updates for acca paper f5

06/05/2011 KAPLAN PUBLISHING

UPDATE SHEET

ACCA F5 Performance Management, Complete text, 2011.

ISBN: 978-0-85732-134-3

Chapter 3 page 69-102

Error/correction

When referring to the term 'bottleneck', this should be replaced with 'limiting factor'.

Decision Tree (missing information)

A decision tree is a diagrammatic representation of a multi-decision problem, where all possible courses of action are represented, and every possible outcome of each course of action is shown.

Decision trees should be used where a problem involves a series of decisions being made and several outcomes arise during the decision-making process. Decision trees force the decision maker to consider the logical sequence of events. A complex problem is broken down into smaller, easier to handle sections.

The financial outcomes and probabilities are shown separately, and the decision tree is ‘rolled back’ by calculating expected values and making decisions.

Three step method

Step 1: Draw the tree from left to right, showing appropriate decisions and events / outcomes.

Some common symbols can be used:

A square is used to represent a decision point (i.e. where a choice between different courses of action must be taken.

A circle is used to represent a chance / outcome point. The branches coming away from a circle with have probabilities attached to them. (Probabilities will add up to ‘1’)

Label the tree and relevant cash inflows/outflows and probabilities associated with outcomes. Step2: Evaluate the tree from right to left carrying out these two actions:

1. Calculate an EV at each outcome point. 2. Choose the best option at each decision point.


Step 3: Recommend a course of action to management.

Lecture Example 1

A university is trying to decide whether or not to advertise a new post-graduate degree programme. The number of students starting the programme is dependent on economic conditions. If conditions are poor it is expected that the programme will attract 40 students without advertising. There is a 60% chance that economic conditions will be poor. If economic conditions are good it is expected that the programme will attract only 20 students without advertising. There is a 40% chance that economic conditions will be good. If the programme is advertised and economic conditions are poor, there is a 65% chance that the advertising will stimulate further demand and student numbers will increase to 50. If economic conditions are good there is a 25% chance the advertising will stimulate further demand and numbers will increase to 25 students. The profit expected, before deducting the cost of advertising, at different levels of student numbers are as follows: Number of students Profit in $

15 (10,000) 20 15,000 25 40,000 30 65,000 35 90,000 40 115,000 45 140,000 50 165,000

The cost of the advertising programme will be $15,000.

Required: Demonstrate, using a decision tree, whether the programme should be advertised.

Lecture example 2

The manager of a hotel is deciding if he should carry out repairs to the hotel immediately or postpone them for a year. He has made the following estimates for the coming year: The cost of the repairs would be £90,000. If the repairs are started immediately there is only a two-in-three chance of them being completed in time. If the repairs are completed in time the contribution for the hotel could be any one of the three levels below with equally probability. If the repairs are not completed on time some rooms will be unavailable and consequently demand could be either medium or low, with equal probability.


Contribution for the coming year if the repairs are undertaken could be:

£200,000 if there is high demand

£150,000 if there is medium demand

£100,000 if demand is low

If the repairs are not undertaken the contribution for the coming year is estimated to be £37,500. Required: Demonstrate, using a decision tree, if the repairs should be started immediately or postponed for a year.

Lecture example 3

An events management company is trying to decide whether or not to advertise an outdoor concert. The sale of tickets is dependent on the weather. If the weather is poor it is expected that 5,000 tickets will be sold without advertising. There is a 70% chance that the weather will be poor. If the weather is good it is expected that 10,000 tickets will be sold without advertising. There is a 30% chance that the weather will be good.

If the concert is advertised and the weather is poor, there is a 60% chance that the advertising will stimulate further demand and ticket sales will increase to 7,000. If the weather is good there is a 25% chance the advertising will stimulate demand and ticket sales will increase to 13,000.

The profit expected, before deducting the cost of advertising, at different levels of ticket sales are as follows:

Number of tickets sold

Profit $

5,000 (20,000)

6,000 (5,000)

7,000 35,000

8,000 55,000

9,000 70,000

10,000 90,000

11,000 115,000

12,000 130,000

13,000 150,000

The cost of advertising the concert will be $15,000.

Required:

Demonstrate, using a decision tree, whether the concert should be advertised.


Solution Lecture Example 1

Conclusion : The EV of the ‘advertise’ option is higher than the EV of the ‘Don’t advertise’

option; Therefore, the programme should be advertised.

