Question: Hardhat Ltd’s Budget Committee, which has
Hardhat Ltd’s Budget Committee, which has members drawn from all the major functions in the business, is meeting to consider the projected income statement for 2018/2019, which is composed of the ten months’ actuals to the end of January 2018 and estimates for the last two months of the financial year: Hardhat Ltd: Projected income statement 2016/2017 
After some discussion of information principally supplied by the Finance Director, John Perks, the Committee agrees the following changes for the 2019/2020 budget: 30% increase in number of units sold 20% increase in unit cost of materials 5% increase in direct labour cost per unit 10% increase in variable indirect cost per unit 5% increase in indirect fixed costs 8% increase in selling expenses, arising solely from increased volume 6% increase in administrative expenses, reflecting anticipated higher salary and other costs rather than any effects of the expected increased sales volume. The increase in sales volume is meant to be a significant step towards an ambitious target market share which was included in the latest review of Hardhat’s strategic plan at the insistence of the marketing manager, Keith Boskin. Despite the change in volume, inventory quantities are expected to change little next year because of planned efficiency gains in the supply and handling of materials and despatch of finished goods. The composition of the production cost of a unit of finished product in 2018/2019 for materials, direct labour and production overhead was in the ratio of 3:2:1 respectively. In 2018/2019 £40 000 of the production overhead was fixed. No changes in production methods or credit policies are anticipated for 2019/2020. The managing director, Steve Hartley, has set a target profit before tax for 2019/2020 of £2 000 000, and the Budget Committee are now debating what this might imply for the unit selling price, on the basis of the information they have assembled so far. The consensus appears to be that the profit target is very tough, but that presumably this is what Steve and the Chairman, Lord Haretop, believe the City expects. Keith Boskin is worried that the imposition of the short-term target profit will jeopardize the staged attainment of his long-run market share. ‘I’m concerned that, in order to meet the profit (target imposed by Steve Hartley) we’ll have to drastically put up our price. If that happens, we might hit the profit, but it’ll ruin my plans for damaging the prospects of Farfetched Co., who have been trying to take market share from us for some time now via heavy marketing expenditure – I think they’re getting desperate because our cost structure and product quality are better than theirs! If we can just keep squeezing them for another year or two we might force them out of the market, or get them to agree to a takeover on reasonable terms. Then we’d effectively have the market to ourselves.’ Dick Whittington, Keith’s deputy, asked ‘rather than putting up the price, could we work out how many units we’d have to sell at the old price to meet the profit target? Then we could check to see whether it would be within the plant’s capacity.’ Mark Catchall, the production manager, intervened at this point, saying ‘we can make up to 150 000 units a year with the present plant, but could we sustain that capacity output for long? I doubt it. We might have to invest in extra capacity, which is a whole new ball game. Besides, I don’t really believe we can sell an extra 30 000 units next year, never mind 50 000 units, especially at an enhanced price. I suspect we will only manage to sell an extra 20 000 units at best, and perhaps only 10 000: what would that do for our profits, John?’ John replied that he didn’t know, but would investigate the various suggestions and come back to the next meeting in a week’s time with some figures. As he walked back to his office, John privately mused that perhaps the MD and Chairman wanted to boost short-term profits to make it easier to raise the finance to take over Farfetched Co., in which case it wouldn’t hurt to give some thought as to the best source of finance for such a deal. Required: Write a report to the Board of Hardhat Ltd setting out the financial effects of the various proposals and make recommendations as to what price Hardhat should charge next year and in the longer run. Your report and presentation should cover: (a). the sales price needed to earn the target profit, using the information compiled by the budget committee; (b). the number of units that would have to be sold at the old price to meet the target profit, and whether this seems feasible; (c). what the profit would be if the sales price calculated in (a) were adopted, but sales volume only rose by 10%, or at best 20%; (d). any other factors you think should be taken into account when making decisions about the price to be charged next year, such as any change in risk involved in the cost–volume–profit structure you propose; the link between short- and long-run prices; and the interactions between acquisitions policy, financing decisions and pricing decisions.
