Quickspray Ltd offers professional car spraying services at Suame Magazine. The company is planning its activities for the month of June 2018 for its saloon car spraying section. The company charges service fee of GH¢1,000 and incurs fixed cost (excluding fixed maintenance cost) and variable cost per unit (excluding variable maintenance cost) of GH¢35,000 and GH¢644.39 respectively for spraying of a saloon car.

The following data also relates to Quickspray Ltd on the maintenance hours of its key machine, revenue and profit for the six months ended April 2018.

Total fixed cost increases by GH¢1,120 when maintenance hours go beyond 1,400.

Required: 

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Calculate for the month of May the;
i) Break-even point in units and value   (4 marks)

ii) Sales level in order to make an after-tax profit of GH¢21,150, assuming Quickspray Ltd is in the 25% tax bracket.  (4 marks)

iii) Margin of safety if the target after-tax profit of GH¢21,150 is achieved.  (2 marks)

Jayjay & Co is a medium sized company that is engaged in delivery services. As a result of the recent increase in the demand for his services the Managing Director (MD) is planning to acquire a delivery van at the cost of GH¢85,000. The expected net cash flow per year are as follows:

The Sales Manager has indicated to the MD that the company will recoup its investment in less than four years and for that reason, it’s a good investment.
The Management Accountant has however drawn the MD’s attention to the fact that the Sales Manager has not factored in time value of money and the cost of capital into his analysis. The Management Accountant could not however suggest the cost of capital since financial institutions are charging different interest rates.

Required:
i) Calculate the cost of capital that when used will make the investment break-even when the useful life of the van is five years with residual value of GH¢8,500. (11 marks)

Graphix Communication Group Limited (GCGL) is a magazine publishing company. It comprises a number of different divisions, each publishing magazines in a different sector. GCGL is now considering publishing Financial Magazine. The Financial Magazine market is very competitive with a number of well-established titles already being published by GCGL’s competitors.
Financial Magazine is a monthly magazine.

GCGL has therefore commissioned an advertising campaign to launch its Financial Magazine. The price of the Financial Magazine has been set at full cost plus a mark-up of 20%.
Forecast variable cost per copy of the Financial Magazine:
.                                                              GH¢
Paper                                                     0.83
Ink                                                         See note (i)
Machine cost                                        0.22
Other variable cost                             0.15
The following additional information is available:
i) Each Financial Magazine needs 0.2 litres of ink. However, 10% of the ink input to the printing process is wasted. Ink costs GH¢5.40 per litre.
ii) In month 1, GCGL expects to sell 50,000 copies of the magazine to new customers at this price.
iii) After their first month of sales, GCGL expects 90% of first month’s customers to purchase the Financial Magazine in month 2. After the second month of purchase, GCGL expects to retain 85% of month 2 customers in subsequent months.
iv) As the magazine circulation area increases, sales to additional new customers in month 2 will be 20% of month 1 sales figure. 90% of this would be retained in month 3.
v) Sales to additional new customers in month 3 would be 30% of month 1 sales figures
vi) Fixed overhead costs are apportioned by GCGL to the Financial Magazines based on first month sales volume. Total budgeted annual fixed overhead is GH¢18,000,000 and total budgeted annual magazine sales, including the Financial Magazine, is 12,000,000 copies.
vii) The sales price of the Financial Magazine will remain unchanged throughout the first three months.

Required:
a) Discuss TWO (2) advantages and TWO (2) disadvantages of the managing director’s pricing strategy in the circumstances described above.                                                                                                                                                    (4 marks)

b) Produce a statement that shows the total profit for the first three months of Financial Magazine.                             (10 marks)

c) Calculate the number of copies of the Financial Magazine that need to be sold to achieve a profit of GH¢100,000.         (6 marks)

Boasiako Ltd manufactures high quality coffee biscuits that are sold to hotels and restaurants in Koforidua. Two months ago it had prepared a budget for the forthcoming financial year.

