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Kamau and Njoroge are two cousins specializing in hawking business along River
road. Kamau specializes in second hand shirts while Njoroge specializes in cheap
electronic goods. However, sales have been decreasing partly due to the harsh
economic condition in Kenya and partly due to restrictions by the City Council.
Each of the cousins is considering expanding to include in their lines of business,
items on which their rivals now have a monopoly. Each knows that the other is
considering this expansion and this influences each of their decisions.
Kamau figures out that if he does not expand his business and his cousin does, it will
hurt his trade by Sh.500 of profit per day. If neither of them expands inventory to
include the extra product, Kamau thinks it will boost his net profit by Sh.500 per day
due to his superior location. If he expands and his cousin does also, he believes the
combination of location and expanded inventory will increase his profits by Sh.1,000
per day. However, if he alone expands and his cousin does not, this will result in no
net increase in business.
Required:
i Prepare a game matrix and show that a pure strategy does not exist.
ii Solve the above game to determine the average winnings (or losses) each of the cousins would expect.
Date posted:
May 4, 2021
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Briefly explain four ways in which competitive situations (or games) can be classified.
Date posted:
May 4, 2021
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Boots Ltd. manufactures a range of five similar products, A, B, C, D and E. the table below shows the quantity of each of the required inputs necessary to produce one unit of each product, together with the weekly inputs available and selling prices of each product.
Required:
a) Formulate this problem as a Linear Programming problem.
b) The problem has been solved using a computer package and the following final table of a simplex solution has been produced:
Where A, B, C, D and E are the weekly production levels for the five products; X is the
amount of raw material that falls short of the maximum available; S, T an U are the
respective number of hours short of maximum weekly input of forming, firing and packing
time.
i Use this table to find the optimum weekly production plan.
ii Describe the implications of using this plan in terms of unused resources and overall
contribution to profit.
iii In the context of this problem explain the meaning of “The dual or shadow price of a resource”
iv There is a proposition that the company manufactures an additional product which would sell at Sh.50 per unit. Each unit will need 6 kg of raw material, one hour of forming time, five hours of firing time and one hour of packing time. Is it a worthwhile proposition?
Date posted:
May 4, 2021
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Kiko Ltd. is a large cash and carry warehouses which sells electronics. Kiko Ltd. Purchases
the most popular model of calculators (FX 100) directly form the manufacturer at a cost of
Sh.250 each. Average sales per a 300 day year are 475 calculators. Whenever an order with
the manufacturers is placed, Kiko Ltd, Incurs a cost of Sh.50. The stock holding costs are
estimated at Sh.12.50 plus 10% opportunity cost of capital. The lead-time is three days.
During the last 50 stock cycles, the demand during the lead-time has generated the following
frequency distribution:
Lead time demand 0 1 2 3 4 5 6 7 8
Number of stock cycles 1 2 6 8 10 8 8 5 2
Each time the warehouses runs out of stock, an emergency order is placed with an extra cost
of Sh.20 per calculator.
Required:
a) The economic order quantity (EOQ) and the reorder level.
b) The total annual relevant costs for the order quantity in (a) above.
Date posted:
May 4, 2021
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Mount Sinai Health Centre specializes in the provision of sports/exercise and
medical/dietary advice to clients. The service is provided on a residential basis and
clients reside for whatever number of days that suit their needs.
Budgeted estimates for the year ending 300 June 2002 are as follows:
1. The maximum capacity of the center is 50 clients per day for 350 days in the year.
2. Clients will be invoiced at a fee per day. The budgeted occupancy level will vary with
the client fee level per day and is estimated at different percentages of maximum
capacity as follows:
3. Variable costs are also estimated at one of the three levels per client day. The high
most likely and low levels per client per day are Sh.1,900, Sh.1,700 ad Sh.1,400
respectively.
4. The range of cost levels reflects only the possible effect of the purchase prices of
goods and services.
Required:
i. A summary which shows the budgeted contribution to be earned by Mount Sinai Health
Centre for the year ended 30 June 2002 for each of the nine possible outcomes.
ii. State the client fee strategy for the year to end 30 June 20002 which will result from the use
of each of the following decision rules.
(a) Maximax;
(b) Maximin;
(c) Minimax regret.
