C ONS TR UC TED RES PONSE QUES TIONS – SEC TION C: S E CTI O N 3

291 BITS AND PIECES (JUNE 2009)

Question debrief

Bits and Pieces (B&P) operates a retail store selling spares and accessories for the car market.
The store has previously only opened for six days per week for the 50 working weeks in the
year, but B&P is now considering also opening on Sundays.
The sales of the business on Monday through to Saturday averages at $10,000 per day with
average gross profit of 70% earned.
B&P expects that the gross profit % earned on a Sunday will be 20 percentage points lower
than the average earned on the other days in the week. This is because they plan to offer
substantial discounts and promotions on a Sunday to attract customers. Given the price
reduction, Sunday sales revenues are expected to be 60% more than the average daily sales
revenues for the other days. These Sunday sales estimates are for new customers only, with
no allowance being made for those customers that may transfer from other days.
B&P buys all its goods from one supplier. This supplier gives a 5% discount on all purchases if
annual spend exceeds $1,000,000.
It has been agreed to pay time and a half to sales assistants that work on Sundays. The normal
hourly rate is $20 per hour. In total five sales assistants will be needed for the six hours that
the store will be open on a Sunday. They will also be able to take a half-day off (four hours)
during the week. Staffing levels will be allowed to reduce slightly during the week to avoid
extra costs being incurred.
The staff will have to be supervised by a manager, currently employed by the company and
paid an annual salary of $80,000. If he works on a Sunday he will take the equivalent time off
during the week when the assistant manager is available to cover for him at no extra cost to
B&P. He will also be paid a bonus of 1% of the extra sales generated on the Sunday project.
The store will have to be lit at a cost of $30 per hour and heated at a cost of $45 per hour.
The heating will come on two hours before the store opens in the 25 ‘winter’ weeks to make
sure it is warm enough for customers to come in at opening time. The store is not heated in
the other weeks.
The rent of the store amounts to $420,000 annum.

Required:
(a) Calculate whether the Sunday opening incremental revenue exceeds the incremental
costs over a year (ignore inventory movements) and on this basis reach a conclusion
as to whether Sunday opening is financially justifiable.  (12 marks)
(b) Discuss whether the manager’s pay deal (time off and bonus) is likely to motivate
him.  (4 marks)
(c) Briefly discuss whether offering substantial price discounts and promotions on
Sunday is a good suggestion.  (4 marks)
(Total: 20 marks)

Calculate your allowed time, allocate the time to the separate parts……………

KAPLAN P UBLI S H I N G 165

P M: PE RFORMA NCE MANA GEME N T

292 STAY CLEAN (DECEMBER 2009)

Stay Clean manufactures and sells a small range of kitchen equipment. Specifically the
product range contains a dishwasher (DW), a washing machine (WM) and a tumble dryer
(TD). The TD is of a rather old design and has for some time generated negative contribution.
It is widely expected that in one year’s time the market for this design of TD will cease, as
people switch to a washing machine that can also dry clothes after the washing cycle has
completed.
Stay Clean is trying to decide whether or not to cease the production of TD now or in
12 months’ time when the new combined washing machine/drier will be ready. To help with
this decision the following information has been provided:
(1) The normal selling prices, annual sales volumes and total variable costs for the three
products are as follows:
DW WM TD
Selling price per unit $200 $350 $80
Material cost per unit $70 $100 $50
Labour cost per unit $50 $80 $40
Contribution per unit $80 $170 –$10
Annual sales 5,000 units 6,000 units 1,200 units
(2) It is thought that some of the customers that buy a TD also buy a DW and a WM. It is
estimated that 5% of the sales of WM and DW will be lost if the TD ceases to be
produced.
(3) All the direct labour force currently working on the TD will be made redundant
immediately if TD is ceased now. This would cost $6,000 in redundancy payments. If
Stay Clean waited for 12 months the existing labour force would be retained and
retrained at a cost of $3,500 to enable them to produce the new washing/drying
product. Recruitment and training costs of labour in 12 months’ time would be $1,200
in the event that redundancy takes place now.
(4) Stay Clean operates a just in time (JIT) policy and so all material cost would be saved
on the TD for 12 months if TD production ceased now. Equally, the material costs
relating to the lost sales on the WM and the DW would also be saved. However, the
material supplier has a volume based discount scheme in place as follows:
Total annual expenditure ($) Discount
0 – 600,000 0%
600,001 – 800,000 1%
800,001 – 9 00,000 2%
900,001 – 960,000 3%
960,001 and above 5%
Stay Clean uses this supplier for all its materials for all the products it manufactures.
The figures given above in the cost per unit table for material cost per unit are net of
any discount Stay Clean already qualifies for.
(5) The space in the factory currently used for the TD will be sublet for 12 months on a
short-term lease contract if production of TD stops now. The income from that
contract will be $12,000.
(6) The supervisor (currently classed as an overhead) supervises the production of all
three products spending approximately 20% of his time on the TD production. He
would continue to be fully employed if the TD ceases to be produced now.

