Professional Documents
Culture Documents
P1 – Performance Operations
24 November 2010 – Wednesday Morning Session
Instructions to candidates
You are allowed 20 minutes reading time before the examination begins
during which you should read the question paper and, if you wish, highlight
and/or make notes on the question paper. However, you will not be allowed,
under any circumstances, to open the answer book and start writing or use
your calculator during this reading time.
You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is all parts and/or sub-
questions).
ALL answers must be written in the answer book. Answers written on the
question paper will not be submitted for marking.
You should show all workings as marks are available for the method you use.
The list of verbs as published in the syllabus is given for reference on page
19.
Write your candidate number, the paper number and examination subject title
in the spaces provided on the front of the answer book. Also write your
contact ID and name in the space provided in the right hand margin and seal
to close.
Tick the appropriate boxes on the front of the answer book to indicate which
questions you have answered.
TURN OVER
Your answers should be clearly numbered with the sub-question number then ruled
off, so that the markers know which sub-question you are answering. For multiple
choice questions, you need only write the sub-question number and the letter
of the answer option you have chosen. You do not need to start a new page for
each sub-question.
For sub-questions 1.6 to 1.8 you should show your workings as marks are available
for the method you use to answer these sub-questions.
Question One
C Selling invoices to a finance company that then collects the cash from the customer.
D Selling invoices to a finance company for less than their face value while continuing to
collect the cash from the customer.
(2 marks)
The costs and activity levels are expected to remain the same for each year of the
project.
The sensitivity of the investment decision to changes in the variable costs is:
A 131.9%
B 44.0%
C 33.0%
D 29.3%
(2 marks)
1.3 The data in the table below has been extracted from a company’s cost accounting
records. It shows the total costs and the inflation index for the periods in which the
costs were incurred. Cost behaviour patterns are the same in both periods.
The variable cost per unit, to the nearest $0.01, at an inflation index of 1.06 is:
A $1.45
B $1.59
C $1.53
D $1.50
(2 marks)
TURN OVER
The budgeted selling price of one of C’s range of chocolate bars was $6.00 per bar. At the
beginning of the budget period market prices of cocoa increased significantly and C decided
to increase the selling price of the chocolate bar by 10% for the whole period. C also decided
to increase the amount spent on marketing and as a result actual sales volumes increased to
15,750 bars which was 5% above the budgeted volume. The standard contribution per bar
was $2.00 however a contribution of $2.25 per bar was actually achieved.
A $9,450 A
B $9,450 F
C $9,000 A
D $9,000 F
(2 marks)
1.5 The sales volume contribution variance for the period was:
A $1,500.00 F
B $3,937.50 F
C $3,750.00 F
D $1,687.50 F
(2 marks)
1.6 H has a budgeted production for the next budget year of 12,000 units spread evenly
over the year. It expects the same production level to continue for the next two years.
Each unit uses 4kg of material.
The estimated opening raw material inventory at the start of the next budget year is
3,000kg. H’s future policy will be to hold sufficient raw material inventory at the end of
each month to cover 110% of the following month’s production.
The budgeted material cost is $8 per kg for purchases up to 49,000kg. The excess of
purchases over 49,000kg in a year will be at a cost of $7.50 per kg.
(3 marks)
1.7 An unquoted bond has a coupon rate of 6% per annum and will repay its face value of
$100 on its maturity in 4 years’ time. The yield to maturity on similar bonds is estimated
to be 3% per annum. The annual interest has just been paid for the current year.
(3 marks)
A market research company believes it can provide perfect information about the
preferences of customers in this market.
Calculate the maximum amount that should be paid for the information from the market
research company.
(4 marks)
Reminder
All answers to Section A must be written in your answer book.
Answers to Section A written on the question paper will not be
submitted for marking.
End of Section A
TURN OVER
Question Two
(a) Explain the stages in the budget setting process for a company that uses a zero-based
budgeting system.
(5 marks)
(b) AP sells fruit in a market where the level of demand is uncertain. AP has to order the
fruit before the demand level is known.