Date posted:
May 4, 2021
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Skyline Ltd. operates daily round-trip flights on the Nairobi-Mogadishu route using a fleet of
three light aircraft. These three aircraft are Skyline 1, “Skyline 2 and Skyline 3. The
standard quantity of fuel used on each round-trip over this twelve-month period has a mean
of 100 KL and a standard deviation of 10 KL. (1 KL = 1,000 litres)
James Thuo, the operations manager of Skyline Ltd., uses a statistical quality control (SQC)
approach in deciding whether to investigate the variances from the standards fuel usage per
round-trip flight. He investigates all those flights with fuel usage greater than two standard
deviations from the mean. In addition, James Thuo monitors trends in the SQS charts to
determine if additional investigations decisions should be made.
James Thuo received the following reports for round-trip fuel usage for the month of May
2001 from the pilots of the three planes operating on the Nairobi-Mogadishu route:
Required:
a) Using the +-2 rule, indicate the variance investigation decisions which should be made.
b) Present the SQC charts for round-trip fuel usage by each of the three aircraft I May 2001.
c) What inferences can be made from the three SQC charts developed in (b) above?
Date posted:
May 4, 2021
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Kelele Company Ltd. manufacturers crockery. The company is considering the use of simple
and multiple linear regression analysis to forecast annual sales for they are 2001 because
previous forecasts have been inaccurate. The sales forecast will be used to initiate the
budgeting process and to identify more accurately the underlying process that generates
sales.
The financial controller of the company has considered many possible independent variables
and equations to predict sales and has narrowed his choices to four equations. He used
annual observations from twenty prior years to estimate each of the four equations.
The following is a statistical summary of the four equations and definitions of the variables
used in the exercise.
Required:
a) Using the relationship T = a + bx, write Equations II and IV
b) If the actual sales for the year 2000 were sh.7,500,00, what would be the forecast sales for the year 2001?
c) Explain the meaning and significance of the coefficient of determination.
d) Explain why the Financial Controller might prefer Equation III to Equation II.
e) Explain the advantages and disadvantages of using Equation IV to forecast annual sales.
Date posted:
May 4, 2021
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K.K Limited manufactures security systems for homes. To enable the company offer a
better quality product at a lower cost than its competitors, the company has decided to
expand its present facility to accommodate a new line. A project team has been formed
within the company to direct and coordinate the plant expansion.
This team met weekly to monitor the status of the project.
Prior to the start of the plant expansion, the management developed the following list of
required activities:
Required:
a) Determine the critical path and list the critical activities.
b) Determine the minimum time and minimum cost network.
c) K. K Ltd knows that other companies are working on a competing product. The
company estimates that the delay of every week beyond the 40th week in bringing out
the new line will cost the firm sh. 1,000,000 in lost profit..
What will be the cost to the firm if the project is completed in 50 weeks?
d) Is it advisable to crash the profits from 51 to 45 weeks? Why?
Date posted:
May 3, 2021
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Kanorer Enterprises Ltd has two divisions Mugaa and Gwashati. Mugaa division manufactures an intermediate product for which there is no external market. Gwashati division incorporates the intermediate product into a final product, which it sells. One unit of the intermediate product is used in the production of the final product. The expected units of the final product which Gwashati division estimates it can sell at various selling
prices are as follows:
Required:
a) Profit statements for each division and the company as a whole for the various selling
prices.
b) Which selling prices maximize the profits of Gwashati division and the company as a
whole? Comment on why the selling price (which is selected by the company) is not
selected by Gwashati division.
c) It has been argued that full cost is an inappropriate basis for selling transfer prices.
Outline the objections which can be raised against this basis.
Date posted:
May 3, 2021
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ABC Lt. Is a manufacturing company that makes only three products P, Q, and R. Data for the period ended last month are as follows:
Required:
Using activity based costing (ABC) show the cost and gross profit per unit for each product during the period.
Date posted:
May 3, 2021
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Explain the advantages of using Value Added Statements (VAS) for interdivision for comparisons in decentralized firm.
Date posted:
May 3, 2021
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Some businesses which supply two or more separate markets from a single source may decide to charge a higher price for sales to home markets than for export sales. The businesses may justify their pricing policy by stating that they need to earn foreign exchange from foreign markets and recover their research and development costs, plus production overheads against home demand.
