MAC2601 Oct/Nov 2013 exam paper — questions

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  1. Question 1.1 · Accounting for material, labour and overheads; inventory valuation · 2 marks

    Question 1 is a multiple-choice section made up of ten short questions, numbered 1.1 to 1.10, each worth 2 marks. For each one you must write down the question number together with the letter (A, B, C or D) of the option you consider correct. Abbettery (Pty) Ltd is a construction company that builds large shopping malls as well as residential complexes, and it values its inventory using the FIFO method. Its inventory records for October 2013 show an opening inventory on 1 October of 150 units at R6,50 each, and a purchase on 3 October of 1 200 units at R6,80 each; freight charges equal to 10% of the cost price per unit apply, and the average ZAR/USD exchange rate for that day was 9,9275. On 5 October, 800 units were issued, and on 8 October 25 units (out of units bought on 8 October) were returned to the supplier. Using the FIFO method, what is the value of the inventory purchased on 3 October 2013? Choose the correct option: A. R8 796; B. R8 061; C. R8 976; D. R8 160.Show the full question

  2. Question 1.2 · Accounting for material, labour and overheads; inventory valuation · 2 marks

    Question 1 is a multiple-choice section made up of ten short questions, numbered 1.1 to 1.10, each worth 2 marks. For each one you must write down the question number together with the letter (A, B, C or D) of the option you consider correct. Referring again to Abbettery (Pty) Ltd, which uses the FIFO method of inventory valuation, which one of the following statements correctly describes this inventory valuation method? A. Materials received or purchased first are issued last; B. Materials received or purchased first are issued first; C. Materials with the highest value are issued first; D. Materials with the lowest value are issued last.Show the full question

  3. Question 1.3 · Direct and absorption costing · 2 marks

    Question 1 is a multiple-choice section made up of ten short questions, numbered 1.1 to 1.10, each worth 2 marks. For each one you must write down the question number together with the letter (A, B, C or D) of the option you consider correct. Nkandla (Pty) Ltd absorbs its production overheads on the basis of machine hours. In the preceding accounting period, the budgeted production overheads were R200 000 against actual production overheads of R225 000; budgeted machine hours were 40 000 against actual machine hours of 35 000; and budgeted units produced were 25 000 against actual units produced of 22 500. Determine whether the overheads for the preceding period were over- or under-applied, and by how much: A. R50 000 over applied; B. R50 000 under applied; C. R45 000 under applied; D. R45 000 over applied.Show the full question

  4. Question 1.4 · Direct and absorption costing · 2 marks

    Question 1 is a multiple-choice section made up of ten short questions, numbered 1.1 to 1.10, each worth 2 marks. For each one you must write down the question number together with the letter (A, B, C or D) of the option you consider correct. A chicken farm applies a predetermined overhead recovery rate based on machine hours. For the year, budgeted farming overheads amounted to R600 000, while actual farming overheads amounted to R750 000. During the year the farm absorbed R810 000 of farm overheads based on 125 000 actual machine hours worked. Calculate the farm's budgeted level of machine hours for the year (rounded to the nearest whole number): A. 92 395 hours; B. 125 000 hours; C. 92 593 hours; D. 126 000 hours.Show the full question

  5. Question 1.5 · Job costing · 2 marks

    Question 1 is a multiple-choice section made up of ten short questions, numbered 1.1 to 1.10, each worth 2 marks. For each one you must write down the question number together with the letter (A, B, C or D) of the option you consider correct. Jambo Plumbing Services is in the process of implementing a costing system and requires the expertise of a management accountant; its manager, P. Postman, approaches you for advice. Which one of the following statements is NOT true about a job costing system? A. Job costing is appropriate where homogeneous products are manufactured using the same production facilities; B. Job costing is appropriate where heterogeneous products are manufactured using the same production facilities; C. A common example of a business where job costing is applied is a workshop where repairs are carried out on different vehicles and the cost of repairing each vehicle is calculated separately; D. Job costing is not appropriate in industries where large quantities of similar products pass through a single process or consecutive processes during production.Show the full question

