Question 1
Hakeem plc is an international pharmaceutical company that operates three divisions. An extract from the 2019 management accounts is summarized below:
| Scotland Division | England Division | Northern Ireland Division | |
| £ | £ | £ | |
| Revenues | 77,000 | 85,000 | 55,000 |
| Variable costs | (55,000) | (62,000) | (47,000) |
| Contribution margin | 22,000 | 23,000 | 8,000 |
| Fixed costs | (12,000) | (12,000) | (12,000) |
| Operating income | 10,000 | 11,000 | (4,000) |
Requirement:
- Senior management are considering a proposal to close the Northern Ireland division because it has been reporting losses for the last 3 years. Advise the management on whether such a decision is profitable for Hakeem plc. Clearly show any workings to support your advice. (2 Marks)
- Senior management has recently conducted a review into the fixed costs of the Northern Ireland division and discovered that it includes £10,000 for the annual salaries of staff which could be saved by laying them off in the event of closure. Advise the management on whether the closure is profitable or not. Clearly show any workings to support your advice. (2 Marks)
- As part of the review in (b) above, senior management has analysed the operations of the Northern Ireland division and discovered that it has an idle capacity of 8000 units per annum. Healthy Styles Ltd has recently submitted a request for a special product supply to the Northern Ireland division; a deal that can be repeated and sustained for the coming years. The total quantity demanded is 6000 units for a special price of £50 each, which is less than the regular selling price of £55 per unit. The variable manufacturing costs are £47 per unit; no additional fixed costs are expected and no marketing and selling expenses will be required. Advise the management on whether to accept the deal with Healthy Styles Ltd at the specified special price. Clearly show all workings and state all assumptions. (3 Marks)
- The England Division sells three different products with the details shown below. Machine time is limited to 175 hours per week.
| Product name | |||
| CH101 | CH102 | CH103 | |
| £ | £ | £ | |
| Selling price per unit | 30 | 24 | 25 |
| Variable cost per unit | (15) | (12) | (15) |
| Weekly demand (units) | 25 | 20 | 30 |
| Machine hours required/ unit | 5 | 3 | 4 |
Determine the best business prioritization of resource allocation to maximise profit?
(8 Marks)
Total 15 Marks
Question 2
Drawing on relevant academic literature, critically discuss in your own words the meaning of the term ‘corporate governance’ and its importance to investors. Also, discuss the measures a company can take to minimise the risk of poor corporate governance.
Total 20 Marks
Question 3
Quality Tobaccos plc, a British tobacco producer manufactures two classes of tobacco qualities: Standard and Branded. Product costs are estimated using a business wide overhead absorption rate. Products absorb overheads on a labour hour basis. Selling prices are set based on cost plus a 25 per cent mark-up. The following information is provided:
| Standard | Branded | |
| Direct materials (£ per unit) | 12 | 24 |
| Direct labour (£ per labour hour) | 12 | 12 |
| Direct labour hours (total) | 100 | 150 |
| Budget production/sales (units) | 2000 | 1000 |
| Total production overheads | £400,000 | |
Quality Tobaccos plc reported the following breakdown of the £400,000 annual manufacturing overheads:
| Costs | Activity of cost driver | Standard | Branded | |
| Designing | 60,000 | 60 designing hours | 18 hours | 42 hours |
| Machining | 240,000 | 20,000 machining hours | 8,000 hours | 12,000 hours |
| Packaging | 100,000 | 70,000 packaging hours | 25,000 hours | 45,000 hours |
| Total Overheads | £400,000 |
Requirement:
- Calculate the full cost to produce both the Standard and Branded tobaccos using an Activity Based Costing (ABC) approach. (14 Marks)
- Based on the ABC cost per unit, calculate the selling price per unit for the standard and branded tobaccos. (6 Marks)
- Comment on the advantages of using ABC rates compared to using a single rate system uniquely for Quality Tobaccos plc. (5 Marks)
Total 25 Marks
CITATION
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The post Hakeem plc is an international pharmaceutical company that operates three divisions. An extract from the 2019 management accounts is summarized below: Scotland Division England Division Northern Ireland Division £ £ £ Revenues 77,000 85,000 55,000 Variable costs (55,000) (62,000) (47,000) Contribution margin 22,000 23,000 8,000 Fixed costs (12,000) (12,000) (12,000) Operating income 10,000 11,000 (4,000) Requirement: Senior management are considering a proposal to close the Northern Ireland division because it has been reporting losses for the last 3 years. Advise the management on whether such a decision is profitable for Hakeem plc. Clearly show any workings to support your advice. (2 Marks) appeared first on Apax Researchers.
