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  • 15 Marks

MA – L2 – Q47 – Decision Making Techniques

Establish production plan to maximize profit with steel limited to GH₵250,000, prioritizing a major customer's order.

An engineering company has been experiencing problems with restricted availability of resources. The company manufactures a variety of casings. It makes four types of casing. Each casing requires the same bought-in component and some high-grade steel. The standard costs for the four types of casing are as follows:

Casing A B C D
GH₵ GH₵ GH₵ GH₵
Steel 250 500 190 390
Bought-in component 50 50 50 50
Direct labour 60 60 50 100
Variable production costs 40 50 40 50
Fixed production costs 180 240 150 270
Selling and administration costs 145 225 120 215
Profit 35 55 30 55
Selling price 760 1,180 630 1,130

All the selling and administration costs are fixed and the same single component is used for each of the four products. Direct labour is paid GH₵8 per standard hour and each member of the workforce is capable of producing any of the casings.
The company’s main customer has ordered 30 units of Casing A, 20 units of B, 30 units of C, and 20 units of D for production and delivery in the next month. Senior management have agreed that this order should be treated as a priority order and that these casings must be manufactured and delivered to the customer next month. This is necessary to maintain the goodwill of the customer. It is estimated that this order represents 10% of the total demand next month for each type of casing.
The company operates a just-in-time system, and has no inventories of steel, components, or finished goods.
Required:
If the aim is to maximise profit for the month, establish the production and selling plan for the company next month in the following situation:
(a) Situation 1. Supplies of steel are limited to GH₵250,000.

(b) Situation 2. Only 400 bought-in components are available from suppliers.

(c) Situation 3. A labour dispute restricts available productive labour hours in the month to 2,125.

(d) Situation 4. A labour dispute restricts available productive labour hours in the month to 2,125; but the manufacture of any quantities of the four casings could be sub-contracted to an outside supplier. The cost of buying the casings externally would be GH₵475, GH₵705, GH₵380, and GH₵640 for Casing A, Casing B, Casing C, and Casing D respectively. In addition, it should be assumed that the major customer insists that its order is completed by the company itself and the manufacture should not be subcontracted.

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  • 15 Marks

MA – L2 – Q46 – Decision making techniques

Compute Ouluto Limited's net profit for February 20X9 based on the optimum product mix, given resource constraints and cost data.

Ouluto Limited (OUL) is engaged in the manufacture and sale of three products viz. WBA, QPR and SC. The following information is available from OUL’s records for the month of February 20X9:

WBA QPR SC
Sales price per unit (GH₵) 2,300 1,550 2,000
Material cost per Kg. (GH₵) 250 250 250
Labour time per unit (Minutes) 20 30 45
Machine time per unit (Hours) 4 2.5 3
Net weight per unit of finished product (Kg.) 6 4 5
Yield (%) 90 95 92
Estimated demand (Units) 10,000 20,000 9,000

Each worker is paid monthly wages of GH₵15,000 and works a total of 200 hours per month. OUL’s total overheads are estimated at 20% of the material cost.
Fixed overheads are estimated at GH₵5 million per month and are allocated to each product on the basis of machine hours. 100,000 machine hours are estimated to be available in February 20X9.
Required:
Based on optimum product mix, compute OUL’s net profit for the month of February 20X9.

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  • 20 Marks

MA – L2 – Q45 – Decision making techniques

Compute units of each product for Image Solutions to maximize profit and calculate contribution at optimal mix, considering machine hour constraints.

Image Solutions Limited deals in various products. Relevant details of the products are as under:

PW PX PY PZ
Estimated annual demand (units) 5,000 10,000 7,000 8,000
Sales price per unit (GH¢) 150 180 140 175
Material consumption:
R (kg) 2 2.5 1.5 1.75
T (kg) 0.5 0.6 0.4 0.65
Labour hours 2 2.25 1.75 2.5
Variable overheads (based on labour cost) 75% 80% 100% 90%
Fixed overheads per unit (GH¢) (based on 80% capacity utilisation) 10 20 14 16
Machine hours required:
Processing machine hours 5 6 8 10
Packing machine hours 2 3 2 4

Company has a long term contract for purchase of material R and T at a price of GH¢ 15 and GH¢ 20 per kg respectively. Wage rate for 8 hours shift is GH¢ 200.

The estimated overheads given in the above table are exclusive of depreciation expenses. The company provides depreciation on number of hours used basis. The depreciation on each machine based on full capacity utilisation is as follows:

Hours GH¢
Processing machine 150,000 150,000
Packing machine 100,000 50,000

The company has launched an advertising campaign to promote the sale of its products. GH¢ 2 million have been spent on such campaign. This cost is allocated to the products on the basis of sale.

