Question 1
Clear Ltd bottles and distributes mineral water from the company’s natural springs. The company markets two products: 1-litre disposable plastic bottles and 15 litre reusable plastic containers.
Required
- For 2019, Clear Ltd’s marketing manager forecasted monthly sales of 320,000 1-litre bottles and 80,000 15-litre containers. Average selling prices are estimated at $0.20 per 1-litre bottle and $1.20 per 15 litres container. Prepare a revenues budget for Clear Ltd for the year ending 31 December 2019.
- Clear Ltd begins 2019 with 720,000 1-litre bottles in inventory. The manager of operations requests that 1-litre bottles ending inventory on 31 December 2019 be no less than 480,000 bottles. Based on sales projections as budgeted in requirement ‘a’ above, what is the minimum number of 1-litre bottles Clear Ltd must produce during 2019?
- The manager of operations requests that ending inventory of 15-litre containers, on 31 December 2019, be 160,000 units. If the production budget calls for Clear Ltd to produce 1,040,000 15-litre containers during 2019, what is the beginning inventory of 15-litre containers on 1 January 2019?
Question 2
Lions Ltd is preparing its cash budget for the month of May 2019. Sales are estimated to be 20% cash and 80% credit.
Past experience has shown that debtors pay 50% in the month following a sale, 35% in the second month and 10% in the third month after the sale. 5% of the debtors are written off as bad debts in the fourth month after the sale.
Actual and estimated sales data for January to May 2019 are provided below.
| Month | Sales |
| January | $50,000 |
| February | $40,000 |
| March | $35,000 |
| April (estimated) | $24,000 |
| May (estimated) | $50,000 |
Required
Calculate the estimated cash received from debtors in May 2019. (10 marks)
Question 3
Cloths Ltd has two retail divisions, which reported the following results for the financial year ending 30 June 2018.
| Shirts | Trousers | |
| Profit | $450,000 | $100,000 |
| Average invested capital | $3,000,000 | $500,000 |
| Return on Investment (ROI) | 15% | 20% |
Required:
- Based on the ROI information provided above, which division was more successful? Explain. Explain also whether you agree with this conclusion.
- Calculate each division’s residual income (RI) under each of the following assumptions about the firm’s minimum required rate of return: 12%, 15%, 18%
- In what way can the use of ROI as a performance measure lead to bad decisions? How does the RI approach overcome this problem?
Question 4
A company produces three products, small-sized shoes, average-sized shoes and large-sized shoes. Each of these products, from a joint production process, can be sold at the split-off point or processed further. Joint production costs of $120,000 per year are allocated to each product based on the relative number of units produced. The company has provided the following budgeted information for 2019:
| Product | Units produced | Sales value at the splitoff point | Cost of processing further | Sales value if processed further |
| Small shoes | 25,000 | $170,000 | $120,000 | $260,000 |
| Average shoes | 5,000 | $70,000 | $40,000 | $100,000 |
| Large shoes | 10,000 | $150,000 | $40,000 | $200,000 |
Required:
Please advise the company how to arrange the production of each product to maximize the company’s profit.
Question 5
Thrill Games developed a new play station called T-RILL. Thrill Games has a standard cost system to help control its costs. The following standards have been established for T-RILL.
- Direct materials 15 grams per T-RILL.
- Standard direct material cost per T-RILL is $10.
- Direct labour 1.4 hours per T-RILL.
- Standard cost of direct labour is $14.40 per T-RILL.
During October the company produced 6,500 T-RILL units. Production data for October are:
- Direct materials: 95,000 grams were purchased at a cost of $60,000; 5,000 grams of this was still in inventory at the end of the month.
- Direct labour: 9,000 direct labour hours were worked at a cost of $95,000.
Required:
Compute the following variances for October:
- Direct materials price and quantity variances. (5 marks)
- Direct labour rate and efficiency variances. (5 marks)
Are the variances computed in (a) and (b) linked? Provide a brief commentary on the variances computed above, including explanations regarding the price and the quantity, and the rate and the efficiency variances.
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