ACW1200

SOLUTIONS TO FINAL EXAMINATION QUESTIONS

SEMESTER 2, 2017

PART A

1 D 5 B 9 D 13 D 17 B
2 B 6 C 10 B 14 C 18 D
3 A 7 D 11 D 15 D 19 D
4 C 8 C 12 D 16 C 20 A
 PART B

Solution to Q1 (Total = (3 x 2) + (2 x 2) + 2 + 4 + 4 = 20 marks)

Q1(a)
Sales RM2500 X 150000 375,000,000

VC RM1000 X 150000 (150,000,000)

FC (13,500,000)

(i)Operating profit 211,500,000

(ii)Contribution margin per

unit 2500 - 1000 1500

(iii)Break-even points (in

units) 13,500,000/1500 9000

(b)

(i)Break-even points (in units) (13,500,000 + 6,000,000)/1500 13000

(ii)Sales (in units) (19,500,000 + 211,500,000)/1500 154,000

(c) The increase in the advertising costs has these implications:

 The total fixed cost increase to RM19,500,000 in 2018.
 As a result, SM Bhd needs to increase the number of carpets sold in 2018 to
13,000 units to break-even and to 154,000 units to make the operating profit as
much as in 2017.

(d) The recommendations to lessen the impact on the profit (or other sensible points):

 Increase the price: many factors must be considered, for example, the quality
must reflect the increase in price, competitors’ pricing strategy and the reaction
from customers.
 Widen the market: consider the new market but careful on the additional cost of
this venture. Should keep minimum otherwise the margin would not be able to
cover the cost.

(e) The weaknesses of the break-even analysis:

 Non-linear relationship
 Stepped fixed costs
 Multi-product businesses.
(Any 2 points with good explanations)
Solution to Q2 (Total = 3 + (3 + 3 + 6 + 3 + 2) = 20 marks)

Q2a.
The cost which remains same, regardless of the level of activity is known as fixed cost. The
cost which changes with the level of activity is considered as a variable cost. Examples of
fixed costs: rental fee for a factory and CEO salary. Examples of variable costs: labour cost
and cost of raw materials.
(3 marks)
Q2b.

The break-even point with the turning machine is higher because of higher fixed cost.
However, this point is lower than the break-even point if the VC doesn’t change. The lower
VC contributes to a higher contribution margin (RM40 vs RM30) which then helps the
company to break-even at 375 units instead.

Without turning
With turning machine
machine
Expected level of
1,500 units 1,500 units
sales
Sales price per unit RM150 RM150
Variable costs per
RM120 RM110
unit
Fixed costs RM7,500 RM15,000
(i) Break-even points
(unit) 7500/(150-120) 15,000/(150-110)
250 units 375 units
Without turning
With turning machine
machine
(ii) Level of sales units
1500
Sales revenue RM225,000 RM225,000
Variable costs RM180,000 RM165,000
Fixed costs RM7,500 RM15,000

Profit RM37,500 RM45,000

(iii) Level of sales units

2500
Sales revenue RM375,000 RM375,000
Variable costs RM300,000 RM275,000
Fixed costs RM7,500 RM15,000
 Profit RM67,500 RM85,000

Level of sales units

5000
Sales revenue RM750,000 RM750,000
Variable costs RM600,000 RM550,000
Fixed costs RM7,500 RM15,000

Profit RM142,500 RM185,000

Without turning
With turning machine
machine
(iv) Percentage increase
in profit
(67500- (85000 – 45000)/45000 X
1500 to 2500 37500)/37500 X 100 100
80% 89%

(142500- (185000-45000)/45000 X
1500 to 5000 37500)/37500 X 100 100
280% 311%

Without turning machine, the improvement in sales from 1500 units to 2500 units would
increase the profit by 80%, but with turning machine the same amount of improvement in
the sales level would increase the profit by 89%. Likewise, there would be a big jump in the
profit if the company uses the turning machine and the sales increase from 1500 to 5000
units. The profit would rise by 311% as compared to 280% if there is no turning table.
(v) With the machine the company could generate 89% increase in profit (if sales increase
to 2500 units) or a whopping 311% increase in profit (if sales increase to 5000 units).
However, without the turning machine, the increase of profit would be 80% and 280% for
the two different levels of sales respectively. The explanation for this is that, a company
with high fixed costs and lower VC could accumulate profits very rapidly once it has
reached the break-even point. This could not be matched by a company with high variable
costs because the variable costs always change in proportion with the level of sales.
Therefore, with the turning machine, the company would experience a faster and higher
operating gearing.
Solution to Q3 (Total = 3 + 9 + 4 + 4 = 20 marks)

(a) A budget is a financial plan for a future period. A forecast is an

assessment/estimation of what is expected to happen in the environment. ‘Plan’
implies an intention to achieve. Thus a budget is a plan of what is intended to be
achieved during the period of the budget. Relevant forecasts may well be taken into
account when budgets are being prepared, but there is a fundamental difference
between budgets and forecasts.