The payoff table below shows the profits AP can expect depending on the level of order
that is placed and the level of demand that occurs.
Required:
(ii) Identify, using a minimax regret table, the order level that would be selected if AP
applied the minimax regret decision criterion.
(3 marks)
Required:
(i) Explain the above statement.
(2 marks)
(d) RX has a balance outstanding on its trade receivables account at the start of the year
of $83,000 after allowing for bad debts. RX forecasts sales revenue for the next year of
$492,750. All sales are on credit.
Based on past experience, RX anticipates that bad debts will represent 5% of sales for
the year. Trade receivable days at the end of the year are expected to be 60 days.
Required:
(i) Calculate the expected receipts from customers during the year.
(3 marks)
(ii) Describe TWO methods that RX could use to reduce the possibility of bad debts
occurring.
(2 marks)
(e) A company has forecast that it will have surplus funds to invest for a 12 month period. It
is considering two investments as follows:
Investment 1
Invest in a bank deposit account that has a variable rate of interest. The current rate of
interest on the account is 1.1% per quarter.
Investment 2
Buy a 12 month fixed dated government bond. The bond has a coupon rate of 2.5%
payable every six months.
Required:
Explain the advantages AND disadvantages to the company of each of the
investments.
You should consider the return offered and the level and type of risk involved with each
investment.
You should assume that there are no other investments available and that these
investments are only available now.
(5 marks)
TURN OVER
$000
Sales revenue (80% on credit) 1,400
Cost of sales 1,215
Purchases of materials (95% on credit) 915
Inventories at end of year
Raw materials 85
Finished goods 90
Trade receivables 185
Trade payables 125
Required:
Calculate the length of WCC’s working capital cycle to the nearest 0.1 of a day.
(5 marks)
End of Section B
TURN OVER
[You are advised to spend no longer than 45 minutes on each question in this
section.]
Question Three
A healthcare company specialises in hip, knee and shoulder replacement operations, known
as surgical procedures. As well as providing these surgical procedures the company offers
pre operation and post operation in-patient care, in a fully equipped hospital, for those
patients who will be undergoing the surgical procedures.
Surgeons are paid a fixed fee for each surgical procedure they perform and an additional
amount for any follow-up consultations. Post procedure follow-up consultations are only
undertaken if there are any complications in relation to the surgical procedure. There is no
additional fee charged to patients for any follow up consultations. All other staff are paid
annual salaries.
The company’s existing costing system uses a single overhead rate, based on revenue, to
charge the costs of support activities to the procedures. Concern has been raised about the
inaccuracy of procedure costs and the company’s accountant has initiated a project to
implement an activity-based costing (ABC) system.
The project team has collected the following data on each of the procedures.
The project team has obtained the following information about the support activities.
Overheads
Activity Cost Driver
$000
Theatre preparation for each session Number of theatre preparations 864
(a) Calculate the profit per procedure for each of the three procedures,
using the current basis for charging the costs of support activities to
procedures.
(5 marks)
(b) Calculate the profit per procedure for each of the three procedures using
activity-based costing.
(13 marks)
(c) Discuss the ways in which the information obtained by the project team
may be of benefit to the management of the company.
(7 marks)
TURN OVER
A car manufacturer has been experiencing financial difficulties over the past few years. Sales
have reduced significantly as a result of the worldwide economic recession. Costs have
increased due to quality issues that led to a recall of some models of its cars.
Production volume last year was 50,000 cars and it is expected that this will increase by 4%
per annum each year for the next five years.
The company directors are concerned to improve profitability and are considering two
potential investment projects.
It is estimated that raw material costs will be reduced by $62 per car and that both internal
and external failure costs from quality failures will be reduced by 80%.
Estimated internal and external failure costs per year without the new process, based on last
year’s production volume of 50,000 cars, and their associated probabilities are shown below:
Internal and external failure costs are expected to increase each year in line with the number
of cars produced.
The company’s accountant has calculated that this investment will result in a net present
value (NPV) of $1,338,000 and an internal rate of return of 10.5%.
