Intensive Exercise Questions-Class 3
m )
What is the wholesale distribution market?
It can be defined as a market where a trader buys goods at a discount from a manufacturer in
xa
bulk and re-sells the goods in smaller quantities to other business or retailers to further sell the
goods to end consumers.
For wholesale stores, the costs included in the cost of sales would typically consist of the direct
costs associated with acquiring the goods for resale. These costs may include the purchase price
E
of the goods, labour costs, transportation costs, import duties, and any other costs directly
attributable to obtaining the inventory. It is important to note that the cost of sales does not include
other operating expenses such as overhead costs, marketing expenses, or administrative costs.
24
The cost of sales specifically focuses on the direct costs related to the goods being sold.
Question 1
20
Wholesale Co (WC) runs a large number of wholesale stores and is increasing the number of
these stores all the time. It measures the performance of each store on the basis of a target return
on investment (ROI) of 15%.
Store managers get a bonus of 10% of their salary if their store's annual ROI exceeds the target
ec
each year. Once a store is built there is very little further capital expenditure until a full four years
have passed.
WC has a store (store E) in the east of the country. Store E has historical financial data as follows
(D
over the past four years.
ei
eM
(1) Typically, WC's stores generate a 40% gross profit margin.
(2) All of the distribution costs are variable, as each order is individually packed and sent out
uE
by courier.
(3) The wholesale distribution market in which WC operates has been growing steadily.
REQUIRED:
a) i) Discuss the past financial performance of store E using ROI and any other measure you
La
feel appropriate. Note there are a maximum of 5 marks available for calculations.
(13 marks)
ii) Using your findings from (i) discuss whether the ROI correctly reflects store E's actual
performance, reaching a conclusion about the manager's performance. (2 marks)
m )
b) Explain how a manager in store E might have been able to manipulate the results so as to
gain a bonus more frequently. (5 marks)
(Total 20 marks)
E xa
Extra Notes:
If the expenses as a percentage of sales remain constant, it means that the relationship between
expenses and sales remains consistent over time. In other words, as sales increase or decrease,
24
the expenses also increase or decrease proportionally. This can indicate that the company is
effectively managing its expenses and maintaining a stable cost structure relative to its sales
revenue.
20
If the sales are decreasing over the years and expenses as a percentage of sales also decrease,
it suggests that the company is effectively managing its expenses relative to the declining sales
revenue. This could indicate cost-cutting measures, improved efficiency, or a decrease in variable
expenses.
ec
If the sales are increasing over the years and expenses as a percentage of sales decrease, it
indicates that the company is effectively managing its expenses relative to the growing sales
revenue. This suggests improved cost control, increased efficiency, or a decrease in variable
(D
expenses. The decreasing expenses as a percentage of sales can be seen as a positive trend,
as it indicates that the company is maintaining or improving its profitability despite the sales growth.
If the sales are decreasing over the years and expenses as a percentage of sales increase, it
suggests that the company is facing challenges in managing its expenses relative to the declining
ei
sales revenue. This could indicate inefficiencies, cost overruns, or an increase in fixed expenses
that are not being adequately controlled. The increasing expenses as a percentage of sales can
be seen as a negative trend, as it indicates that the company's profitability is being negatively
eM
impacted by the declining sales.
uE
La
Question 2
Chase Co (CC) runs a large number of wholesale stores and is increasing the number of these
)
stores all the time. It measures the performance of each store on the basis of a target return on
m
investment (ROI) of 15%. Store managers get a bonus of 10% of their salary if their store’s annual
ROI exceeds the target each year. Once a store is built there is very little further capital
expenditure until a full four years have passed.
xa
CC has a store (store W) in the west of the country. Store W has historic financial data as follows
over the past four years:
20X8 20X9 20Y0 20Y1
Sales ($000) 200 200 180 170
E
Gross profit ($000) 80 70 63 51
Net profit ($000) 13 14 10 8
24
Net assets at start of year ($000) 100 80 60 40
The market in which CC operates has been growing steadily. Typically, PC’s stores generate a
40% gross profit margin.
20
CC has another store (store S) about to open in the south of the country. It has asked you for
help in calculating the gross profit, net profit and ROI it can expect over each of the next four
years.
