QUESTION ONE

Karibu Textile Mills at Mbagala is currently facing a problem on its packaging machine at the plant. Regarding the specific problem, there are 48 hours of manufacturing time to go before a scheduled shutdown for repairs. One of the machine‘s major parts has developed visible defects, which have not yet had any effect on production. However, it may suddenly fail at any time in the next 48 hours of production operations and, therefore, force an emergency shutdown

Based on these conditions, the production foreman can take one of the two alternatives. He can shut down the plant now and repair the machine on a planned basis, which will take four hours since servicemen are available. Alternatively, he can continue with production operations but run the risk of a sudden breakdown, which will require eight hours due to the need to call in the mechanics, make repairs and restart the machine. In both cases, production time is evaluated to be worth T.shs 100,000. Any lost time can be calculated by this hourly rate.

Experience with this packaging machine indicates that there are 8 chances in 10 in making it through the 48 hours of normal operation without a breakdown. On the other hand, there is a 0.99 probability of the machine holding up during the 48 hours after a shutdown for repairs now.

Required:

  1. Draw a decision tree for this statistical decision problem.
  2. Advise the foreman on the decision to take so as to maximize expected returns to the plant on the optimal use of machine time.

  • Updated: 4 June 24
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  • Attempts: 142
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  • Correct: 141

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Expected Value if we Shut-Down:
QUESTION TWO

Mr. Seba, the General Manager of Kiburugwa Enterprises purchased a machine on January 1, 2023 for TZS 40,000,000/-. The machine has 4 years’ useful life and zero disposal value. The machine would be used to manufacture a product that is estimated to bring in revenue of TZS 300,000,000/- per year. The cost of operating a machine has been estimated at TZS 30,000,000/- per annum. Other annual operating costs of Kiburugwa Enterprises are TZS 220,000,000/-. Kiburugwa Enterprises has a policy of giving its managers annual bonus that is a percentage of the net income generated during the year.

A week after he bought a machine, Mr. Seba was informed by a friend that there was a machine which was ideal for the manufacture of his product, at a list price of TZS 48,000,000/-. A friend claimed that the machine has the same capacity as the machine that Mr. Seba bought and it has the same useful life. However, the cost of operating the machine was only TZS 18,000,000/- per year. A friend further informed Mr. Seba that he could find a buyer who is willing to pay TZS 16,000,000/- for a machine that Mr. Seba had bought on the January 1, 2023. Other annual operating costs of Kiburugwa Enterprises would remain the same whatever alternative is chosen. Kiburugwa Enterprises uses straight line depreciation for the its fixed assets.

Required:

  1. Using only relevant cost and revenue, advise Mr. Seba whether he should purchase a new machine or not.
  2. Prepare the income statement of Kiburugwa Enterprises for the four years under each alternative.

  • Updated: 22 June 24
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  • Attempts: 198
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  • Correct: 89

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Net advantage if we buy new machine:
QUESTION THREE

The Mwanamboka Manufacturing Company in Mwanza manufactures a product that it distributes through its own sales branches in the northern part of the country.

The company’s president, Mr. Maji Marefu was recently approached by a distributor from the eastern part of the country who showed interest in obtaining a franchise for distribution of the product in eastern part of the country which now is not served by the company. The distributor proposes that he will purchase the product from the Mwanamboka Manufacturing Company at a price of shs. 3,250 f.o.b. the Mwanamboka Manufacturing Company factory and offer it for sale to retailers at a price of shs.4,250.

The distributor would pay freight charges averaging shs. 350 per unit. No sales commissions would be paid on these sales. The product is now sold to retailers in Mwanamboka’s present market area at a price of shs.4,400 delivered. Sales commissions are computed at 5% of sales. Freight charges averages shs.150 a unit.Other selling and administrative costs are regarded as fixed and amount to shs.450 per unit.

Manufacturing costs amounts to shs. 2,950 per unit as follow:-

Tshs
Material cost 1,870
labour cost 300
Variable overhead costs 330

Manufacturing capacity will be adequate to handle the increased volume of the Eastern Zone order, which the company estimates would amount to 1,000 units a month. This additional order would bring about an increase of fixed factory overhead to the tune of shs. 150,000 per month.

REQUIRED: Should the Mwanamboka Manufacturing Company accept the arrangement suggested by the Eastern Zone distributor?


  • Updated: 22 June 24
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  • Attempts: 193
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  • Correct: 68

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Incremental cost:
QUESTION FOUR

Eva Chambo runs a shop at Kiwalani - Dar - es - Salaam retailing Compact Discs (CD) which sell for Tshs. 4,950 each. Each CD costs the business Tshs 2,900 and there are other expenses attached to the sale, estimated to amount to Tshs 50 per CD. Eva is considering switching to a lower priced range of CD retailing at Tshs. 4,250 each. These CDs would cost Eva Tshs 2,700 each, with other expenses of Tshs 50 per CD as before. The annual expenses of the business for the coming year are estimated to be as follows:

Amount (TZS)
Wages 11,000,000
Rent 3,500,000
Electricity 1,200,000
Insurance and other fixed expenses 2,300,000

The manager of the shop estimated the probabilities of different levels of sales demand in units as follows:

Probability High priced Range CDs Low priced Range CDs
0.25 13,000 14,000
0.50 14,000 20,000
0.25 15,000 24,000

Required:

  1. Which alternative should the manager choose? Explain your answer.
  2. What is the maximum amount the manager should be prepared to pay for the perfect information regarding future sales demand?

