Topic: Decision-making techniques

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PM – Nov 2024 – L2 – Q4 – Decision-Making Techniques

Determine optimal production mix for maximizing profit using marginal costing and throughput accounting principles.

PK Limited manufactures two models of heavy-duty cooking racks suitable for restaurant kitchens and other commercial environments. Both models utilize the same types of raw materials and machine hours. No inventories are held. The sales budget for next year is as follows:

Model Sales Units Selling Price (N)
A 300,000 1,000
B 140,000 1,400

The following additional information is provided:

  • Cost data:
Model Material Cost (N) Variable Production Conversion Costs (N)
A 400 100
B 500 300
  • Fixed production overheads attributable to the manufacture of both models total N40,500,000.
  • Production is completed in the machining department, where the production rate per hour is:
    • Model A: 12.5 units
    • Model B: 10 units
  • Machine hours are limited to 30,000 hours.

Required:

a. Using marginal costing principles, calculate the optimal mix (units) of each model that will maximize net profit, and indicate the value of the net profit. (5 Marks)

b. Calculate the throughput accounting ratio for each model and briefly discuss when a product is worth producing under throughput accounting principles. Assume that the variable overhead cost, amounting to N24 million for the chosen product mix in part (a), is fixed in the short term. (7 Marks)

c. Using throughput accounting principles, advise management on the quantities of each model to produce for maximizing profit and provide a projected net profit for PK Limited next year. (5 Marks)

d. Explain two ways in which the concept of ‘contribution’ in throughput accounting differs from its use in marginal costing. (3 Marks)

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PM – Nov 2024 – L2 – Q1 – Decision-Making Techniques

Optimization of Oshimiri Nigeria Limited's production plan to maximize profits under resource constraints using linear programming.

Oshimiri Nigeria Limited, a company based in Aba, produces two grades of industrial vanish. The selling price and associated unit variable costs for vanish Grade A and Grade B are shown below:

Particulars Grade A Grade B
Selling Price N2,100 N1,500
Material X (N240/kg) N480 N240
Skilled Labour (N144/hr) N720 N288
Unskilled Labour (N60/hr) N120 N180
Variable Overhead (N84/machine hr) N168 N336

The fixed overhead costs are N2,600,000 per month. The company plans to maximize profits.

The availability of resources for the following month is as follows:

  • Material X: 25,000 Kg
  • Skilled Labour: 48,000 hours
  • Unskilled Labour: 39,000 hours
  • Machine hours: 50,000 hours

Required:

a. Identify the objective function and the constraints of the model to be used in determining the optimum production plan for the following month. (5 Marks)

b. Determine the optimum production plan for the month and the associated profit. (5 Marks)

c. Explain the concept and significance of dual prices and slack variables in the context of the model used by the company in this scenario. (4 Marks)

d. Calculate the dual prices for constraints identified in this scenario. (10 Marks)

e. Suggest ways in which the management can overcome the capacity constraints identified above during the month and the cost implications. (6 Marks)

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PM – May 2021 – L2 – Q5 – Decision-Making Techniques

Calculate the optimal order quantity to maximize expected profits considering ordering constraints and probability distribution of demand.

A national boutique chain sells a wide range of high-quality customized fashion goods. One particular outfit is bought at ₦8,000 and sold at ₦13,000. Mean holding costs per season per outfit are ₦500, and it costs ₦80,000 to order and receive goods in stock. The manufacturers require orders in advance, and once a batch is made, it is impossible to place a repeat order. Additionally, delivery cannot be staggered over the fashion season.

When a customer buys an outfit that requires adjustments, alterations are made, and the customer collects it later. Generally, if an outfit is out of stock at one boutique, it can be obtained from another branch within hours. However, if the chain as a whole runs out of stock, it loses both the outfit’s profit and an estimated ₦2,000 profit from additional items customers typically buy. If excess stock remains at season’s end, it is disposed of at ₦5,000 per outfit.

