3513 words - 15 pages

MA360 EXAM SOLUTIONS – 2011

SECTION A

Question 1

(a)

|Selling Price per|Year 1 Sales Units |Year 1 Year End Stock units |Year 2 Unit Sales |Sales Revenue Year 1 |

|Unit (£) | | | |(£) |

|20,000 |800,000 |400,000 |500,000 |(100,000) |

|40,000 |1,600,000 |800,000 |500,000 |300,000 ...view middle of the document...

0 marks each = 5 marks) [5]

a) The Flat Glass division would prefer an output and sales level of 100,000 m2 of glass, whereas the Building division would prefer an output and sales level of 80,000 m2. These are the preferred levels because both divisions maximise their profits at these levels. [1] So, although the FG division’s manager would be happy with a TP of £40, it is unlikely that the BD’s manager would be satisfied. [1]

b) The transfer price which would maximise Sussex Glass’ profits would be a price equal to the variable cost per m2 of the Flat Glass division, i.e. £20.00 per m2. [1] This would encourage the building division to sell 100,000 m2 of glass, the level at which company profits are maximised, i.e.

(100,000 m2 x £72) – (100,000 m2 x [£20 + £15]) – (£500,000 + £1,200,000) = £2,000,000 [1]

(Or simply £1,500,000 + £500,000 = £2,000,000 as per the calculations in (a) above)

This TP is not likely to be acceptable to the FG division’s manager, as at all levels of output his division makes a loss equal to its fixed costs of £500,000 [1]

(c) To maximise profits, the TP must be equal to the variable cost of the supplying division, i.e. £20 per m2. [1]

At this level, BD makes a RI of: £2.0 million – (10% of £7 million) = £1,300,000, while the FG division makes a loss of £500,000, and therefore a negative RI. [1]

To break even in terms of RI, the FG division must make a profit of (6% of £4 million) = £240,000. [1] So, if the BD were to pay the FG division a lump-sum payment of (£500,000 + £240,000 = £740,000), the FG division would be in a break even situation. [1] This would leave the BD with a positive RI of (£1,300,000 - £740,000) = £560,000. [1]

So, if the lump sum payment to the FG division were increased above £740,000 so that both divisions could share fairly in the BD’s remaining RI of £560,000 (on a negotiated basis), both divisions would reflect positive RI’s and both managers would receive bonuses. The profits of the Sussex Glass Company would also be maximised. [1]

[6]

Question 3

(a) HSC Total sales revenue (25m x £1.80**) 45.0 [1.0]

32% Gross Margin (£45m x 0.32) 14.4 [1.0]

Total required costs 30.6

** HSC selling price per sandwich = (100 / 133.333) x £2.40 = £1.80 [2.0]

Labour cost calculations:

Y10 = 60,000 x 10 -0.3219

= 60,000 x 0.4765 = 28,590 hours [1.0]

Total time taken for 10 batches = 28,590 x 10 = 285,900 hours [1.0]

Y9= 60,000 x 9 -0.3219

= 60,000 x 0.4930 = 29,580 hours [1.0]

Total time taken for 9 batches = 9 x 29,580 = 266,220 hours [1.0]

Time taken for 10th batch = 285,900 – 266,200 = 19,680 hours [1.0]

Total time taken: First 10 batches 285,900 hours

Next 15 batches (19,680 x 15) 295,200 hours [0.5]

Total 581,100 hours...

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