Details of the budget is presented below:
.                                                                                       GH¢
Sales                                                                             6,000,000
Less:
Direct materials                                                           2,080,000
Direct labour                                                                1,160,000
Variable overheads                                                      840,000
Fixed overheads                                                           972,600
Total costs                                                                    5,052,600
Profit                                                                             947,400

The budget above has been prepared on the assumption that sales will be 800,000 packets of biscuits. However, due to changing economic conditions, the sales forecast for the year is now 720,000 packets of biscuits. It is expected that selling price per unit, direct costs per unit and variable overhead cost per unit will not change from those budgeted. It is also expected that fixed overheads will be the same as those budgeted.

Management is now considering a number of options so as to improve profitability for the forthcoming financial year:
Option 1:
Decrease the selling price by 20%. It is anticipated that this would increase sales volume by 25% on the forecast sales for the current year.
Option 2:
Decrease all variable costs by 10% and decrease fixed costs by 10%. This is not expected to have any impact on the sales level.
Option 3:
Decrease the selling price by 10% and decrease fixed costs by 5%. This is expected to increase sales volume by 25% on the forecast sales for the current year.

Required:
a) Calculate the expected profit for the current year (forecast sales).                                                                                          (2 marks)

b) Based on the forecast activity for the year, calculate:                            (6 marks)
i) The breakeven point in packets of biscuits.

ii) The margin of safety in percentage terms.

iii) The sales revenue required to earn a profit of GH¢1,440,000.

c) Evaluate the profitability of the three options and recommend the option that Boasiako Ltd should adopt.                          (7 marks)

Zealow Ltd has just introduced a new standard marginal costing system to assist in the planning and control of the production activities for the single product which the company manufacturers. “The Stand”, the system became operational on 1 March 2017.

The Management Accountant has consulted with the Senior Engineer and they have agreed the following standard specifications to manufacture one unit of the product known as “The Stand”.

Direct materials        4kg @ GH¢1.75 per kg
Direct labour             2 hours @ GH¢10 per hour
Variable overhead   2 hours @ GH¢8.25 per hour

The Marketing Director has advised that in Zealow Ltd’s industry, the budgeted selling price is normally calculated to achieve a mark up to 30% on cost.

The budgeted level of production and sales activity has been agreed with both production managers and sales staff at 24,000 units per month.

The actual results for the month of March 2017 are as follows:
Sales                              22,000 units yielding a total revenue of GH¢1,276,000
Production                    23,000 units
Direct Materials           90,000 kgs at a cost of GH¢162,000
Direct labour                48,000 hours at a cost of GH¢576,000
Variable overhead        GH¢350,000
Required:

Zealow Ltd uses a standard marginal costing system and therefore fixed costs have been ignored in the calculations shown above. Assuming that the fixed costs for the company are estimated to be GH¢1,879,200 per annum, calculate the monthly sales in both units and value which will be required to break-even and estimate the margin of safety, based on the current budget levels.                                                                                                                                                                                   (3 marks)

DDB limited has decided to set up a factory to process groundnuts into oil. The feasibility studies cost them GH¢35,000. The consultants have advised that the initial outlay will be GH¢250,000, however, they were unable to estimate the cash inflow due to the uncertain economic environment.
Required:
Using NPV as an appraisal technique you are required to calculate;
i) The constant cash inflow needed to break even if the cost of capital is 15% and the project is to last for 10 years.      (4 marks)

ii) By how much should the cash inflow increase to break even if cost of capital is increased to 20%.                            (4 marks)

iii) If the cash inflow is GH¢45,000, for how long should the project run to break even if the cost of capital is 15%.     (4 marks)

Anima Ventures want to start a new bakery at Bodwease in Ashanti Region. She plans to rent a store room for her operations under the following terms and conditions.
                                            Option 1                  Option 2
Fixed Rent Charge             GH¢5,000               GH¢3,000
Variable Rent                         –                    10% of selling price of each loaf

The following data are also relevant for her business:
.                                                        GH¢                GH¢
Selling Price                                                            5.00
Material cost:      Flour                  0.80
.                           Margarine          0.70
Labour cost                                    0.50

Required:
i) Determine the break-even point in units under each option.                                                                                           (2 marks)

ii) Calculate the degree of operating leverage (DOL) for the two options if 10,000 loaves of bread are to be sold in the current year.                                                                                                                                                                                      (4 marks)

iii) What would be the expected operating income if sales increase by 25% next year?                                                    (4 marks)

iv) Which of the two options would you recommend to Anima Ventures and why?                                                          (3 marks)