The following information is provided:
ec
Sales in the first year will be 18,000 units. Sales volume will grow at 10% for years two and three
but no further growth is expected in year 4. Sales price will start at $12 per unit for the first two
years but then reduce by 5% per annum for each of the next two years.
(D
Gross profit will start at 40% but will reduce as the sales price reduces. All purchase prices on
goods for resale will remain constant for the four years.
Overheads, including depreciation, will be $70,000 for the first two years rising to $80,000 in years
three and four.
ei
Store S requires an investment of $100,000 at the start of its first year of trading.
eM
PC depreciates non-current assets at 25% of cost. No residual value is expected on these assets.
REQUIRED:
a) Discuss the past financial performance of store W using ROI and any other measure you
feel appropriate and, using your findings, discuss whether the ROI correctly reflects Store
W’s actual performance. (8 marks)
uE
b) Calculate (in columnar form) the revenue, gross profit, net profit and ROI of store S over
each of its first four years. (8 marks)
c) Calculate the minimum sales volume required in year 4 (assuming all other variables
remain unchanged) to earn the manager of S a bonus in that year. (4 marks)
(Total 20 marks)
La
Question 3
Simply Soup Co manufactures and sells soups in a JIT environment. Soup is made in a
)
manufacturing process by mixing liquidised vegetables, melted butter and stock (stock in this
m
context is a liquid used in making soups). It operates a standard costing and variances system to
control its manufacturing processes. At the beginning of the current financial year, it employed a
new production manager to oversee the manufacturing process and to work alongside the
xa
purchasing manager. The production manager will be rewarded by a salary and a bonus based
on the directly attributable variances involved in the manufacturing process.
After three months of work there is doubt about the performance of the new production manager.
E
On the one hand, the cost variances look on the whole favourable, but the sales director has
indicated that sales are significantly down and the overall profitability is decreasing.
The table below shows the variance analysis results for the first three months of the manager's
24
work.
Table 1
F = Favourable A = Adverse
20
ec
(D
ei
REQUIRED:
eM
a) Using the information in Table 1:
i) Explain the meaning of each type of material variance above (price, mix and yield but
excluding the total variance) and briefly discuss to what extent each type of variance is
controllable by the production manager. (6 marks)
ii) Evaluate the performance of the production manager considering both the cost variance
uE
results above and the sales director's comments. (5 marks)
La
b) The board has asked that the variances be calculated for Month 4. In Month 4 the production
department data is as follows:
m )
E xa
Calculate the material price, mix and yield variances for each ingredient for Month 4. You are not
required to comment on the performance that the calculations imply. Round variances to the
nearest $. (9 marks)
24
(Total 20 marks)
Question 4
20
Lewisville is a town with a population of 100,000 people. The town council of Lewisville operates
a bus service which links all parts of the town with the town centre. The service is non-profit
seeking and its mission statement is 'to provide efficient, reliable and affordable public transport
to all the citizens of Lewisville'. Attempting to achieve this mission often involves operating
ec
services that would be considered uneconomic by private sector bus companies, due either to
the small number of passengers travelling on some routes or the low fares charged. The majority
of the town council members are happy with this situation as they wish to reduce traffic congestion
and air pollution on Lewisville's roads by encouraging people to travel by bus rather than by car.
(D
However, one member of the council has recently criticised the performance of the Lewisville bus
service as compared to those operated by private sector bus companies in other towns. She has
produced the following information:
ei
Lewisville bus service
SUMMARISED INCOME AND EXPENDITURE ACCOUNT YEAR ENDING 31 MARCH 20X6
eM
uE
La
m )
E xa
24
20
ec
(D
ei
eM
REQUIRED:
uE
a) Assess the performance of the bus service for the year ended 31 March 20X6 using financial
performance indicators calculated from the above information.
