Monitoring Test MT

Performance
Management
F5PM-MT1A-Z17-A

Answers & Marking Scheme

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®
1 RODBER CO

Linear programming model

x = monthly production of product X ½

y = monthly production of product Y

Contn for X = 12 – 2 – 1.50 – 2 – 1 = $5.50

Contn for Y = 10 – 1 – 2 – 3 – 0.5 = $3.50

Objective function

To maximise contribution, C = 5.50x + 3.50y subject to 1

Constraints

0  x  2,000
0  y  3,000 ½

Material A 4x + 2y  10,000 (0, 5,000) (2,500, 0) ½

2 ½
Direct labour x + y  4,000 (0, 4,000) (6,000, 0)
3

Graph
y

Marks for graph

5,000 X = 2,000 line ½
4x + 2y = 10,000 Y = 3,000 line ½
Other constraints
(1 each) 2
E x = 2,000 Contribution line 1
4,000 Presentation 1
————
Total for graph 5
F ————
3,000 A B y = 3,000

2,000
C=
9,62

1,000 C 2
/ 3 x + y = 4,000
5

D x
0
1,000 2,000 3,000 4,000 5,000 6,000

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Optimal production plan and maximum profit

Feasible region O, A, B, C, D.
Optimal point is B 1
y = 3,000 
4x + 2y = 10,000 

Substituting  in 

4x + 6,000 = 10,000
Therefore x = 1,000

Optimal production plan is 1,000 units product X and 3,000 units product Y. 1
$
 Contribution (5.50  1,000) + (3.50  3,000) 16,000
Less: Fixed costs 3,000
______
Profit 13,000 1
______ ————
2 ELLA CO 11
————
(a) Product DG

(i) Initial selling price per unit

Initial selling price = (variable + fixed cost per unit) + mark up of 40% 2
= [$4 + $(18,000 ÷ 3,000)] × 1·40 = $14

(ii) Weekly profit based on initial selling price per unit

Profit = 3,000 units × $4 profit per unit = $12,000 1

————
3
————
(b) Selling price to maximise weekly profit

Profits are maximised when:

Marginal cost (MC) = Marginal revenue (MR) ½
MC = variable cost = 4 ½
MR = 20 – 0·004Q
4 = 20 – 0·004Q
Q = 4,000 units 2
P = 20 – 0·002 (4,000) = $12 = profit maximising price. 1
————
4
————

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(c) Penetration and skimming pricing policies

Tutorial note: Penetration pricing and price skimming are both methods of pricing associated
with new products, and relate to the price to be charged when launching the product.

Penetration pricing implies setting a low price in order to achieve a high share of the
market. This is likely to be used in competitive markets, where the new product will be max 2
competing against established products.

Price skimming is the opposite approach. A higher price is set initially, which implies that
the product will be sold only to a small elite segment of the market. The company will max 2
make large margins on this segment. Price skimming is used where a new product is being
launched which has no competition; typically high technology products that are the latest ————
4
thing. Such products may also confer status on the customers, which is why they are
————
prepared to pay the higher price.

3 EXE

Lowest cost estimate

Note $
Direct materials
Steel – 10m2 at $5.50 1 55.0 1
Brass fittings 2 20.0 ½
Direct labour
Skilled – 25 hours @ $12 per hour 3 300.0 1
Semi-skilled 4 0.0 ½
Overheads – 10 hours at $0.75 5 7.5 1
Estimating time 6 0.0 ½
–––––
Relevant cost of the equipment 382.5 ½
–––––
Notes

1. Steel – since this is used regularly in the business the relevant cost is the 1
replacement cost, which is $5.50 per square metre.

2. Brass fittings – these would be bought specially for the job, so the supplier’s 1
quotation is the relevant cost.

3. Direct labour: The choice is between doing the work in overtime, therefore 2
incurring a cost of $12.00 per hour ($8.0 × 1.5), or doing the work in normal time.
If the work is done in normal time, there will be a lost contribution of $13.00 per
hour. The relevant cost of working in normal time would be $21.00 per hour ($8 +
$13). The work would therefore be done in overtime, as the relevant cost of this is
less.

4. Semi-skilled – as there is unused capacity the work can be done at no additional 1

cost. The relevant cost of the semi skilled labour is therefore nil.

5. Overheads – only the power appears to be an incremental cost. 1

6. Estimating time – this is a sunk cost. 1

————
12
————

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4 ALFRED CO

(a) Costs for order A and order B

(i) Using volume-based allocation

$940,000 ÷ 4,000 orders = $235 per order 2

So customer would be charged the invoice value of goods ordered plus £235 per order

(ii) Using activity-based costs

Invoice costs are $320,000 ÷ 16,000 = $20 per invoice line.

Other costs are $280,000 ÷ 4,000 orders = $70 per order

Order an Order B
$ $
Invoice costs 2 × $20 40 8 × $20 160 2
Packing costs small 9 large 15 2
Delivery per table 8 75 2
Other costs per order 70 70 2
––– ––– ————
Total costs per order 127 320 10
––– ––– ————

(b) Use of activity-based costing data for pricing decisions

An ABC system gives a better indication of the resources consumed – in this case to 1
process and deliver an order. This is a long-run average cost; not a variable cost.
Therefore: 1

 small changes in the volumes or types of order will not have an immediate effect ½
on actual costs;

 a significant change in volumes will usually change costs also. ½

It is important to note that costs will only decrease if staff are actually removed from the
activity; either through leaving the firm or by moving to another activity where there is a max 1
need for additional staff.

Some commentators argue that ABC is dangerous as it discourages managers from using 1 each
contribution as a basis for pricing short-term incremental orders. However, others argue for and
this is a strength as pricing based on full ABC ensures that all orders make a profit. This against
may not be optimal in the short run but they argue it protects long-run profitability.

It is also important to note that many companies face a situation where there are clear 1
market prices. Where this occurs it may not be possible to change prices as a result of an
ABC exercise. The ABC costs then act as a guide to profitability and may indicate where 1
it is necessary to cut costs, or perhaps change processes. ————
max 6
————

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 Marking Scheme

Marks Marks
1 RODBER CO

(a) Defining variables ½

Objective function 1
Constraints – > 0 constraints ½
Material A & B – ½ each 1
Graph:
Constraints: x = 2,000, y = 3,000 – ½ each 1
Others – 1 each 2
Contribution line 1
Presentation 1
Identification of optimal point 1
Solving equations to find optimal point 1
Calculation of profit at optimal point 1
–––
11
–––
2 ELLA CO

(a)(i) Initial selling price 2

(ii) Resultant weekly profit 1
––– 3

(b) Marginal cost (MC) = Marginal revenue (MR) ½

MC ½
Optimal quantity (via MC = MR) 2
Optimal price 1
––– 4

(c) Penetration price 2

Skimming price 2
––– 4
–––
11
–––

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3 EXE

Correct amounts:
Steel 1
Brass fittings ½
Direct labour skilled 1
Direct labour semi-skilled ½
Overheads 1
Estimating time ½
Exclude profit margins ½
__
5
Explanations
Steel 1
Brass fittings 1
Direct labour – skilled (include calculation of normal time) 2
Semi skilled 1
Overheads 1
Estimate 1
__
7
–––
12
–––

4 ALFRED CO

(a) Costs of Order A and Order B

(i) Calculation of overhead cost per order 2

(ii) Calculation of activity based costs
Invoice costs 2
Packing costs 2
Delivery costs 2
Other costs 2
__
10

(b) Discussion of use of ABC for pricing decisions

What it means for costs max 2
Use in pricing max 2
Relevance of market prices max 2
_____
6
___
16
___

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