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

  1. 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.
  2. 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?
  3. 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:

  1. Based on the ROI information provided above, which division was more successful? Explain. Explain also whether you agree with this conclusion.
  2. 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%
  3. 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:

  1. Direct materials price and quantity variances. (5 marks)
  2. 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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