The sales pattern for a comparable outfit indicates the following probability distribution for total chain sales:

Outfits Sold Probability
1,100 0.30
1,200 0.40
1,300 0.20
1,400 0.10

The management accountant must determine the optimal order quantity for the upcoming season to maximize expected profit, factoring in overstocking and understocking costs.

Required:
a) Determine the number of outfits to order to maximize expected profits.
(17 Marks)

b) Compare and contrast the model developed with the classical Economic Order Quantity (EOQ) model.
(3 Marks)

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PM – May 2021 – L2 – Q2 – Budgeting and Budgetary Control

Recommend the appropriate forecast for PQR Plc, analyze the limiting factor, and explain the budgeting process.

PQR Plc is preparing its budgets for the upcoming year and has forecasted two demand scenarios for its product range:

You are to assume only one forecast (either Forecast 1 or Forecast 2) will be selected. The expected variable unit costs for each product are:

The general fixed costs are budgeted at ₦20,000 for the year, with no specific fixed costs expected per product. Additionally, all three products use the same direct material, with a limited supply of 22,020 kgs available for the budget year.

Required:
a. Recommend, with supporting calculations, whether forecast 1 or forecast 2 should be adopted for the budget period. (11 Marks)
b. Prepare a report, addressed to the managing director, to explain the budget preparation process, with particular reference to: i. The principal budget factor (3 Marks)
ii. The budget manual (3 Marks)
iii. The role of the budget committee (3 Marks)

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PM – May 2023 – L2 – SA – Q4 – Decision-Making Techniques

Evaluate the costs and desirability of mutually exclusive contracts for Tayo Limited, considering penalties and other relevant factors.

Tayo Limited is a civil engineering company based in Benin. Contracts are carried out under the supervision of project managers who are sent out from Head Office and remain on-site for the duration of the contract. The project manager recruits local labour and arranges for plant and materials to be provided by Head Office.

Some time ago, the company successfully tendered for two contracts that have now become mutually exclusive. It is currently considering which of these to accept. Both jobs would last for 12 months.

The following information about each contract is available:

Notes:

(i) The materials which would be used on the Abuja job have increased in money value by 60% over their purchase cost. Tayo Limited has no other use for these materials on any other contract apart from the Abuja one, but they could be re-sold to other companies in the industry at 90% of their value. Transportation and other selling costs would further decrease the cash inflow from the sale by 16.67% of the sales price.

(ii) The materials for the Lagos job have no other obvious use, but could be sold for scrap if the contract were cancelled. The scrap value would be 10% of cost, and costs of transport, etc., would be paid by the scrap merchant. It is likely, however, that the materials could be used next year on another contract in substitution for a different material normally costing 20% less than the cost of the materials to be used on the Lagos contract.

(iii) Local labour can be hired as and when required.

(iv) Plant is depreciated on a straight-line basis, and the interest on plant charge is a nominal cost added for accounting purposes.

(v) The two contracts would require similar plant, although more plant would be required for the Lagos than for the Abuja job. The plant not required on the Abuja job would be sub-contracted out by Head Office for ₦200,000 per annum.

(vi) Head Office administration costs are fixed at ₦2,500,000 for the coming year. This excludes project managers’ salaries.

Required:

a. Present the data to management in a form which will assist in making the decision as to which job to undertake. Provide notes to explain the principles which have been used in selecting the data and to support any calculations made. (12 Marks)

b. Comment on the appropriateness of the approach used in your analysis. (4 Marks)

c. List briefly any other factors which ought to be considered before finally making the decision in this case. (4 Marks)

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PM – May 2023 – L2 – SA – Q3 – Decision Making Techniques

Evaluate the desirability of a contract for Product X by analyzing the labour, material, and overhead costs involved.

