Matric No: _________________

EDINBURGH NAPIER UNIVERSITY

SCHOOL OF ACCOUNTING, FINANCIAL SERVICES AND LAW

MANAGERIAL FINANCE

ACC08702

Academic session: Diet: Sample 2

Exam duration: 2 hours Reading time: 10 minutes

(excluding reading time)
Total exam time: 2 hours 10 minutes

Please read full instructions before commencing writing

Exam paper information

 Total number of pages: 6
 Number of questions: 6
 Section A: Answer TWO questions from a choice of three
 Section B: Answer TWO questions from a choice of three

Special instructions

 Please show all calculations

 Dictionaries may only be used during reading time. After reading time, all
dictionaries must be placed on the floor for the rest of the exam.

Special items
 None

Examiner:

1
 Section A: Answer TWO questions only

Question 1

Gleeson plc, manufactures and sells three different types of bicycle. The
management accountant has the following information for the budget period 1st
October to 31st December 2011.

Sprite Pixie Goblin

Budgeted sales volume 30,000 40,000 60,000
Selling price per bicycle $230 $180 $155
Material cost per bicycle $44 $39 $35
Machine hours per bicycle 4 3 2
Labour rate per machine hour $9.00 $7.00 $15

Variable overheads are budgeted at 20% of the total material and labour costs.

Budgeted fixed overheads for the period are $8,000,000.

Required:

(a) Calculate the contribution per unit for each type of bicycle.
(9 marks)

(b) Calculate the total budgeted net profit for the three month period.
(6 marks)

(c) Calculate the profit maximising sales mix and the resultant net profit if only
280,000 machine hours are available.
(9 marks)

(d) Explain TWO methods the company might use to overcome the machine
capacity constraint.
(6 marks)

Total (30 marks)

2
Question 2

Bytesize Electronics manufactures and sells a type of hand-held computer game.

In the previous financial year Bytesize sold 30,000 games at a selling price of $25
each. Total fixed costs amounted to $144,000.

Variable costs per unit were as follows:

$
Component A 3.25
Component B 2.00
Component C 1.50
Assembly Labour 4.00
Variable Overhead 5.25
Total 16.00

Required:

(a) Calculate Bytesize’s breakeven point in units for last year.

(6 marks)
(b) Calculate the margin of safety in percentage terms.
(4 marks)

(c) Calculate the level of sales revenue the company would have needed to
generate last year to earn a profit of $144,000.
(4 marks)

In an attempt to improve the product and profitability for this year, the company is
considering replacing component A with a new and better part that has a cost of
$5.25 per unit. A new machine would also be needed to increase capacity. The
new machine would cost $24,000 with a useful life of 8 years and no residual
value. The company uses straight-line depreciation on all plant and machinery.

(d) Calculate how many units of product must be sold this year in order to
break-even, if Bytesize holds the sales price and other costs constant and
makes the suggested changes.
(6 marks)

(e) Calculate the selling price per unit that must be charged, if Bytesize wishes
to maintain the same contribution margin as last year.
(6 marks)

(f) When using Cost/ Volume/ Profit analysis a number of assumptions are
made about the data under consideration. Discuss TWO of these
assumptions and state any weaknesses inherent in them.
(4 marks)

Total (30 marks)

3
Question 3

Great Work Ltd (GWL) has budgeted to produce and sell 20,000 units. The selling
price per unit is $40, the variable cost per unit is $24, and the fixed overheads are
$120,000. The following additional information was also obtained for the next
budget period:

· Fixed costs will rise to $140,000 if sales are above 23,000 units.
· Fixed costs will fall to $96,000 if sales fall below 17,000 units.
· Variable costs will fall by 5% per unit if sales are greater than 19,999 units
since GWL will qualify for bulk purchase discounts. This discount applies to all
products purchased by GWL.

Actual results for GWL were as follows:

Sales (23,200 units) $913,000

Variable costs $528,000
Fixed costs $272,000

Required:

(a) Prepare a flexible budget for the following sales levels: 16,000, 20,000 and
24,000 units.
(9 marks)

(b) Prepare a control statement that compares actual results with the approved
budget of 20,000 units.
(6 marks)

(c) Prepare a control statement that compares actual results with a flexed
budget based on actual activity (23,200 units).
(9 marks)

(d) Explain the potential benefits to a company of using a flexible budgeting

system.
(6 marks)

Total (30 marks)

4
 Section B: Answer TWO questions only

Question 4

James is considering investing in ABC plc. He has obtained a copy of the most
recent annual report and accounts for the year ending 31 December 2011. The
report and accounts show that profits for the year are lower than the previous
year.

Required:

(a) Discuss what specific information included in the annual report and accounts
will help James to make a decision whether or not to invest in ABC plc?
(12 marks)

(b) Identify what further information James will require before making a
decision?
(8 marks)

Total (20 marks)

Question 5

Whilst attending a course on Financial Accounting you heard the following

comments from some of the participants.

(a) ‘The Statement of Financial Position or Balance Sheet shows how much the
company is worth.’
(b) ‘An asset is similar to an expense.’
(c) ‘Profit is more important than cash.’

Required:

Discuss the THREE comments.

Total (20 marks)

5
Question 6
A friend has asked you to consider investing in Relax Limited, a manufacturer of
garden furniture. You have been provided with some key financial ratios for Relax
Limited and for one of their main competitors, Bench Limited. This information is
given below:

Key financial ratios

Relax Limited Bench
Limited

Gross profit margin 16% 25%

Operating profit % 2% 7%
Asset efficiency(asset turnover) 4 times 4 times
Current ratio 1.88:1 2.2:1
Trade receivables days 52 days 30 days
Inventories days 49 days 46 days
Trade payables days 81 days 45 days
Gearing ratio 5% 20%
Interest cover 3 times 9 times
Dividends per share $0.20 $0.07

Required:

(a) The return on capital employed is frequently used to measure the successful
running of a business. Calculate the return on capital employed for Relax
Limited and Bench Limited and fully explain what this ratio tells us about the
two companies.
(8 marks)

(b) Evaluate the strengths and weaknesses of Relax Limited’s financial

performance. Your analysis should consider the ratios of Relax and also how
the ratios compare to Bench Limited.
(12 marks)

Total (20 marks)