Question 1

SHEPs Ltd. produces two mechanical components; Component Car and Component Truck, both
of which are used in the automotive industry. Sales volumes for the first four months of the
forthcoming year have been forecast to be as follows:

January February March April

Component Car 1 000 1 200 1 100 1 300
Component Truck 700 660 720 800

The budgeted selling price for Component Car is $150 per unit, while Component Truck is
budgeted to sell for $190 per unit. 10% of sales are for cash, with the balance being on one month’s
credit. All purchases of materials made by the company are paid for in the month after purchase.
The following opening balances are expected to be included in SHEPs’ Ledger at the start of
January:
Bank $ 12 000 DR
Trade Payables $118 000 CR
Trade Receivables Component Car $124 000 DR
Trade Receivables Component Truck $108 000 DR

The company’s inventory policy requires that sufficient stock of Component Car and Component
Truck be held at the end of every month to cover 40% of the following month’s sales. It is expected
that at the start of January, 400 units of Component Car and 280 units of Component Truck will
be in stock.
The inputs required for the production of one unit of each of the products are budgeted to be as
follows:
Component Car Component Truck
Material A (kg) 2 3
Material B (kg) 4 6

Material A is budgeted to cost $12 per kg. It is expected that 720 kg of Material A will be in stock
at the start of January. Management require that the quantities of Material A in stock at the end of
each of the first three months of the year should be:
January February March
Quantity (in kg) 750 kg 800 kg 950 kg
Material B is expected to cost $14 per kg. It is expected that 1 520 kg of Material B will be in stock
at the beginning of January. Management require that the quantities of Material B in stock at the
end of each of the first three months of the year should be:
 January February March
Quantity (in kg) 1 650 kg 1 840 kg 1 920 kg

Every month fixed production overheads of $92 000 are incurred. These are paid for in the month
in which they are incurred
Required
a) Prepare production budgets (in units) for Component Car and Component Truck for the first
three months of the forthcoming year. [6]
b) Prepare material usage budgets (in kg) for Material 1 and Material 2 for the first three months
of the forthcoming year. [5]
c) Prepare material purchase budgets (in kg and in $) for Material 1 and Material 2 for the first
three months of the forthcoming year. [5]
d) Prepare a cash budget for Drive Ltd. for the first three months of the year which shows receipts
and payments for each month and in total for the period. [9]

Question 2
The Bulawayo Amphi-theatre (BAT) is a medium sized theatre, with a maximum capacity of 500
seats, offering a variety of mainly music events to its patrons. In the past, the events offered were
low budget, featuring local and regional singers and musicians.
This year, the theatre engaged the services of a music director who negotiated and booked two
well-known artists for events in May. The BAT receives some funding to promote its activities
from the Department of Culture and this is sufficient to pay basic operating expenses such as
insurance, light and heat, and staff costs.
When a concert or event is staged additional costs arise and the board of management of the theatre
must ensure that all such costs are covered by ticket sales. While the artists that have been booked
for May are internationally known, they charge higher fees to perform and the board of
management are particularly concerned to ensure that the ticket price charged for the event is
sufficient.
The following details have been provided by the board of management:
Ticket prices
Tickets for events are usually priced at $15 each but the board have stated that a higher price of
$25 would be more suitable for the well-known artists if costs are to be covered. The BAT employs
a ticket booking facility that customers may use online or by telephone. The company providing
the service charges the theatre 10% of the ticket price for each ticket sold.
Additional staff
For every event that is held the theatre employs ten part-time staff members. One staff member is
required for box office ticket collection, four staff members are required to usher customers to
their appointed seats and after the event has finished five workers are required to clean and arrange
the theatre in preparation for the next event.
Each staff member is paid $80 for working at the event.
Well-known artists
1. John Legend agreed to play one concert for a fixed fee of $8,155.
2. Another singer/songwriter, Davido from Nigeria also agreed to play one concert. He negotiated
an arrangement with the music director whereby he would be paid $5,780 plus 20% of the
ticket price for every ticket sold.
Required:
a) For each of the events featuring well known artists:
(i) Calculate the number of tickets that must be sold to breakeven.
(ii) Assuming the maximum number of tickets are sold, if the board of management would
like to earn a profit $5,000 on the event what ticket price should be charged? [10]
b) Assuming a ticket price of $25, at what level of ticket sales will the profit earned from The
John Legend equal the profit earned from Davido? [5]
c) Outline the main assumptions on which the Cost-Volume-Profit model is based. [5]