Required:
Compute the number of units of each product that the company should produce in order to maximize the profit and also compute the product wise and total contribution at optimal product mix.

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  • 20 Marks

MA – L2 – Q44 – Relevant cost and revenue

Recommend whether TechLink Solutions should buy new equipment or outsource electronic modules for 400,000 units annually.

TechLink Solutions Limited manufactures and sells routers. It manufactures its own electronic modules (EM), an important part of the router. The present cost to manufacture an EM is as follows:

GH¢
Direct material 250
Direct labour 300
Variable overheads 150
Fixed overheads
Depreciation 100
General overheads 150
Total cost per unit 950

The company manufactures 400,000 units annually. The equipment being used for manufacturing EM has worn out completely and requires replacement. The company is presently considering the following options:
(A) Purchase new equipment which would cost GH¢ 240 million and have a useful life of six years with no salvage value. The company uses straight-line method of depreciation. The new equipment has the capacity to produce 600,000 units per year. It is expected that the use of new equipment would reduce the direct labour and variable overhead cost by 20%.
(B) Purchase from an external supplier at GH¢ 730 per unit under a two-year contract.
The total general overheads would remain the same in either case. The company has no other use for the space being used to manufacture the EMs.

Required:
(a) Which course of action would you recommend to the company assuming that 400,000 units are needed each year? (Show all relevant calculations)

(b) What would be your recommendation if the company’s annual requirements were 600,000 units?

(c) What other factors would the company consider, before making a decision?

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  • 20 Marks

MA – L2 – Q43 – Decision Making Techniques

Recommend whether to shut down internal production of Component A or B and switch to external purchasing based on cost analysis.

Vento Industries makes two components, A and B, for which costs in the next year are expected to be as follows:

A B
Production (units) 30,000 20,000
Variable costs per unit: GH¢ GH¢
Direct materials 6 5
Direct labour 3 9
Variable production overheads 1 3
Variable production cost 10 17

Direct labour is paid GH¢12 per hour. There will be only 19,500 hours of direct labour time available next year, and any additional components must be purchased from an external supplier.
Total fixed costs per annum are expected to be as follows:

GH¢
Incurred as a direct consequence of making A 40,000
Incurred as a direct consequence of making B 50,000
Other fixed costs 30,000
120,000

An external supplier has offered to supply units of A for GH¢12.50 and units of B for GH¢23.

Required:
(a) Recommend whether Vento Industries should shut down internal production of Component A or Component B and switch to external purchasing.

(b) Recommend the quantities that Vento Industries should make of the components, and the quantities that it should buy externally, in order to obtain the required quantities of both components at the minimum cost. Calculate what the total annual cost will be.

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  • 20 Marks

MA – L2 – Q42 – Decision Making Techniques

Determine optimal production mix for four liquids with a contract obligation, maximizing profit within labour hour constraints.

NexGen Ltd. manufactures four liquids: A, B, C, and D. The selling price and unit cost details for these products are as follows:

Liquid A Liquid B Liquid C Liquid D
GH¢ per litre GH¢ per litre GH¢ per litre GH¢ per litre
Selling price 100 120 120 110
Costs:
Direct materials 24 30 21 18
Direct labour (GH¢6/hour) 18 15 24 12
Direct expenses 0 0 0 0
Variable overhead 12 10 18 12
Fixed overhead (note 1) 24 20 36 24
Total cost per litre 78 75 102 66
Profit per litre 22 35 18 44

Note 1: Fixed overhead is absorbed on the basis of labour hours, based on a budget of 1,600 hours per quarter (three months).
During the next three months, the number of direct labour hours is expected to be limited to 1,345 hours. The same labour is used for all products.
The marketing director has identified the maximum demand for each of the four products during the next three months as follows:

  • Liquid A: 200 litres
  • Liquid B: 150 litres
  • Liquid C: 100 litres
  • Liquid D: 120 litres
    No inventories are held at the beginning of the period that could be used to satisfy demand in the period.

Required:
(i) Determine the number of litres of liquids A, B, C, and D to be produced and sold in the next three months in order to maximise profits.
(ii) Calculate the profit that this would yield.

(B)  Suppose that a contract has been made before the beginning of the period by NexGen Ltd. and one of its customers, PrimeCorp. NexGen Ltd. has agreed to supply PrimeCorp with 20 litres of each A, B, C, and D during the three-month period.
This sales demand from PrimeCorp is included in the demand levels shown above in part (a) of the question.