  6. Question 1.6 · Process and joint product costing · 2 marks

    Question 1 is a multiple-choice section made up of ten short questions, numbered 1.1 to 1.10, each worth 2 marks. For each one you must write down the question number together with the letter (A, B, C or D) of the option you consider correct. The following data relates to two joint products, Isitya and Ikopi. For Isitya: sales at the split-off point are R120 000, sales after further processing are R190 000, the joint cost allocated up to the split-off point is R50 000, and further processing costs are R30 000. For Ikopi: sales at the split-off point are R90 000, sales after further processing are R150 000, the joint cost allocated up to the split-off point is R35 000, and further processing costs are R30 000. Based on this information, which product(s) should be sold at the split-off point and which product(s) should be sold after further processing? A. Isitya: split-off point; Ikopi: split-off point; B. Isitya: further process; Ikopi: split-off point; C. Isitya: split-off point; Ikopi: further process; D. Both Isitya and Ikopi must be processed further.Show the full question

  7. Question 1.7 · Nature and behaviour of costs; cost estimation · 2 marks

    Question 1 is a multiple-choice section made up of ten short questions, numbered 1.1 to 1.10, each worth 2 marks. For each one you must write down the question number together with the letter (A, B, C or D) of the option you consider correct. Questions 1.7 and 1.8 relate to budgeted and actual figures taken from the records of Phala (Pty) Ltd. At a budgeted level of 8 000 units: sales are R5 400 000, variable manufacturing costs are R1 936 000, and semi-variable selling and administrative costs are R2 195 200. At a budgeted level of 12 000 units: sales are R8 100 000, variable manufacturing costs are R2 904 000, and semi-variable selling and administrative costs are R2 917 200. The actual results for 10 500 units were: sales of R7 035 000, variable manufacturing costs of R2 625 000, and semi-variable selling and administrative costs of R2 326 800. Jim Mathoho, the chief operating officer, remarked after observing how expected sales and production volumes differed from the fixed budget, 'As soon as the fixed budget was approved, it was out of date.' Based on this information, what is the budgeted variable cost per unit? A. R422,50; B. R180,50; C. R242,00; D. R274,00.Show the full question

  8. Question 1.8 · Budgeting · 2 marks

    Question 1 is a multiple-choice section made up of ten short questions, numbered 1.1 to 1.10, each worth 2 marks. For each one you must write down the question number together with the letter (A, B, C or D) of the option you consider correct. Using the same Phala (Pty) Ltd budgeted and actual data described for question 1.7 (budgeted figures at 8 000 and 12 000 units, and actual figures at 10 500 units, for sales, variable manufacturing costs and semi-variable selling and administrative costs), determine what contribution amount the flexible (flexed) budget will show: A. R4 546 500; B. R1 835 750; C. R3 731 000; D. R2 649 250.Show the full question

  9. Question 1.9 · Relevant costing for short-term decisions · 2 marks

    Question 1 is a multiple-choice section made up of ten short questions, numbered 1.1 to 1.10, each worth 2 marks. For each one you must write down the question number together with the letter (A, B, C or D) of the option you consider correct. Choose the correct term for the following definition: an amount that was incurred in the past and that cannot be changed by any future decision. A. Committed (unavoidable) cost; B. Committed (unavoidable) income; C. Incremental cost; D. Sunk cost.Show the full question

  10. Question 1.10 · Relevant costing for short-term decisions · 2 marks

    Question 1 is a multiple-choice section made up of ten short questions, numbered 1.1 to 1.10, each worth 2 marks. For each one you must write down the question number together with the letter (A, B, C or D) of the option you consider correct. Which one of the following methods would be most appropriate for allocating resources where more than one (multiple) constraints apply and the organisation produces a single product, given that feasible production output is less than demand? A. Use the contribution per limiting factor to rank products for the optimal product mix; B. Produce the full number of units for which there is a demand; C. Limit output to the resource with the highest (most constrictive) constraint; D. Use the contribution per unit of output to rank products for the optimal product mix.Show the full question