($15,000)



7 Chapter 2

Error/correction

Pro

fit/

(Lo

ss)

£00

0

200

150

100

50

0

(50) 100 200 300 400 500 600 700 800 900 1,000

(100) Revenue (£000)

(150)

(200)

(250)

($15,000)

Product K

Product M

Break-even point

Product J

Product L

X

X

X

X

X


Chapter 4 page 108

Error/correction: (Illustration 3)

It shows units in 10, 20, 30, 40 as can be seen in the picture attached.

The quantities should read 1,2,3,4,5.

Page 130

Error/correction: (replacement TYU 2 answer)

(a)

Let Q = quantity produced and sold

Demand curve

Gradient ‘b’ =

Gradient ‘b’ =

Gradient ‘b’ = – 0.1

Price = a + 0.1Q

$160 = a – [0.1 x (2,000)]

Therefore a = $360

P = a + bQ, with Q the optimum quantity achieved

Optimum quantity is achieved when MR = MC i.e. when a +2bQ = $64 i.e. when $360 – 0.2Q = $64 i.e. when 0 .2 Q = $296 i.e. when Q = 1,480 units


So P = a + bQ

P = $360 – (0.1 x 1,480 units)

P = $360 - $148

P = $212

(b) To maximise profit, Q = 1,480 units

P = 360 * 0.1 (1,480) = $212

Revenue = $212 x 1,480 = $313,760

Less Costs = ($64 x 1,480) + $100,000 = ($194,720)

Maximum Profit = $119,040

Chapter 5 Page 141 (TYU4)

Error:

“similarly 60% of the expenses can be allocated 3:3:2”

Correction :

a sentence should be added “with the remainder not being possible to allocate”?

Chapter 5 Page 144

Error:

Material B first sentence says “and it costs $18”

Correction:

should say “and it cost $18” (i.e. past tense)

Chapter 5 Page.144 - Semi skilled labour

Error:

“who are not currently fully employed”

Correction :

“who are not currently fully utilised”

Chapter 6 page 177

Error: (Illustration 8)

If we decide to supply 40 salads, the minimum pay-off is $160.

Correction: (Illustration 8)

If we decide to supply 70 salads, the minimum pay-off is $160.

Chapter 7 page 193

Error: (TYU 3)

Sales are expected to be $500,000 × 110% × 103% = $623,150.

Correction: (TYU 3)

Sales are expected to be $550,000 × 110% × 103% = $623,150.


Chapter 11 TYU 5

1. Sales Price variances are calculated by comparing the actual selling price per unit and the budgeted selling price per unit; each price variance is multiplied by the number of units for each type of product. See working 3. It is better and safer to do it that way than for total sales, because I suspect different products will have different selling prices in the exam.

2. A sales volume variance is the difference between the actual number of units sold, and the budgeted number. Each difference is multiplied by the budgeted profit per unit. In CABCo, the Sales Volume variance is $3,000 A. Attached in Working 4 . Sales volume in turns splits into a Sales Mix variance and a Sales Quantity variance.

3. A Sales Mix variance indicates the effect on profit of changing the mix of actual sales from the standard mix. A Sales Mix variance can be calculated in one of two ways :

a. The difference between the actual total quantity sold in the standard mix and the actual quantities sold, valued at the standard profit per unit (working 6)

b. The difference between the actual sales and budgeted sales, valued at the standard profit per unit less the budgeted weighted average profit per unit, $3.875 in our case. See working 6 part b).

4. A Sales Quantity variance indicates the effect on profit of selling a different total quantity from the budgeted total quantity. Like the mix variance, it can be calculated in one of two ways :

a. The difference between actual sales volume in the standard mix and budgeted sales valued at the standard profit per unit – see working 7.

b. The difference between actual sales volume and budgeted sales valued at the weighted average profit per unit – see the second part of working 7.


UPDATE SHEET

ACCA F5 Performance Management, Exam kit, 2011.

ISBN: 978-1-84710-989-7

Section 2 page 125 (please see following change to question 19)

Replace Stay Clean Error with the following:

(a) The relevant costs of the decision to cease the manufacture of the TD are needed:

Cost or Revenue Working reference Amount ($)

Lost revenue Note 1 (96,000)

Saved labour cost Note 2 48,000

Lost contribution from other products Note 3 (118,500)

Redundancy and recruitment costs Note 4 (3,700)

Supplier payments saved Note 5 88,500

Sublet income 12,000

Supervisor Note 6 0

–––––––

Net cash flow (69,700)

–––––––

Conclusion: It is not worthwhile ceasing to produce the TD now.

