MI 2022 MYE Paper 2 Answer Guide

1 2022 PU3 Midyear Examination Paper 2 Answer Guide Question 1 a. Statement of Contribution and Profit for the current year Legolas Arwen Total $ $ $ Sales 60 000 25 000 85 000 Less: Variable cost Raw materials 8 000 2 000 82 000 Direct labour 20 000 10 000 30 000 Machine running costs 12 000 3 000 15 000 ( 40 000 ) ( 15 000 ) ( 55 000 ) Contribution margin 20 000 (2M) 10 000 (2M) 30 000 Less: Fixed Costs Rent & rates 15 000 Insurance 600 ( 15 600 ) Net profit 14 400(2m) b. Legolas Arwen Contribution Margin per unit 20 000/20000 = $1 10 000/10 000 = $1 Machine hour per unit 8000/20 000 = 0.4h 2000/10000 = 0.2h Contribution margin per limiting factor $2.50 $5.00 Ranking 2 [ 2m] 1[ 2m] Optimal Production Plan Product Units to produce MH used Arwen 36 000 [ 1m ] 7 200 Legolas 7 000 [ 1m} 2 800 c. Optimal Production Plan Product Units to produce MH used Arwen 8 000 [ 1m ] 1600 (8000 x 0.2) Legolas 8 000 [ 1m ] 3 200 (8000 X 0.4) Arwen 26 000 [ 1m ] 5 200 [1m] [(10 000 – 1600 – 3200)/0.2] 10 000

2 Optimal Production Plan: Arwen 34 000 units Legolas 8000 units Computation of profit based on Optimal Production Plan $ CM for Arwen (34000 X $1) 34 000 CM for Legolas (8000 X $1) 8 000 Contribution margin 42 000 Less: Fixed Costs (15 600) Profit 26 400 d. Points to consider ▪ Increase in demand for Legolas from 20000 to 40000 next year but Arwen contributes more with the limited machine hours (CM per machine hour is $5 but on $2.50 for Legolas). ▪ Consider price increase for Legolas as demand is increasing and the wholesaler plans to increase its prices as well. Possibly by $2.50 to match Arwen’s which will be higher than the wholesaler’s price increase. Need to consider the impact of price increase on demand and the consumers’ sensitivity to price increases. ▪ Maintain the Optimal Production Quantity as demand for Arwen has also gone up. ▪ Possibility of tying in quantity ordered of Legolas with that of Arwen eg. Buy 1 get 1 at 50% (ensure overall still profitable), etc ▪ Wholesaler promotion of Arwen to stimulate demand eg. Special promotion prices for limited period, etc Any 2 X 2 m

3 Question 2 a) Accounts in marginal cost format City Village Park Zoo Total $ Turnover 960 1800 1100 720 4580 Variable operating expenses 670 800 510 740 2720 Contribution 290 1000 590 (20) 1860 Specific fixed costs 320 460 330 90 1200 Segment profit (30) 540 260 (110) 660 General fixed overheads 110 190 140 140 580 Net profit 80 b) Option 1: Closing both routes will improve the business’ profits. (1) The CM for Zoo is negative. This implies that for every trip it takes, the route will make a loss. Taking more trips will result in more losses for the business. To improve profits, Zoo route should be closed. (1) While the CM for City is positive, its segment profit, which factors fixed costs directly attributed to City is negative. This means that it does not earn enough to cover the costs directly associated with City and reduces Beesy Buses’ profits. (1) Expected 20% savings to general overheads of $232 000 (580 000 X 20% X 2) will further improve the bottom line. (NP = 80 000 + 30 000 + 110 000 +232 000 = 452 for reference only) Option 2: Better option than Option 1 (1) On top of the benefits of Option 1, there is incremental profit from Village taking over a part of City’s route (CM of $120 000) (1) while enjoying the savings on specific fixed costs and general fixed costs.(1). [NP = 80 000 + 30 000 + 110 000 +232 000 +(300 000 – 120 000 – 60 000) = 572 000 for reference only] Option 3: New ticketing procedures will improve the overall contribution margin and hence, profits by $272 000. Individually, both City and Zoo will turn around and earn segment profits. (1). This may not be as profitable as Option 2 as there will be no savings in general fixed costs of $232 000. (1). The suggestion to re -apportion fixed cost equally between Village and Park is purely cosmetic and makes no difference to the overall profit of the business as the total fixed cost has to be incurred regardless as no routes are closed. (1) See table below. Computation for marking reference only