Transcribed Image Text:
(£000s) (£000s) Sales (100 000 units) Cost of goods sold Gross profit Selling expenses Administrative expenses 10 000 6000 4000 1500 1000 2500 Net profit before tax 1500
> A random variable X follows a negative binomial distribution with parameters k = 5 and p [i.e.,b ∗ (x; 5, p)]. Furthermore, we know that p follows a uniform distribution on the interval (0, 1). Find the Bayes estimate of p under the squared-error loss fu
> Use Cochran’s test at the 0.01 level of significance to test for homogeneity of variances in Exercise 13.4 on page 519. Exercise 13.4: Immobilization of free-ranging white-tailed deer by drugs allows researchers the opportunity to clos
> Six different machines are being considered for use in manufacturing rubber seals. The machines are being compared with respect to tensile strength of the product. A random sample of four seals from each machine is used to determine whether the mean tens
> (a) Fit a multiple regression equation of the form μY |x = β0 + β1x + β2x2 to the data of Example 11.8 on page 420. (b) Estimate the yield of the chemical reaction for a temperature of 225 ◦ C.
> The following is a set of coded experimental data on the compressive strength of a particular alloy at various values of the concentration of some additive: (a) Estimate the quadratic regression equation μY |x = β0 + Î&s
> An experiment was conducted in order to determine if cerebral blood flow in human beings can be predicted from arterial oxygen tension (millimeters of mercury). Fifteen patients participated in the study, and the following data were collected: Estimat
> An experiment was conducted on a new model of a particular make of automobile to determine the stopping distance at various speeds. The following data were recorded. (a) Fit a multiple regression curve of the form μD|v = β0 +
> Rayon whiteness is an important factor for scientists dealing in fabric quality. Whiteness is affected by pulp quality and other processing variables. Some of the variables include acid bath temperature, â—¦ C (x1); cascade acid concent
> A client from the Department of Mechanical Engineering approached the Consulting Center at Virginia Tech for help in analyzing an experiment dealing with gas turbine engines. The voltage output of engines was measured at various combinations of blade spe
> For the quadratic model of Exercise 12.51(b), give estimates of the variances and covariances of the estimates of β1 and β11. Exercise 12.51(b): The following is a set of data for y, the amount of money (in thousands of dollars)
> For the model of Exercise 12.50(a), test the hypothesis H0: β4 = 0, H1: β4 ≠0. Use a P-value in your conclusion. Exercise 12.50(a): For the punter data in Case Study 12.2, an additional response, â€
> Suppose that a sample consisting of 5, 6, 6, 7, 5, 6, 4, 9, 3, and 6 comes from a Poisson population with mean λ. Assume that the parameter λ follows a gamma distribution with parameters (3, 2). Under the squared-error loss function, find the Bayes estim
> The following is a set of data for y, the amount of money (in thousands of dollars) contributed to the alumni association at Virginia Tech by the Class of 1960, and x, the number of years following graduation: (a) Fit a regression model of the type &Ici
> For the punter data in Case Study 12.2, an additional response, “punting distance,” was also recorded. The average distance values for each of the 13 punters are given. (a) Using the distance data rather than the hang
> The electric power consumed each month by a chemical plant is thought to be related to the average ambient temperature x1, the number of days in the month x2, the average product purity x3, and the tons of product produced x4. The past yearâ€&
> Use the techniques of backward elimination with α = 0.05 to choose a prediction equation for the data of Table 12.8.
> For the data of Exercise 12.15 on page 452, use the techniques of (a) forward selection with a 0.05 level of significance to choose a linear regression model; (b) backward elimination with a 0.05 level of significance to choose a linear regression mode
> Consider the “hang time” punting data given in Case Study 12.2, using only the variables x2 and x3. (a) Verify the regression equation shown on page 489. (b) Predict punter hang time for a punter with LLS = 180 pounds and Power = 260 foot-pounds. (c) C
> A study was done to determine whether the gender of the credit card holder was an important factor in generating profit for a certain credit card company. The variables considered were income, the number of family members, and the gender of the card hold
> A study was done to assess the cost effectiveness of driving a four-door sedan instead of a van or an SUV (sports utility vehicle). The continuous variables are odometer reading and octane of the gasoline used. The response variable is miles per gallon.
