In relation to the investment information, evaluate the options using: Maximin; Maximax; Minimax regret criteria.

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Danson plc produce robotic automatic vacuum cleaners. As soon as they are set up, they clean automatically. Current sales match maximum production and are globally estimated for next year at a level of 250 000 units. The machines retail price is for $199 each and the variable cost of production is $75 per unit. They are looking at investing funds into expanding the business and have three investment options:

Danson plc investment options:
Increased production and probability – Hi – highest estimated level; Low – lowest estimated level
New machinery
$ 5 000 000
Hi – 10% increase in production 80% chance of happening
Low – 2% increase in production 20% chance of happening
New Factory
$16 500 000
Hi – 20% increase in production 60% chance of happening
Low – 5% increase in production 40% chance of happening
Training academy
$2 000 000
Hi – 6% increase in production 25% chance of happening
Low – 3% increase in production 75% chance of happening

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Global sales next year for vacuum cleaners are expected to hit 200 million units.
Danson have a strategic plan to achieve 1% of global sales within 10 years.
Demand is difficult to predict for their products. A marketing campaign costing $1million last year led to an increase of 5% in sales.


1. Work out the possible ‘return’ outcomes, and confirm the best investment option (You should include decision trees and expected values). [10 marks]
2. In relation to the investment information, evaluate the options using: Maximin; Maximax; Minimax regret criteria.
[8 marks]
3. Evaluate any other issues and impact on the firm when dealing with uncertainty. Develop at least three approaches the firm can take to measure ‘uncertainty’. [7 marks]


The Fitwell Group is a group of three sports centres– The East Fitwell centre; The North Fitwell centre and The South Fitwell centre – all based in North West England. They have an accounting department that provides its three centres with accounting/computer support. The accounting department is based in Preston. The accounting support requirements vary with the number of purchases, receipts, cash and staff from each sports centre. To re-charge these costs it has been accepted, for simplification purposes, that a per customer hour charge would be applied – based on the assumption that every 30 customers equate to one chargeable hour. In order to provide a fast service, the accounting department asks the shops to estimate their requirements at the beginning of the financial year (runs from 1 April). The actual demand for accounting support does not always conform to the estimates prepared in advance.
The following table shows the estimated and actual demand of accounting support for the first six months of the year.
Fitwell Group Estimated and Actual Demands and Budgeted Accounting Requirements (Chargeable Hours)

East Fitwell
North Fitwell
South Fitwell
No of Customers

Expected Demand
270 000
360 000
330 000
960 000
Actual Demand
251 000
375 000
323 000
949 000

Average sales price $ per customer

Average variable cost $ per customer

Sport Centre Direct Overheads $
296 000
403 000
445 000

*The budgeted accounting requirements are based on a calculation of 1 hour for every 30 customers and so the charge – in hours, is worked out against expected demand levels.
When the accounting department meets the expected demand levels of output, its costs are estimated at $464 000. The majority of these are fixed costs.
The sports centres are charged at a rate per hour to fully recover the accounting department’s standard costs at expected demand levels.
The accounting department consistently fails to recover its costs from the charges it makes to service departments.

(i) Work out the current contribution and profit levels for the three sport centres, inclusive of the accounting department overhead costs (based on actual demand).
[6 marks]
(ii) Calculate the accounting department’s over/under recovery of costs. What alternative charging systems could be used to ensure optimum use of the accounting department’s capacity?
[10 Marks]
(iii) Critically evaluate some of the issues arising from using the chosen allocation system and in relation to: the different cost causal factors – purchases, receipts, cash and staff; its implications for divisionalisation and to cost centres’ performance measurement.
[9 Marks]

Zulu ltd make exclusive wooden wardrobes, which require a high level of skill to make – in particular, they are all hand crafted and put together. The wardrobes sell for $799 each. They cost $100 in direct material cost and $250 in labour cost to make them. Labour is the limiting factor in producing the wardrobes. The firm works a 50-week year.
They currently have 12 full time skilled crafts-persons to shape the wardrobes, 90% of whom have worked there for more than 10 years. It takes a 4 year apprenticeship to become a fully skilled crafts-person. They are concerned as to the impact that bringing in new staff will have on their production schedules, and ultimately to financial performance. They have a small reserve of skilled craft-persons – who are not quite up to the speed of the full time employees. A reserve crafts-person was brought in recently to cover for illness over a four week period. Their time in making a number of wardrobes is shown below:
Wardrobe Number Total time taken (cumulative)
1 20 hours
2 36 hours
4 64.8 hours
8 116.64 hours
The established craft-person would normally expect to craft 3 wardrobes in a 37.5 hour week, which is an average working week.
A former accountant who was going to work out some efficiency information for them left the following on a note: log 0.9 = -0.046; log 2 = 0.301
1. Following the experience of the new employee, work out using the learning curve: the learning efficiency level, and also calculate how long it took the reserve craft-person to shape the 3rd wardrobe.
[10 marks]
2. Calculate a worked financial example on the impact of the firm’s efficiency levels if the firm had to replace three established staff due to illness/absence with reserve craft-persons for a week. Comment on this information.
[8 marks]
3. Discuss and evaluate the limitations of learning curves in helping maintain firms efficiency levels.
[7 marks]
Oatflake ltd. produce the ingredients that are mixed into muesli (granola), which are three main components: oats; nuts; dried fruit. They produce their own ready mixed Oatflake Granola and also supply the ingredients separately to retail firms that may want to mix their own granola. The standard cost card for a batch of 20 packets of Oatflake Granola is as follows:
14 kg oats at $ 0.5 per kg
4 kg of nuts at $ 2.00 per kg
2 kg of dried fruit at $ 1.00 per kg
No inventories of raw material are kept. Purchases are made as needed. The actual raw material inputs used to produce 100 batches (2000 packets of Oatflake granola) in April was:
1 450 kg oats $ 717.75
390 kg of nuts $ 791.70
220 kg of dried fruit $ 224.40
_______ _________
2 060 kg $ 1 733.85
======== =========
The following sales prices are based on per kg values as follows:
Budget Actual Total
1 kg oats $ 5 (1 450 kg) $ 7 351.50
1 kg nuts $ 8 ( 390 kg) $ 3 112.20
1 kg dried fruit $ 10 ( 220 kg) $ 2 255.00
Total (2 060 kg) $12 718.70

1. Calculate the material yield and mix variances for each raw material used and in total for April.
[8 marks]
2. Calculate the Sales Margin Price Variance and Sales Margin Volume Variance.
[9 marks]
3. Discuss the findings of the variance exercise in the light of the process of variance analysis and any limitations this process may have.
[8 marks]

Question 5.
“Reinvent your transfer pricing processes with a more streamlined, accurate and transparent approach. Not only will it save you money, it will yield documentation to support future reviews, including audits.”
(PWC on Transfer Pricing service –, retrieved 1 March 2015)
Evaluate transfer pricing, by particularly paying attention to what is it, and how it works in the case of large multi-national corporations. Evaluate the criticisms on transfer pricing and the benefits and reasons for adopting this approach. Illustrative real examples could be used to help develop your argument.
[25 marks].


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