Section B - types of questions
Glam Co
Glam Co is a hairdressing salon that provides both 'cuts' and 'treatments' to clients. All cuts and treatments
at the salon are carried out by one of the salon's three senior stylists. The salon also has two salon
assistants and two junior stylists.
Every customer attending the salon is first seen by a salon assistant, who washes their hair; next, by a
senior stylist, who cuts or treats the hair depending on which service the customer wants; then finally, a
junior stylist who dries their hair. The average length of time spent with each member of staff is as
follows:
Cut
Treatment
Hours
Hours
Assistant
0.1
0.3
Senior stylist
1.0
1.5
Junior stylist
0.6
0.5
The salon is open for eight hours each day for six days per week. It is only closed for two weeks each
year. Staff salaries are $40,000 each year for each senior stylist, $28,000 each year for each junior stylist
and $12,000 each year for each of the assistants. The cost of cleaning products applied when washing the
hair is $1.50 per client. The cost of all additional products applied during a 'treatment' is $7.40 per client.
Other salon costs (excluding labour and raw materials) amount to $106,400 each year.
Glam Co charges $60 for each cut and $110 for each treatment.
The senior stylists' time has been correctly identified as the bottleneck activity.
1. What is the annual capacity of the bottleneck activity?
Cuts
Treatments
2,400
1,600
4,800
4,800
7,200
4,800
9,600
9,600
2. The salon has calculated the cost per hour to be $42.56.
Calculate the throughput accounting ratio (TPAR) for both services (to two decimal places).
Cuts
Treatments
3.
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❑
❑
❑
❑
❑
4.
Which THREE of the following activities could the salon use to improve the TPAR?
Increase the time spent by the bottleneck activity on each service
Identify ways to reduce the material costs for the services
Increase the level of inventory to prevent stock-outs
Increase the productivity of the stage prior to the bottleneck
Improve the control of the salon's total operating expenses
Apply an increase to the selling price of the services
What would be the effect on the bottleneck if the salon employed another senior stylist?
❑ The senior stylists' time will be a bottleneck for cuts only
❑ The senior stylists' time will be a bottleneck for treatments only
❑ The senior stylists' time will remain the bottleneck for both cuts and treatments
❑ There will no longer be a bottleneck
5. Which of the following statements regarding the theory of constraints are correct?
1. It focuses on identifying stages of congestion in a process when production arrives more quickly
than the next stage can handle
2. It is based on the concept that organisations manage three key factors – throughput, operating
expenses, and inventory
3. It uses a sequence of focusing steps to overcome a single bottleneck, at which point the
improvement process is complete
4. It can be applied to the management of all limiting factors, both internal and external, which can
affect an organisation
A.
(1) and (3)
B.
(1), (2) and (3)
C.
(2), (3) and (4)
D.
(1), (3) and (4)
Sweet Treats Bakery
Sweet Treats Bakery makes three types of cake: brownies, muffins, and cupcakes. The costs, revenues,
and demand for each of the three cakes are as follows:
Brownies
Muffins
Cupcakes
Batch size (units)
40
30
20
Selling price ($ per unit)
1.50
1.40
2.00
Material cost ($ per unit)
0.25
0.15
0.25
Labour cost ($ per unit)
0.40
0.45
0.50
Overheads ($ per unit)
0.15
Minimum daily demand (units) 30
0.20
0.30
20
10
Maximum daily demand (units) 140
90
100
The minimum daily demand is required for a long-term contract with a local café and must be met.
The cakes are made in batches using three sequential processes: weighing, mixing and baking. The
products must be produced in their batch sizes but are sold as individual units.
Each batch of cakes requires the following amount of time for each process:
Brownies
Muffins
Cupcakes
Weighing (minutes)
15
15
20
Mixing (minutes)
20
16
12
Baking (minutes)
120
110
120
The baking stage of the process is done in three ovens which can each be used for eight hours a day, a
total of 1,440 available minutes. Ovens have a capacity of one batch per bake, regardless of product type.
Sweet Treats Bakery uses throughput accounting and considers all costs, other than material, to be
‘factory costs’ which do not vary with production.
1. On Monday, in addition to the baking ovens, Sweet Treats Bakery has the following process
resources available:
Process
Minutes available
Weighing
240
Mixing
180
Which of the three processes, if any, is a bottleneck activity?
❑ Weighing
❑ Mixing
❑ Baking
❑ There is no bottleneck
2.
