MIDLANDS STATE UNIVERSITY
FACULTY OF BUSINESS SCIENCES
DEPARTMENT OF ACCOUNTING SCIENCES
ACC408/438 INCLASS TEST 1 hour
Attempt all questions
1.Nubo ltd is currently operating at 50% practical capacity due to a depressed demand market. Its
annual production of its electrical component is 50 000 units. A company in Zambia wants to
purchase 30 000 units at $6 per unit. Nubo ltd has not previously sold components to Zambia.
The budgeted costs for 50 000 and 80 000 units of output are as follows:
Direct materials
Direct labour
Manufacturing overheads
50 000 units
$75 000
75 000
200 000
350 000
80 000 units
$120 000
120 000
260 000
500 000
Unit cost
$7,00
$6,25
The sales manager thinks that the order should be accepted even if it results in a loss of $0,25 per
unit. He thinks the order could build future markets. The production manager does not want the
order accepted because of the unit loss ($6,00 less $6,25). According to the treasurer’s quick
computation, the order would actually increase contribution margin.
Required
i)Explain why the cost seemed to drop from $7 per unit to $6,25 per unit when budgeted
production increased from 50 000 to 80 000 units. Show supporting computations.
(6
marks)
ii)Explain how each of the following could affect the decision to accept or reject the special
order:
a)the likelihood of repeat sales and OR that all sales would be made at $6 per unit.(3 marks)
b)Sales are made to customers operating in two isolated markets or to customers competing in
the same market.
(3 marks)
2. Bell ltd must decide whether to make or buy a subassembly XYZ. Although Bell’s idle
equipment could be used to produce up to 15 000 units of the subassembly, the company
presently needs only 10 000 units. A cost analyst has prepared the following estimates on making
the subassembly:
Annual additional set up & maintenance costs
Allocated general manufacturing overhead
Depreciation on existing equipment
Total fixed costs
$30 000 per year
20 000
40 000
90 000 per year
Direct material cost per unit
Direct labour cost
Variable overhead
$4,00
6,00
6,00
Tracey Ltd is willing to sell Bell ltd the subassembly for $20 per unit.
Required
a)Should Bell ltd make or buy the subassembly.
(5 marks)
b)At what volume would Bell ltd be undecided to making or buying the subassembly. (3 marks)
3. Pick n Go ltd is considering promoting its sales either through advertising its merchandise or
salespersons. Should it take up the advertising option, there is a 70% chance that it would engage
the electronic media and a 30% chance that it would resort to the print media.
Should it engage the electronic media, there is a 40% chance it would use Facebook; 35%
Twitter and 25% You tube. Going for Facebook , Twitter and You tube would cost $2 000, $3
000, $3 500 respectively.
Should the print media be adopted, there is a 35% chance that periodicals may be engaged at a
cost of $1 200 and a chance that billboards may be erected at a cost of $800.
Should salespersons be engaged, there is a 65% chance that ‘door-to-door’ salesmen be recruited
at a cost of $1 500 and a chance that shop assistants would go for retraining at a cost of $400.
The following gross outcomes would result:
Source
Facebook
Twitter
You tube
Outcome
$150 000
220 000
180 000
Source
Periodicals
Billboards
Door to door
Shop assistants
Outcome
$120 000
100 000
95 000
80 000
Required
a)By means of a decision tree diagram, advise management of the action to take. (10 marks)