Monitoring Test MT Performance Management F5PM-MTA-Z6-A Answers & Marking Scheme 06 DeVry/Becker Educational Development Corp.
RODBER CO Linear programming model x = monthly production of product X y = monthly production of product Y Cont n for X =.50 = $5.50 Cont n for Y = 0 0.5 = $.50 Objective function To maximise contribution, C = 5.50x +.50y subject to Constraints 0 x,000 0 y,000 Material A 4x + y 0,000 (0, 5,000) (,500, 0) Direct labour x + y 4,000 (0, 4,000) (6,000, 0) Graph y 5,000 4,000 E 4x + y = 0,000 F x =,000 Marks for graph X =,000 line Y =,000 line Other constraints ( each) Contribution line Presentation Total for graph 5,000 A B y =,000,000 C = 9,65,000 C / x + y = 4,000 0 D,000,000,000 4,000 5,000 6,000 x 06 DeVry/Becker Educational Development Corp. All rights reserved.
Optimal production plan and maximum profit Feasible region O, A, B, C, D. Optimal point is B y =,000 4x + y = 0,000 Substituting in 4x + 6,000 = 0,000 Therefore x =,000 ELLA (a) Optimal production plan is,000 units product X and,000 units product Y. $ Contribution (5.50,000) + (.50,000) 6,000 Less: Fixed costs,000 Profit,000 (i) Calculation of initial selling price per unit Initial selling price = (variable + fixed cost per unit) + mark up of 40% = [$4 + $(8,000,000)] 40 = $4 (b) (ii) Calculation of weekly profit based on initial selling price per unit Profit =,000 units $4 profit per unit = $,000 Calculation of selling price to maximise weekly profit Profits are maximised when: Marginal cost (MC) = Marginal revenue (MR) MC = variable cost = 4 MR = 0 0 004Q 4 = 0 0 004Q Q = 4,000 units P = 0 0 00 (4,000) = $ = profit maximising price. 7 06 DeVry/Becker Educational Development Corp. All rights reserved.
(c) Penetration and skimming pricing policies EXE Penetration pricing and price skimming are both methods of pricing associated with new products, and relate to the price to be charged when launching the product. Penetration pricing implies setting a low price in order to achieve a high share of the market. This is likely to be used in competitive markets, where the new product will be competing against established products. Price skimming is the opposite approach. A higher price is set initially, which implies that the product will be sold only to a small elite segment of the market. The company will make large margins on this segment. Price skimming is used where a new product is being launched which has no competition; typically high technology products that are the latest thing. Such products may also confer status on the customers, which is why they are prepared to pay the higher price. Lowest cost estimate Note $ Direct materials Steel 0m at $5.50 55.0 Brass fittings 0.0 Direct labour Skilled 5 hours @ $ per hour 00.0 Semi-skilled 4 0.0 Overheads 0 hours at $0.75 5 7.5 Estimating time 6 0.0 Relevant cost of the equipment 8.5 Notes. Steel since this is used regularly in the business the relevant cost is the replacement cost, which is $5.50 per square metre.. Brass fittings these would be bought specially for the job, so the supplier s quotation is the relevant cost.. Direct labour: The choice is between doing the work in overtime, therefore incurring a cost of $.00 per hour ($8.0 x.5), or doing the work in normal time. If the work is done in normal time, there will be a lost contribution of $.00 per hour. The relevant cost of working in normal time would be $.00 per hour ($8 + $). The work would therefore be done in overtime, as the relevant cost of this is less. 4. Semi-skilled as there is unused capacity the work can be done at no additional cost. The relevant cost of the semi skilled labour is therefore nil. 5. Overheads only the power appears to be an incremental cost. 6. Estimating time this is a sunk cost. 06 DeVry/Becker Educational Development Corp. All rights reserved. 4
4 THE ALFRED COMPANY (a) Costs for order A and order B (i) Using volume-based allocation $940,000 4,000 orders = $5 per order So customer would be charged the invoice value of goods ordered plus 5 per order (ii) Using activity-based costs Invoice costs are $0,000 6,000 = $0 per invoice line. Other costs are $80,000 4,000 orders = $70 per order Order an Order B $ $ Invoice costs $0 40 8 $0 60 Packing costs small 9 large 5 Delivery per table 8 75 Other costs per order 70 70 Total costs per order 7 0 0 (b) Strengths and weaknesses of using activity based costing data for pricing decisions An activity-based costing system gives a better indication of the resources consumed in this case to process and deliver an order. This is a long run average cost and is in no sense a variable cost. Thus small changes in the volumes or types of order will not have an immediate effect on actual costs. However, if there is a significant change in volumes, then these costs will usually change also. It is important to note that costs will only go down if staff are actually removed from the activity; either through leaving the firm or by moving to another activity where there is a need for additional staff. Some commentators argue that activity-based costing is dangerous as it discourages managers from using contribution as a basis for pricing short-term incremental orders. However, others argue this is a strength as pricing based on full activity-based cost ensures that all orders make a profit. This may not be optimal in the short run but they argue it protects long-run profitability. It is also important to note that many companies face a situation where there are clear market prices. Where this occurs it may not be possible to change prices as a result of an ABC exercise. The ABC costs then act as a guide to profitability and may indicate where it is necessary to cut costs, or perhaps change processes. 06 DeVry/Becker Educational Development Corp. All rights reserved. 5
Marking Scheme RODBER CO Marks Marks (a) Defining variables Objective function Constraints > 0 constraints Material A & B each Graph: Constraints: x =,000, y =,000 each Others each Contribution line Presentation Identification of optimal point Solving equations to find optimal point Calculation of profit at optimal point ELLA (a) (i) Initial selling price (ii) Resultant weekly profit (b) Marginal cost (MC) = Marginal revenue (MR) MC Optimal quantity (via MC = MR) Optimal price 7 (c) Penetration price Skimming price 06 DeVry/Becker Educational Development Corp. All rights reserved. 6
EXE Correct amounts: Steel Brass fittings Direct labour skilled Direct labour semi skilled Overheads Estimating time Exclude profit margins Explanations Steel Brass fittings Direct labour skilled (include calculation of normal time) Semi skilled Overheads Estimate 4 THE ALFRED COMPANY (a) Costs of Order A and Order B (i) Calculation of overhead cost per order (ii) Calculation of activity based costs Invoice costs Packing costs Delivery costs Other costs 0 (b) Up to marks for each strength and weakness of using ABC as a basis for pricing max 5 5 06 DeVry/Becker Educational Development Corp. All rights reserved. 7