(b) Cash budgeting

Dec-16 Jan-17 Feb-17 Mar-17

Sales 960,000 1,080,000 1,200,000 1,280,000
Cash sales 192000 216000 240000 256000
Credit
768,000 864,000 960,000 1,024,000
sales
Cash
192000 984,000 1,104,000 1,216,000
receipts
Cash from
AR 0 768,000 864,000 960,000

a) Calculate total cash collected from sales for the month of March.
Answer: 960,000 + 256,000 = 1,216,000 (cash sales in March plus credit sales in Feb)

b) Calculate the cash collected from accounts receivable in the month of February.
Answer: 0.8 x 1,080,000 = 864,000 (credit sales in January)

c) What will be the balance of accounts receivable on 1 March?

Answer: 0.8 x 1,200,000 = 960,000 (credit sales in Feb)

d) Calculate the total cash sales for the three months, January, February and March.
Answer: 216,000 + 240,000 + 256,000 = 712,000

(c) Two (2) important conditions for effective budgetary control. (any 2 of the following
with clear explanations)
i. A serious attitude from all levels of management
ii. Clearly defined areas of management responsibility
iii. Reasonable budget targets (focus on achievability)
iv. Specific rather than general-purpose reporting
v. Fairly short reporting periods (e.g. monthly)
vi. Action taken to regain control
 (d) Two behavioural implications of budgeting (any 2 of the following points with clear
explanations)
i. Existence of budgets tends to improve performance
ii. Demanding but achievable targets seem to motivate more than easy targets
iii. Unrealistic targets adversely affect performance
iv. Allowing managers to set their own targets improves motivation,
commitment and performance

Solution to Q4 (Total = 6 + 2 + 6 + 6 = 20 marks)

(a) Answers to part (a)

i. FV30 = 10 (RM10,000) (FVIF8%,30) = $100,000 (10.063) = RM1,006,300
ii. PV = RM5,000 (0.746) = RM3,730
iii. PV = RM500,000,000 (0.593) = RM296,500,000
iv. Palm Oil Garden Bhd
Year (n) Cash flow PV factor PV of cash flows
(i = 8%)

0 -105000 1 -105000
1 30000 0.926 27780
2 30000 0.857 25710
3 30000 0.794 23820
4 30000 0.735 22050
5 30000 0.681 20430
Net present 14790
value

(b) On purely economic grounds a dollar earlier is preferred to a dollar later, because the
dollar received earlier can be invested at a risk-free interest rate to accumulate to a
larger future sum. For example, $1.00 invested for one year at 10% p.a. is equal to $1.10
in one year from now.

Answers:
 Proposal 2 is the best because it will provide the second highest net cash flows and
will recover the cost of investment in 4.5 years and generate a reasonable return at
6%.
 Although proposal 4 will have the highest net cash flows and a good return of 7%, it
will need 7 years to recoup the initial outlay.
 Proposal 1 will provide the highest ARR at 8% and the shortest payback period but
it will generate a very low net cash flow of $80,000.
  Proposal 3 will give the lowest ARR, a bit long payback period and a moderate net
cash flows.

(d) ARR (any 1 strength and 1 weakness)

Strength—close link between ARR and ROCE enhances credibility and understanding.
Strength—easy for accountants to understand as uses familiar accounting measures.
Strength—provides a result in percentage terms as preferred by many managers.
Weakness—doesn’t recognise the time value of money.
Weakness—doesn’t properly rank investments with competing projects of different size.
Weakness—subject to manipulation due to use of accounting measures.

Payback method (any 1 strength and 1 weakness)

Strength—easy to understand.
Strength—easy to calculate.
Strength—good, basic measure of risk.
Weakness—doesn’t recognise the time value of money.
Weakness—doesn’t recognise cash flows after the project pays back.
Weakness—doesn’t properly rank investments with competing projects of different size.

Net present value (any 1 strength and 1 weakness)

Strength—explicitly recognises the time value of money.
Strength—considers cash flows for the life of the project.
Weakness—the actual return percentage is unknown since the NPV method provides an absolute
dollar amount as the return.
Weakness - does not provide for ranking of alternative projects. If funds were unlimited, then all
projects with positive (+) NPVs would be selected. However, funds are normally
restricted and ranking alternative projects on the basis of NPV may not achieve
the best investment strategy