CPA
Advanced Leval
Advanced Management Accounting November 2018
Suggested solutions

(i). Advise the management of ABC Ltd. on the minimum price to quote on this contract.

i) Determining minimum price quotation
Direct Material (300,000 × 12) Other Material Labour Cost Skilled Workers (30,000 × 30) Unskilled Workers (Irrelevant) Depreciation:- General Irrelevant :- Specific Purpose Machine Total Relevant Cost Markup profit (10% × 6,700,000) Price quotation	3,600,000 2,000,000 900,000 0 0 200,000 6,700,000 670,000 7,370,000

(ii). Describe why in practice the minimum price is never actually used.

• The Minimum price usually does not include additional costs such as fixed costs, so their use will not achieve the goal of maximizing profits.

• Minimum price, only variable and contingent costs are considered; in practice, there are also fixed and unavoidable costs.

EMV investigation

(55,000 × 0.9 × 0.5) - (1,500 + 10,000 × 0.5) = 18,250

EMV no investigation

Decision: They should conduct an investigation

(i) Net profit

Sales volume Selling price Total sales (sh 000) Gross profit margin Gross profit Overhead cost Net profit

1 18,000 900 16,200 40% 6,480 (5,250) 1.230

2 19,800 900 17,820 40% 7,128 (5,250) 1,878

3 21,780 855 18,621.9 38% 7,076.32 (6,000) 1.076.32

4 23,958 855 20,484 38% 7,784 (6,000) 1,784

(ii) Return on investment (ROI).

Assets balance b/d (A) Depreciation 25%*7,500 N.B.V Net income(B) ROI = B/A x 100%

Year 1 7,500 (1,875) 5,625 1,230 16.4%

Year 2 5,625 (1,875) 3,750 1,878 33.39%

Year 3 3,750 (1,875) 1,875 1,076.32 28.7%

Year 4 1,875 (1,875) 0 1,784 95.15%

(i). A simulation of the company's inventory balances for a period of 10 days.

Demand
Demand(Units) 10 14 18 22	Probability 0.22 0.30 0.40 0.08	Cummulative Probability 0.22 0.52 0.92 1.00	Range 00-21 22-51 52-91 92-99

Lead time
Days 2 3 4 5	Probability 0.10 0.30 0.20 0.40	Cummulative Probability 0.10 0.40 0.60 1.00	Range 00-09 10-39 40-59 60-99

Simulation
Day	Opening stock	Demand		Clossing stock	Make order	Lead time		Holding	Ordering	Shortage	Total
1 2 3 4 5 6 7 8 9 10	55 33 19 5 0 0 55 33 19 1	Rn 94 24 42 47 52 70 99 31 74 70	Units 22 14 14 14 18 18 22 14 18 18	33 19 5 0 0 0 33 19 1 0	- - Yes - - - - - Yes -	Rn 56 06 39 95 23 56 16 68 42 00	Days - - 3 - - - - - 4 -	1,650 950 250 - - - 1,650 950 50 -	- - 1,000 - - - - - 1,000 -	- - - 1,800 3,600 3,600 - - - 3400	1,650 950 1,250 1,800 3,600 3,600 1,650 950 1,050 3,400 19,900

(ii). The average daily inventory cost.

Average inventory daily cost = Total cost / No.of days
19,900 / 10 = 1,990

Perspective Financial Customer Internal business process Leaning and growth

Measure Profit margin Variety Demand Productivity Percentage of development cost

Product Existing New Existing New Existing New Both

Computation (550 - 375) / 550 x 100% = 31.82% (125 - 70) / 125 x 100% = 44% 25,000 5,000 ➪ Ratio = 25,000 / 5,000 = 5:1 Units / Hours = 25,000 / 5,000 = 5 Units / Hours = 5,000 / 1,250 = 4 47 / (375 + 70) x 100% = 10.6%

Evaluation of the lifecycle cost per unit
Details Research & development Production cost: :- Variable cost :- Fixed cost Marketing cost: :- Variable cost :- Fixed cost Distribution cost: :- Fixed cost Disposal of equipment Total cost Present value factor Present value of cost	1 Jan 2018 850,400 850,400 1 850,400	31 Dec 2018 200,000 200,000,000 500,000 240,000 200,000 120,000 3,260,000 0.89 2,901,400	31 Dec 2019 - 1,600,000 500,000 160,000 150,000 120,000 2,530,000 0.8 2,024,000	31 Dec 2020 1,800,000 500,000 200,000 100,000 120,000 300,000 3,020,000 0.71 2,144,200

Cost per unit = Total cost / Total units

7,920,000 / 60,000 = Ksh. 132

Cost gap Actual cost - Target cost

132 - 120 = sh.12

(ii). Comment on the target price by the Marketing Director and suggest ways of reducing any cost gap.

How to reduce cost gap

➢ Reduce the total life cost

➢ Strategise of increasing production

(i) The learning curve index

y = ax^{b + 1}

a = 40

x = 30

b = LogT / Log 2

Log 0.8 / Log 2 = -0.322

(ii) The unit cost

y = ax^{b + 1}

b+1 = -0.322 + 1 = 0.678

Total time to make 30 units

y = ax^{b + 1}

40 x 30^0.678 = 401 hrs

Cost analysis Direct Material 40 × 30 Direct Labour 401 × 6 Variable Overhead 401 × 0.5 Fixed Overhead Total

1,200.00 2,406.00 200.50 6,000.00 9,806.50

Unit cost = 9,806.5 / 30 = Sh. 327