The price paid to the current supplier is $370 per component. It is estimated that the in-house
variable cost of production will be $260 per component. Each car requires one component.
Fixed production costs, including machinery depreciation, are estimated to increase by
$5,000,000 per annum as a result of manufacturing the component in-house.
Additional Information
The company is unable to raise enough capital to carry out both projects. The company will
therefore have to choose between the two alternatives.
(a) Calculate for Project 1 the relevant cash flows that the accountant should
have used for year 1 when appraising the project.
(10 marks)
(c) Advise the company directors which of the two investment projects should
be undertaken.
(4 marks)
Project A Project B
st nd
NPV 1 2
nd
IRR 2 1st
Discuss potential reasons why the conflict between the NPV and IRR
ranking may have arisen.
(5 marks)
n
Present value of $1, that is 1 r where r = interest rate; n = number of periods until
payment or receipt.
Periods Interest rates (r)
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149
PROBABILITY
A B = A or B. A B = A and B (overlap).
P(B | A) = probability of B, given A.
Rules of Addition
If A and B are mutually exclusive: P(A B) = P(A) + P(B)
If A and B are not mutually exclusive: P(A B) = P(A) + P(B) – P(A B)
Rules of Multiplication
If A and B are independent:: P(A B) = P(A) * P(B)
If A and B are not independent: P(A B) = P(A) * P(B | A)
DESCRIPTIVE STATISTICS
Arithmetic Mean
x fx
x x (frequency distribution)
n f
Standard Deviation
(x x )2 fx 2
SD SD x 2 (frequency distribution)
n f
INDEX NUMBERS
o
Price:
Q1
w
Qo
Quantity: x 100
w
TIME SERIES
Additive Model
Series = Trend + Seasonal + Random
Multiplicative Model
Series = Trend * Seasonal * Random
Annuity
Present value of an annuity of £1 per annum receivable or payable for n years, commencing in one
year, discounted at r% per annum:
1 1
PV = 1
r [1 r ] n
Perpetuity
Present value of £1 per annum, payable or receivable in perpetuity, commencing in one year,
discounted at r% per annum:
PV =
LEARNING CURVE
b
Yx = aX
where:
Yx = the cumulative average time per unit to produce X units;
a = the time required to produce the first unit of output;
X = the cumulative number of units;
b = the index of learning.
The exponent b is defined as the log of the learning curve improvement rate divided by log 2.
INVENTORY MANAGEMENT
2C o D
EOQ =
Ch
It is important that you answer the question according to the definition of the verb.
LEARNING OBJECTIVE VERBS USED DEFINITION
Level 1 - KNOWLEDGE
What you are expected to know. List Make a list of
State Express, fully or clearly, the details/facts of
Define Give the exact meaning of
Level 2 - COMPREHENSION
What you are expected to understand. Describe Communicate the key features
Distinguish Highlight the differences between
Explain Make clear or intelligible/State the meaning or
purpose of
Identify Recognise, establish or select after
consideration
Illustrate Use an example to describe or explain
something
Level 3 - APPLICATION
How you are expected to apply your knowledge. Apply Put to practical use
Calculate Ascertain or reckon mathematically
Demonstrate Prove with certainty or to exhibit by
practical means
Prepare Make or get ready for use
Reconcile Make or prove consistent/compatible
Solve Find an answer to
Tabulate Arrange in a table
Level 4 - ANALYSIS
How are you expected to analyse the detail of Analyse Examine in detail the structure of
what you have learned. Categorise Place into a defined class or division
Compare and contrast Show the similarities and/or differences
between
Construct Build up or compile
Discuss Examine in detail by argument
Interpret Translate into intelligible or familiar terms
Prioritise Place in order of priority or sequence for action
Produce Create or bring into existence
Level 5 - EVALUATION
How are you expected to use your learning to Advise Counsel, inform or notify
evaluate, make decisions or recommendations. Evaluate Appraise or assess the value of
Recommend Advise on a course of action
P1 – Performance Operations
November 2010