company's operations during 2013 are given in the following table. All units produced during the year were sold. (Ignore income tax.) Sales revenue (10,000 units) $3,000,000 Manufacturing costs: Fixed $800,000 Variable $1,200,000 Selling costs: Fixed $80,000 Variable $220,000 Administrative costs: Variable $200,000 Fixed $100,000 Required: 1- Prepare a traditional income statement and a contribution income statement for the company. Discuss which type of income statements an operating manager would find useful. 2- Calculate the breakeven point in revenues. 3- The company is considering replacing a component part that has a cost of $15 with a new and cheaper part costing $13 per unit in the coming year. A new machine would also be needed to increase plant capacity. The machine would cost $32,000 with a useful life of eight years and a salvage value of $4,000. The sales price will remain constant. a. Calculate the number of units that must be sold in the coming year to break even. b. Calculate the number of units that must be sold in the coming year to make a net income of $447,720. Answer
1 - Traditional income statement: My Tablet Inc. Income Statement For the year ended December 31, 2013 Sales $3,000,000 Manufacturing costs: Less: Cost of goods sold $2,000,000 Gross margin $1,000,000 Less: Operating expenses: Selling expenses $300,000 Administrative expenses $300,000 $600,000 Net income $ 400,000 Contribution income statement: My Tablet Inc. Income Statement For the year ended December 31, 2013 Sales $3,000,000 Less: Variable costs: Variable manufacturing $1,200,000 Variable selling $220,000 Variable administrative $200,000 $1,620,000 Contribution margin $1,380,000 Less: Fixed costs: Fixed manufacturing $800,000 Fixed selling $80,000 Fixed administrative $100,000 $980,000 Net income $ 400,000 Most operating managers prefer the contribution income statement. The contribution format highlights the contribution margin and separates fixed and variable costs. 2- Breakeven point in revenues(in Dollars): Breakeven point= Fixed costs Contribution margin percentages = Breakeven in revenues $980,000 ($300 $162)/300 = $980,000 0.46 = $2,130,435
3 (a) New breakeven point (in units): New breakeven point (in units) New breakeven point (in units) = New fixed costs = New unit contribution margin $980,000 + [($32,000-4,000)/8]* = 7,025 units ($300 - $160**) *Annual straight-line depreciation on new machine **$160 = $162 + ($13 $15) increase in the unit cost of the new part (b) Number of sales units required to earn target net profit, given manufacturing changes: New breakeven point (in units) = $983,500 + $400,000 $140 = 10,223 units EX (7) Al Kamel manufactures two types of doors, D1 and D2. Costing information for products D1 and D2 is set out below: D1 D2 Nb of units sold 350 650 Selling price/unit $130 $150 Total variable cost/unit Raw material Labor Total fixed costs = $20,000 $35 $24 Required: 1- Calculate the contribution per unit for each product, and show which one is the most profitable for the company. 2- The fixed costs are allocated based on the units produced. Calculate the selling price per unit to reach a profit margin of 15%. 3- The Company has a maximum working capacity of 815 labor hours. Labour hours are paid at a rate of $16 per hour. Show which production plan is most profitable for the Company. $40 $32
Answer a. Contribution margin per unit Product D1 Product D2 Selling Price/unit $130 $150 Less total variable cost/unit 35 + 24 = $59 40 + 32 = $72 Contribution margin per $71 $78 unit Product D2 is more profitable because it has the highest contribution per unit. b. Total cost per product: Product D1 Product D2 Total variable cost/unit $59 $72 Allocated Fixed costs per unit: 20,000/1,000 = $20 $20 Total costs $79 $92 Selling price = TC/0.85 $92.94 $108.24 c. Contribution margin per limiting factor Product D1 Product D2 Contribution margin per unit $71 $78 Limiting factor (labor hours) 24/16 = 1.5 hours 32/16 = 2 hours Contribution margin per 71/1.5 = $47.33 78/2 = $39 limiting factor Product D1 is more profitable because it has the highest contribution margin per limiting factor. The company should produce 350 D1 and 145 D2: D1: 350 units x 1.5 hours = 525 hours D2: 290 hours / 2 hours = 145 unit 815 525
EX (8) Al-Manama Company carries a wide assortment of items for its customers. One item, KGS is very popular. Desirous of keeping its stock under control, a decision is taken to order only the optimum economic quantity, for this item, each time. You have the following information. Annual demand (units) 72,000 Purchase price per unit $ 200 Carrying/Holding costs per $ 6 unit Cost per order $ 375 Required: 1. Determine the EOQ using the following two methods: a- Equation method. b- Tabular method, by developing the following table: 2. Plot your answer to (1) on a graph displaying the order size and total costs. 3. Give examples of costs Included in annual carrying (holding) costs of stock when using the EOQ decision model. Notes: 1- EOQ = Where: No. of orders 1 10 20 30 90 120 Order size Average stock Carrying (Holding) costs Order costs Total costs D - Represents the annual demand for the inventory item C - Represents the cost of placing an order H - Represents the cost of holding one unit of inventory for one year. 1- Determine the EOQ: a- Using the equation method: Answer ( )
( ) EOQ = 3,000 units per order b- Using the Tabular method: No. of orders Order size Average stock Carrying (Holding) Costs ($) Orderin g Costs ($) Total costs ($) 1 72,000 36,000 6 36,000 = 216,000 375 216,375 10 7,200 3,600 6 3,600 = 21,600 3,750 25,350 20 3,600 1,800 6 1,800 = 10,800 7,500 18,300 30 2,400 1,200 6 1,200 = 7,200 11,250 18,450 90 800 400 6 400 = 2,400 33,750 36,150 120 600 300 6 300 = 1,800 45,000 46,800 The economic order quantity is at the point where holding cost = order cost. Cost of ordering = [72,000/3,000] 375 = $ 9,000 Cost of holding = [3,000/2] 6 = $ 9,000 Total cost = 18,000 2- EOQ graph: Total Cost $18,000 Holding Cost $9,000 Order Cost 0 3,000 Order Size 3- Costs included in the carrying (holding) costs of stock are incremental costs for such items as insurance, rent, obsolescence, spoilage, and breakage plus the opportunity cost of capital (or required return on investment).
