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 t