Kenny Limited (KL) has been offered a contract that, if accepted, would significantly increase next year’s activity levels. The contract requires the production of 20,000 kg of product X and specifies a contract price of N10,000 per kg. The resources used in the production of each kg of X include the following:

Resources per kg of X:

Labour:

  • Grade 1: 2 hours
  • Grade 2: 6 hours

Materials:

  • Material A: 2 units
  • Material B: 1 litre

Costs:

  • Grade 1 Labour: N400 per hour
  • Grade 2 Labour: N200 per hour
  • Material A: Replacement cost N1,000 per unit, Net Realisable Value N900
  • Material B: Replacement cost N3,200 per litre, Net Realisable Value N2,500
  • Fixed production overheads: N60,000,000 based on 300,000 productive labour hours
  • Incremental overheads for the contract: N22,800,000
  • Variable production overheads: N300 per productive labour hour

The contract could also result in a 5,000-unit decrease in sales of another product, Y, which contributes N7,000 per unit in revenue and incurs variable costs of N1,200 and 4 hours of Grade 2 labour per unit. However, avoiding the production of Y will save attributable fixed overheads of N5,800,000.

Required:

a. Advise KL on the desirability of the contract. (8 Marks)
b. Show how the contract, if accepted, will be reported on the routine job costing system used by KL. (6 Marks)
c. Briefly explain the reasons for any differences between the figures used in (a) and (b) above. (6 Marks)

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PM – May 2023 – L2 – SA – Q2 – Decision-Making Techniques

Construct payoff tables, determine profitable print numbers, and discuss decision rules for football program sales.

The local football club has asked for your advice on the number of programmes that should be printed for each game. The cost of printing and production of programmes for each game, as quoted by the local printer, is ₦1,000,000 plus ₦400 per copy. Advertising revenue which has been agreed for the season represents ₦800,000 for each game.

Programmes are sold for ₦150 each. A review of sales during the previous seasons indicates that the following pattern is expected to be repeated during the coming season of 50 games:

Number of programmes sold Number of games
10,000 5
20,000 20
30,000 15
40,000 10

Programmes not sold at the game are sold as waste paper to a paper manufacturer at ₦100 per copy.

Assuming that the four quantities listed are the only possibilities, you are required to:

a. Prepare a payoff table. (6 Marks)

b. Determine the number of programmes that would provide the highest profit if a constant number of programmes were to be printed for each game. (4 Marks)

c. Explain why you should buy 30,000 or 40,000 copies, assuming one of these is the most profitable quantity, despite the fact that the most probable sales are 20,000 copies per game. (2 Marks)

d. Calculate the profit which would arise from a perfect forecast of the numbers of programmes which would be sold at each game. (4 Marks)

e. Discuss the major limitations of the expected value criterion in decision making. (4 Marks)

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PM – Nov 2015 – L2 – Q6 – Decision-Making Techniques

Evaluate whether Tee Company should replace Green with Brace and the best timing for changeover.

Tee Company makes and sells a product, the Green, which is nearing the end of its life. A replacement product, Brace, has been designed and test marketed, and the company is trying to decide when to replace Green with Brace. Tee Company only has the capability to produce one of the two products at a time.

Sales of Green are expected to be 100,000 units in the first quarter of Year 7 and are forecast to fall after that so that each quarter’s sales will be 10% less than those of the previous quarter. Green has a selling price of ₦14 per unit, and its Contribution to Sales ratio (C/S ratio) is 40%. The fixed costs of making Green in Year 7 will be ₦200,000 per quarter.

Test market results for Brace were very good, and demand for similar products is growing rapidly. Tee Company believes that sales of Brace can be predicted by the following equation:

Y = 80,000 + 6,000 T

Where:

  • Y = Sales of Brace in units per quarter
  • T = Time, measured in quarters. For the first quarter of Year 7 (January to March Year 7), T = 1; for the second quarter of Year 7, T = 2; etc.

The selling price of Brace will be ₦16, and its contribution per unit will be ₦6. Fixed costs will increase to ₦240,000 per quarter if Green is replaced by Brace.

