The TMA Questions

The TMA Questions
Part A
Breakeven Analysis
Harrison Research manufactures and sells specialized titanium rods used in medical equipment. The product is manufactured and sold in 0.25 meter long “sticks.’ The product is generally produced and sold to match customer demand, and there is not a significant amount of finished goods inventory at any point in time. Summary information for 2012 is as follows:
Sales were $5,000,000, consisting of 200,000 sticks.
Total variable costs were $3,500,000.
Total fixed costs were $1,250,000.
Net income was $250,000.

Due to deteriorating general economic conditions there is some concern about a reduction in sales volume.
Required:
a- What is the company’s break-even point in ‘sticks?’ Can the company sustain a 30% reduction in total volume, and remain profitable?
b- The company’s sole shareholder, Chem Harrison, relies on the dividends paid by the company. The company typically declares and pays a dividend equal to 25% of net income. If Chem needs to receive $150,000 in dividends for normal living expenses, what total revenues must Harrison Research produce in 2013?
c- If total volume is expected to decrease by 20%, and the company wishes to continue to produce a $250,000 net income by raising the per unit selling price, what revised per stick price must be imposed? Will this pricing strategy work in the market place?
d- If the company expects a drop in raw material prices to reduce total variable costs to $15 per stick, but all other revenue and cost factors to be unaffected, what will be the revised break-even point in sales and units?
​​​​​​​​​[Marks (Words): 4×8 = 32 (220)]

Part B
Case study: Activity Based Costing
Orange Ltd manufactures micro-chips products for the computer industry. Orange’s management accountant has produced a profit report showing the profitability of each of its three main Products for last year (Table 1).
Table l: Orange products profit report:

A
£
B
£
C
£
D
£
Total
£
Sales
5,000,000
5,000,000
5,000,000
5,000,000
20,000,000
Cost of materials
1,200,000
1,800,000
1,500,000
2,500,000
7,000,000
Cost of labour
700,000
800,000
800,000
200,000
2,500,000
Gross profit
3,100,000
2,400,000
2,700,000
2,300,000
10,500,000
Corporate overheads (allocated as 30 % of sales):

6,000,0000
Operating profit

4,500,000
The company wishes to keep producing only three products, it plans to discontinue production of the least profitable product.

Calculation of predetermined overhead rate:
Manufacturing overhead budget:
Machine setup
£ 2,000,000
Machinery
1,400,000
Inspection
800,000
Material handling
1,800,000
Total
£6,000,000

The cost drivers are as follow:
Activity Cost pool
Cost Driver
Product

A
B
C
D
Machine setup
Number of setups
10,000
3,000
5,000
2,000
Machinery
Machine hours
10,000
2,000
7,000
1,000
Inspection
Number of inspections
1,000
1,000
1,000
1,000
Material handling
Raw-material costs

Required:
From the case, provide a recommendation concerning which product to discontinue using the ABC costing method and describe the state of the current accounting system. (Hint: you need to compare the profitability under each method)

​​​​​​​​​[Marks (Words) =25(700)]

PART C
Budgeting
(Case study: Planning a budget)
Davis Service Group is a large public limited company employing around 17,000 people. Its shares are quoted on the London Stock Exchange. The business is based on service contracts to source, clean and maintain industrial textiles, such as protective clothing and linens. This is across four key sectors: work wear, healthcare, hotels and restaurants, and general facilities, such as washroom linen. Access the Davis case study on www.thetimes100.co.uk.From home page click on “Case studies” and then in “Finance” choose “budgeting”, and then choose Davis, Planning a Budget.
Instructions
Use the case study to answer the following questions:

1. Outline the purpose of budgets within organisations.​
[Marks (Words) = 7(250)]
2. Explain the relationship between an objectives budget and operational budgets and give an example.
[Marks (Words) = 7(70)]​
3. Analyse the factors that managers might have to take into consideration when preparing budgets.​​​​​
​​​​​​​​[Marks (Words) = 9(230)]
4. Critically evaluate how budgeting can contribute to the success of a business’s strategy​​
[Marks (Words) = 20(550)]
[Total Marks: 32 +25 + 43 + 20 marks of deduction for general presentation and references]

In your answer, you should explain each point or inquire separately. Use the following headings (below) to make up the different sections of your work:

The PT3 form (Available on LMS)

Title and contents page
Part A
Breakeven Analysis