On Wednesday, the mixing process is identified as the bottleneck process. On this day, only 120
minutes in the mixing process are available.
Assuming that Sweet Treats Bakery wants to maximise profit, what is the optimal production plan
for Wednesday?
❑ 80 brownies, 30 muffins and 100 cupcakes
❑ 0 brownies, 90 muffins and 100 cupcakes
❑ 120 brownies, 0 muffins and 100 cupcakes
❑ 40 brownies, 60 muffins and 100 cupcakes
3.
Sweet Treats Bakery has done a detailed review of its products, costs and processes and has
identified potential actions to improve its throughput accounting ratio (TPAR).
Which TWO of the following statements will improve the throughput accounting ratio (TPAR)?
❑ The café customer will be given a loyalty discount.
❑ A bulk discount on flour and sugar is available from suppliers.
❑ There is additional demand for cupcakes in the market.
❑ The rent of the premises has been reduced for the next year.
4.
On Friday, due to a local food festival at the weekend, Sweet Treats Bakery is considering
increasing its production of cupcakes. These cupcakes can be sold at the festival at the existing selling
price.
The company has unlimited capacity for weighing and mixing on Friday but its existing three ovens are
already fully utilised. Therefore in order to supply cupcakes to the festival, Sweet Treats Bakery will need
to hire another identical oven at a cost of $45 for the day.
How much will profit increase by if the company hires the new oven and produces as many
cupcakes as possible?
A.
$55.00
B.
$140.00
C.
$95.00
D.
$31.00
5. In the previous week, the weighing process was the bottleneck and the resulting throughput accounting
ratio (TPAR) for the bakery was 1.45.
Which of the following statements about the TPAR for the previous week is/are true?
I.The bakery’s operating costs exceeded the total throughput contribution generated from its three
products.
II.Less idle time in the mixing department would have improved the TPAR.
III.Improved efficiency during the weighing process would have improved the TPAR.
A.
(3) only
B.
(2) only
C.
(1) and (2)
D.
(1) and (3)
Hare Events
Hare Events is a company which specialises in organising sporting events in major cities across Teeland.
It has approached the local council of Edglas, a large city in the north of Teeland, to request permission to
host a running festival which will include both a full marathon and a half marathon race.
Based on the prices it charges for entry to similar events in other locations, Hare Events has decided on an
entry fee of $55 for the full marathon and $30 for the half marathon. It expects that the maximum entries
will be 20,000 for the full marathon and 14,000 for the half marathon.
Hare Events has done a full assessment of the likely costs involved. Each runner will receive a race pack
on completion of the race, which will include a medal, t-shirt, water and chocolate. Water stations will
need to be available at every five-kilometre (km) point along the race route, stocked with sufficient
supplies of water, sports drinks and gels. These costs are considered to be variable as they depend on the
number of race entries.
Hare Events will also incur the following fixed costs. It will need to pay a fixed fee to the Edglas council
for permits, road closures and support from the local police and medical services. A full risk assessment
needs to be undertaken for insurance purposes. A marketing campaign is planned via advertising on
running websites, in fitness magazines and at other events Hare Events is organising in Teeland, and the
company which Hare Events usually employs to do the race photography has been approached.
The details of these costs are shown below:
Full marathon $
Half marathon $
Race packs
15.80
10.80
Water stations
2.40
1.20
$
Council fees
300,000
Risk assessment and insurance
50,000
Marketing
30,000
Photography
5,000
1.If Hare Events decides to host only the full marathon race, what is the margin of safety?
❑
❑
❑
❑
35.0%
47.7%
52.3%
65.0%
2.Assuming that the race entries are sold in a constant sales mix based on the expected race entry
numbers, what is the sales revenue Hare Events needs to achieve in order to break even (to the nearest
$'000)?
❑
❑
❑
❑
$385,000
$575,000
$592,000
$597,000
3.Hare Events wishes to achieve a minimum total profit of $500,000 from the running festival.
What are the number of entries Hare Events will have to sell for each race in order to achieve this level of
profit, assuming a constant sales mix based on the expected race entry numbers applies? Work to the
nearest whole number.
❑
❑
❑
❑
Full marathon: 17,915 entries and half marathon: 12,540 entries
Full marathon: 14,562 entries and half marathon: 18,688 entries
Full marathon: 20,000 entries and half marathon: 8,278 entries
Full marathon: 9,500 entries and half marathon: 6,650 entries
4.Hare Events is also considering including a 10 km race during the running festival. It expects the race
will have an entry fee of $20 per competitor and variable costs of $8 per competitor. Fixed costs
associated with this race will be $48,000.