To avoid disruption of the production of Tee’s other products, the changeover between Green and Brace must take place on either 1 January Year 7 or 1 July Year 7. The costs of changeover will differ depending upon which date is chosen, and the following information is available:

  1. Some of the machinery used to make the Green will no longer be required for the Brace. The written-down value of this machinery will be ₦250,000 on 1 January Year 7, and ₦220,000 by 1 July Year 7. Its net realizable value at 1 January Year 7 will be ₦140,000, but by 1 July Year 7, it will be ₦30,000.
  2. Some redundancies will result from the change of products. Redundancy payments of ₦40,000 will be made if the changeover occurs on 1 January, but these will rise to ₦50,000 by 1 July. The five administration workers concerned are each paid ₦20,000 per annum and will not be replaced. Their wages are not included in the costs given above.

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PM – Nov 2015 – L2 – Q1 – Decision-Making Techniques

Comparison of two machine purchase options - ZIGMA 5000 and DELPHA 7000 using profitability statement, cash flows, payback period and NPV.

The Board of Directors of Danda Company Limited is proposing the purchase of either of two machines that have been proved adequate for the production of an engineering product “Gee”. The two machines are: ZIGMA 5,000 and DELPHA 7,000. Production in the first year would be affected by installation challenges and inadequate understanding of the operating instructions of the machines.

Information available from the production profile of the two machines are as shown below:

ZIGMA 5000:

Cost of machine is N16,500,000 while the life span is 6 years.

DELPHA 7000:

Cost of plant is N18,300,000 while the life span is 6 years.

Other information relevant to the company’s operations and administration are:

(i) Selling price per unit is N300.

(ii) Variable cost per unit is N150.

(iii) Annual fixed overhead exclusive of depreciation is N1,200,000.

(iv) Company depreciation policy is straight line basis.

(v) The budgeted production capacity is 100,000 units.

(vi) No opening or closing inventory is envisaged.

(vii) All sales are for cash.

(viii) All costs are for cash.

Required:

a. Prepare the SIX year profitability statement for the two machines. (6 Marks)

b. Prepare the SIX year cash flow statement for the two machines. (6 Marks)

c. What is the payback period for the two machines? (7 Marks)

d. Determine the Net Present Value (NPV) of the two machines if the acceptable discount rate for the company is 15%. (7 Marks)

e. Which of the two machines should the company acquire? (4 Marks)

 

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PM – NOV 2016 – L2 – Q4 – Decision-Making Techniques

Question requires analysis of airline operations to determine profitability of different pricing and charter decisions through contribution analysis.

Aghobe Air owns a single aircraft which operates between Lagos and Kano. The normal flight schedule is that flights leave Lagos on Mondays and Thursdays and depart from Kano on Wednesdays and Saturdays. Aghobe Air cannot offer any more flights between Lagos and Kano. The only seat available on the aircraft is economy class.

The following information is available: Seating capacity of the aircraft is 360 passengers. Weekly average number of passengers per flight is as follows:

Additional information:

(i) Food and beverages service cost N1,000 per passenger but at no charge to the passengers;

(ii) Commission to travel agents paid by Aghobe Air (All tickets are booked by travel agents) is 8% of fare;

(iii) Fixed annual leased costs allocated to each flight is N2,650,000 per flight;

(iv) Fixed ground services (maintenance, check in baggage handling, etc.) cost allocated to each flight N350,000 per flight;

(v) Fixed flight crew salaries allocated to each flight is N200,000 per flight; and

(vi) Fuel cost is unaffected by the actual number of passengers on the flight.

Required:

a. Determine the net operating income made by Aghobe Air on each one way flight between Lagos and Kano. (5 Marks)

b. The market research unit of Aghobe Air indicates that lowering the average one way fare to N24,000 will increase the average number of passengers per flight to 212. Should Aghobe Air lower its fare? (5 Marks)

c. A tourist group known as Sea Bird Tour Operator approaches Aghobe Air on the possibility of chartering the aircraft twice each month from Lagos to Kano and back from Kano to Lagos. If Aghobe Air accepts the offer, it will only offer 184 flights in each year. Other terms of the offer include:

  • For each one way flight, Sea Bird Tour Operator will pay Aghobe Air N3,750,000 which covers cost of charter for one way, use of flight crew and ground service staff. Sea Bird Tour operator will pay for fuel costs, food and beverages.

