# Assignment Brief As part of the formal assessment for the programme you are required to submit a Decision Making assignment. Please refer to your Student Handbook for full details of the programme assessment scheme and general information on preparing and submitting assignments. Learning Outcomes: After completing the module, you should be able to: 1. Apply relevant cost analysis to complex business decision 2. Identify and apply appropriate decision-making techniques to deal with risk and uncertainty 3. Apply discounted cash flow techniques to the problem of effective investment appraisal

Assignment Brief As part of the formal assessment for the programme you are required to submit a Decision Making assignment. Please refer to your Student Handbook for full details of the programme assessment scheme and general information on preparing and submitting assignments.

Learning Outcomes: After completing the module, you should be able to:

1. Apply relevant cost analysis to complex business decision

2. Identify and apply appropriate decision-making techniques to deal with risk and uncertainty

3. Apply discounted cash flow techniques to the problem of effective investment appraisal

4. Demonstrate fluency in mathematical skills consistent with the role of the accountant

5. Appreciate the critical importance of effective decision making within a commercial environment

Question 1 LG group of companies is made up of two divisions, L and G. L division manufactures a component which it sells to G division and other customers externally. The following information relates to L Division:

Market price per component £200 Variable cost per component £105 Fixed costs £1,375,000 per period Demand from G Division 20,000 component per period Capacity 35,000 component per period

G division sells another product which it assembles to other external customers. To assemble the product it requires two components manufactured by L division. The following information relates to G Division:

Selling price per unit £800 Variable cost per unit: To be calculated Two components from L 2@transfer price Other variable costs £250 Fixed variable costs £900,000 per period Demand 10,000 units per period Capacity 10,000 units per period

Group Transfer Pricing Policy • Transfers must be at opportunity cost • G must buy the components from L

Required: a. What is the profit for each division if the external demand per period for the components that are made by L Division is: i. 15,000 components ii. 19,000 components iii. 35,000 components

b. Assuming G Division ignored the transfer pricing policy of the Group and purchased the 20,000 components for £170 externally, Calculate the financial impact on the Group taking into consideration the three levels of demand (15,000;19,000 and 35,000 components)

c. Briefly explain Two attributes of a good transfer pricing policy

Question 2 A seminar was recently attended by the Managing Director of XYZ Manufacturing Company Limited located at Sheffield. The focus of the seminar was “optimising scarce resources utility in a manufacturing setting with particular reference to linear programming”. On his return to his base, he called for a meeting with the Management to share his experience from the seminar and the impact this will have on the decision by the Board to produce two major products in the years ahead.

A group of external research experts had previously been commissioned and the following represents information from the research carried out by them The expected products are “Best” and “Smart” with expected costs statistics as follows:

Best £ Smart £ Material costs (5kg@£50/kg) 250 (3kg@£50/kg) 150 Labour costs Machinery time (4 hours @£15/Hr) 60 (2hours @£15/Hr) 30 Other Processing Time (4 hours @£10/hr) 40 (5hours@£10/Hr) 50

The applicable pricing policy is based on total cost of production plus 20% mark up on cost. The Company’s overhead is expected to be £10,000,000 with normal production of 200,000 units of Best and 100,000 units of Smart and overhead absorbed on the basis of 3 to 2 respectively. The resources below will be available to the company in the following year.

i. Materials 1,800,000kgs

ii. Machine time 800,000 hours

iii. Other process time 1,400,000

Required:

a. What is linear programming? Briefly explain the usefulness of the model. (5 Marks)

b. Compute the prices that will be adopted by the company for the two products using the company policy. (5 Marks)

c. Advise the company on the output that needs to be produced to maximise its total profit, supporting your answer with full financial analysis. (10 Marks)

d. i. Explain the meaning of “shadow prices” and comment on the usefulness of it and its limitation. (5 Marks) ii. Calculate the shadow prices of the constraints. (7 Marks)

e Assuming the company’s position in (c) is maintained for three years with an investment cost of £45,000,000 on the day of commencement of manufacturing business, using a cost of capital of 15%.

i. Can this venture be justified for the period? (4 Marks) ii. What is the breakdown discount factor for this project?

Question 3 a. Risk occurs where there are several possible outcomes which can be assigned the likelihood of occurring without knowing which will happen. Explain these types of risks

b. Management uses Cost Volume Profit (CPV) analysis as a planning process to predict the future volume of activity, costs incurred, sales made and profit received. Required: i. List and explain FIVE assumptions in C-V-P analysis

c. Discuss in detail Five benefits and drawbacks of throughput accounting

Question 4 a. Business decisions rely on certain characteristics which are based on intelligent and well-informed decisions. Explain in detail these characteristics.

b. Classification of costs may be based on the information needs of management and their nature. Briefly explain the classification required for various purposes with appropriate examples.

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