Chartered University College

F5 Test 1 (Part A & Part B)

Time: 2 hours Marks: 60

QUESTION 1

Benson Company is a dog grooming service. They provide two services, the Scottie and the Labrador. The Scottie is a short service which is wash and comb and the all over Labrador includes a wash, condition, comb, nail clip and blow dry. Both services involve the same resources, just in different quantities. The cost cards for both services are listed below:

Scottie Labrador

$ per service $ per service

Selling price 13.25 24.00

Specialised cleaning material ($5 per litre) 0.50 0.75

Direct labour ($7.5 per hour) 3.75 7.50

Variable machine time ($3 per hour) 1.50 0.75

Fixed overhead ($3 per labour hour) 1.50 3.00

------ -------

Profit 6.00 12.00

Benson Company budgets to sell 240 Scotties and 226 Labrador per month. However, Benson Company is facing a shortage of resources over the next month. The maximum amount of specialized cleaning material available is 60 litres, the total labour available is 300 hours and the total machine time available is 150 hours.

Crufts will be on in the next month and Benson Company has a contract to provide 25 Scotties and 50 Labradors in 2nd week of the month. If Benson Company does not honour this contract it will be fined a healthy amount and be left shame faced in the dog world.

Required:

a) Using linear programming advise Benson of the best mix of services to provide maximum contribution. (11 marks)

b) Find the shadow price for machine hours and specialized cleaning material. (5 marks)c) Describe two pricing strategies that might be applicable for Benson Company. (4 marks)

(Total = 20 marks)

QUESTION 2

Envico Ltd is well established and provides seminars on various aspects of current and recently announced changes in employment legislation. Envico Ltd has decided to enter into a one-year renewable contract with Mieras Business Associates, which owns large premises that are suitable for holding educational seminars in each of eight cities. Envico Ltd has had similar dealings with Mieras Business Associates during recent years.

Mieras Business Associates has offered a choice of four different contracts, each of which relates to seminar rooms of differing sizes. These are known as room types A,B,C and D, which are capable of accommodating100,200,300 and 400 delegates respectively. Envico Ltd will charge an all-inclusive fee of £80 per delegate at every seminar throughout the year. The cost incurred by Envico Ltd varies according to room type, as shown in the following table:

Room type No. of candidates Cost per seminar ($)

A 100 6,000

B 200 10,800

C 300 14,400

D 400 16,000

Envico must decide in advance of the forthcoming year which size of conference room to contract for. It is not possible to contract for a different size conference room in different cities, i.e. only one size of room can be the subject of the contract with Mieras Business Associates. Due to the rapid growth in interest regarding environmental issues and corporate social responsibility, and the large amount of forthcoming legislative changes, Envico Ltd has decided to hold one seminar in every week of the year in each city. Sometimes a regional government representative will attend and speak at such seminars. On other occasions a national government representative will attend and speak at such seminars. The rest of the time the speakers at seminars are representatives from within Envico Ltd.

Envico has estimated the following frequency regarding seminars to be held during the forthcoming year:

Category of speaker: %

Envico representive 20

Regional govt. representative 50

National govt. representative 30

Market research has indicated that where a national government representative is in attendance, Envico Ltd can be reasonably assured of selling 400 seminar places and where a regional government representative is in attendance 200 seminar places can be sold. Envico Ltd expects to sell only 100 seminar places when there is no attendance by a government representative.

Required:

a) Explain the difference between risk and uncertainty and illustrate with brief examples.(4marks)

b) Advise Envico Ltd on the size of seminar room that should be contracted from Mieras Business Associates, using the criterion of expected value. Your answer should show the expected annual contribution from each decision option. (10 marks)

c) Determine whether your decision in (a) would change if you were to use the Maximin and Minimax regret decision criteria. Your answer should be supported by relevant workings.(6marks)

(Total = 20 marks)

QUESTION 3

F plc supplies pharmaceutical drugs to drug stores. Although the company makes a satisfactory return, the directors are concerned that some orders are profitable and others are not. The management has decided to investigate a new budgeting system using activity based costing principles to ensure that all orders they accept are making a profit.

Each customer order is charged as follows. Customers are charged the list price of the drugs ordered plus a charge for selling and distribution costs (overheads). A profit margin is also added, but that does not form part of this analysis.

Currently F plc uses a simple absorption rate to absorb these overheads. The rate is calculated based on the budgeted annual selling and distribution costs and the budgeted annual total list price of the drugs ordered.

An analysis of customers has revealed that many customers place frequent small orders with each order requesting a variety of drugs. The management of F plc has examined more carefully the nature of its selling and distribution costs, and the following data have been prepared for the budget for next year:

Total list price of drug supplied $8m

Number of customer orders 8,000

Selling and Distribution Costs $000 Cost driver

Invoice processing 280 See note 2

Packing 220 Size of packages – see note 3

Delivery 180 Number of deliveries – see note 4

Other material 200 Number of orders

Total overheads 880

Notes:

1. Each order will be shipped in one package and will result in one delivery to the customer and one invoice (an order never results in more than one delivery).

2. Each invoice has a different line for each drug ordered. There are 28,000 invoice lines each year. It is estimated that 25% of invoice processing costs are related to the number of invoices, and 75% are related to the number of invoice lines.

3. Packing costs are £32 for a large package, and £25 for a small package.

4. The delivery vehicles are always filled to capacity for each journey. The delivery vehicles can carry either six large packages or 12 small packages (or appropriate combinations of large and small packages). It is estimated that there will be 1,000 delivery journeys each year, and the total delivery mileage that is specific to particular customers is estimated at 350,000 miles each year. £40,000 of delivery costs are related to loading the delivery vehicles, and the remainder of these costs are related to specific delivery distance to customers.

The management has asked for two typical orders to be costed using next year’s budget data, using the current method, and the proposed activity-based costing approach. Details of two typical orders are shown below:

Order A Order B

Lines on invoice 2 8

Package size small large

Specific delivery distance 8 miles 40 miles

List price of drug supplied $12.00 $9.00

Required:(a) Calculate the charge for selling and distribution overheads for Order A and Order B using:

(i) the current system; and(ii) the activity-based costing approach. (10 marks)

(b) Write a report to the management of F plc in which you (i) assess the strengths and weaknesses of the proposed activity-based costing approach for F plc; and (5 marks) (ii) recommend actions that the management of F plc might consider in the light of the data produced using the activity-based-costing approach. (5 marks)

(Total = 20 marks)