MA360 EXAM – MAY/JUNE 2014
SOLUTIONS
PART A:
Question 1
(a) P = a – bQ
b = Change in price divided by change in quantity demanded = 10/40 = 0.25
Substitute b = 0.25 in original price/quantity situation, i.e.:
400 = a – 0.25(1,440)
400 = a – 360
a = 760
[1]
[1]
[1]
Formula for demand line: P = 760 – 0.25 Q
[1]
Revenue will be maximised where MR = MC
MR formula = P = a – 2bQ
P = 760 – 0.5Q
Price at which MR = MC = 2 x £100 = £200
Substituting P = £200 in MR formula: 200 = 760 – 0.5Q
Therefore: 0.5Q = 560
Therefore: Q = 1,120
Selling price per room at revenue-maximising quantity (Q = 1,120):
P = 760 – 0.25 Q
P = 760 – 0.25 (1,120)
P = 760 – 280
P = £480
[0.5]
[0.5]
[1]
[1]
[1]
(b) Profit earned:
Sales Revenue
Double
Single
Suite
No of
Rooms
1,120
360
240
Price per
Room
480
300
600
Nights
Total
5
5
5
2,688,000
540,000
720,000
3,948,000
[Marks: 1 mark for each revenue total = 3 marks in total]
Variable costs:
Rooms
Double
Single
Suite
Guests per room
2x
1x
4x
Var. Costs/night
1,120 x 100 x 5
360 x 100 x 5
240 x 100 x 5
Total
1,120,000
180,000
480,000
1,780,000
[Marks: 1 mark for each variable cost total = 3 marks total]
Total profit: £3,948,000 - £1,780,000 - £515,000 - £300,000 = £1,352,000
[Marks: 0.5 each for two fixed costs = 1 mark in total]
(c) Complementary product pricing involves selling products that complement each other, at different
prices (e.g. razors and razor blades). The initial product is sold at a lower price to encourage
customers to buy the product (e.g. the razor), and the complementary product (e.g. razor blades) is
then sold at a higher price to improve overall profitability.
[2]
In the case of SC, management could offer guests reduced room prices on the understanding that
they will have to pay a high fee to gain entrance to the Pro-Am tournament. This would then
replace the free ‘lucky draw’ basis of gaining entrance to the Pro-Am tournament. (Any other
reasonable example will be accepted).
[2]
(d) The following initiatives might be considered:




Management could attempt to negotiate fees for television coverage of the tournament, or for
other media coverage;
Management could charge fees to vendors wishing to sell food, drink or golf clothing etc. during
the tournament;
A range of souvenirs or other memorabilia could be sold to visitors during the tournament.
Any other feasible suggestion.
[3 x 2 marks each = 6 marks total]
Question 2
(a) To earn a bonus, the Divisional Net Profit after Tax would need to exceed the required return on
capital invested [1]. This is 9% of £12m = £1,080,000. [1] As the DNPAT is only £880,000, or
£200,000 below the required rate of return, the DM will not receive a bonus [1].
(b) The performance of the DM should only be measured against those elements of revenue and
expenditure that he or she can control. [1] At the moment this is not the case, as a number of
revenue and expense elements are beyond the DM’s control. As a result the current incentive
scheme is not a fair one [1].
A fairer incentive scheme would be based on Controllable Contribution [1], but even then this
would have to be adjusted upwards to account for the following revenue and expense items
which are not controllable by the DM:
(i)
The loss of revenue due to inter-divisional transfers having to take place at below
market-rate prices [1]. This amounts to [£1,200,000 / 0.75] - £1,200,000 = £400,000 [1].
(ii)
The additional variable costs, due to higher prices charged by BBC farms on 25% of
variable costs, i.e 25% x £1,680,000 = £420,000 [1]
Overcharge = £420,000 – [100/120 x £420,000] = £70,000 [1]
(iii)
Only £25,000 of the £125,000 depreciation charge is controllable by the DM. An
adjustment of £100,000 must therefore be made. [1]
The revised Controllable Contribution would therefore be:
£s
Original CC
1,870,000
Add back:
Lost revenue
400,000
Higher wheat costs
70,000
Uncontrollable deprec. 100,000
Revised CC
2,440,000
[2]
(c) Additional adjustments required:
(i)
Non-controllable avoidable costs must be increased from £530,000 to £630,000 to
include the depreciation on assets not authorised by the DM [2].
(ii)
Allocated corporate expenses should be decreased to £375,000, the market value of the
services provided [1]. The rest of the allocated expenses do not represent the economic
cost of providing these services, and should therefore be ignored [1].