  11. Question 2.1 · Direct and absorption costing · 7 marks

    The management accountant of Vivo (Pty) Ltd, a company that manufactured a single product for the year ended 31 October 2013, has supplied the following figures. Variable prime costs per unit were R120 in 2013 (R105 in 2012), while the selling price per unit was R200 in 2013 (R180 in 2012). Overhead costs comprised variable manufacturing overheads of R45 per unit, fixed manufacturing overheads of R150 000, fixed selling and administrative overheads of R80 000, and variable selling and administrative overheads of R2 per unit. Additional information states that Vivo (Pty) Ltd manufactures 20 000 units every year, that 15 000 units were sold during 2013, and that apart from the change in prime costs, the company's cost structure stayed the same as in 2012. The opening inventory of 2 500 units, valued for IFRS (financial accounting) purposes at 1 November 2012, amounted to R393 750, and there was no opening inventory at 1 November 2011. The company applies the weighted average method of inventory valuation. Using the direct costing method, draw up the contribution statement of comprehensive income for Vivo (Pty) Ltd for the year ended 31 October 2013.Show the full question

  12. Question 2.2 · Direct and absorption costing · 8 marks

    The management accountant of Vivo (Pty) Ltd, a company that manufactured a single product for the year ended 31 October 2013, has supplied the following figures. Variable prime costs per unit were R120 in 2013 (R105 in 2012), while the selling price per unit was R200 in 2013 (R180 in 2012). Overhead costs comprised variable manufacturing overheads of R45 per unit, fixed manufacturing overheads of R150 000, fixed selling and administrative overheads of R80 000, and variable selling and administrative overheads of R2 per unit. Additional information states that Vivo (Pty) Ltd manufactures 20 000 units every year, that 15 000 units were sold during 2013, and that apart from the change in prime costs, the company's cost structure stayed the same as in 2012. The opening inventory of 2 500 units, valued for IFRS (financial accounting) purposes at 1 November 2012, amounted to R393 750, and there was no opening inventory at 1 November 2011. The company applies the weighted average method of inventory valuation. Using the absorption costing method, draw up the statement of comprehensive income for Vivo (Pty) Ltd for the year ended 31 October 2013.Show the full question

  13. Question 3(a) · Activity-based costing · 5 marks

    You work as a senior management accountant at Fabulous (Pty) Ltd, a profitable manufacturing company situated in Kempton Park. The Financial Director of Fabulous (Pty) Ltd asked you to attend a management accounting seminar on activity-based costing presented by Charl Hatt, a specialist in the field, and afterwards you feel equipped to help Fabulous implement activity-based costing. The company makes four products, C1, C2, C3 and C4, with respective output levels of 200, 250, 100 and 300 units, and machine hours per unit of 5, 4, 2,25 and 3 respectively. Production overheads for the period consist of machine department costs of R40 000, setup costs of R20 000, stores receiving of R15 000, inspection of R10 000, and material handling and dispatch of R25 000. For activity-based costing purposes the cost drivers are: machine hours for machine department costs (with the cost driver volume left blank, shown as '?'), number of production runs for setup costs (20 runs), requisitions raised for stores receiving (60 requisitions), number of inspections for inspection costs (50 inspections), and orders executed for materials handling (25 orders). Assuming that all production overheads are instead allocated to products on the basis of machine hours (not using activity-based costing), calculate the manufacturing overhead cost per unit of product C2.Show the full question

  14. Question 3(b) · Activity-based costing · 5 marks

    You work as a senior management accountant at Fabulous (Pty) Ltd, a profitable manufacturing company situated in Kempton Park. The Financial Director of Fabulous (Pty) Ltd asked you to attend a management accounting seminar on activity-based costing presented by Charl Hatt, a specialist in the field, and afterwards you feel equipped to help Fabulous implement activity-based costing. The company makes four products, C1, C2, C3 and C4, with respective output levels of 200, 250, 100 and 300 units, and machine hours per unit of 5, 4, 2,25 and 3 respectively. Production overheads for the period consist of machine department costs of R40 000, setup costs of R20 000, stores receiving of R15 000, inspection of R10 000, and material handling and dispatch of R25 000. For activity-based costing purposes the cost drivers are: machine hours for machine department costs (with the cost driver volume left blank, shown as '?'), number of production runs for setup costs (20 runs), requisitions raised for stores receiving (60 requisitions), number of inspections for inspection costs (50 inspections), and orders executed for materials handling (25 orders). Assuming that activity-based costing is now used, calculate an activity rate for each of the five activities: machine department costs, setup costs, stores receiving, inspection, and material handling and dispatch.Show the full question