Should Aghobe Air accept the offer from Sea Bird Tour Operator? (5 Marks)

d. What factors should be taken into consideration in taking the decision in (c) above? (5 Marks)

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PM – Nov 2016 – L2 – Q1 – Decision Making Techniques

Evaluate profit maximization, machine bottlenecks, and inventory valuation using marginal and throughput accounting approaches.

Hicenta Limited makes three products Soyi, Milco and Yoghurt. All the three
products must be offered for sale each month in order to provide a complete
market service. The products are fragile and their quality deteriorates rapidly
shortly after production.
The products are produced on two types of machine and worked on by a single
grade of direct labour. Fifty direct employees are paid N80 per hour for a
guaranteed minimum of 160 hours per month.
All the products are first pasteurised on a machine type A and then finished
and sealed on a machine type B.
The machine hour requirements for each of the products are as follows:

Machine Information:

Machine Type Product Hours per Unit
Machine A Soyi 1.5
Machine A Milco 4.5
Machine A Yoghurt 3.0
Machine B Soyi 1.0
Machine B Milco 2.5
Machine B Yoghurt 2.0

The capacity of the available machines type A and B are 6,000 hours and 5,000
hours per month respectively. Details of the selling prices, unit costs and
monthly demand for the three products are as follows:

Product Costs and Demand:

Product Selling Price (N per unit) Concentrate Cost (N per unit) Other Direct Material Cost (N per unit) Direct Labour Cost (N per unit) Overheads (N per unit) Profit (N per unit) Maximum Monthly Demand (units)
Soyi 910 220 230 60 240 160 1,200
Milco 1,740 190 110 480 620 340 700
Yoghurt 1,400 160 140 360 520 220 600

Although, Hicenta Limited uses marginal costing and contribution analysis as
the basis for its decision making activities, profits are reported in the monthly
management accounts using the absorption costing basis. Finished goods
inventories are valued in the monthly management accounts at full absorption
cost.
You are required to:

a. Calculate the monthly machine utilisation rate for each product and
explain which of the machines is the bottleneck/limiting factor.
(6 Marks)
b. Use current system of marginal costing and contribution analysis to
calculate the profit maximising monthly output of the three products.
(6 Marks)
c. Explain why throughput accounting might provide more relevant
information in Hicenta‟s circumstances. (6 Marks)
d. Use a throughput approach to calculate the throughput-maximising
monthly output of the three products. (6 Marks)
e. Explain the throughput accounting approach to optimizing the level of
inventory and its valuation. Contrast this approach to the current system
employed by Hicenta. (6 Marks)

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PM – Nov 2019 – L2 – Q1c – Decision-Making Techniques

Advise management on whether to accept a special order for 25,000 units of Apet at a price of N12 per unit, considering material procurement.

A customer has just placed a special order for 25,000 units of Apet and the customer is willing to pay N12.00 per unit. Advise the management whether to accept or reject the order. Assume that for any shortfall in material A required to produce the order, it can be bought at a price of N2.00 per kg. (10 Marks)

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PM – Nov 2019 – L2 – Q1b – Decision-Making Techniques

Discuss management accounting techniques and principles that aid decision-making in scenarios like production reduction or factory closure.

b. Discuss the management accounting technique and principle that a management accountant will apply in preparing calculations to support management decisions in such a circumstance as above. (10 Marks)

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PM – Nov 2019 – L2 – Q1a – Decision-Making Techniques

Analyze business decision on factory closure by comparing sales volume, advertising costs, and other production costs for two proposals.