Required:
i Critically explain briefly the rationale for such a differential pricing policy.
ii Should earning of foreign exchange be a factor in a firm's pricing policy.
Date posted:
May 3, 2021
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Alvis Kiptoo has budgeted that output and sales of his single product will be 100,000
units in the coming year. At this level of activity, his unit variable costs are budgeted at
Sh.50 and his unit fixed costs at Sh.25. His sales manager estimates that the demand for
the product would increases by 1000 units for every decreased of Sh.1 in unit selling
price (and vice versa) and that at a unit selling price of Sh.200 demand would be nil.
Information about two price increases has just been received from suppliers: one is for
materials (which are included in Alvis Kiptoo‟s variable costs) and one is for
fuel (which included in his fixed costs). Their effect will be to increase both the variable
and fixed costs by 20% each over the budgeted figures.
Alvis Kiptoo aims at maximizing profits from his business.
Required:
a. Calculate before the cost increases the budgeted contribution and profit at the budgeted levels of 100,000 units.
b. Calculate the level of sales at which profits would be maximized and the amounts of these maximum profits before the cost increases.
c. Show whether and by how much Alvis Kiptoo should adjust his selling price in respect to increases in:
- Fuel costs.
- Material costs.
Date posted:
May 3, 2021
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The Executive Furnitures Ltd. (EFL) produces a unique type of computer desks. Four of
EFL‟s main outlets are S1, S2,S3, and S4.These outlets already have requirements
in excess of the combined capacity of its three production plants P1,P2, and P3. The
company needs to know how to allocate its production capacity to maximize profits.
Distribution costs (in Sh.) per unit from each production plant to each outlet are given in
the following table:
Since the four outlets are in different parts of the country and as there are differing
transportation costs between the production plants and the outlets along with slightly
different production costs at different production plants there is a pricing structure which
enables different prices to be charged at the four outlets. Currently, the price per unit
charged is Sh.2,300 at S1, Sh.2,350 at S2, Sh.2,250 at S3, and Sh.2,400 at S4. The variable unit
production costs are Sh.1,500 at plants P1 and P 3 and Sh.1,550 at plant P2. The demand at
S1,S2, S3 and S4 are 850, 640, 380 and 230 desks respectively while the plant capacity at plant
P1, P2 and P3are 625, 825 and 450 desks respectively.
Required:
Using the transportation algorithm, determine the contribution to profit for the optimal
allocation.
Date posted:
May 3, 2021
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Highlight how the transportation algorithm can be modified for profit maximization rather than minimization of costs.
Date posted:
May 3, 2021
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Sola Ltd. is a manufacturing company that requires component XLA20 in one of its production lines. The components are bought from outside suppliers. Form past experience, the company has determined that the demand for the component can be approximated by a normal distribution with a mean of 500 and a standard deviation of 10, over the range 470 to
530.
The unit is an initial stock of 2000 components and the company has decided to order in batches of 2500 whenever the stock level falls below 1500 components. Again, past experience indicates that the time between the order being placed and delivery varies as follows:
The unit cost of holding stock is Sh.5 per week applied to the total stock held at the end of
each week. The cost associated with placing an order is Sh.5.00 and the unit cost of being
out of stock is Sh.200 per week. The company does all its accounting at the end of the week
and all ordering and delivery occur at the beginning of a week.
Required:
Estimate the average cost per week of the above policy, using simulation analysis and the
following random numbers:
Date posted:
May 3, 2021
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A critic has suggested that budgets should be abolished because they introduce rigidity and hamper creativity. Discuss.
Date posted:
May 3, 2021
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In his study of: “the impact of budgets on people” C Argyris reported the following
comment by a financial controller on the practice of participation in setting budgets in
his company:
“We bring in the supervisors of budget areas, we tell them that we want their frank
opinion, but most of them just sit there and nod their heads. We know they are not
coming out with exactly what they feel. I guess budget scares them”.
Explain why managers may be reluctant to participate fully in setting budgets, indicating
the negative side effects, which may arise from the imposition of budgets by senior management.
Date posted:
May 3, 2021
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Watt Lovell Ltd. (WLL) is trying to decide whether or not to drill for oil on a particular site
in North Eastern Kenya. The Chief Engineer has assessed the probabilities that there will be
oil as follow, based on past experience.