  • Updated: 22 June 24
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  • Attempts: 69
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  • Correct: 0

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Expected profit for the High priced Range CDs:
QUESTION FIVE

The Mukoko Manufacturing company produces and sells three product lines. Below is a profit and Loss Statement in summary form for six months period. The Mukoko Manufacturing Company Profit or Loss Statement in Summary Form for the 6 months ended 30th June 2024

Product Lines
TotalA BC
Sales 5,000,000 2,000,000 2,200,000 800,000
Cost of Goods sold 3,320,000 1,480,000 1,360,000 480,000
Gross Margin 1,680,000 520,000 840,000 320,000
Selling Expenses 820,000 260,000 420,000 140,000
Administrative Expenses 600,000 200,000 200,000 200,000
Total Operational Expenses 1,420,000 460,000 620,000 340,000
Profit Before Taxes 260,000 60,000 220,000 -20,000

You are given additional information as follows:-

  1. Cost of Goods sold include T.shs. 1,200,000 of fixed manufacturing overhead which has been allocated to the product lines as follows: -
    A: 40%
    B: 40%
    C: 20%
  2. Selling expenses have been allocated to the product lines on the basis of sales orders. However, the variable selling expenses for each product line amount to 10% of sales shillings.
  3. Administrative expenses are all fixed.

Management is concerned with the poor performance of product line C. During a discussion with the Sales Manager, the Managing Director of the Company expressed total dissatisfaction about the loss on product line C. The following alternative was discussed and explored: “Eliminate product C, maintain the present volume for product line A and B, and rent the unused production facilities for T.shs. 60,000 a month”.
Required:
Advice management on the best course of action to take.


  • Updated: 22 June 24
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  • Attempts: 187
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  • Correct: 0

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Differential Revenue:
QUESTION SIX

Quick Print Ltd is proposing to introduce to the market a new type of laser printer. It has three possible models which reflect speed of printing and available fonts: Basic, Fast and Enhanced. (The model numbers are QP200B, QP500F and QP700E respectively). However the company has only sufficient capacity to manufacture one of this models. An analysis of the probable market acceptance of each of the three models has been carried out and the resulting profits estimated as follows:-

Profits (Millions)
Probability Model type
QP200B QP500F QP700E
Excellent (E) 0.2 60 100 120
Moderate (M) 0.5 40 60 80
Poor (P) 0.3 20 0 (40)

Required:

  1. Using the maximum expected profit criterion, choose an appropriate model to introduce to the market.
  2. Explain what is meant by the "expected value of perfect information". Calculate its value for this situation.

  • Updated: 22 June 24
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  • Attempts: 85
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  • Correct: 43

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Expected highest profit:
QUESTION SEVEN

The Usambara Spinning Mill has two production departments; Machining and Assembly. The Machining department has a monthly capacity of 1,500 machine hours and the Assembly department a monthly capacity of 3,000 direct labour hours. The production capacity of either can be expanded within a period of 15 months.

At present the company makes 3 products all of which us the same machining and assembly facilities. The expected demand, unit selling price, the variable costs and the time which each unit takes in machining and assembly are provided below:-

Product A B C
Unit Selling Price 1,000 2,000 2,500
Variable Cost 400 1,200 1,240
Machine time 2 hours 4 hours 6 hours
Assembly time 3 hours 6 hours 8 hours
Monthly demand 200 units 200 units 100 units

The company has fixed overheads of shs. 200,000 per month.

Required:

  1. Calculate the mix of production and sales which will maximize profits within the constraints under which the company operates. Calculate the profit at this mix. State all the assumptions which you have made in your calculations.
  2. Mr. Mbwambo, the Managing Director has asked you as to which is the most profitable product. Write a memo to him responding to his question.
  3. The Marketing Director has suggested that if a further shs. 15,000 is spent on advertising product A, the sales could be increased to 300 units per month without any reduction in selling price. Is the additional advertising worthwhile if the company is already short of production capacity? State all your assumptions.

  • Updated: 22 June 24
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  • Attempts: 143
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  • Correct: 78

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Maximum profit:
QUESTION EIGHT

The Dar es Salaam Lamp Factory produces a student reading table lamp Annual production is 10,000 lamps. Currently sales are 8,000 lamps per year. Per unit cost and revenue data are as follows:-

Price TShs.2,400
Cost
Materials 900
Labour 300
Variable Overhead 300
Fixed Overhead 300
Sales Commissions 240 2,040
Profit per unit TShs. 360

Variable overhead varies directly with direct labour hours and overhead rate equals the labour rate. Fixed overhead is applied at the rate of 100% of direct labour costs and sales commissions are 10% of the selling price. There are no sales commissions for special orders.
Required:
Treat each question below independently:

  1. Suppose Dar es Salaam Lamp Factory receives a special order for 1,000 lamps from a new customer. This would not affect current sales. Compute the minimum price the factory should accept for this special order.
  2. Suppose Dar es Salaam Lamps Factory receives a special order for 3,000 lamps from a new customer. If the order is accepted, it must be filled completely. Compute the minimum price the company should accept
  3. Suppose that current excess capacity is used to repair lamps. The repair business generates a total contribution margin of shs. 300,000. It is estimated that the existence of the repair business increases sales of lamps by 2,000 units per year. If production exceeds 8,000 units, the repair business must be discontinued. How, if at all, would this affect your answers to part (a) and (b) above?

  • Updated: 22 June 24
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  • Attempts: 76
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  • Correct: 35

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part (a) Minimum Price:
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