166 K A P LA N P UB L I S H I N G
 C ONS TR UC TED RES PONSE QUES TIONS – SEC TION C: S E CTI O N 3

Required:
(a) Calculate whether or not it is worthwhile ceasing to produce the TD now rather than
waiting 12 months (ignore any adjustment to allow for the time value of money). 
(13 marks)
(b) Explain two pricing strategies that could be used to improve the financial position of
the business in the next 12 months assuming that the TD continues to be made in
that period.  (4 marks)
(c) Briefly describe three issues that Stay Clean should consider if it decides to outsource
the manufacture of one of its future products.  (3 marks)
(Total: 20 marks)

293 CHOICE OF CONTRACTS

A company in the civil engineering industry with headquarters located 22 miles from London
undertakes contracts anywhere in the United Kingdom.
The company has had its tender for a job in north-east England accepted at $288,000 and
work is due to begin in March 20X3. However, the company has also been asked to undertake
a contract on the south coast of England. The price offered for this contract is $352,000.
Both of the contracts cannot be taken simultaneously because of constraints on staff site
management personnel and on plant available. An escape clause enables the company to
withdraw from the contract in the north-east, provided notice is given before the end of
November and an agreed penalty of $28,000 is paid.
The following estimates have been submitted by the company’s quantity surveyor:
Cost estimates
North-east South-coast
$ $
Materials:
In inventory at original cost, Material X 21,600
In inventory at original cost, Material Y 24,800
Firm orders placed at original cost, Material X 30,400
Not yet ordered – current cost, Material X 60,000
Not yet ordered – current cost, Material Z 71,200
Labour – hired locally 86,000 110,000
Site management 34,000 34,000
Staff accommodation and travel for site management 6,800 5,600
Plant on site – depreciation 9,600 12,800
Interest on capital, 8% 5,120 6,400
Total local contract costs 253,520 264,800
Headquarters costs allocated at rate of 5% on total
contract costs 12,676 13,240
––––––– –––––––
266,196 278,040
North-east South-coast
$ $
Contract price 288,000 352,000
––––––– –––––––
Estimated profit 21,804 73,960
––––––– –––––––

KAPLAN P UBLI S H I N G 167

P M: PE RFORMA NCE MANA GEME N T

(1) X, Y and Z are three building materials. Material X is not in common use and would not
realise much money if re-sold; however, it could be used on other contracts but only
as a substitute for another material currently quoted at 10% less than the original cost
of X. The price of Y, a material in common use, has doubled since it was purchased; its
net realisable value if re-sold would be its new price less 15% to cover disposal costs.
Alternatively it could be kept for use on other contracts in the following financial year.
(2) With the construction industry not yet recovered from the recent recession, the
company is confident that manual labour, both skilled and unskilled, could be hired
locally on a sub-contracting basis to meet the needs of each of the contracts.
(3) The plant which would be needed for the south coast contract has been owned for
some years and $12,800 is the year’s depreciation on a straight-line basis. If the north-
east contract is undertaken, less plant will be required but the surplus plant will be
hired out for the period of the contract at a rental of $6,000.
(4) It is the company’s policy to charge all contracts with notional interest at 8% on
estimated working capital involved in contracts. Progress payments would be
receivable from the contractee.
(5) Salaries and general costs of operating the small headquarters amount to about
$108,000 each year. There are usually ten contracts being supervised at the same time.
(6) Each of the two contracts is expected to last from March 20X3 to February 20X4 which,
coincidentally, is the company’s financial year.
(7) Site management is treated as a fixed cost.

Required:
As the management accountant to the company present comparative statements to show
the net benefit to the company of undertaking the more advantageous of the two
contracts.
Explain why you have included, or not, each of the items given in the data in your
comparative financial statements.  (Total: 20 marks)

294 HS EQUATION
HS manufactures components for use in computers. The business operates in a highly
competitive market where there are a large number of manufacturers of similar components.
HS is considering its pricing strategy for the next 12 weeks for one of its components. The
Managing Director seeks your advice to determine the selling price that will maximise the
profit to be made during this period.
You have been given the following data:
Market demand
The current selling price of the component is $1,350 and at this price the average weekly
demand over the last four weeks has been 8,000 components. An analysis of the market
shows that, for every $50 increase in selling price, the demand reduces by 1,000 components
per week. Equally, for every $50 reduction in selling price, the demand increases by 1,000
components per week.

168 K A P LA N P UB L I S H I N G