4- Al-Manama has been offered a 1 per cent discount on the cost if it places orders in quantities of 18,000. Discuss whether the company should accept the discount and place larger orders, show your workings. 4- The total costs for B Al-Manama if it orders the EOQ of 3,000 units are: Cost of buying the KGS = $200 x 72,000 = $14,400,000 Cost of ordering = [72,000/3,000] 375 = $ 9,000 Cost of holding = [3,000/2] 6 = $ 9,000 Total Costs = $14,418,000 The total costs for Biscay if it orders 18,000 units are: Cost of buying the KGS = $200 x 72,000 x 0.99 = $14,256,000 Cost of ordering = [72,000/18,000] 375 = $ 1,500 Cost of holding = [18,000/2] 6 = $ 54,000 Total Costs = $14,311,500 Ordering 18,000 units will, therefore, save $14,418,000 $14,311,500 = 106,500$ over a year. As expected, the holding cost increases (from 9,000 to 54,000), but this is more than compensated by the reduced cost of buying and ordering. Al-Manama should take the discount. EX (9) Company X uses 60,000 of component A. The company estimates the cost of placing an order at $30 per order. Its annual holding cost is 15% of the purchase price of $6 per unit. Required:Calculate the EOQ. ( ) Answer ( ) EOQ = 2,000 units per order D Annual demand = 60,000 components A per year C = cost of placing order = $30 H = cost of holding inventory = 15% $6 = $0.9
Q 1- The value Chain is a tool developed by Michael Porter to help organizations develop a competitive advantage through a better understanding of the activities through which they create value. Draw a diagram that describes Porter's Value Chain. Discuss the elements of primary and secondary activities that make up the value chain of an organisation and give examples. Porter suggests that it is useful to separate a business into a series of value generating activities, which he refers to as the value chain.he argues that many businesses comprise a sequence of activities that can be classified as either primary or secondary activities, the latter existing to support the former. The primary activities are: Inbound logistics activities, involving managing inbound items and including, for example, raw materials handling and warehousing. Operations activities, involving the transformation of inbound items into products or services suitable for resale, for example, manufacturing and product design. Outbound logistics activities, involving carrying the product from the point of manufacturing to the buyer, for example, finished goods warehousing and distribution. Marketing and sales activities, involving informing buyers about products and services and providing a reason to purchase. They include distribution and promotional activities such as advertising. Service, including all activities required to keep the product or service working effectively for the buyer, after it is sold and delivered. Examples include installation, repair, after sales service, warranty claims and answering customer enquiries.
The secondary activities are: Procurement (purchasing) Human resource management Technology development (R&D) Infrastructure (accounting and finance, strategic planning, etc.). Q 2- Discuss two ways to acquire a competitive advantage. A competitive advantage can be achieved by managing activities better than competitors, either by having lower costs or by better differentiation (or even both). A cost advantage can be achieved by gaining a better understanding of what drives cost and then reducing cost by managing the cost drivers. Differentiation may be achieved by focusing on the real value adding activities and performing them better than competitors. The value chain is another tool developed by Michael Porter to help organizations develop a competitive advantage through a better understanding of the activities through which they create value.. Q 3- Decentralization describes the situation where the authority to make decisions is delegated to people at lower levels of the organization. Briefly explain the usefulness of decentralization. The advantages of decentralization are: Specialization: Managers can develop more detailed and specialized knowledge by concentrating on a limited aspect of the organization's operations. This should result in better quality decisions. Timeliness: Quicker decisions are possible if it is not necessary to pass decisions up through the hierarchical chain of command. In addition, senior managers time is then available for more important decisions affecting the future of the whole organization. Motivation: Having authority to make decisions usually results in greater motivation and commitment and hence improved performance. Human resource development: Less experienced managers can learn their trade without their mistakes jeopardizing the entire organization. The impact of mistakes/ misjudgements is likely to be confined to a limited aspect of the organization's operations.