Adeco Nigeria plc. is a large and diversified company with several factories. One of its factories that produces “Apet” has not been able to meet its sales target for over two years. The board has mandated the company’s management to take an urgent decision on what to do with the factory.

The management has therefore set up a committee of three, the factory manager, the marketing manager, and the management accountant to analyze the situation and come up with a report on what they felt the management should do. The marketing manager has submitted two proposals to the committee. These are:

  • A sales volume of 25,000 units can be achieved with a selling price of N13.50 per unit and an advertising campaign of N37,500; or
  • A sales volume of 35,000 units can be achieved at a selling price of N11.25 with an advertising campaign costing N52,500.

The management accountant is to work on these proposals with the information provided by the factory manager and show with calculations that will help the committee determine which proposal to be recommended to management. The management accountant is also to provide a third option, the closure of the factory.

The factory manager has submitted the following information to the management accountant:

The following additional information has also been made available:
(i) There are 50,000 kg of material A in inventory. This originally cost N1.5 per
kg. Material A has no other use and unless it is used by the division, it will
have to be disposed of at a cost of N750 for every 5,000 kg.
(ii) There are 30,000 litres of material B in inventory. Any unused material can be
used by another department to substitute for an equivalent amount of a
material, which currently costs N1.875 per litre. The original cost of material B
was N0.75 per litre and it can be replaced at a cost of N2.25 per litre.
(iii) All production labour hours are paid on an hourly basis. Rumours of the
closure of the department have led to a large proportion of the department‟s
employees leaving the organisation. Uncertainty over its closure has also
resulted in management not replacing these employees. The department is
therefore, short of labour hours and has sufficient to produce only 25,000
units. Output in excess of 25,000 units would require the department to hire
contract labour at a cost of N5.625 per hour. If the department is shut down
the present labour force will be redeployed within the organisation.
(iv) Included in the variable overhead is the depreciation of the only machine
used in the department. The original cost of the machine was N300,000 and it
is estimated to have a life of 10 years. Depreciation is calculated on a straightline basis. The machine has a current resale value of N37,500. If the
machinery is used for production, it is estimated that the resale value of the
machinery will fall at the rate of N150 per 1,000 units produced. All other
costs included in variable overhead vary with the number of units produced.
(v) Included in the fixed production overhead is the salary of the factory manager
which amounts to N30,000. If the department were to shut down the manager
would be made redundant with a redundancy pay of N37,500. All other costs
included in the fixed production overhead are general factory overheads and
will not be affected by any decision concerning the factory.
(vi) The non-production cost charged to the factory is an apportionment of the
total non-production costs incurred by the factory.
The committee will be meeting in a week‟s time to prepare its report to
management on the line of action management should follow, either one of the
marketing manager‟s proposals or to close down the factory.
63
Required:

As the management accountant of Adeco plc., you are to:
a. Prepare detailed calculations to support the committee‟s recommendation to
the management whether to:
i. reduce production to 25,000 units
ii. reduce production to 35,000 units
iii. shut down the factory. (20 Marks)

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PM – Nov 2020 – L2 – Q1 – Decision-Making Techniques

Analyze two sales proposals for production volumes and a third scenario reflecting the closure of the factory.

Adeco Nigeria plc is a large and diversified company with several factories. One of its factories that produces “Apex” has not been able to meet its sales target for over two years. The board has mandated the company’s management to take a decisive step on what to do with the factory.

The management, therefore, set up a committee of three—the factory manager, marketing manager, and the management accountant—to analyze the situation and come up with a report on what the management should do. The marketing manager submitted two proposals to the committee, which are:

  • Proposal 1: A sales volume of 25,000 units can be achieved with a selling price of ₦13.50 per unit and an advertising campaign costing ₦37,500.
  • Proposal 2: A sales volume of 35,000 units can be achieved at a selling price of ₦11.25 per unit with an advertising campaign costing ₦52,500.

The management accountant is to work on these proposals with the information provided by the factory manager and come up with calculations to help the committee know which of the proposals to recommend to management. The management accountant is also required to prepare a third scenario that would reflect the factory’s closure.