Oil 0.2
No oil 0.8
It is possible for WLL to hire a firm of international consultants to carry out a complete
survey of the site. WLL has used the firm many times before and has made the following
estimates:
1. If there really is oil, then there is a 95% chance that the report will be favourable.
2. If there is no oil then there is only a 10% chance that the report will indicate that there is oil.
The following additional information is also provided:
The cost of drilling is Sh.10 million.
The value of the benefits if oil is found is Sh.70 million
The cost of obtaining information is Sh.3 million.
Required:
a) Advise the company on whether to acquire additional information from the consultants
b) Compute the value of imperfect information.
Date posted:
May 3, 2021
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Muthothi Ltd. Operates a conventional stock control system based on re-order levels and
Economic Order Quantities (EOQ). The various control levels were set originally based on
estimates which did not allow for any uncertainty and this has caused difficulties because, in
practice, lead times, demands and other factors to vary.
The company works for 360 days per year and it costs Sh.1,000 to place an order. The
holding cost is estimated at Sh.0.025 for storage plus 10% opportunity cost of capital. Each
unit is purchased at Sh.2. The re-order level for this part is currently 150,000 units and it can
be assumed that the demands would apply for the whole of the appropriate lead-time.
Required:
a) Calculate the level of buffer stock implicit in a re-order level of 150,000 units.
b) Calculate the probability of stock-outs.
c) Calculate the expected annual stock-outs in units.
d) Compute the stock-out costs per unit at which it would be worthwhile raising the reorder
level to 175,000 units.
e) Discuss the possible alternatives to a re-order level EOQ inventory system and their
advantages and disadvantages.
Date posted:
May 3, 2021
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A manufacturer produces and sells two products, A and B. The unit variable cost is sh.12
and sh.8 for A and B respectively. A review of selling prices is in progress and it has
been estimated that, for each product and increase in the selling price would result in a
fall in demand of Sh.500 units per every Sh.1 increase in price and similarly a decrease of
Sh.1 in price would result in an increase in demand of 500 units.
Required:
Calculate the profit-maximizing price for reach product.
Date posted:
May 3, 2021
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The Z division of XYZ Ltd., produces a component which it sells externally, and can also
be transferred to other divisions within the organization. The division has set a
performance target for the coming financial year of residual income of Shs. 5,000,000.
The following budgeted information relating to Z division has been prepared for the
coming financial year.
1. Maximum production/sales capacity 800,000 units.
2. Sales to external customers: 500,000 units at Sh.37.
3. Variable cost per component Sh.25.
4. Fixed costs directly attributable to the division Sh.1,400,000.
5. Capital employed: Sh.20,000,000 with cost of capital of 13%
The X division of XYZ Ltd has asked Z division to quote a transfer price for units of the
component.
Required:
i Calculate the transfer price per component which Z division should quote to X
division so that its residual income target is achieved.
ii Explain why the transfer price calculated in (i) above may lead to sub -optimal
decision making from the point of view of XYZ Ltd taken as a whole.
Date posted:
May 3, 2021
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“Control theory offers valuable insights into the design and operation of management
accounting information systems, but only under circumstances where an organization‟s
environment is stable and predictable and outcomes are clearly measurable.”
Required:
Comment on the relevance and validity of this statement within the analysis or established
control theory systems within a business organization.
Date posted:
May 3, 2021
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A processing company, Timao Co. Ltd., is extremely busy. It has increased its output and
sales from 12,900 kg in 1st quarter of the year to 17,300 kg in the 2nd quarter. Although
demand is still rising, it cannot increase its output more than an additional 5% from its
existing labour force, which is now at its maximum.
Data for its four products in 2nd quarter were:
The Kagocho Company has offered to supply 2000 kg of product Q at a delivered price of
90% of Timao‟s Co. Ltd. Selling price. Timao Co. Ltd., will then be able to
produce extra of product P instead of product Q to the plant‟s total capacity.
Required:
a) State with supporting calculations, whether Timao Co. Ltd should accept the Kagocho
Company‟s offer.
b) Which would be the most profitable combination of subcontracting 2000kg of one
product at a price of 90% of its selling price and producing extra quantities of another
product up to the plant total capacity?
Assume that the market can absorb the extra output.
Date posted:
May 3, 2021