> For the data set given in Exericise 12.16 on page 453, can the response be explained adequately by any two regressor variables? Discuss. Exericise 12.16: An engineer at a semiconductor company wants to model the relationship between the gain or hFE of a
> Consider the data of Exercise 12.13 on page 452. Can the response, wear, be explained adequately by a single variable (either viscosity or load) in an SLR rather than with the full two-variable regression? Justify your answer thoroughly through tests of
> Suppose that the time to failure T of a certain hinge is an exponential random variable with probability density f(t) = θe−θt, t>0. From prior experience we are led to believe that θ is a value
> In Example 12.8, a case is made for eliminating x1, powder temperature, from the model since the P-value based on the F-test is 0.2156 while P-values for x2 and x3 are near zero. (a) Reduce the model by eliminating x1, thereby producing a full and a rest
> Consider Example 12.3 on page 447. Compare the two competing models. First order: yi = β0 + β1x1i + β2x2i + €i, Second order: yi = β0 + β1x1i + β2x2i+ β11x21i + β22x22i + β12x1ix2i + i. Use R2adj in your comparison. Test H0 : β11 = β22 =β12 = 0. In addit
> Consider Example 12.4. Figure 12.1 on page 459 displays a SAS printout of an analysis of the model containing variables x1, x2, and x3. Focus on the confidence interval of the mean response μY at the (x1, x2, x3) locations representing the 13 data points
> An experiment was conducted to determine if the weight of an animal can be predicted after a given period of time on the basis of the initial weight of the animal and the amount of feed that was eaten. The following data, measured in kilograms, were reco
> Consider the data of Exercise 11.55 on page 437. Fit a regression model using weight and drive ratio as explanatory variables. Compare this model with the SLR (simple linear regression) model using weight alone. Use R2, R2adj, and any t-statistics (or F-
> Consider the data for Exercise 12.36. Compute the following: R(β1 | β0), R(β1 | β0, β2, β3), R(β2 | β0, β1), R(β2 | β0, &I
> Consider the electric power data of Exercise 12.5 on page 450. Test H0: β1 = β2 = 0, making use of R(β1, β2 | β3, β4). Give a P-value, and draw conclusions. Exercise 12.5: The elec
> A small experiment was conducted to fit a multiple regression equation relating the yield y to temperature x1, reaction time x2, and concentration of one of the reactants x3. Two levels of each variable were chosen, and measurements corresponding to the
> Repeat Exercise 12.17 on page 461 using an F-statistic. Exercise 12.17: For the data of Exercise 12.2 on page 450, estimate σ2. Exercise 12.2: In Applied Spectroscopy, the infrared reflectance spectra properties of a viscous liquid used in
> For the model of Exercise 12.5 on page 450, test the hypothesis H0: β1 = β2 = 0, H1: β1 and β2 are not both zero. Exercise 12.5: The electric power consumed each month by a chemical plant is thought to be
> Suppose that in Example 18.7 the electrical firm does not have enough prior information regarding the population mean length of life to be able to assume a normal distribution for μ. The firm believes, however, that μ is surel
> Estimate the proportion of defectives being produced by the machine in Example 18.1 if the random sample of size 2 yields 2 defectives.
