YSGOL BUSNES BANGOR

BANGOR BUSINESS SCHOOL

Arholiadau Diwedd Semester y Gwanwyn 2020/21
End of Spring Semester Examinations 2020/21

ASB4007

FINANCE FOR MANAGERS

Amser a ganiateir: AWR 2

Exam Time: 2 hours

Cyfarwyddiadau Cyffredinol / General Instructions:

GWELER YR AIL DUDALEN

PLEASE REFER TO THE NEXT PAGE

 Cyfarwyddiadau Penodol I’r Modiwl / Module-Specific Instructions:

Answer any two questions, all questions carry the same marks

CYFARWYDDIADAU I BOB MODIWL YBB

INSTRUCTIONS FOR ALL BBS MODULES

Atebion i'w cyflwyno trwy Turnitin o fewn 24 AWR

Caiff cyflwyniadau hwyr farc o sero
Defnyddir Turnitin i asesu llên-ladrad a chyd-weithio
Peidiwch â rhannu na chopïo eich atebion
Caiff rheoliadau Ymarfer Annheg eu gweithredu fel arfer
Rhaid defnyddio dyfyniadau a llyfryddiaeth pan yn briodol
Dylid cyflwyno eich atebion mewn dogfen Word yn unig. O fewn y ddogfen,
fe ganiateir cynnwys sgan o waith ysgrifenedig ar gyfer atebion meintiol yn
unig.

To be submitted through Turnitin within 24 HOURS

Late submissions will be awarded a mark of zero
Turnitin will be used to assess for plagiarism and collusion
Do not copy and paste answers or share answers
University procedures for Unfair Practice will be implemented as normal
In-text citations and referencing must be used where appropriate
Your answers must be submitted in a Word document only. Within the
document, you are permitted to include scans of handwritten work for the
quantitative answers only.
1. Answer both parts

Part A
Tree plc manufactures wooden boomerangs and sells to one retailer. The following
information has been compiled for the preparation of the budget for the next
financial year.

Expected sales are 100,000 boomerangs at a selling price of £9. All sales are on
credit.
Each boomerang requires 0.75 metres of birch. Assume no other raw materials are
needed.
The birch is expected to cost £4 per metre.
The manufacture of the boomerang requires 0.5 hours of machine time at a cost of
£4 per hour.
The production process has the following overhead costs
Production salaries £80,000
Other factory operating expenses £65,000

Tree plc maintains an inventory of finished goods, which, at the start of the year, was
3,000 boomerangs. This is expected to decrease to 2,500 at the end of the year.
An inventory of birch is also kept which, at the start of the year, was 560 metres.
This is expected to increase to 700 metres at the end of the year.
Administration and selling overhead expenses are expected to be £60,000.
The balance sheet at the start of the year is expected to include the following:
Trade receivables £20,100
Trade payables £600
Cash at bank £12,000

Trade receivables at the end of the year are expected to be £22,000.

Closing trade payables are expected to be £800.
Required:

Prepare the functional budgets and a cash budget. (20 marks)

Part B
The company you work for has just appointed a new CEO who is considering
abolishing the annual budget. The company currently operates a zero-based
budgeting system using a bottom-up approach.
Required

(i) Describe the following and explain their advantages and disadvantages
a. A zero-based budgeting system,
b. The bottom-up approach to budgeting. (10 marks)

(ii) Describe the advantages, the limitations and the criticisms of an annual
budgeting system. (15 marks)

(iii) Briefly describe alternatives to an annual budgeting system. (5 marks)

2. Fruity Plc plans to produce a new drink based on fruit and yoghurt called Stream. It is
anticipated that variable costs will amount to 35p (£0.35) per drink. The company will
produce Stream in a processing facility with a capacity to produce 400,000 drinks a year.
Fixed costs are anticipated as being £165,000 per year. The company plans to supply to
retailers at a price of 95p (£0.95) per drink.

Required:

a) Calculate the break-even volume and the break-even revenue at the projected price.
(4 marks)
b) Calculate the break-even sales price to retailers if the factory is used at full capacity.
(6 marks)
c) The company is thinking of setting the price at £1.00 per drink and launching an
advertising campaign at a cost of £35,000 how many drinks will need to be sold to
achieve a profit of £27,500. (5 marks)

d) Describe the following pricing strategies and explain the market conditions when they
are more likely to be successful. In addition, explain how they would impact on the price
of the drinks:
a. Market skimming
b. Market penetration
c. Target pricing (18 marks)

A major health food chain has approached Fruity plc to ask if the company would be willing
to provide 100,000 drinks in the forthcoming year at a price of 60p per drink. The company
will only accept 100,000 drinks. Assume that the company has finalised production and sales
plans for the year at a price of £0.95 and a volume of 360,000 drinks.