Note 1: All sales of the TD will be lost for the next 12 months, this will lose revenue

of 1,200 units $80 = $96,000

Note 2: All normal labour costs will be saved at 1,200 units $40 = $48,000

Note 3: Related product sales will be lost.

This will cost the business 5% ((5,000u $150) + (6,000u $270)) = $118,500 in contribution (material costs are dealt with separately below)

Note 4: If TD is ceased now, then:

Redundancy cost ($6,000)

Retraining saved $3,500

Recruitment cost ($1,200)

––––––

Total cost ($3,700)

––––––


Note 5: Supplier payments:

DW ($)

WM ($)

TD

($)

Net cost ($)

Discount level

Gross cost ($)

Current buying cost 350,000 600,000 60,000 1,010,000 5% 1,063,158

Loss of TD (60,000) (60,000) 5% (63,158)

Loss of related sales at cost

(17,500)

(30,000)

(47,500)

5%

(50,000)

New buying cost 921,500 3% 950,000

Difference in net cost

88,500

Note 6: There will be no saving or cost here as the supervisor will continue to be fully employed.

An alternative approach is possible to the above problem:

Cash flow Ref Amount ($)

Lost contribution – TD Note 7 12,000

Lost contribution – other products Note 8 (71,000)

Redundancy and recruitment Note 4 above (3,700)

Lost discount Note 9 (19,000)

Sublet income 12,000

Supervisor Note 6 above 0

––––––

Net cash flow (69,700)

––––––

Note 7: There will be a saving on the contribution lost on the TD of 1,200 units $10 per unit = –$12,000

Note 8: The loss of sales of other products will cost a lost contribution of 5% ((5,000

$80) + (6,000 $170)) = $71,000

Note 9

DW WM TD Total (net) Discount Total gross

Current buying cost 350,000 600,000 60,000 1,010,000 5% 1,063,158

Saved cost (17,500) (30,000) (60,000)

New buying cost 332,500 (570,000) 0 902,500 5% 950,000

921,500 3% 950,000

Lost discount (19,000)

(b) Complementary pricing

Since the washing machine and the tumble dryer are products that tend to be used together, Stay Clean could link their sales with a complementary price. For example they could offer customers a discount on the second product bought, so if they buy(say) a TD for $80 then they can get a WM for (say) $320. Overall then Stay Clean make a positive contribution of $130 (320 + 80 – 180 – 90).

Product line pricing

All the products tend to be related to each other and used in the utility room or kitchen. Some sales will involve all three products if customers are upgrading their utility room or kitchen for example. A package price could be offered and as long as Stay Clean make a contribution on the overall deal then they will be better off.


(c) Outsourcing requires consideration of a number of issues (only 3 required):

– The cost of manufacture should be compared to cost of buying in from the outsourcer. If the outsourcer can provide the same products cheaper then it is perhaps preferable

– The reliability of the outsourcer should be assessed. If products are delivered late then the ultimate customer could be disappointed. This could damage the goodwill or brand of the business.

– The quality of work that the outsourcer produces needs to be considered. Cheaper products can often be at the expense of poor quality of materials or assembly.

– The loss of control over the manufacturing process can reduce the flexibility that Stay Clean has over current production. If Stay Clean wanted, say, to change the colour of a product then at present it should be able to do that. Having contracted with an outsourcer this may be more difficult or involve penalties.

ACCA marking scheme Marks

(a) Lost revenue 2.0 Saved labour cost 2.0 Lost contribution from other products 2.0 Redundancy and recruitment cost 2.0 Supplier payments 3.0 Sublet income 1.0 Supervisor 1.0 –––– Maximum 13.0 –––– (b) Complementary pricing 2.0 Product line pricing 2.0 Other valid suggestions 2.0 –––– Maximum 4.0 –––– Per issue 1.0 –––– Maximum 3.0 –––– Total 20 ––––

Page 167

Formula for b (about one quarter of the way down the page) - the last term should be 9300 squared not 9300 2


CORRECTION

19 ELECTRICITY COSTS

From the following data revise the forecast for electricity costs.

Next year energy costs are forecast at £212,160. This assumes a 2% increase in energy consumption and a 4% increase in gas and electricity tariffs.

However energy saving measures are being proposed. Instead of increasing, consumption should be reduced by 5%.

The energy budget should be £______________

Select from £197,600 £200,000 £201,552 £208,000

updates for acca paper f5

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