Note. Clearly state any assumptions and show all workings clearly. Your answer should be
structured under the following main headings: Return on capital employed (ROCE); Return
on sales; Asset turnover; Average cost per passenger mile. (13 marks)
La
b) Another council member suggests that the performance of the bus service should be
assessed on the basis of economy, effectiveness and efficiency.
m )
Explain the meaning of the following terms in the context of performance measurement and
suggest a measure of each one appropriate to a bus service.
i) Economy
xa
ii) Effectiveness
iii) Efficiency (3 marks)
E
c) Suggest two non-financial indicators that could be useful in measuring the performance of a
bus service and explain why your chosen indicators are important. (4 marks)
(Total 20 marks)
24
Question 5
Ties Only is a new business, selling high quality imported men’s ties via the internet. The
managers, who also own the company, are young and inexperienced but they are prepared to
20
take risks. They are confident that importing quality ties and selling via a website will be successful
and that the business will grow quickly. This is despite the well recognised fact that selling clothing
is a very competitive business.
They were prepared for a loss-making start and decided to pay themselves modest salaries
ec
(included in administration expenses in table 1 below) and pay no dividends for the foreseeable
future.
The owners are so convinced that growth will quickly follow that they have invested enough money
(D
in website server development to ensure that the server can handle the very high levels of
predicted growth. All website development costs were written off as incurred in the internal
management accounts that are shown below in table 1.
ei
Significant expenditure on marketing was incurred in the first two quarters to launch both the
website and new products. It is not expected that marketing expenditure will continue to be as
high in the future.
eM
Customers can buy a variety of styles, patterns and colours of ties at different prices.
uE
La
The business’s trading results for the first two quarters of trade are shown below in table 1.
)
Table 1
m
E xa
24
REQUIRED: 20
ec
a) Assess the financial performance of the business during its first two quarters using only the
data in table 1 above. (10 marks)
b) Briefly consider whether the losses made by the business in the first two quarters are a true
reflection of the current and likely future performance of the business. (3 marks)
(D
The owners are well aware of the importance of non-financial indicators of success and therefore
have identified a small number of measures to focus on. These are measured monthly and then
ei
combined to produce a quarterly management report. The data for the first two quarters
management reports is shown below:
eM
Table 2
uE
* A website hit is automatically counted each time a visitor to the website opens the home page
of Ties Only.
La
The industry average conversion rate for website hits to number of ties sold is 3·2%. The industry
average sales return rate for internet-based clothing sales is 13%.
REQUIRED:
c) Comment on each of the non-financial data in table 2 above taking into account, where
)
appropriate, the industry averages provided, providing your assessment of the performance
m
of the business. (7 marks)
(Total 20 marks)
xa
Question 6
Which TWO of the following statements concerning the assumptions of cost-volume-profit (CVP)
analysis are true?
E
A. Contribution per unit is constant with respect to volume
B. Total fixed costs will reduce as volume increases
C. To increase demand the selling price per unit must be reduced
24
D. All costs can be classified as either fixed or variable
E. It is best suited as a long-term planning tool
20
Question 7
Prest Co sells three products, R, S and T. The following information is available for the last period.
ec
(D
What is the total favourable sales quantity variance (to the nearest $)?
$ ____________ Favourable
ei
Question 8
Lake Co has operating gearing of 160%. It calculates operating gearing by dividing contribution
by operating profit.
eM
How much will Lake Co's operating profit fall by if its sales volume reduces by 20% (to the nearest
whole %)?
____________ %
Question 9
uE
Rotag Co manufactures cement. It has decided to improve its image with regard to environmental
issues and is hoping that the new activity-based costing (ABC) approach being introduced will
help the company to better allocate the environmental costs it incurs.
Which TWO of the following environmental costs would be better allocated as a result of the
introduction of ABC?
La
A. Normal material losses arising from a wasteful manufacturing process
B. Salary costs of the supervisor at Rotag Co's CO2 emission purification process
)
C. Off-site costs of training staff to follow relevant environmental safety procedures when
m
making products
D. Increased hourly wages paid to compensate staff for working with toxic gases
xa
Question 10
Division Red makes Product Y and Product Z. The maximum capacity of the factory is 5,000 units
per month in total. This capacity can be used to make either 5,000 units of Product Y or 5,000
E
units of Product Z, or any combination of the two.
