Management Accounting
Tutorial Set 4 – Short term decision making
Question 1
William Limited manufactures a unique high-quality umbrella and supplies two well-known
department stores in Achimota. The cost of producing one umbrella is calculated as GHS 9 and
the selling price charged to the department stores is GHS 15. The company currently has spare
production capacity and has been approached by a local golf club to supply 1,000 umbrellas for
a special promotion event. The golf club has specified that it would like the umbrella to be
manufactured using red waterproof fabric which is the club colour and has offered to pay GHS 12
per umbrella. The following information is available:
(i) William Limited recently employed Creative Product Consultants to alter the design of the
umbrella. The cost of developing the revised design was GHS 5,000. The company had received
the invoice from the consultants but had not yet paid it.
(ii) The umbrella comprises a steel frame, waterproof fabric and a varnished wooden handle. The
steel frame costs GHS 2.50 per umbrella and the handle costs GHS 1 per umbrella. Each umbrella
uses 2 metres of waterproof fabric which costs GHS 1 per metre. The company does not currently
use any red fabric in its production and would have to purchase the fabric from a different supplier.
The supplier will only sell the red fabric in batches of 5,000 metres for a total cost of GHS 5,100.
William Limited does not envisage using the red fabric after the golf club order has been filled.
Any red fabric not used could be sold for GHS 0.90 per metre.
(iii) The golf club has requested that the club logo (crest) is applied to each umbrella. To do this
the company would have to purchase one embossed label for each umbrella at a cost of GHS
0.45 per label. If not used on the umbrellas these labels would be scrapped.
(iv) Each umbrella takes 15 minutes to cut fabric, assemble and pack. The company pays its
workers GHS 12 per hour. Currently, the company wage records show total idle time of 300 hours
per month. It envisaged that the umbrellas for the golf club would be produced during the month
of February 2015.
(v) To produce the umbrellas for the golf club the company will have to use one particular machine
which is being depreciated at GHS 3,000 per month. This machine is currently being leased for
GHS 4,200 per month to a company located in the building beside William Limited.
(vi) The company uses traditional overhead absorption costing to allocate production overheads
to products. A budgeted overhead absorption rate of GHS 2 per labour hour has been calculated
for the year.
Required:
Should William Limited manufacture the umbrellas for the local Golf Club?
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Question 2
Esther Plc produces four types of yoghurt, with the main ingredient being milk. The following is
the budget of Esther Plc for the quarter ending 30/06/2025.
Products A B C D
Demand (units) 5,000 8,000 10,000 2,000
Selling price (GHS) 100 80 40 120
Per unit (GHS):
Milk (GHS 5/kg) 20 15 10 25
Direct labour 20 10 13 15
Variable overhead 10 15 2 25
Fixed overheads total GHS 415,000.00. The purchasing manager has confirmed the availability
of milk is limited to 58,000 kg.
Required:
Identify the optimal production plan.
Question 3
Irene Products Ltd manufactures three ranges of high-quality paper-weights – Basic, Standard
and Deluxe. Its cost accountant has prepared a draft budget for Year 2026:
Products Basic Standard Deluxe Total
GHS’000 GHS’000 GHS’000 GHS’000
Revenue 45 35 40 120
Material 15 10 10 35
Labour 20 15 5 40
Variable overhead 5 12 5 22
Fixed overhead 9 5 6 20
49 42 26 117
Profit/(loss) (4) (7) 14 3
Fixed overheads are allocated to each product line on the basis of direct labour hours. The
directors are concerned about the viability of the company and are currently considering the
cessation of both Basic and Standard ranges, since both are apparently making losses.
Required:
(a) If the directors close down only the manufacture of Basic paperweights, what is the effect on
total profit?
(b) If the directors close down only the manufacture of Standard paperweights, what is the effect
on total profit?
(c) What is the best decision with regard to keeping profit as high as possible?
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Question 4
Zeinab Tours Limited sells weekend tours of Accra for GHS 200 per person. Last month 1,000
tours were sold and costs were GHS 180,000 (representing a total cost per tour of GHS 180).
These costs included GHS 60,000 which were fixed costs. A local college wishing to send 200
students on an educational trip has offered Zeinab Tours GHS 140 per tour.
Required:
(a) Explain, with reasons, whether Zeinab Tours should accept the offer.
b) Explain the danger, in the long term, of Zeinab Tours using prices based on variable (marginal)
costing.
Question 5 (To be Submitted as an Assignment)
CH T-Shirts Ltd is a company that specialises in online t-shirt retailing. The company’s unique
selling point is its creative and quirky designs. Anyone in the world can submit a design and if it
is popular enough (i.e., gets enough votes), CH T-Shirts Ltd will produce and market the t-shirt
on its well-known website. The designer of each t-shirt is guaranteed a fixed percentage of each
sale in return for their successful design work.
Each t-shirt sells for GHS 30 each. Designers get GHS 5 from each sale of each t-shirt that they
have designed. So popular is the site, the company’s most successful t-shirt designers are able
to make a living just by creating new designs for CH T-Shirts. The company expects to produce
and sell 100,000 t-shirts this year, although there is a total production capacity of 110,000 in the
current factory setup. Fixed costs are GHS 400,000 per year. The direct costs of production are
GHS 24.50 per t-shirt (this includes GHS 5 paid to the designers, the purchase of ‘unfinished’ t-
shirts from a Chinese supplier, factory floor staff, dies, paints, postage, etc.)
Alice, the Operations Manager is examining a proposal put forward by the company’s CEO to buy
in a new automated screen-printing machine that links with new design software. This would
enable a new design and manufacturing process capable of producing very large runs of custom
designs. The quality would be very much improved. Production capacity could be increased to
200,000 t-shirt per year.
There are very large overheads associated with the purchase of the new machine and IT system,
namely the high cost of financing these purchases. Total fixed costs would double to GHS 800,000
per year. Savings would be made by reducing the number of factory workers directly employed in
the manufacturing process. Some of these savings would then be used to purchase in higher
priced and higher quality unfinished t-shirts. Direct costs of production would decrease to GHS
17.50 per t-shirt. Research from the marketing department indicates that higher quality t-shirts,
higher quality designs and a price reduction to GHS 25 would increase the demand for CH T-
Shirts by 50 per cent to 150,000 t-shirts per year.
Required:
i. Construct a break-even graph to represent the current data, identifying the break-even
level of production and the safety margin.
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ii. Management has decided that the RoCE (return on capital employed) should be at least
15%. In the case of current figures the net profit would need be at least GHS 200,000 to
achieve this. Calculate the output needed if a profit target of GHS 200,000 is included.
iii. Calculate the following:
a. The break-even level of output associated with the new manufacturing system
b. The margin of safety associated with the new manufacturing system
c. The profit associated with the current system of production
d. The profit associated with the new manufacturing system
iv. Based on monetary and non-monetary factors, advise the firm, as to whether it should
remain as it is or to adopt the new design and manufacturing system. You should include
an evaluation of the advantages and limitations of break-even analysis in your answer.