The factory manager provided the following information:

Budgeted Sales and Production of Apex (Units) 50,000
Sales ₦750.0
Less production costs:
Material A – 1 kg per unit ₦75.0
Material B – 1 litre per unit ₦37.5
Labour – 1 hour per unit ₦187.5
Variable overhead ₦150.0
Fixed overhead ₦75.0
Non-production costs ₦75.0
Total cost ₦600.0
Budgeted profit ₦150.0

The following additional information has also been made available:

(i) There are 50,000 kg of material A in inventory. This originally cost ₦1.5 per
kg.
Material A has no other use and unless it is used by the division, it would have
to be disposed off at a cost of ₦750 for every 5,000 kg.

(ii) There are 30,000 litres of material B in inventory. Any unused material can be
used by another department to substitute for an equivalent amount of a
material, which currently costs ₦1.875 per litre. The original cost of material B
was ₦0.75 per litre and it can be replaced at a cost of ₦2.25 per litre.

(iii) All production labour hours are paid on an hourly basis. Rumours of the
closure of the department have led to a large proportion of the department‟s
employees leaving the organisation. Uncertainty over its closure has also
resulted in management not replacing these employees. The department is
therefore short of labour hours but has sufficient man hour to produce 25,000
units. Output in excess of 25,000 units would require the department to hire
contract labour at a cost of ₦5.625 per hour. If the department is shut down,
the present labour force will be deployed within the organisation.

(iv) Included in the variable overhead is the depreciation of the only machine
used in the department. The original cost of the machine was ₦300,000 and it
is estimated to have a life span of 10 years. Depreciation is calculated on a
straight-line basis. The machine has a current resale value of ₦37,500. If the
machinery is used for production, it is estimated that the resale value of the
machinery will fall at the rate of ₦150 per 1,000 units produced. All other
costs included in variable overhead vary with the number of units produced

(v) Included in the fixed production overhead is the salary of the factory manager
which amounts to ₦30,000. If the department were to shut down, the
manager would be made redundant with a redundancy pay of ₦37,500. All
other costs included in the fixed production overhead are general factory
overheads and will not be affected by any decision concerning the factory.
(vi) The non-production cost charged to the factory is an apportionment of the
total on-production costs incurred by the factory.
The committee will be meeting in a week‟s time to prepare its report to the
management on what course of action the management should take, either one of
the marketing manager‟s proposals or to close down the factory.
Required:

As the management accountant of Adeco Plc, you are to:
a. Prepare detail calculations to support the committee‟s recommendation to
the management whether to:
i. reduce production to 25,000 units
ii. reduce production to 35,000 units
iii. shut down the factory. (20 Marks)
b. A customer has just placed a special order for 25,000 of Apex and the
customer is willing to pay ₦12.00 per unit. Advise management whether to
accept or reject the order. Assume that for any shortfall in material “A”
required to produce the order, it can be bought at a price of ₦2.00 per kg.
(10 Marks)
c. Discuss the management accounting techniques and principles that a
management accountant will apply in preparing calculations to support
management decision in such a circumstance as above. (10 Marks)

 

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PM – Nov 2021 – L2 – Q6 – Decision-Making Techniques

Explain methods to help choose the optimal marketing package under uncertainty and risk for Mr. Alade’s business.

Mr. Alade, the owner of a business, has been attending a course on scenario planning and decision-making. As a result of that advice, he has produced, using cost, volume, and profit analysis, 12 scenarios for a new product that the business will launch in the near future. There are four possible marketing packages (A, B, C, or D), and three possible market conditions (poor, average, or good) that could be encountered. The Net Present Value (NPV) of the cash flows resulting from each of the scenarios is shown in the table below:

Market Package A B C D
Market Conditions N’000 N’000 N’000 N’000
Poor 180 230 220 190
Average 190 200 210 275
Good 550 260 210 500

Mr. Alade missed the session on how to deal with risk and uncertainty. He sent this table to the course tutor, who advised him to review the methods under the “Uncertainty” section. If he can estimate the probability of each market condition, he should use “Risk-based methods.” The decision will be influenced by Mr. Alade’s attitude towards risk.