Y Z
24
Selling price $12 $16
Variable cost $9 $11
Extra cost if sold externally $1 $1
20
Contribution $2 $4
REQUIRED:
a) Determine which product Division Red would make and what would be the monthly
ec
contribution of the division.
b) Division Blue has asked Division Red to supply 1,000 units of Product Y per month.
Determine the minimum transfer price which would be acceptable to Division Red.
(D
c) Division Blue now informs Division Red that it can buy product Y from an external supplier
for $11 per unit and is not prepared to accept a price above this from Division Red.
Explain what would happen if both divisions were given autonomy to make their own
decisions. Comment on whether this benefits the company as a whole.
ei
eM
Question 11
Ben's Grub Co (BG) operates a food takeaway and delivery service based in Homeland.
Customers buy ready meals by either walking into one of BG's takeaway shops or by placing an
order for home delivery by telephone or Internet. Home deliveries are delivered by motorcycle.
BG's mission is to provide excellent-quality food, by buying only the freshest products, and
excellent service, by recruiting and retaining the best staff. Its meals are of good quality and aimed
uE
at busy middle-class professionals with high levels of disposable income.
A performance measurement report focusing on non-financial measures has been used for a
number of years. The report for the last two years contains the following information, with industry
average figures, where available:
La
Industry
Year 1 Year 2 average
)
% of orders delivered in 30 minutes 86% 81% 80%
m
Quality of meals − rating by
independent reviewer (out of 10) 8 7 6
Average customer rating (out of 5) 4.3 3.7 3
xa
Number of meals sold 62,000 70,000
Number of online sales 18,000 27,000
Number of website visits 400,000 450,000
E
Number of new meals launched 3 5
Number of complaints 500 760
Staff turnover
24
(Number of leavers ÷ Average headcount)
35% 30% 60%
Number of employees 20 22
20
The industry average conversion rate (number of online sales as a percentage of website visits)
is 4.5%.
REQUIRED:
Assess the non-financial performance of BG for the last two years, based on the
information provided.
ec
Question 12
Well-heeled ("WH") is a children's shoe shop located in a suburb of a major capital city. The
(D
shop was started in 20X7, and quickly established a reputation for high-quality children's shoes.
There are no other shoe shops in this particular suburb, but there is a large shopping centre in
the next suburb 5 km from WH with several children's shoe shops.
The retail space next door to WH became vacant at the start of 20Y0. Because this was also
ei
owned by the same landlord, WH decided to rent this space too, expanding the area of the shop
from 40 square meters to 60.
The company employs one full-time shop assistant, and starting in 20Y0 employed an additional
eM
assistant to work on Saturdays. The owner of WH also works in the shop, but does not take a
salary for her time.
The country in which WH is located was hit badly by an economic downturn in the first half of
20Y0, but started to recover in the second half of 20Y0. Inflation in 20X9 and 20Y0 was 2%.
uE
La
The statements of profit or loss for the years 20X9 and 20Y0 are presented below:
)
20X9 20Y0
m
$ $ $ $
Sales 180,000 240,000
Less: Cost of sales 120,000 168,000
xa
Gross profit 60,000 72,000
Less expenses
Staff Costs 20,000 30,000
E
Rent 7,200 10,800
Marketing 5,000 6,000
Light and heat 1,000 1,200
24
33,200 48,000
Net profit 26,800 24,000
REQUIRED:
20
Assess the financial performance of the shop using the information above.
Question 13
ec
NYE Co manufactures three standard products which it sells to several large wholesale chains.
Production is highly automated and occurs in large batches.
Goods are shipped to customers in slightly smaller batches.
(D
Details of a typical month’s output are as follows:
ei
eM
Two types of indirect labour are employed – four quality control inspectors (at a cost of $4,000
each per month) and nine administrators (at a monthly cost of $3,500 each). Each employee
works a standard 180 hours per month.
uE
The role of the quality control staff is to inspect a sample from each batch of output produced.
The standard inspection time is four hours per batch. The administrators perform two tasks –
shipment processing work (which takes three hours per batch shipped) and monitoring of
production (at a rate of 1 hour of administrator time for every 600 units of output).