> This is an extract from Ducker, H., Head, A., McDonnell, B., O’Brien, R. and Richardson, S. (1998), A Creative Approach to Management Accounting: Case Studies in Management Accounting and Control, Sheffield Hallam University Press, ISBN
> This case study is taken from Ducker, J., Head, A., McDonnell, B., O'Brien, R. and Richardson, S. (1998), A Creative Approach to Management Accounting: Case Studies in Management Accounting and Control, Sheffield Hallam University Press, ISBN 086339 791
> Southern Paper Inc. is a global packaging company headquartered in the United States. The company was founded in the 1880s and has three principal business sectors – forest products, packaging and papers. The forest products division supplies lumber to t
> This case study is taken from Ducker, J., Head, A., McDonnell, B., O'Brien, R. and Richardson, S. (1998), A Creative Approach to Management Accounting: Case Studies in Management Accounting and Control, Sheffield Hallam University Press, ISBN 086339 791
> This case was originally set in the 1960s in rural Vermont. The Majestic Lodge is an old but well-maintained property that has changed ownership several times over the years. It has no restaurant or bar. It is positioned as a mid-price, good quality "des
> The Managing Director of the Kiddy Toy Company (KTC) needs to decide whether a special export order should be accepted or rejected, with reasons provided, for the manufacture of Panda bears. The background Official statistics indicate that China manufact
> Professor Anthony Atkinson, (University of Waterloo) and adapted by Professor John Shank (The Amos Tuck School of Business Administration Dartmouth College) This case is reprinted from Cases in Cost Management, Shank, J. K., 1996, South Western Publishin
> Anjo Ltd was established in 1986 by two brothers, Andrew and Jonathan Bright. They saw a market for providing accessories in the home to accommodate the new era of home entertainment, such as television cabinets, record stands, hi-fi cabinets, tape casse
> Permission to reprint this case has been granted by Captus Press Inc. and the Accounting Education Resource Centre of the University of Lethbridge. Foster’s Construction Ltd: Organizational Background Fosters Construction Ltd (FCL) is a privately owned c
> Airport Complex was founded in Northern Europe in the early 1960s, and at the time it primarily served as a domestic airport. During the 1980s, flights to foreign destinations became an ever more vital activity for the airport. Today, the airport functio
> The Application of Linear Programming to Management Accounting Midland Airport Ltd LEARNING OBJECTIVES: After reading this case study and completing the questions you will be able to: • Formulate the initial linear programming model (ob
> Fleet operates a chain of high street retail outlets selling clothing and household items. In 1995 this company was heading for a financial loss and was deemed to have lost strategic direction. The business formula that had proved successful in the 1980s
> This case study is taken from Ducker, J., Head, A., McDonnell, B., O'Brien, R. and Richardson, S. (1998), A Creative Approach to Management Accounting: Case Studies in Management Accounting and Control, Sheffield Hallam University Press, ISBN 086339 791
> In November 2012, a consultant was employed to review and document the planning and control systems of Integrated Technology Services (UK) Ltd (ITS-UK), to ensure that these were effectively meeting the needs of the business and to provide a basis for st
> This case was originally set in a specialty manufacturer of industrial measuring instruments in Scotland in 1979. The topic is profit variance analysis. THE FIRM Kinkead has been a leading UK firm since World War II in specialty instruments for measuring
> Company A is in the chemical industry and a manufacturer of industrial paints. At one of its manufacturing sites (site 1) a new system of costing and management information is being considered to replace a traditional system, which was not meeting fully
> The Board of Dumbellow Ltd are meeting on the 23rd January to discuss the draft budget for 2018/19, some two months before the start of that year. The company produces three industrial valves which are incorporated into equipment used in the Oil and Gas
> Learning objectives: After reading this case study and completing the questions you will be able to: • Demonstrate familiarity with two methods of process costing: weighted average and FIFO. • Discuss the treatment of normal loss, abnormal loss and abnor
> The case was prepared as the basis for discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Danfoss Drives A/S is a Danish producer of frequency converters located in Graasten in the southern part
> Company B is a manufacturer of large, complex electrical motors. It has been making them 'to order', in order quantities of, typically, one-four in a jobbing/batch production system for many years. A typical selling price may range from £3000-£20 000 per
> Learning objectives: After reading this case study and completing the questions you will be able to: • Explain the alternative methods of allocating joint costs to products. • Discuss the arguments for and against each
> Mestral is a highly successful company manufacturing a range of quality bathroom fittings. For the past 15 years production has been carried out at three locations: Northern town in the North East of England; at Western town on the Severn estuary; and at