Required:
(i) Given the contract with PrimeCorp, determine the number of litres of liquids A, B, C, and D to be produced and sold in the next three months in order to maximise profits, if the maximum number of labour hours remain 1,345 hours for the period.
(ii) Calculate the profit that this would yield.

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  • 15 Marks

MA – L2 – Q41 – Cost-volume-profit (CVP) analysis

Calculate breakeven point in units and sales value for Nartey Enterprises based on budgeted profit statement.

Nartey Enterprises, a manufacturing organisation, has a budgeted profit statement for its next financial year, when it is expected to be operating at 75% level of capacity. The budget is given below:

GH₵ GH₵
Sales 9,000 units at GH₵32 288,000
Less:
Direct materials 54,000
Direct wages 72,000
Production overhead:
fixed 36,000
variable 18,000
Administration and distribution costs:
fixed 42,000
variable 27,000 249,000
Profit 39,000

Required:
(a) Calculate the breakeven point in units and in sales value.

  (b) Calculate the contribution/sales ratio.                                                                                                                                                                  (c) Calculate the number of units to be sold to earn a profit of GH₵52,000.

    (d) Calculate the profit that would be expected if the company operated at full capacity.

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  • 15 Marks

MA – L2 – Q40 – Cost-volume-profit (CVP) analysis

Compute break-even point in GH¢ and units for AquaPure Limited at GH¢16 per bottle using budgeted cost data.

AquaPure Limited is planning to produce mineral water. It is contemplating to purchase a plant with a capacity of 100,000 bottles a month. For the first year of operation the company expects to sell between 60,000 to 80,000 bottles. The budgeted costs at each of the two levels are as follows:

Particulars 60,000 bottles 80,000 bottles
Material 360,000 480,000
Labour 200,000 260,000
Factory overheads 120,000 150,000
Administration expenses 100,000 110,000

The production would be sold through retailers who will receive a commission of 8% of sale price.

Required:
(a) Compute the break-even point in GH¢ and units if the company decides to fix the sale price at GH¢16 per bottle.

(b) Compute the break-even point in units if the company offers a discount of 10% on purchase of 20 bottles or more, assuming that 20% of the sales will be to buyers who will avail the discount.

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  • 20 Marks

MA – L2 – Q39 – Cost-volume-profit (CVP) analysis

Compute break-even sales for Fuseni Limited's two products, maintaining budgeted sales ratio, with detailed overhead allocation.

Fuseni Limited has two divisions each of which makes a different product. The budgeted data for the next year is as under:

Product A Product B
Sales GH¢ 200,000,000 GH¢ 150,000,000
Direct material GH¢ 45,000,000 GH¢ 30,000,000
Direct labour GH¢ 60,000,000 GH¢ 45,000,000
Factory overheads GH¢ 35,000,000 GH¢ 15,000,000
Price per unit GH¢ 20 GH¢ 25

Details of factory overheads are as follows:
(i) Product A is stored in a rented warehouse whose rent is GH¢0.25 million per month. Product B is required to be stored under special conditions. It is stored in a third party warehouse and the company has to pay rent on the basis of space utilised. The rent has been budgeted at GH¢0.12 million per month.
(ii) Indirect labour has been budgeted at 20% of direct labour. 70% of the indirect labour is fixed.
(iii) Depreciation for assets pertaining to product A and B is GH¢6.0 million and GH¢2.0 million respectively.
(iv) 80% of the cost of electricity and fuel varies in accordance with the production in units and the total cost has been budgeted at GH¢4.0 million.
(v) All other overheads are fixed.

Required:
Compute the break-even sales assuming that the ratio of quantities sold would remain the same, as has been budgeted above.

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  • 15 Marks

MA – L2 – Q38- Cost-volume-profit (CVP) analysis

Compute break-even point in GH¢ and margin of safety for Ofori Fabricators based on last year's sales and cost data.

Ofori Fabricators produces and markets a single product. Presently, the product is manufactured in a plant that relies heavily on direct labour force. Last year, the company sold 5,000 units with the following results:

GH¢
Sales 22,500,000
Less: Variable expenses 13,500,000
Contribution margin 9,000,000
Less: Fixed expenses 6,300,000
Net income 2,700,000

Required:
(a) Compute the break-even point in GH¢ and the margin of safety.

(b) Calculate the contribution margin ratio and the break-even point in units if the variable cost per unit increases by GH¢600? Also calculate the selling price per unit if the company wishes to maintain the contribution margin ratio achieved during the previous year.

(c) The company is also considering the acquisition of a new automated plant. This would result in the reduction of variable costs by 50% of the amount computed in (b) above whereas the fixed expenses will increase by 100%. If the new plant is acquired, how many units will have to be sold next year to earn net income of GH¢3,150,000.

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