TASK 1 Planning for profit and cost control
To enable the learner to prepare the budgeted profit statement and
undertake cost-volume-profit analysis for decision making.
Marks allocated 35 marks
Anhad Sdn. Bhd. manufactures car alarms, and its trading results for the year ended 31 October
2013 are as follows:
Sales (800,000 alarms) 7,200
Materials: direct, variable 1,600
Labour: direct, variable 960
Labour: indirect, fixed 280
Other production overheads: variable 400
Other production overheads: fixed 640
Selling overheads: variable 480
Selling overheads: fixed 360
Distribution overheads: variable 280
Distribution overheads: fixed 120
Administration overheads: fixed 600
Net profit for the year 1,480
Anhad is planning next year’s activity and its forecasts for the year ended 31 October 2014 are
1. A reduction in selling price per car alarm to $8 per alarm is expected to increase sales
volume by 50%.
2. Materials costs per unit will remain unchanged, but 5% quantity discount will be
3. Hourly direct wage rates will increase by 10%, but labour efficiency will be unchanged.
4. Variable selling overheads will increase in total in line with the increase in sales revenue.
5. Variable production and distribution overheads will increase in line with the 50%
increase in sales volume.
6. All fixed costs will increase by 25%.
You are required to do the following:
a) Prepare a budgeted profit statement for the year to 31 October 2014 showing total
sales and marginal costs for the year and also contribution and net profit per unit.
b) Calculate the break-even point for the two years and explain why the break-even point
has changed. Comment on the margin of safety in both years.
c) Calculate the sales volume required (using the new selling price) to achieve the same
profit in 2014 and in 2013.
d) A director comments that ‘with these figures, all we have to do to work out our
budgeted profit is to multiply the net profit per unit by the units we want to sell”. Why
is this statement incorrect?
TASK 2 Investment appraisal
To enable the learner to evaluate and make choices between
different projects in which to invest.
Marks allocated 35 marks
Satnam Berhad is considering diversifying their business activities and they are currently
reviewing two proposals. Proposal A is to launch their own television station whilst Proposal B
is a joint venture with Kaboor Limited to launch a satellite that would enable the African region
to receive advertisements for both company’s products.
The available data is follows:
Proposal A – TV Station
Initial set-up costs: $250 million
Annual running costs: $100 million
Estimated life of project: 5 years
Value of assets released at the end of the project: $40 million
Increased sales as a result of advertising products: $60 million in the first year, growing
cumulatively by 50% each year for the following four years.
Project B – Satellite
Initial set-up costs: $700 million
Annual running costs: $50 million
Value of assets released at the end of the project: $10 million
(Note: all the above to be shared 50/50 with Kaboor Limited)
Estimated life of the project is 6 years.
Increased sales for Satnam Berhad as a result of advertising their products in the African
continent: $80 million in the first year, growing cumulatively by 20% each year for the following
Funding for both projects would be at a cost of capital of 6%.
Relevant discount factors at 6% p.a. are:
1 0.943 0.943
2 0.890 1.833
3 0.840 2.673
4 0.792 3.465
5 0.747 4.212
6 0.705 4.917
a) Using the net present value method of investment appraisal, critically evaluate the two
proposals and make your recommendation to Satnam Berhad.
b) What other considerations should Satnam Berhad take into account in deciding which
Project to pursue?
TASK 3 Short term decision making
To enable the learner to identify the relevant and irrelevant costs
and benefits associated with each feasible alternative with the
greatest overall net benefit to aid decision making.
Marks allocated 30 marks
Swagat Manufacturing Sdn. Bhd. needed to determine if it would be cheaper to make 10,000
units of a component in-house or to purchase them from an outside supplier for $4.75 each.
Cost information on internal production includes the following:
Total Cost Unit Cost
Direct materials 10,000 1.00
Direct labour 20,000 2.00
Variable overheads 8,000 0.80
Fixed overheads 44,000 4.40
Total 82,000 8.20
Fixed overhead will continue whether the component is produced internally or externally. No
additional costs of purchasing will be incurred beyond the purchase price.
a) List the relevant cost of internal production and external purchase