Section A (Compulsory)

Question 1

Johnson trades as a chandler at the Savoy Marina. His profit in this business during the year to
30 June was £12,000. Johnson also undertakes occasional contracts to build pleasure cruisers and
is considering the price at which to bid for the contract to build the Blue Blood for Mr B.W. Dunn,
delivery to be in one year’s time. He has no other contract in hand, or under consideration, for
at least the next few months. Johnson expects that if he undertakes the contract, he would
devote one-quarter of his time to it.

To facilitate this, he would employ G. Harrison, an unqualified practitioner, to undertake his

bookkeeping and other paperwork, at a cost of £2,000. He would also have to employ on the
contract one supervisor at a cost of £11,000 and two craftsmen at a cost of £8,800 each; these
costs include Johnson’s normal apportionment of the fixed overheads of his business at the rate
of 10 per cent of labour cost. During spells of bad weather one of the craftsmen could be
employed for the equivalent of up to three months full-time during the winter in maintenance
and painting work in the chandler’s business. He would use materials costing £1,000.

Johnson already has two inclusive quotations from jobbing builders for this maintenance and
painting work, one for £2,500 and the other for £3,500, the work to start immediately. The
equipment which would be used on the Blue Blood contract was bought nine years ago for
£21,000. Depreciation has been written off on a straight-line basis, assuming a ten-year life and
a scrap value of £1,000. The current replacement cost of similar new equipment is £60,000 and
is expected to be £66,000 in one year’s time. Johnson has recently been offered £6,000 for the
equipment and considers that in a year’s time he would have little difficulty in obtaining £3,000
for it. The plant is useful to Johnson only for contract work. In order to build the Blue Blood
Johnson will need six types of material, as follows:

No. of units Price per unit (£)

Material In stock Needed for Purchase Current Current
code contract price of purchase resale
stock items price price
A 100 1,000 1.10 3.00 2.00
B 1,100 1,000 2.00 0.90 1.00
C -- 100 -- 6.00 --
D 100 200 4.00 3.00 2.00
E 50,000 5,000 0.18 0.20 0.25
F 1,000 3,000 0.90 2.00 1.00

Materials B and E are sold regularly in the chandler’s business. Material A could be sold to a local
sculptor, if not used for the contract. Materials A and E can be used for other purposes, such as
property maintenance. Johnson has no other use for materials D and F, the stocks of which are
obsolete.

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The Blue Blood would be built in a yard held on a lease with four years remaining at a fixed annual
rental of £5,000. It would occupy half of this yard, which is useful to Johnson only for contract
work. Johnson anticipates that the direct expenses of the contract, other than those noted above,
would be £6,500.

Johnson has recently been offered a one-year appointment at a fee of £15,000 to manage a boat-
building firm on the Isle of Wight. If he accepted the offer, he would be unable to take on the
contract to build Blue Blood, or any other contract. He would have to employ a manager to run
the chandler’s business at an annual cost (including fidelity insurance) of £10,000 and would incur
additional personal living costs of £2,000.

You are required:

(a) to calculate the price at which Johnson should be willing to take on the contract in order to
break even, based exclusively on the information given above; (30 marks)

(b) to set out any further considerations which you think that Johnson should take into account
in setting the price at which he would tender for the contract. (10 marks)

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Section B (Answer any TWO)
Question 2
VAIR was founded in September 2018 and is one of a growing number of low-cost airlines in the
country of Vania.

VAIR’s strategy is to operate as a low-cost, high efficiency airline, and it does this by:
– Operating mostly in secondary cities to reduce landing costs.
– Using only one type of aircraft in order to reduce maintenance and operational costs. These
planes are leased rather than bought outright.
– Having only one category of seat class.
– Having no pre-allocated seats or in-flight entertainment.
– Focusing on e-commerce with customers both booking tickets and checking in for flights
online.

The airline was given an ‘on time arrival’ ranking of seventh best by the country’s aviation
authority, who rank all 50 of the country’s airlines based on the number of flights which arrive
on time at their destinations. However, 48 VAIR flights were cancelled in 2020 compared to 35 in
2019. This was due to the pandemic and also to an increase in the staff absentee rate at VAIR
from 3 days per staff member per year to 4·5 days.