Required:

e) Assess whether Fruity Plc should accept this special order and calculate the company’s
profit if the order is accepted. (8 marks)
f) Discuss other factors companies should consider when deciding whether to make or
buy-in. (9 marks)
3. Answer all parts

Part A

The Allied Company makes wheelchairs. Allied Company’s costs to produce the
locking mechanism for the 3,000 wheelchairs they produce, annually, are:

Direct materials £10,000

Direct labor £8,000
Variable overhead £6,000
Fixed overhead £10,000

An outside supplier has offered to sell Allied Company the reclining mechanism for
£9.00 per chair. If the mechanisms are purchased from the outside supplier, £2,000
of annual fixed overhead could be avoided. The space the manufacture takes up will
then be leased to an outside business at a rent of £3,000 per annum.
Required
a. Considering cost criteria, only, advise whether the company should continue
to manufacture or whether it should purchase the mechanisms. (10 marks)
b. Briefly describe other factors companies should consider before making the
decision to buy-in rather than manufacture. (5 marks)

Part B
Explain, giving examples, the following terms
i. Relevant costs
ii. Sunk costs
iii. Opportunity costs
iv. Incremental costs (15 marks)
Part C
A company manufactures two products, the A and B. Both products utilise the same
material and require skilled labour. Materials and skilled labour are the only variable
costs. Product details are as follows:
A B

£ £
Selling price 36 48
Material costs 12 18
Skilled labour costs 15 20

Materials cost £6 per kg. Skilled labour costs £10 per hour. For the month of July
2021 maximum demand is for 2,000 units of A and 1,500 units of B. In July 2021
there is a restriction on the availability of both material and skilled labour. There are
9,000 kgs. of Material available and 5,000 hours of skilled labour. Fixed costs have
been identified as £10,000 per month.
Required:
Calculate the optimal production plan for July 2021, and the profit made using that
production plan. 20 marks)
4. A company is choosing between two alternative investment projects relating to the
manufacture of a new product. Project A involves an initial outlay on machinery of £12
million and project B involves an initial outlay on machinery of £14 million. The
machinery used in Project A is not anticipated to have any scrap value at the end of the
project’s life. The machinery used in Project B is anticipated to have a disposal value of
£1 million at the end of the project’s life. The company uses a cost of capital of 10% in
project evaluation.

The other net cash inflows associated with each project are:
Year Project A Project B
£m £m
1 2 6
2 4 5
3 4 2
4 5 2
5 2
Required:
a) Calculate the accounting rate of return on each project. (6 marks)

b) Calculate the payback period for each project. (4 marks)

c) Calculate the net present value for each project (10 marks)

d) Calculate the internal rate of return for each project. (10 marks)

e) Explain with reasons which, if either, project should be undertaken by the

company. Your answer should include a discussion of the advantages and
disadvantages of each of the investment appraisal methods used in parts (a) to
(d) above. (20 marks)

Note: Present value tables for £1 show:

Discount rates
Period 9% 10% 11%
1 0.917 0.909 0.901
2 0.842 0.826 0.812
3 0.772 0.751 0.731
4 0.708 0.683 0.659
5 0.650 0.621 0.593
5. Answer all parts

Part A

Twixt plc manufactures a single product. Budgeted production and sales are 15,000
units for October 2021. It is expected that 13,000 kg of raw material will be
required at a cost of £5.00 per kg. Production workers are expected to be paid
£12.00 an hour and 3,500 production labour hours are expected to be required.
Fixed overheads are expected to be £30,000.
The sales price is expected to be £20 per unit.
The actual results were:
Sales number of units 15,500
Sales revenue £294,500
Materials £63,000
Labour £44,000
Fixed production overheads £29,000.

Required:
Prepare a fixed, flexed and actual budget for October 2021, identify all the variances
and briefly comment on the variances. (16 marks)
Part B

Trite plc manufactures wine bottle corks. The variance analysis shown below has
been produced for the production department for the last accounting period.
Material price variance 1,600 F
material usage variance 2,000 A
labour rate variance 2,300 A
labour efficiency variance 2,500 A
variable overhead variance 1,300 F
fixed overhead expenditure variance 1,200 A
F = favourable variance, A = adverse variance
In response to the variance analysis the production manager has made the following
comments
i. We had problems with strikes and then a high staff turnover, so I increased wage
rates during the period. I believe that this has improved staff morale and
produced a positive benefit to the company.
ii. We have been directed to a cheaper supplier which should increase profit.
iii. We have previously rented an extra machine when needed but because output
has been high this year we decided to buy a new machine at the start of the year.
We have not needed to rent the extra machine this year.
Required
Comment on the performance of the production department based upon the
variance analysis and the comments from the production manager provided.
(14 marks)

Part C

A division with total assets of £250,000 currently earns a ROI of 14%. It can make an
additional investment of £30,000 for a 5 year life with nil residual value. The average
operating income per annum from this investment would be £3,600. The division’s
cost of capital is 10%.

Required

a. Compute and comment on the Return on Investment and the Residual Income, with
and without the additional investment, and then advise the company whether it
should make the additional investment. (8 marks)

b. Critique the relative advantages of ROI and RI for measuring divisional performance.
(12 marks)