Question 1

Achaa Co

Achaa Co sells Mobile Phones and is about to launch a new product onto the market. It needs to prepare
its budget for the coming year and is trying to decide whether to launch the product at a price of Ghc 90
or Ghc 105 per unit.

The following information has been obtained from market research

Price per unit Ghc 90 Price per unit Ghc 105

Probabilities sales volume probabilities sales volume

0.2 120,000 0.4 108,000

0.6 115,000 0.3 105,000

0.1 110,000 0.1 100,000

0.1 140,000 0.2 94,000

Notes:

1. Variable production costs would be Ghc 36per unit for production volume up to and including
300,000 units each year. However, if production exceed 330,000 each year, the variable production cost
per unit would fall to Ghc 33 for all units produced.

2. Advertising costs would be Ghc 2,700,000 per annum at a selling price of Ghc 90 and Ghc
2,910,000 per annum at a price of Ghc 105.

3. Fixed production costs would be Ghc 950,000 per annum

Required:

a. Calculate each of the eight possible profit outcomes which could be arise for Achaa Co in the
coming year.

4 Marks

b. Calculate the expected value of profit for each of the two price options and recommend, on this
basis which option Gam Achaa would choose.

c. Briefly explain the maximin decision rule and identify which price should be chosen by
management if they use this rule to decide which price should be charged.
QUESTION 4

Shika assembles 4 types of Plants at the same factory. The 50cc Sunshine; the 250cc Roadster and the
1000cc Fireball 75cc Koxo. It sells plants all over the world. In response to market pressures has Shika
invested heavily in new manufacturing technology in recent years and, as a result, has significantly
reduced the size of its workforce.

Historically the company has allocated all overhead costs using total machine labour hours, but is now
considering introducing Activity Based Costing (ABC). Shika ’s accountant has produced the following
analysis

Annual Annual direct Selling Raw Mat

output (units) Machine (Hrs) Price (Ghc per unit) Cost ( Ghc Per unit)

Sunshine 6,000 400,000 8,000 800

Roadster 4,800 440,000 12,000 1,200

Fireball 1,200 160,000 16,000 1,800

Koxo 2,400 120,000 10,000 1,400

The three cost drivers that generate overheads are:

Deliveries to retailers- The number of deliveries of motorcycles to retail showrooms

Set-ups - The number of times to assembly line is re-set to accommodate the

production run of a different plant

Purchase orders - The number of purchase

The annual cost driver volumes of relating to each activity and for each type of plant are as follows:

No of deliveries to retailers Number of set-ups Number of purchase orders

Sunshine 300 105 1200

Roadster 240 120 900

Fireball 210 75 300

Koxo 270 90 270

The annual overhead costs relating to these activities are as follows:

Ghc

Deliveries to retailers 6,400,000

Set-up costs 18,000,000

Purchase orders 9,600,000

All direct labour is paid at Ghc 15 per hour. The company holds no inventories.

At a board meeting there were some concerns over the introduction of activity based costing.

The finance director argued: ‘I very much doubt whether selling the fireball is viable but I’m not
convinced that activity based costing would tell us any more than the use of labour hours in assessing
the viability of each product.

The marketing director argued:’ I am in the process of negotiating a major contract with a motorcycle
rental company for the Sunshine model. For such a big order they will not pay our natural prices but we
need to at least cover our incremental costs. I am not convinced that activity based costing would
achieve this as it merely averages costs of our entire production.’

The managing director argued: ‘I believe that activity based costing would be an improvement but it still
has its problems. For instance if we carry out an activity many times surely we get better at it and costs
fall rather than remain constant. Similarly, some costs are fixed and do not vary during labour hours or
any other cost driver.’

The chairman argued: ’I cannot see the problem. The overall profit for the company is the same no
matter which method of allocating overheads we use. It seems to make no difference to me.’

Required

a) Calculate the total profit on each of Shika’s three types of product using each of the following
methods to attribute overheads:

i. The existing method based upon labour hours

5 Marks

ii. Activity based costing