If the selling price per competitor, the variable cost per competitor and the total fixed costs for this 10 km
race all increase by 10%, which of the following statements will be true?
❑
❑
❑
❑
Break-even volume will increase by 10% and break-even revenue will increase by 10%
Break-even volume will remain unchanged but break-even revenue will increase by 10%
Break-even volume will decrease by 10% but break-even revenue will remain unchanged
Break-even volume and break-even revenue will both remain the same
5.Which of the following statements relating to cost volume profit analysis are true?
(1) Production levels and sales levels are assumed to be the same so there is no inventory movement
(2) The contribution to sales ratio (C/S ratio) can be used to indicate the relative profitability of different
products
(3) CVP analysis assumes that fixed costs will change if output either falls or increases significantly
(4) Sales prices are recognised to vary at different levels of activity especially if higher volume of sales is
needed
❑
❑
❑
❑
1, 2 and 3
2, 3 and 4
1 and 2 only
3 and 4 only
CARDIO CO (DECEMBER 2015, ADAPTED)
Cardio Co manufactures four types of fitness equipment: elliptical trainers (E), treadmills (T),cross
trainers (C) and rowing machines (R). Cardio Co is considering ceasing to produce elliptical trainers at
the end of 20X5.
The budgeted sales prices and volumes for the next year (20X6) are as follows:
T
C
R
Selling price
$1,600
$1,800
$1,400
Units
420
400
380
Total sales revenue
$672,000
$720,000
$532,000
$1,924,000
–––––––––
The standard cost card for each product is shown below:
Labour costs are 60% fixed and 40% variable. General fixed overheads excluding any fixed labour costs
are expected to be $55,000 for the next year.
The following multi-product breakeven chart for Cardio Co has correctly been drawn:
Cardio Co has recently received a request from a customer, Heart Co, to provide a one-off order of fitness
machines (T, C and R), in excess of normal budgeted production for 20X6. The order would need to be
completed within two weeks.
1. Which of the following are valid factors to consider in the decision to cease the production of elliptical
trainers at the end of 20X5?
(1) The elliptical trainers made a loss in 20X5.
(2) The elliptical trainers made a positive contribution in the year just passed.
(3) The elliptical trainer market outlook in the long term looks very poor.
(4) Cardio Co also sells treadmills and many elliptical trainers buyers will also buy treadmills.
(5) The business was founded to produce and sell elliptical trainers.
A (3) and (4) only
B (1), (3), (4) and (5)
C (2), (3) and (4)
D None of the above
2. Which of the following statements about relevant costing are true?
(1) Fixed costs are always general in nature and therefore never relevant.
(2) Notional costs are always relevant, as they make the estimate more realistic.
(3) An opportunity cost represents the cost of the best alternative foregone.
(4) Avoidable costs would be saved if an activity did not happen, and therefore are relevant.
A (2) and (4) only
B (3) and (4) only
C (2), (3), and (4)
D (1), (2) and (4)
3 What is the margin of safety in $ revenue for Cardio Co in 20X6?
A $1,172,060
B $1,577,053
C $1,924,000
D $1,993,632
4.What would happen to the breakeven point if the products were sold in order of the most profitable
products first?
A The breakeven point would be reached earlier.
B The breakeven point would be reached later.
C The breakeven point would be reached at the same time as in the graph above.
D The breakeven point would never be reached.
5. Which statement correctly describes the treatment of general fixed overheads when preparing the Heart
Co quotation?
A The overheads should be excluded because they are a sunk cost.
B The overheads should be excluded because they are not incremental costs.
C The overheads should be included because they relate to production costs.
D The overheads should be included because all expenses should be recovered.
CHOCOLATES ARE FOREVER (CAF)
CAF Ltd produces a single large item of confectionary, Product S, sold for $12 per unit. You have been
provided with the following information about the ‘S’ for the forthcoming year:
Sales: 6,000 units
Variable costs: $7 per unit
CAF’s overheads are budgeted to amount to $20,000. CAF’s Financial Director has asked you to prepare
documents for a presentation to the Board of Directors.
Required:
(a) Calculate, and briefly explain the significance of, CAF’S breakeven point and margin of safety,
expressed as a percentage.
(3 marks)
(b) Based on CAF’s information above, construct and explain the purpose of the two following charts:
(1) A breakeven chart
(2) A profit–volume chart.
(12 marks)
(Total: 15 marks)