(d) ‘Fair’ Divisional Net Profit figure: Revised controllable contribution
2,440,000 [1]
Less non-contr. Avoidable costs
(630,000) [1]
Less allocated corporate expenses
(375,000) [1]
Revised DNPAT
1,435,000
The bonus of the DM would then have been: [1,435,000 – (9% x £12m)] = £35,500 [2]
(e) The return on investment percentage earned during 2013/2014 was [£880,000 / £12m] x 100 =
7.33% [1]. An investment earning a return of 8.5% might therefore be attractive to the DM, as it
would move the DM closer to the targeted return of 9% [1]. However, as the return of 8.5% is
below the divisional cost of capital, this would not be in the best interests of the BBC [1].
Question 3
(a) Material Price Variance
Base
Material
Act. Mix @ Act. Prices
520 x £2.50
£’s
Act. Mix at Std Prices
1,300.00 520 x £2.50
£’s
1,300.00
Stripping agent
320 x £4.60
1,472.00 320 x £4.10
1,312.00
Catalyst
160 x £35.00
5,600.00 160 x £25.00
8,372.00
4,000.00
6,612.00
Price variance = £8,372 - £6,612 = £1,760 A
[5]
Material Mix Variance
Std. Mix at Std Prices
(1,000 x (70/125) = 560
x £2.50
£’s
Material
1,400.00 Base
Act. Mix @ Std Prices
520 x £2.50
£’s
1,300.00
1,000 x (35/125) = 280
x £4.10
1,148.00 Stripping agent
320 x £4.10
1,312.00
1,000 x (20/125) = 160 x
£25.00
4,000.00 Catalyst
160 x £25.00
4,000.00
6,548.00
6,612.00
Mix variance = £5,440- £5,520 = £64 A
[5]
Material Yield Variance
The standard yield is 100 litres of finished product for every 125 litres of raw material input. This
represents a yield of 80% (100/125 x 100).
Standard yield for actual inputs = 80% x 1,000 litres =
Actual yield for actual inputs =
Yield variance in litres
Value of yield variance = 38.0 x £8.185 =
800.0 litres
838.0 litres
38.0 litres F
£272.00 F
(b) Current market share % held by PaintRemova: [9,000/180,000)] x 100 = 5%
[1]
[1]
[1]
[1]
May market share held by PaintRemova: [838 / (15,000 + 500)] x 100 = 5.41%
[1]
Market size variance: (15,500 – 15,000) x 5% x (£14.00 - £8.185) = £145.38 F
[2]
Market share variance: (5.406% - 5.0%) x 15,500 x (£14.00 - £8.185) = £365.94 F
[2]
(c) Positive aspects of the change to the PaintRemova inputs:
As a result of the production manager’s changes, it would seem that PaintRemova is a much
improved product. Whereas customers were complaining about the effectiveness of the
product in previous months, the product now works better and requires fewer applications to
produce a paint-free surface.
This has led to a number of new customers buying the product in May, due largely to
recommendations from Chemico’s largest customer. The market has also grown, and new
customers have been obtained as a result. Due to the effectiveness of the product, it can be
anticipated that volume growth is likely to grow even further in future.
Negative aspects:
The new product is considerably more expensive than in the past, with both the stripping agent
and particularly the catalyst, being more expensive than the standard cost. (Stripping agent by
9.8% and Catalyst by 40%).
As a result, the net production and sales variances for April/May were adverse, particularly the
Material Price variance (£1760 A). Net variances were £1,040 adverse. If this mix of material is
maintained in future, Chemico will need to find a cheaper source of the same quality materials,
or increase the selling prices. If not, it may be difficult to obtain the budgeted returns on this
product.
(Any other reasonable points will be accepted).
[6 marks]
Question 4
(a) The minimum TP in a range (i.e. the TP at which group profits will be maximized) can be
established by using the formula:
(b)
TP = Variable cost per unit of the FG division + Opportunity cost per unit of the FG div.
The bottom point of each range will therefore be:
1 – 20,000m2 = £20 + [£50-£2-£20] = £48
[1 marks]
20,001 – 100,000m2 = £20 + £Nil = £20
[1 mark]
The top point of both ranges can be determined by subtracting the Building div’s variable costs
per unit (excluding the transfer price) from the Building div’s selling price per unit for
100,000m2, i.e.