4 FOR REFERENCE ONLY (Not needed to answer question) Option 1: Profit statement Village Park Total $ Turnover 1800 1100 2 900 Variable operating expenses 800 510 1 310 Contribution 1000 590 1 590 (1m) Specific fixed costs 460 330 790 Segment profit 540 260 800 (1m) General fixed overheads 348 Net profit 452 (1m) Alternative (Differential) Option 1 $ Net contribution of Village 540 Net contribution of Park 260 800 Less general overheads ($580 less 40%) 348 Profit 452 Option 2 As before 800 Add from city (300-180-60) 60 860 Less general overheads (as above) 348 Profit 512 Option 2: Profit statement Village Park Total $ Turnover (1800+300) 2100 1100 3 200 Variable operating expenses (800 + 180) 980 510 1 490 Contribution 1120 590 1 710 Specific fixed costs (460 + 60) 520 330 790 Segment profit 600 260 860 General fixed overheads (40% X 580) 348 Net profit 512 Option 3:Profit Statement City Village Park Zoo Total $ Turnover 960 1800 1100 720 4580 Variable operating expenses 603 720 459 592 2374 Revised contribution 357 1080 641 128 2206 Specific fixed costs 320 460 330 90 1200 Segment profit 37 620 311 38 1006 General fixed overheads 290 290 580 Net profit 37 330 21 38 426 Note: Option 3 paints a false picture. Each route is profitable only because general overheads are offset against two routes only – the routes which give the highest net contribution.

5 c) The best solution is combining Option 2 with the revised ticketing procedures, keeping part of the City routes turnover and closing the Zoo routes. (1) Revised net contribution of Village 620 Revised net contribution of Park 311 931 Add from City [300-(180 X 0.9) -60] 78 1009 Less general overhead ($580 less 40%) 348 Net profit 661 OR Best Solution: Profit Statement Village Park Total $ Turnover (1800 + 300) 2 100 1100 3 200 Variable operating expenses 720 + (90% X 180) 882 459 1269 Revised contribution (1 080 + 138) 1218 641 1 931 Specific fixed costs (460 + 60) 520 330 790 Net contribution 698 311 1 009 General fixed overheads (580 X 40%) 348 Net profit 661

6 Question 3 (a) Production budget for the 3 months ending 30th November 2022 August (extra) September October November Dec (extra) Sales units - 50,000 30,000 25,000 28,000 Add closing stock 65,000 42,500 39,000 44,000 47,000 65,000 92,500 69,000 69,000 75,000 Less opening stock - 65,000 42,500 39,000 44,000 Production units 65,000 27,500 26,500 30,000 31,000 # (b)Raw materials budget for the 3 months ending 30th November 2012 August September October November Production requirements 130,000 55,000 (27,500x2) 53,000 60,000 Add closing stock 55,000 53,000 60,000 62,000 # (to meet Dec prod) 185,000 108,000 113,000 122,000 Less opening stock - 55,000 53,000 60,000 Units to purchase 185,000 53,000 60,000 62,000 Purchase costs $240,000 * $79,500 $90,000 $92,400 When to pay?(Cash budget) Paid in Sept Paid in Oct Paid in Nov (c)Cash budget for the 3 months ending 30th November 2012 September $ October $ November $ Receipts Cash sales 57,600 43,200 36 000 Debtors - 576 000 432 000 57 600 619 200 528 000 Payments Creditors 240,000* 79,500 90,000 Direct labour 165,000 159,000 180,000 Production expenses 36,000 36,000 36,000 Selling expense 50,000 30,000 25,000 Fixed assets - - 50,000 (433 400) 314 700 147 000 Bal b/d 200 000 (1) (233 400) 81 300 Bal cld (233,400) 81 300 228 300

7 (d) ▪ Budgets promote forward thinking and the