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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...(Solved)
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.
- 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...(Solved)
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.
- 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...(Solved)
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.
- 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...(Solved)
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.
- “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...(Solved)
“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.
- 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...(Solved)
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.