> Kaminsky Ltd manufactures belts and braces. The firm is organized into five departments. These are belt-making, braces-making and three service departments (maintenance, warehousing and administration). Direct costs are accumulated for each department. F
> (a). Flopro plc makes and sells two products A and B, each of which passes through the same automated production operations. The following estimated information is available for period 1: (ii). Production/sales of products A and B are 120 000 units and
> Galuppi plc is considering whether to scrap some highly specialized old plant or to refurbish it for the production of drive mechanisms, sales of which will last for only three years. Scrapping the plant will yield £25 000 immediately, where
> Franzl is a contract engineer working for a division of a large construction company. He is responsible for the negotiation of contract prices and the subsequent collection of instalment monies from customers. It is company policy to achieve a mark-up of
> Paragon Products plc has a factory that manufactures a wide range of plastic household utensils. One of these is a plastic brush that is made from a special raw material used only for this purpose. The brush is moulded on a purpose-built machine that was
> Losrock Housing Association is considering the implementation of a refurbishment programme on one of its housing estates which would reduce maintenance and heating costs and enable a rent increase to be made. Relevant data are as follows: (i). Number of
> Using the discounted cash flow yield (internal rate of return) for evaluating investment opportunities has the basic weakness that it does not give attention to the amount of the capital investment, in that a return of 20 per cent on an investment of &Ac
> The Portsmere Hospital operates its own laundry. Last year the laundry processed 120 000 kilograms of washing and this year the total is forecast to grow to 132 000 kilograms. This growth in laundry processed is forecast to continue at the same percentag
> You are employed as the assistant accountant in your company and you are currently working on an appraisal of a project to purchase a new machine. The machine will cost £55 000 and will have a useful life of three years. You have already est
> Your company is considering investing in its own transport fleet. The present position is that carriage is contracted to an outside organization. The life of the transport fleet would be five years, after which time the vehicles would have to be disposed
> Garrett Automative Ltd (GAL) is a UK subsidiary of a American parent company that manufactures turbochargers for the automative industry. GAL decided to begin its profit improvement programme by examining its factory throughput. Throughput was defined as
> The following information relates to three possible capital expenditure projects. Because of capital rationing only one project can be accepted: The company estimates its cost of capital is 18 per cent. Calculate: (a). The payback period for each proje
> Short flower Ltd currently publish, print and distribute a range of catalogues and instruction manuals. The management has now decided to discontinue printing and distribution and concentrate solely on publishing. Long plant Ltd will print and distribute
> Cassidy Computers plc sells one of its products, a plug-in card for personal computer systems, in both the UK and Ruritania. The relationship between price and demand is different in the two markets, and can be represented as follows: Home market: Price
> Butterfield Ltd manufactures a single brand of dog food called ‘Lots O Grissle’ (LOG). Sales have stabilized for several years at a level of £20 million per annum at current prices. This level is not expected to change in the foreseeable future (except a
> Safety or buffer stocks are held for many reasons. For example, road authorities might want to hold sufficient stock of grit salt in case of bad weather, or firms might build stock of key materials if a price rise is impending. In recent times climate c
> The Boeing 737 jet is the world’s most popular and reliable commercial airliner. The company has manufactured over 8000 jets in the 737 family. In 2005, the 737-900ER was launched, which can carry more passengers over a further range than any previous mo
> Modern day aircraft are complex pieces of engineering, increasingly using more technology, composite materials and more efficient engines. Aircraft engines are in particular improving not only in fuel efficiency, but also in range, thus contributing to l
> South African energy and chemicals company Sasol, like many companies dealing with large-scale projects, needs to prepare cost estimates. Sasol specialize in high value liquid fuels, chemicals and low-carbon electricity. In 2014, the company decided to i
> In the March 2012 edition of CIMA’s Financial Management journal, Christian Doherty asks what will management accountants ten years on be grappling with? This question has been posed before (see, for example, Scapings et al., 2003) and technology is a fa
> According to a US Congressional enquiry, this accident apparently partly resulted from local decisions within the oil multinational BP and its contractors to save relatively immaterial costs by cutting corners in oil exploration safety measures (National