Required:
Explain FOUR methods that could help Mr. Alade decide which marketing package to choose. Include THREE methods to deal with uncertainty and ONE method to deal with risk, explaining the attitude associated with the decision-maker for each method.

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PM – Nov 2021 – L2 – Q5 – Decision-Making Techniques

Calculate and compare the expected net present value of two projects under uncertainty.

Gaskiya Nigeria Limited is considering whether or not to invest in any of the two projects where the initial cash investment would be ₦13,000,000 for A and ₦14,000,000 for B. The projects would have a five-year life and the estimated annual cash flows are as follows:

Year Project A (N) Project A Outflows (N) Project B (N) Project B Outflows (N)
1 6,000,000 3,000,000 10,000,000 5,000,000
2 8,000,000 4,000,000 9,000,000 4,000,000
3 10,000,000 4,000,000 8,000,000 3,000,000
4 9,000,000 3,000,000 8,000,000 3,000,000
5 6,000,000 3,000,000 4,000,000 2,000,000

The company’s cost of capital is 10%. Several factors could impact the inflows:

  • Factor 1: 20% probability of government measures reducing inflows by 25%.
  • Factor 2: 30% probability of a competitor entering the market, reducing inflows by 10%.
  • Factor 3: 40% probability of stronger-than-expected demand, increasing inflows by 5%.

Required:
a. Calculate the expected net present value of the two projects. (13 Marks)
b. Which of the projects will be more profitable? (2 Marks)

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PM – Nov 2021 – L2 – Q2 – Decision-Making Techniques

Determine whether to outsource production, calculate indifference price, and evaluate non-financial factors for internal production.

Divine Grace (DG) Limited currently produces “Part-2011” internally but has received an offer from KK Plc to outsource the production. The offer is for 1,000 units at N100 per unit for the next five years. The cost accountant provides the following cost breakdown for internal production of 1,000 units:

Cost Components Amount (₦)
Direct materials 44,000
Direct production labour 22,000
Variable production overhead 14,000
Depreciation on machine 20,000
Product and process engineering 8,000
Rent 4,000
General overheads 10,000
Total 122,000

Additional information:

  1. The machine used exclusively for “Part 2011” was acquired last year for ₦120,000 and has a useful life of six years with no residual value.
  2. The machine could be sold today for ₦30,000.
  3. Product and process engineering costs will cease after one year if outsourced.
  4. Rent savings from storage use if “Part-2011” production stops is ₦2,000.
  5. General overheads are fixed and not allocated to “Part-2011” if outsourced.
  6. Assume a required rate of return of 12%.

Required:
a. Should DG Limited outsource “Part 2011”? (10 Marks)
b. What maximum price should KK Plc quote for 1,000 units to make DG indifferent between outsourcing and internal production? (5 Marks)
c. What non-financial factors would favor internal production over outsourcing? (5 Marks)

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MI – Nov 2020 – L1 – SA – Q10 – Decision-Making Techniques

Identify a disadvantage of a group incentive scheme.

Group incentive schemes are common and frequently successful. Which of the following is NOT an advantage of a group incentive scheme?

A. May engender closer cooperation in the group and a team spirit

B. Increase total production output with the same number of employees

C. Support workers not directly associated with production can be included

D. May encourage more flexible working arrangements within the group

E. Less hardworking members of a group receive the same bonus

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PM – May 2018 – L2 – Q3a – Cost-Volume-Profit (CVP) Analysis

Explain the different concepts of relevant costs in the context of decision-making.

In the context of relevant costs, explain the following:
i. Incremental costs;
ii. Differential costs;
iii. Avoidable and unavoidable costs;
iv. Committed costs;
v. Sunk costs; and
vi. Opportunity costs.

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