Topic: Divisional Performance

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  • 8 Marks

MA – April 2022 – L2 – Q1a – Divisional performance

Evaluate whether a fitness club manager should receive a bonus based on forecasted financial performance.

a) Gyakie Ltd (Gyakie) operates a chain of fitness clubs in Oti Region. Managers at the fitness clubs receive a quarterly bonus if their fitness club achieves or exceeds all of the following financial targets:

  • Return on Capital Employed (ROCE): 8% (based on net assets)
  • Asset turnover: 40%
  • Operating profit margin: 20%

Summary of the actual performance for Quarter 3 of the current year for one of the fitness clubs in Papase is detailed below:

Description Amount (GH¢)
Revenue 36,000
Staff costs 12,000
Other fixed costs 22,000
Net assets 110,000
Number of customers 600

The quarterly financial targets are set by the head office finance team, and all fitness clubs are given the same target. Gyakie is currently forecasting the performance of its fitness clubs in Quarter 4. The following information will be used to forecast the performance for each of its fitness clubs in Quarter 4:

  • The average revenue per customer will increase by 10% on Quarter 3.
  • Customer numbers will increase by 5% on Quarter 3.
  • Staff costs and net assets are expected to remain at the same level as Quarter 3.
  • Other fixed costs are expected to decrease by 5% on Quarter 3.
  • Staff and other costs are fixed (they are not related to the number of customers).

Required: Justify whether the manager of the fitness club in Papase should receive a bonus in Quarter 4 based on the forecast performance. Your computation should include operating profit margin, ROCE, and asset turnover for Quarter 4.

Description Quarter 4 (GH¢)
Revenue 41,580
Less: Staff cost 12,000
Less: Other costs 20,900
Profit 8,680
Net asset 110,000
No. of customers 630

Quarterly ROCE: ROCE=

Profit Margin =

Asset turnover

Based on the forecast performance in quarter 4, only one of the three financial targets will be achieved. Therefore, a bonus will not be awarded to the manager of the health club at Papase.

Workings:
1. Q3 Average revenue per customer = GH¢360,000/600 = GH¢60
Increase of 10% (GH¢60 x 1.6) = GH¢66
Customer 600 x 1.05 = 630
Revenue 630 x GH¢66 = GH¢ 41,580
2. Other costs GH¢ 22,000x 0.95 = GH¢20,900

  • 10 Marks

MA – May 2016 – L2 – Q5b – Decision Making Techniques, Relevant Cost and Revenue, Divisional Performance

Decision Making Techniques, Relevant Cost and Revenue, Divisional Performance

Unity Company Ltd is preparing for next season’s operations. The company has provided the following information relating to its three products:

TO GE DA
Selling Price GH¢18.5 GH¢16.2 GH¢12.6
Material Cost (@ GH¢1.75 per kg) GH¢8.75 GH¢10.5 GH¢3.5
Labour Cost (@ GH¢2.2 per labour hour) GH¢7.7 GH¢4.4 GH¢7.7
Annual Demand 2,150 units 3,235 units 1,556 units

The company can only make available a total of 18,560 hours in the short run.

Required:

i) Provide the optimal production plan for Unity Ltd for the ensuing period.
(5 marks)

ii) What is the total incremental benefit of producing DA instead of GE, assuming available resources can only meet the demand for DA?
(3 marks)

iii) Indicate the shadow price of the production plan and state the basic assumption under which this price will apply.
(2 marks)

 

i) Optimal Production Plan:

  1. Labour hours required to meet demand:
    • TO: 2,150 units×3.5 hours/unit=7,525 hours2,150 \text{ units} \times 3.5 \text{ hours/unit} = 7,525 \text{ hours}
    • GE: 3,235 units×2.0 hours/unit=6,470 hours3,235 \text{ units} \times 2.0 \text{ hours/unit} = 6,470 \text{ hours}
    • DA: 1,556 units×3.5 hours/unit=5,446 hours1,556 \text{ units} \times 3.5 \text{ hours/unit} = 5,446 \text{ hours}

    Total required hours: 19,441 hours (exceeds available hours).

  2. Contribution per labour hour:
    • TO: Contribution per unit = GH¢2.05, Contribution per labour hour = 2.053.5=0.59\frac{2.05}{3.5} = 0.59
    • GE: Contribution per unit = GH¢1.30, Contribution per labour hour = 1.302=0.65\frac{1.30}{2} = 0.65
    • DA: Contribution per unit = GH¢1.40, Contribution per labour hour = 1.403.5=0.40\frac{1.40}{3.5} = 0.40

    Ranking: GE (1st), TO (2nd), DA (3rd).