> As one of the pioneers in the low-cost airline market, easyJet’s business model includes some core values: ● Safety – Our number one value, sitting at the core of everything we do. ● Pioneering – We challenge to find new ways to make travel easy and affo
> Insteel Industries decided to implement ABM at the Andrews, South Carolina, plant. The ABM team analysed operations and identified 12 business processes involving a total of 146 activities. The ABM study revealed that the 20 most expensive activities acc
> Taylor, Woods and Cheng Ge Fang (2014) reported on how one UK company moved its target costing system away from profit targets and focused it on product-level economic value added (EVA(TM)) targets. The company, which used the pseudonym Electronics for c
> Management accounting combines accounting, finance and management with the leading-edge techniques needed to drive successful businesses. Chartered management accountants: ● Advise managers about the financial implications of projects. ● Explain the fina
> Following events of September 2001, airport security screening in the US and globally increased dramatically. As we all know, this led to increasing queues at airports which while inconvenient, are paramount to the safety and security of passengers. Sin
> As a result of the recent financial troubles at Tesco its shares declined to an 11-year low in 2014. Terry Smith, chief executive of investment house Fundsmith, stated in an article published in The Financial Times that investors had long ignored warning
> An article by Chen et al. (2015) published in Strategic Finance described how Zhongyuan Special Steel Co. (ZYSCO), a typical Chinese state-owned company, introduced a new strategic management system that would integrate its value creation strategy into e
> Southwest Airlines set ‘operating efficiency’ as its strategic theme. The four perspectives embodied in the balanced scorecard were linked together by a series of relatively simple questions and answers: Financial: Wha
> The Globe and Mail (Canada) quotes an article written by Professor Pietro Micheli in Industry Week in which he listed seven myths about performance management that promote the wrong behaviours. The following is a summary of these myths: Myth 1: Numbers
> Across Europe, just how much – or little – US multinational firms are paying in taxes is coming under intense scrutiny according to an article published in the Washington Post. Most of the investigations revolve around the issue of ‘transfer pricing’, wh
> According to an article in the Financial Times the UK tax authority (HMRC – HM Revenue & Customs) raised £1.1bn from challenging the pricing of multinational companies’ internal deals in 2013–14 – more than twice as much as in the previous year. The incr
> Medical devices are normally associated with use by hospitals and medical practices. Some devices are used by normal consumers and, according to an article on the Medical Device and Diagnostic Industry website (www.mddionline.com), are proliferating. The
> Teva Pharmaceutical Industries Ltd reorganized its pharmaceutical operations into decentralized cost and profit centres. Teva proposed a transfer pricing system based on marginal costs. But the proposed transfer pricing system generated a storm of contro
> The financial mission of a company should be to invest and create cash flows in excess of the cost of capital. If an investment is announced that is expected to earn in excess of the cost of capital, then the value of the firm will immediately rise by th
> From Real World View 19.1, you know that Siemens operates in many countries and has quite a diverse product offering. With such complex and broad operations, there are many factors that can affect the performance of a business sector or division. In its
> German global company Siemens AG had a turnover of almost €76 billion in 2015, recording a profit after taxes of €7.4 billion, according to its annual report. The company operates globally, with 351 000 employees globally. Siemens is a diverse organizati
> A distinguishing feature of today’s digital technology is that it is characterized by zero (or near-zero) marginal costs. Once you’ve made the investment needed to create a digital good, it costs next to nothing to roll out and distribute millions of cop
> In a BBC documentary called Power to the People, Michael Portillo visited a ‘You Decide’ session organized by the local council in Tower Hamlets, London. At this session, local people decide what is to be done with £250 000 of council money. They are giv
> Meditech South Africa (Pty) Ltd provides software solutions to meet the information needs of healthcare organizations in Africa and the Middle East. According to their website, the software can encompass all areas of healthcare from doctor’s offices to h
> Setting standards in an organization may be primarily to assist in the calculation of a standard cost for the product or service for management accounting purposes. Standards are also relevant for operational and customer service managers as they may aff
> Recipes are used in the manufacturing processes of many sectors. In the paper industry, a starch recipe consisting of borax, caustic soda, starch (from maize or potatoes) and hot water is used to glue corrugated board (cardboard) together. This process i
> Once standard costs have been established and used by a business, they should be updated on a regular basis. Actual costs are frequently used as a basis for any updates. SAP, a leading enterprise resource planning (ERP) system, provides tools and data wi