The average ‘ground turnaround time’ for airlines in Vania is 50 minutes, meaning that, on
average, planes are on the ground for cleaning, refueling, etc for 50 minutes before departing
again. Customer satisfaction surveys have shown that 85% of customers are happy with the
standard of cleanliness on Vania’s planes.

The number of passengers carried by the airline has grown from 300,000 passengers on a total
of 3,428 flights in 2018 to 920,000 passengers on 7,650 flights in 2019. The overall growth of the
airline has been helped by the limited route licensing policy of the Vanian government, which has
given VAIR almost monopoly status on some of its routes. However, the government is now set
to change this policy with almost immediate effect due to the pandemic, and it has become more
important than ever to monitor performance effectively.

Required:

Describe each of the FOUR perspectives of the balanced scorecard. (30 marks)

Question 3
Sliced Bread plc is a divisionalized company. Among its divisions are Grain and Bakery. Grain’s
operations include granaries, milling and dealings in the grain markets; Bakery operates a number
of bakeries. The following data relate to the year ended 30 November:

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The following data relate to the year ended 30 November:
Grain Bakery
(£000) (£000)
Sales 44,000 25,900
Gain on sale of plant – 900
44,000 26,800
Direct labour 8,700 7,950
Direct materials 25,600 10,200
Depreciation 700 1,100
Divisional overheads 5,300 4,550
Head office costs (allocated) 440 268
40,740 24,068

Grain Bakery
(£000) (£000)
Fixed assets (at cost less
accumulated depreciation) 7,000 9,000
Stocks 6,350 1,800
Trade debtors 4,000 2,100
Cash at bank 1,500 –
Bank overdraft – 750
Trade creditors 3,000 2,150

Divisional managements (DMs) are given authority to spend up to £20,000 on capital items as
long as total spending remains within an amount provided for small projects in the annual
budget. Larger projects, as well as sales of assets with book values in excess of £20,000, must be
submitted to central management (CM).
All day-to-day operations are delegated to DMs, whose performance is monitored with the aid
of budgets and reports. The basis for appraising DM performance is currently under review.

At present divisions are treated as investment centres for DM performance appraisal, but there
is disagreement as to whether return on capital employed or residual income is the better
measure. An alternative suggestion has been made that DM performance should be appraised
on the basis of controllable profit; this measure would exclude depreciation and gains or losses
on sale of assets, treating investment in fixed assets as a CM responsibility.

The cost of capital of Sliced Bread plc is 15 per cent per annum.

Requirements: (a) Calculate for both divisions the three measures (return on capital employed,
residual income and controllable profit) which are being considered by Sliced Bread plc and state
any assumptions or reservations about the data you have used in your calculations. (20 marks)

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(b) Examine the merits and problems of Sliced Bread plc’s three contemplated approaches to DM
performance appraisal, and briefly suggest how CM could determine the required level of
performance in each case. (5 marks)

(c) Discuss briefly whether further measures are needed for the effective appraisal of DM
performance. (5 marks)

Question 4
You have been provided with the following operating statement, which represents an attempt to
compare the actual performance for the quarter which has just ended with the budget:

Budget Actual Variance

Number of units sold (000s) 640 720 80
£000 £000 £000
Sales 1,024 1,071 47
Cost of sales (all variable)
Materials 168 144
Labour 240 288
Overheads 32 36
440 468 (28)
Fixed labour cost 100 94 6

Selling and distribution costs:

Fixed 72 83 (11)
Variable 144 153 (9)
Administration costs:
Fixed 184 176 8
Variable 48 54 (6)
548 560 (12)
Net profit 36 43 7

Required:

(a) Using a flexible budgeting approach, re-draft the operating statement so as to provide a more
realistic indication of the variances and comment briefly on the possible reasons (other than
inflation) why they have occurred. (20 marks)

(b) Explain why the original operating statement was of little use to management. (5 marks)

(c) Discuss the problems associated with the forecasting of figures which are to be used in flexible
budgeting. (5 marks)