£72 - £15 = £57
[1 mark]
The ranges would therefore be: 1 – 20,000m2: =>£48<£57
[1 mark]
20,001 – 100,000m2: =>£20<£57
[1 mark]
(c) Flat Glass Division
Output m2 TP Revenues ( £40 /m2) Var.Costs (£20/m2) Fixed costs
Profit (Loss)
20,000
800,000
400,000
500,000
(100,000)
40,000
1,600,000
800,000
500,000
300,000
60,000
2,400,000
1,200,000
500,000
700,000
80,000
3,200,000
1,600,000
500,000
1,100,000
100,000
4,000,000
2,000,000
500,000
1,500,000
(5 Profit calculations x 1 marks each = 5 marks)
[5]
Building Division
Output
(Units)
Total
Revenues
Var.Costs
(£15/unit)
Transfer In Costs (£40
/m2)
Fixed Costs
Total Profit /
(Loss)
20,000
2,200,000
300,000
800,000
1,200,000
(100,000)
40,000
3,400,000
600,000
1,600,000
1,200,000
0
60,000
4,800,000
900,000
2,400,000
1,200,000
300,000
80,000
6,240,000
1,200,000
3,200,000
1,200,000
640,000
100,000
7,200,000
1,500,000
4,000,000
1,200,000
500,000
(5 Profit calculations x 1.0 marks each = 5 marks)
[5]
The Flat Glass division would prefer an output and sales level of 100,000 m2 of glass, whereas the
Building division would prefer an output and sales level of 80,000 m2. [1] These are the preferred levels
because both divisions maximise their profits at these levels. [1] So, although the FG division’s manager
would be happy with a TP of £40, it is unlikely that the BD’s manager would be satisfied. [1]
(c) To maximise profits, the TP must be equal to the variable cost of the supplying division, i.e. £20 per
m2. [1.0]
At this level, (at sales of 100,000 m2) BD makes a RI of: £2.5 million – (10% of £7 million) =
£1,800,000, [1.0] while the FG division makes a loss of £500,000, and therefore a negative RI. [0.5]
To break even in terms of RI, the FG division must make a profit of (6% of £4 million) = £240,000.
[0.5] So, if the BD were to pay the FG division a lump-sum payment of (£500,000 + £240,000 =
£740,000), the FG division would be in a break even situation. [1.0] This would leave the BD with a
positive RI of (£1,800,000 - £740,000) = £1,060,000. [1.0]
So, if the lump sum payment to the FG division were increased above £740,000 so that both divisions
could share fairly in the BD’s remaining RI of £1,060,000 (on a negotiated basis) [1], both divisions
would reflect positive RI’s and both managers would receive bonuses [0.5]. The profits of the Sussex
Glass Company would also be maximised. [0.5]
[7 marks]
PART B:
Question 1: Since its foundation in the first half of the last century as a family business, the
LEGO Group has become one of the biggest toy-maker companies in the world operating as a
multinational corporation.
a) Which kind of multinational corporation is the LEGO Group and why is it possible to
define The LEGO group as a multinational corporation?
(7 marks)
Using the Mouritsen (1995) model, on the basis of its organisational structure it is possible to
classify multinational corporation in global, multidomestic and exporting. In our case the LEGO
is mainly a global corporation mainly because the headquarters make a strategic plan for all the
different companies being part of the group.
In order to distinguish a multinational corporation from a domestic corporation is necessary to
use a geographical criteria instead of a functional one.
b) Discuss the main problems related to control systems in multinational corporations such
as LEGO (9 marks), and discuss the control system most suited to a multinational
corporation such as the LEGO Group (9 marks).
(18 marks)
The main differences that could affect a Multinational corporation such as the LEGO group are
related to differences in the national cultures where the company operates, the local institutions
operating in the different countries where the multinational corporation operates, the different local
business environment and the foreign currency translation. All these differences are potentially faced
by the LEGO group as it operates in Europe, North America and Asia where there are big differences
in terms of culture, local institutions and business environment (9 marks).
On the basis of the Goold and Campbell (1987) model according to the typology of multinational
corporation should be used a different control system. In particular,
- global organisations should mainly adopt a strategic planning system (focus on the ex ante
phase of the control system);
- multidomestic organisations should mainly adopt a strategic control system (focus still at the
strategic level but at the ex post phase of the control process);
- exporting organisations should mainly adopt a financial control system (focus more at the
managerial level instead of the strategic level both at the ex ante and ex post phase of the
control process).
As the LEGO group is a multinational organisational it has a mainly centralised decision making
process at the strategic level. Other less appropriate frameworks could be used in order to discuss the
second part of the question such as Merchant and Van der Stede (2007) or Anthony and
Govindarajan (2007) (9 marks).
