Advanced Management Accounting Assignment -
Question 1 -
(a) Ben and Jean opened a bakery in Orchard Road and it was a huge success, so they decided to open a few more bakeries in the heartlands. Peter was hired to manage these bakeries.
Ben and Jean are considering two different sets of performance measures for Peter. The first set would grade Peter based on the cleanliness of the outlets and customer service. The second set would use accounting numbers including the profit of those bakeries under his care.
Explain the advantages and disadvantages of each set of performance measures.
(b) The Parkway Resort is a privately owned golf club. It has the following managers and organisational structure.
James Tan: General Manager responsible for all the operations of the golf course and other facilities (swimming pool, restaurant, golf shop).
Hubert Lim: Manager of the facilities and estate maintenance. Moses Lee : Manager of the restaurant within the resort.
Lionel Ho: Head golf professional and responsible for golf lessons, the golf shop, and reserving times for starting golfers on the course.
Jimmy Beh: Manager of golf carts rented to golfers and manages the caddies.
Distinguish each of the managers in terms of being responsible for a cost, profit, or investment center and possible performance measures for each manager.
Question 2 - To increase the division's profit, the manager of Industrial Services Division, Gilbert, is considering the acquisition of a new asset. The division already earns $780,000 on assets of $2,600,000. The company's cost of capital is 15%. The new investment has a cost of $450,000 and will have a yearly cash inflow of $168,000. The asset will be depreciated using the straight-line method over a 6-year life and is expected to have no salvage value. ROI is based on beginning-of-year net book values in the denominator.
He is also exploring the option of leasing the asset on a year-to-year lease for $148,000 per year. All depreciation and other tax benefits would be accrued to the lessor.
(a) Compute the division ROI and RI before the acquisition of the asset.
(b) Compute the division ROI and RI in the first year after acquisition of the asset.
(c) Compute the division ROI and RI if the manager opts for the leasing option.
(d) Based on the three scenarios in part (a), (b) and (c), discuss which option Gilbert should take up.
Question 3 - Division A has a pre-fabricated product that can be sold either to external customers or to Division B of the same company for use in its production process. The managers of the divisions are evaluated based on their divisional profits. Sales and cost data on the product are as follow:
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Selling price per unit on the market
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$30
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Variable costs per unit
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$21
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Fixed costs per unit (based on production capacity)
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$4
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Production capacity in units per month
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7,500
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Division B needs 1,000 units of the product from Division A per month. It has received a quote of $24 from another manufacturer. Division A is now selling 6,000 units of the product to external customers per month.
(a) From the standpoint of Division A, calculate the highest and lowest acceptable transfer price for the product to be sold to Division B.
(b) From the standpoint of Division B, calculate the highest and lowest acceptable transfer price for the product to be acquired from Division A.
(c) If both division managers are given autonomy in decision-making, will the product be transferred from Division A to Division B? Explain your answer with figures.
(d) Assuming now that external demand for the product exceeds the production capacity and Division A is able to sell all the products to external customers. If both managers are given autonomy in decision-making, will the product be transferred from Division A to Division B? Explain your answer with figures.
(e) Briefly describe the organisation where you are working at or one that you are familiar with.
Give an example of a good or service that can be transferred from one division of the organisation to another.
What do you think is an ideal way of determining the transfer price? Explain why you think so.
Question 4 - Lourve Boutique sells women's clothing. Lourve's strategy is to offer a wide selection of clothes and excellent customer service and charge a premium price. Lourve presents the following data for 20X1 and 20X2. Assume that each customer purchases one piece of clothing.
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20X1
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20X2
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Piece of clothing purchased and sold
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60,000
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60,000
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Average selling price
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$160
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$158
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Average cost per piece of clothing
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$120
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$122
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Selling and customer service capacity
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32,000 customers
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27,000 customers
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Selling and customer service costs
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$768,000
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$639,900
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Selling and customer service capacity cost per customer (Line 5/Line 4)
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$24.00
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$23.70
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Purchasing and administrative capacity
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200 designs
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172 designs
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Purchasing and administrative costs
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$138,000
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$116,960
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Purchasing and administrative capacity cost per distinct design (Line 8/Line 7)
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$690
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$680
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Total selling and customer service costs depend on the capacity and not on the actual number of customers Lourve serves. Total purchasing and administrative costs depend on purchasing and administrative capacity.
(a) Help Lourve Boutique develop a balance scorecard by doing the following:
(i) Briefly describe the key elements to be included for Lourve's balanced scorecard and the reasons for doing so.
(ii) Identify the pitfalls to avoid when implementing a balance scorecard.
(b) Employ strategic analysis of operating income by computing the price-recovery component of changes in operating income between 20X1 and 20X2.