National University of Science and
Technology
FACULTY OF COMMERCE
DEPARTMENT OF ACCOUNTING
SUPPLEMENTARY EXAMINATION: 2011/2012
DATE: JUNE 2012
SUBJECT: STRATEGIC MANAGEMENT
ACCOUNTING: CAC4205
TIME ALLOWED: THREE (3) HOURS
MARKS: 100
INSTRUCTIONS TO CANDIDATES
1. Answer all three questions
2. Use the examination book provided
3. Use black or blue pen
4. Begin each question on a new page and
5. Submit all answer books
1
QUESTION 1 (30 MARKS)
Two of the divisions of Muchachema Ltd are Intermediate Division and the Final Division.
The Intermediate Division produces three products, A, B and C. The products are sold to
overseas specialist producers as well as to the Final Division at the same prices. The Final
Division uses products A, B and C in the manufacture of product X, Y and Z respectively.
Recently, the Final Division has been forced to work below capacity because of difficulties in
obtaining sufficient suppliers of products A, B and C. Consequently the Intermediate
Division has been instructed by the board of directors to sell all its products to the Final
Division.
The price and cost data is as follows:
Intermediate Division
Product A B C
$ $ $
Transfer price 20 20 30
Variable Manufacturing cost per unit 7 12 10
Fixed costs 50 000 100 000 75 000
The Intermediate Division has a maximum monthly capacity of 50 000 units and must
produce at least 10 000 units of each product. The remaining capacity can be used to produce
20 000 units of any combination of the three products.
Final Division
Products X Y Z
$ $ $
Final selling price 56 60 60
Variable cost per unit:
Internal purchase 20 20 30
Processing in Final Division 10 10 16
Fixed Costs 100 000 100 000 200 000
The Final Division has sufficient capacity to produce up to 20 000 units more than it is now
producing but, because of lack of products A, B and C, is having to limit production to
50 000 units. Further the Final Division is able to sell all the products that it can produce at
the final selling prices.
REQUIRED
(a) Allowing the manager of the Intermediate Division to determine the product mix
calculate this and the resultant profits for both divisions. Assume all transfers are
internal. (6 Marks)
(b) Allowing the manager of the Final Division to determine the product mix, calculate
this and the resultant profit for both divisions. Assume all transfers are internal.
(6 Marks)
2
(c) Compute the product mix which would maximise the total company profits assuming
all transfers were internal. (6 Marks)
(d) If transfers price equals market price, what is the effect if anything is lost by the
policy of internal transfers only?
(6 Marks)
(e) Discuss the effectiveness or otherwise of the transfer pricing system currently used at
Muchechema Ltd. (6 Marks)
QUESTION 2 (40 MARKS)
(a) A firm manufactures colour televisions, radios, record players and speakers for record
players. The costs of manufacture and the number of hours of labour involved are
given below: The labour costs are $1 per hour.
Cost of No of hours Selling
Item Parts ($) of labour Price ($)
Colour TV 160 20 230
B/W TV 20 10 70
Radio 7 5 22
Record Player 35 8 73
Speakers 10 2 20
At least 10 more record players than speakers are required each week. The total number of
hours of labour available is 1 000.
REQUIRED
Express and solve the problem of maximizing the profits (sales revenue-costs) per week in
linear programming form. (20 Marks)
3
(b)
Duration Direct cost
Activity Depends Normal Crash time Normal Crash
On (weeks) (weeks) $ $
A - 3 3 600 600
B A 15 13 2 000 2 300
C A 7 4 1 100 2 000
D A 10 9 800 900
E C 8 8 1 300 1 300
F C 4 3 800 1 000
G FD 5 4 750 1 000
REQUIRED
(i) Draw a project network from the above details and find the critical path.
(10 Marks)
(ii) If indirect costs amount to $600 per week, determine which activities should be
crashed and by how much. (10 Marks)
QUESTION 3 (30 MARKS)
The head office of Lot WT receives regular financial statements from its divisions. Although
non-controllable overhead and an apportionment of centrally incurred costs are charged in
these, the divisional income statements identify divisional controllable profit.
Since the divisions are given the status of investment centres, there is an emphasis on returns
on divisional investment and the company, having regard to the cost of capital figures used in
major investment decisions has set a target of 12% for this.
For the quarter ended 31 March the summarized returns of two of the divisions are as
follows:
Divisional Income Statements.
Sothern Division Northern Division
$ $
Sales
External 100 000 650 000
Internal (to other divisions) 200 000 50 000
300 000 700 000
Cost of goods sold
Direct materials 50 000 100 000
Direct labour 100 000 120 000
Controllable overheads 50 000 200 000 80 000 300 000
Selling & distribution expenses 10 000 50 000
Controllable Profit 90 000 350 000
4
Sothern Division Northern Division
$ $ $ $
Controllable Profit 90 000 350 000
Non-controllable divisional
Overhead 11 000 30 500
Central overhead 9 000 21 000
(Apportioned on sales) 20 000 51 500
Divisional net profit 70 000 298 500
Divisional Investment $350 000 $2 000 000
Return on Divisional
Investment 20% 15%
It is considered appropriate to compare the performance of these two divisions since both
manufacture the same range of product selling at similar prices. Intra group transfers are
made at market price.
Although Northern Division has more modern plant than Southern Division and a larger
profit there is some concern at the comparatively low rate of return that it is earning.
REQUIRED
Draft a report for the financial controller of WT Ltd commenting on and comparing the
performance of the two divisions. In your report, consider the transfer pricing method used
by the company and the use of the rate of return on investment as a measure of operating
performance. Make suggestions of improving the divisional performance appraisal system, if
you consider that there is room for improvement. Consider the role that residual income
might play in a revised performance measurement system. (30 Marks)
END OF EXAMINATION PAPER