Organizational segment performance comparison: By dividing the organization into separate segments, it is possible to evaluate which aspects of operations are performing well and which are not something not usually possible when the inputs/outputs are at a more aggregate level. Q 4- An important task of management is the analysis of the competitive environment in which the organization operates. Explain and give examples of the five forces of Michael Porter s analytical model. Micheal Porter s five forces are: a- The rivalry among existing firms; b- The threat of new entrants; c- The threat of substitute products; d- The bargaining power of suppliers; e- The bargaining power of buyers. Q 5-1- A database is a collection of data that can be manipulated by users. Explain the uses of data mining for an organisation.
Data mining is the practice of automatically searching large stores of data to discover patterns and trends that go beyond simple analysis leading to creation of actionable information. 2- Briefly explain the problems in using of database management systems. The disadvantages of database management systems relate to issues of security and control: There is the possibility of unauthorized access to the data Hacking, necessitating procedures for data security and software controls. As data are held only once but are used by many applications, the impact of systems failure (system breakdown) is likely to be greater. Also, as data are held only once, the impact of inaccurate data is likely to be greater. The cost of setting up a database system can be very high. 3- Explain the characteristics of good quality information. The characteristics of good quality information are: Q 6-1- Relevance: Information is relevant if it helps users make decisions. 2- Reliability: Information is reliable if it is free from material error. 3- Comparability: Accounting information must be comparable with similar information produced by similar organizations and with information produced by the same organization for different time periods. 4- Understandability: Information should be expressed as clearly as possible, and in a form that the anticipated users can understand. One way of beginning to analyze knowledge is to clarify the distinctions between: - data, - information, - knowledge, - Wisdom and insight. Required: a. Explain the four concepts listed above. b. For each concept give one accounting related example. a.
Data Data is a set of discrete, objective facts about events. In accounting, data is described as structured records of transactions. Information Information is data endowed with relevance and purpose. That is, information is data that has been organised for some specific purpose that gives it meaning. In other words, when you take data and use it to produce something that is relevant to a specific purpose, what you have created is information. Knowledge Knowledge is a fluid mix of framed experience, values, contextual information, and expert insight that provides a framework for evaluating and incorporating new experiences and information. Wisdom Wisdom comes from having knowledge that you understand correctly. You cannot have valid wisdom unless you have sufficient knowledge to understand fully the focus of your attention. b. You may have included some of the following: Data about: a sale, a purchase order, the stock holding level of a particular item, a debtor. [You have the data but have not yet put it to use by converting it into information.] Information concerning: the payment record of a customer, the variable cost of a product, the net profit, the earnings per share of a company, the change in net assets over a period, the net book value of an asset. On a greater scale, any or all of the financial statements.[you have the information, but you have not yet converted it into knowledge you have not yet absorbed the information.] Knowledge concerning: the credit rating of a customer, the cost of buying-in a product that is currently being produced internally,whether one capital investment proposal is preferable to another.[you have absorbed the information and now know it you have the knowledge.]
Wisdom concerning: the circumstances in which to refuse a customer credit and the circumstances in which to grant the same customer credit, whether to over-rule a recommendation that a capital appraisal project proceed, whether to invest in a business. [You have the knowledge, you understand it correctly, and you know how to use it appropriately.] Q 7- Expert systems involve various forms of knowledge representation. Once computers are applied to areas involving knowledge and judgment, they can aid organizations significantly. Required: a. Discuss, using examples, the advantages of using such expert systems. b. Discuss why users may reject an accounting expert system even if it is shown to be at least as good as a human expert. a - The advantages of using an expert system. - Provision of cost savings: in that they are capable of evaluating many more possible options within a given time frame than is possible for a human brain. - Lack of emotion: meaning that the decision will be made based on the facts alone. - Having better memory capability than humans which can be designed to remember the previous decisions taken based on similar facts. When designed in this way, they can demonstrate an ability to learn from previous decisions by virtue of their ability to remember. - They can discover rules in sets of expert judgments and in effect convert tacit knowledge into explicit rule-based knowledge. - They capture the knowledge of experts, who are retiring, so that knowledge is retained within the organization. - They are potentially available 24 hours a day, 365 days a year. - They are consistent, that is, they always give the same recommendation when the circumstances are identical. b - You may include any or all of the following reasons: - Resistance to technology. - Uncertainty over the boundaries of the expert system s knowledge base. - Blind belief that human beings are always superior to machines. - Lack of adequate explanations from the expert system concerning why it has recommended a particular course of action. - Belief by the individual that they are more of an expert than the expert system. - Misalignment of responsibility for the decision being taken, that is, if the user is responsible for the decision even though it was recommended by the expert system.