Question 2: During the last decade the LEGO group has experienced a profound and successful
change process to overcome a serious financial crisis.
a) Using the SWOT technique, identify and discuss the LEGO Corporation’s major
strengths and weaknesses, as well as its most significant opportunities and threats. (You
should identify two significant strengths, weaknesses, opportunities, and threats.
Strength: 1) its products are not only toys but also educational instruments; 2) strong brand name at
the international level; 3) very strong organizational identity and culture;
Weakness: 1) Imitation of products; 2) Intense competition means high brand switching and also loss
of market share;
Opportunity: 1) Diversify more into other segments; 2) involve educational organisations in
developing new knowledge transfer processes;
Threats: 1) video games; 2) Cartoon channels; 3) internet; 4) other similar companies.
(8 marks)
b) Making reference to the Macintosh and Quattrone (2010) model, discuss the LEGO’s
type of organisation, strategy and structure.
The LEGO group has usually operated as a prospector focusing on a continuous innovation
process of its product. During the crisis the LEGO group tried to operate also as a defender
organisation by reducing production costs through outsourcing.
(5 marks)
c) Based on the Merchant and Van der Stede (2007) model, identify and discuss which
forms of control you consider most important in the LEGO group.
In the LEGO group action, result and personnel control systems are used. Due to the particular
products and main customers of the company, the LEGO group focuses mainly on the culture of
the people employed at different organisational levels. Particularly important is the background
of the people employed in the HR department and the reward system that is direct to reward
results in terms of innovativeness more than punish for errors. The LEGO group has a very low
turnover rate of the personnel and it is considered a good and stimulating organisation where to
be employed.
(12 marks)
Question 3: The LEGO group has adopted an ERP system such as SAP and a strategic risk
management system to support the company during the change process and overcome the period
of crisis.
a) With reference to Chenhall’s (2003) contingency-based approach to MCS, identify and
discuss briefly the main reasons for the implementation of the SAP IT system by the
Lego Corporation.
According to the Chenhall (2003) model MCS should be developed taking into consideration
contingency aspect. In particular, the complexity and the massive amount of information to be
managed at the central level made necessary the implementation of an ERP such as SAP. This
choice was also linked to the difficulties in managing the commercial relationship with
Flextronics.
(5 marks)
b) Malmi and Brown (2008) note that, in considering the use of MCS as a package, part of
the problem is that different interest groups introduce different systems at different
times.
With reference to Malmi and Brown’s (2008) framework, briefly discuss why this
might be a problem for an organisation and, with examples from the case study if
possible, show how this problem might have applied at LEGO.
The main problem of MCSs as a package is the potential contrast between the different MCSs
implemented within an organisation. This potential contrast is due to the fact that different
interest groups often introduce different systems at different times, so the controls in their
entirety cannot be defined holistically as a single system. In face of this kind of problem SAP
plays a representational role as it make possible to analyse at the same time different typologies
of data linked to different group of interests. The integrated analysis of more available data
produced by the different parts of an organisation should reduce the possibilities to make
decisions that could create contrast between managers operating at the different level of the
organisation or in its different sections. The Monte Carlo Simulation is a tool that in the LEGO
Group is used also to make simulations in the budgeting process. As used in the LEGO Group,
the Monte Carlo Simulation is an instrument that combines the strategic and the managerial
planning process. In this way two different perspectives and subjects are putted together: the
long term perspective of the board of directors with the short term perspective (managerial
myopia) of the lower level managers.
(15 marks)
c) With reference to the institutional theory, discuss the role Flextronics played in
changing the approach of the LEGO group toward documentation and standardisation
of production.
The Flextronics played a role as an external advisor in making clear the possibility and
advantages stemming from documentation and standardisation of the production. Previously, the
LEGO Group, to a large extent, had carried out its production processes without paying too
much attention to the documentation of it. ‘We had had the pleasure of being in Billund for 40
years with many loyal colleagues,’ said Thomas Nielsen, a LEGO manufacturing vicepresident. ‘The downside to this, however, is that you become rather lazy on the documentation
side as everybody with many years of experience knows exactly what to do.’ As the LEGO
Group went from producing the absolute majority in-house to becoming highly dependent on
external partners, changes were unavoidable. With the Flextronics collaboration, LEGO
management came to realize not only the need, but also the value, of documenting work
processes, communication lines and interfaces between activities and tasks in the production.
(5 marks)