La
In addition to the production machinery (which has a capacity of 100,000 production machine
hours [PMH] per month) there are two additional types of specialised machinery which perform
)
automated production setup and automated shipment loading procedures. Details of these two
m
machines are provided as follows:
E xa
REQUIRED:
a) Use activity-based budgeting to assess whether the resources currently owned or employed
24
by the company are sufficient to meet typical monthly output. Comment on any significant
surplus/shortfall in resource. (14 marks)
20
b) Briefly outline THREE advantages that may be claimed for the use of activity based
budgeting rather than a traditional incremental budgeting system.
(6 marks)
(Total 20 marks)
ec
The following scenario relating to Questions 14 to 18:
Raasay Co manufactures three types of guitars in one of its divisions: the Jazz, the Rock, and the
(D
Classic. Raasay Co currently operates a costing system which uses a single overhead rate, based
on revenue, to charge overhead costs to the guitars. The finance director has suggested a change
to an activity-based costing (ABC) system. The following information has been collected about
the manufacture of the components:
ei
eM
uE
Further details on the overheads incurred have also been ascertained:
La
m )
xa
Question 14
What is the profit per unit of a Jazz guitar using the current basis for charging overhead costs (to
E
two decimal places)?
A. $192.34
B. $250.00
24
C. $312.34
D. $57.66
20
Question 15
Using activity-based costing, what is the machine set-up cost for a Rock guitar (to two decimal
places)?
$ ____________
ec
Question 16
Using activity-based costing, what is the cost of component processing for a Classic guitar (to two
decimal places?
(D
A. $32.70
B. $3.00
C. $7.01
D. $95.26
ei
Question 17
Which of the following statements concerning the advantages of activity-basedcosting (ABC), as
eM
opposed to a traditional absorption costing system, is correct?
A. All overhead costs will be accurately linked with a measurable cost driver, which will
facilitate the control of all overhead costs
B. Costing will be more accurate when overheads are a small proportion of total costs
C. Short-term decision-making will be more meaningful because all fixed production
overheads are included in the calculations
uE
D. Costing will be more accurate as it recognises that activities are consumed at different
rates by different products
Question 18
The finance director is pleased with the results of the ABC analysis of the guitars and is keen to
La
extend the use of ABC to other divisions in the company.
One such division, which manufactures electronic keyboards, has begun to introduce ABC and
has identified some relevant activities and cost drivers.
m )
E xa
24
20
ec
Question 19
(D
Stow Health Centre specialises in the provision of sports/exercise and medical/dietary advice for
clients. The service is provided on a residential basis and clients stay for whatever number of
days suits their needs.
Budgeted estimates for the year ending 30 June 20X1 are as follows:
ei
• The maximum capacity of the centre is 50 clients per day for 350 days in the year.
• Clients will be invoiced at a fee per day. The budgeted occupancy level will vary with the
client fee level per day and is estimated at different percentages of maximum capacity as
eM
follows:
uE
• Variable costs are also estimated at one of three levels per client day. The high, most likely
La
and low levels per client day are $95, $85 and $70 respectively.
The range of cost levels reflects only the possible effect of the purchase prices of goods and
services.
m )
REQUIRED:
a) Prepare a summary which shows the budgeted contribution earned by Stow Health Centre
xa
for the year ended 30 June 20X1 for each of nine possible outcomes. (6 marks)
b) State the client fee strategy for the year to 30 June 20X1 which will result from the use of
each of the following decision rules.
E
1) Maximax
2) Maximin
3) Minimax regret
24
Your answer should explain the basis of operation of each rule. Use the information from your
answer to (a) as relevant and show any additional working calculations as necessary. (10 marks)
20
c) The probabilities of variable cost levels occurring at the high, most likely and low levels
provided in the question are estimated as 0.1, 0.6 and 0.3 respectively.
REQUIRED:
Using the information available, determine the client fee strategy which will be chosen where
ec
maximisation of expected value of contribution is used as the decision basis. (4 marks)
(Total 20 marks)
(D
Question 20: BPP Exam Kit- Mock Exam 4-Q31 Daisy Co pg 523
ei
Question 21: BPP Exam Kit- Mock Exam 4-Q32 Lemic Air Co pg 524
eM
uE
La