Question three
Sisters Judith and Betty have recently won a design award for their ‘Hiker’ walking boots and
have established a company, JB Ltd, to commence production of the footwear. The ‘Pro-Hiker’
boots have an innovative design and are made of a resilient, cushioning material, which reduces
the possibility of injury. Judith has just read a newspaper article about the importance of cash
budgets in highlighting the finances required for business operations. Consequently, she has asked
for your assistance in preparing a cash budget for the first four months of operations, from May to
August 2017. The following information has been obtained from a planning meeting with the
sisters:
1. ‘Pro-Hiker’ boots are produced for men and women. Details of selling prices and projected
sales for the four month period are shown below.
Type of boots Selling price Pairs of boots
May June July August
Men’s $80 2 000 2 400 3 000 3 200
Women’s $70 1 400 1 800 2 400 3 000
2. It is expected that all sales will be on credit to department stores and shops specialising in
outdoor wear. The brothers estimate that 30% of customers will pay within one month while
the remaining customers will take two months to pay.
3. Production of the ‘Pro-Hiker’ boots is based on sales demand. The company requires a closing
inventory of 200 pairs of women’s boots and 400 pairs of men’s boots at the end of each month.
As the company is just commencing operations there are no opening inventories of boots.
4. The boots comprise cushioning fabric and specially treated rubber for the sole. The materials
and labour required to make each pair of boots are shown in the following table.
Type of boots Cushioning fabric( Rubber ($8 per Labour (14 per
$28 per metre) metre) hour)
Men’s 0.4m 0.15m 0.25 hours
Women’s 0.3m 0.10m 0.20 hours

5. Both of the materials are supplied by one company based in China. This supplier requires that
50% of the purchase total is paid for in cash with the order, and allows one month’s credit for
the remaining amount. Labour costs are paid in the month incurred.
6. Each pair of boots produced will be packed in a biodegradable cardboard box using
environmentally friendly packaging costing, in total, $1.85 per box. The company will buy the
packaging materials from a South African company based in Cape Town and it has agreed one
month’s credit for these purchases.
7. The company has signed a rental agreement for the production facility. The total factory rent
for the year will be $360 000, which will be paid in equal monthly instalments. A security
deposit amounting to $25 000 must also be paid in May. Other operational costs including
power, insurance, and administration expenses, which must be paid monthly, are expected to
be $93 600 for the year.
8. To promote the walking boots a marketing campaign for television, radio, newspaper and
social media has been organised. The total cost of the marketing campaign has been agreed at
$33 600 for the four-month period payable in equal instalments from May 2017. A commission
of 5% of projected sales is also payable one month in arrears.
9. Judith and Betty will introduce capital of $50,000 at the commencement of the company’s
operations
Required:
a) Prepare a cash budget for JB Ltd on a monthly basis, for the four-month period commencing
1 May 2017. [22]
b) Explain the meaning of the following terms:
Master budget.
Flexible budget. [3]

Question 4
S Ltd. manufactures street lamps for the City Council. The following is the budgeted Income
Statement for the business for December 2015:

$000 $000
Sales Revenue 21 200
Direct material 10 000
Direct labour 3 920
Production overhead 1 720
Selling overhead 2 120 17,760
Profit 3 440

The following information is also supplied:

1. The monthly budgeted production and sales is 5,000 units.
2. Fixed and variable costs can be broken down as follows:

Variable Fixed
% %
Direct materials 100 -
Labour 30 70
Production overhead 40 60
Selling overhead 100 -

Required:
a) Calculate the following:
(i) Total contribution for the year;
(ii) Contribution per unit;
(iii) Contribution / sales ratio;
(iv) Breakeven sales volume;
(v) Margin of safety %;
(vi) Sales volume required to achieve a profit of €/£2,960,000. [12]
b) Prepare a clearly labelled breakeven chart, showing the breakeven point, margin of safety and
expected profit. [4]
c) CVP analysis is based on a number of underlying assumptions and limitations that affect its
validity. List four limitations of CVP analysis [4]