  3. Resource Allocation (18,560 hours):
    • GE: 3,235 units×2.0 hours/unit=6,470 hours3,235 \text{ units} \times 2.0 \text{ hours/unit} = 6,470 \text{ hours}
    • TO: 2,150 units×3.5 hours/unit=7,525 hours2,150 \text{ units} \times 3.5 \text{ hours/unit} = 7,525 \text{ hours}
    • DA: 1,304.29 units×3.5 hours/unit=4,565 hours1,304.29 \text{ units} \times 3.5 \text{ hours/unit} = 4,565 \text{ hours}

    Total allocated hours: 18,560 hours.

ii) Total Incremental Benefit of Producing DA Instead of GE:

  • Contribution per unit for DA = GH¢1.40
  • Contribution per unit for GE = GH¢1.30
  • Incremental Benefit per unit = GH¢0.10Total Incremental Benefit: 0.10×1,556 units=GH¢155.600.10 \times 1,556 \text{ units} = GH¢155.60

iii) Shadow Price and Assumptions:

  • Shadow Price: GH¢0.40 (the contribution per limiting factor).
  • Basic Assumption: This shadow price applies under the assumption that the additional resource can be obtained at the normal variable cost and that there are no changes in the product mix or external conditions.
  • 20 Marks

MA – May 2016 – L2 – Q3 – Transfer Pricing, Divisional Performance, Relevant Cost and Revenue, Decision Making Techniques

Calculate profitability under different costing methods and evaluate an outsourcing offer, including additional decision factors.

Anim Shoes Ltd produces and sells Ghana-made shoes with two main departments: production/sales and repairs departments. The production and sales department produces and sells 10,000 pairs of shoes each year. Due to the low quality of raw materials available in the country, the company includes an additional GH¢11 in the cost of a pair of shoes sold to cater for one-year after-sales repairs. On average, it is expected that a quarter of the total pairs of shoes sold would come back for repairs a year after sale. Repair works on a pair of shoes take 2 labour hours, and it is estimated that total repair cost on the quarter of shoes will be GH¢27,500.

In addition to providing repair services to the production and sales department, the repair department sometimes picks up offers from outside the company. Such external offers are billed at full cost and a margin on sales of 20%. The following is the breakdown of the average repair cost of a pair of shoes:

Cost Item Cost (GH¢)
Material 2.50
Labour (1.5 per hour) 3.00
Variable Overheads 1.00
Fixed Overheads 2.30

Required:

i) Calculate the individual profits of the Production/Sales department, Repairs department, and Anim Ventures if repairs are done by the repairs department of Anim Ventures at either full cost plus 20% margin on sales or at marginal cost.
(8 marks)

ii) Pee Shoe Repairs has offered to repair each pair of shoes for Anim Ventures at GH¢10.00, a price which is cheaper than what the repairs department is offering. Should Anim Ventures accept this offer?
(5 marks)

iii) Identify THREE other factors Anim Ventures should consider in finalizing the decision in (ii) above.
(3 marks)

iv) Explain TWO principles of a good transfer pricing method.
(4 marks)

 

i) Profit Calculation:

  1. Full Cost plus 20% profit on sales:
Cost Item Production/Sales Dept (GH¢) Repairs Dept (GH¢) Anim Ventures (GH¢)
Sales 27,500 27,500 27,500
Cost 27,500 22,000 22,000
Profit 0 5,500 5,500
  1. Marginal Costing Method:
Cost Item Production/Sales Dept (GH¢) Repairs Dept (GH¢) Anim Ventures (GH¢)
Sales 27,500 16,250 27,500
Cost 16,250 22,000 22,000
Profit 11,250 (5,750) 5,500

ii) Should Anim Ventures accept Pee Shoe Repairs’ offer at GH¢10.00?

If Pee’s offer is accepted:

Cost Item Production/Sales Dept (GH¢) Repairs Dept (GH¢) Anim Ventures (GH¢)
Sales 27,500 0 27,500
Cost 25,000 5,750 30,750
Profit 2,500 (5,750) (3,250)

Decision:
No, Anim Ventures should not accept Pee Shoe Repairs’ offer because the entire organization would be worse off, with an overall loss of GH¢8,750 (GH¢5,500 + GH¢3,250).

iii) Additional Factors Anim Ventures Should Consider:

  1. Quality Standards: Pee Shoe Repairs’ ability to meet the quality standards required by Anim Ventures.
  2. Timely Delivery: The capability of Pee Shoe Repairs to provide timely after-sales repair services.
  3. Impact on In-House Repairs: Potential impact on the repairs department, including possible closure due to reduced workload and uncertain customer response if they discover the repair work is outsourced.

iv) Principles of a Good Transfer Pricing Method:

  1. Goal Congruence: The method should lead to optimal decisions for the entire organization, not just a specific division.
  2. Subunit Autonomy: If decentralization is favored, the transfer pricing method should support the autonomy of different subunits within the organization.

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