  15. Question 4(a) · Process and joint product costing · 7 marks

    Simple Snacks (Pty) Ltd manufactures a single product through one process and applies a process costing system. For June 2013 the following unit data apply: work-in-process on 1 June 2013 stood at 300 000 units, 20% completed; work-in-process on 30 June 2013 stood at 240 000 units, 90% completed; 400 000 units were started (put into production) during June; and 420 000 units were completed during June. Additional information: raw materials are added at the start of the process while conversion costs are incurred evenly throughout the process; normal losses are estimated at 4% of the units that reach the wastage point. Cost details for June 2013 were: work-in-process on 1 June 2013 comprised R1 050 000 of material cost and R432 000 of conversion cost; current production cost for the month comprised R1 456 000 of material cost and R2 029 000 of conversion cost. Using the data given for Simple Snacks (Pty) Ltd for June 2013, prepare the quantity statement for June 2013 using the weighted average method, assuming that wastage occurs at the point where the process is 10% complete.Show the full question

  16. Question 4(b) · Process and joint product costing · 8 marks

    Simple Snacks (Pty) Ltd manufactures a single product through one process and applies a process costing system. For June 2013 the following unit data apply: work-in-process on 1 June 2013 stood at 300 000 units, 20% completed; work-in-process on 30 June 2013 stood at 240 000 units, 90% completed; 400 000 units were started (put into production) during June; and 420 000 units were completed during June. Additional information: raw materials are added at the start of the process while conversion costs are incurred evenly throughout the process; normal losses are estimated at 4% of the units that reach the wastage point. Cost details for June 2013 were: work-in-process on 1 June 2013 comprised R1 050 000 of material cost and R432 000 of conversion cost; current production cost for the month comprised R1 456 000 of material cost and R2 029 000 of conversion cost. Using the data given for Simple Snacks (Pty) Ltd for June 2013, prepare the quantity statement for June 2013 using the FIFO method, assuming that wastage occurs at the end of the process.Show the full question

  17. Question 5(a)(i) · Standard costing and variance analysis · 3 marks

    Prepaid Meters (Pty) Ltd manufactures prepaid electrical devices and supplies them to the City of Tshwane, operating a manufacturing plant in Rosslyn, Tshwane. The company applies standard costing and uses two raw materials in production, material CTA 1 and material CTA 2. You have been appointed as financial director to help the company become the best in terms of revenue and service levels, and your first task is to assist with standard costing matters. The budget for the year ended 31 October 2013 was based on budgeted sales of 9 000 units and specifies: labour hours of 90 000 at a rate of R15 per hour; material CTA 1 usage of 0,95 kg per unit at R19 per kg (R18,05 per unit); and material CTA 2 usage of 0,85 kg per unit at R20 per kg (R17,00 per unit). The actual results for the period were: actual production of 8 000 units; actual labour hours worked of 80 000; actual labour cost of R1 600 000; materials purchased and used comprising 500 kg of CTA 1 costing R12 000 and 400 kg of CTA 2 costing R6 000. Using the budget and actual figures given for Prepaid Meters (Pty) Ltd for the period ended 31 October 2013 (budgeted labour hours 90 000 at R15 per hour; actual labour hours 80 000 costing R1 600 000 in total), calculate the labour rate variance.Show the full question

  18. Question 5(a)(ii) · Standard costing and variance analysis · 3 marks

    Prepaid Meters (Pty) Ltd manufactures prepaid electrical devices and supplies them to the City of Tshwane, operating a manufacturing plant in Rosslyn, Tshwane. The company applies standard costing and uses two raw materials in production, material CTA 1 and material CTA 2. You have been appointed as financial director to help the company become the best in terms of revenue and service levels, and your first task is to assist with standard costing matters. The budget for the year ended 31 October 2013 was based on budgeted sales of 9 000 units and specifies: labour hours of 90 000 at a rate of R15 per hour; material CTA 1 usage of 0,95 kg per unit at R19 per kg (R18,05 per unit); and material CTA 2 usage of 0,85 kg per unit at R20 per kg (R17,00 per unit). The actual results for the period were: actual production of 8 000 units; actual labour hours worked of 80 000; actual labour cost of R1 600 000; materials purchased and used comprising 500 kg of CTA 1 costing R12 000 and 400 kg of CTA 2 costing R6 000. Based on the same budgeted standard of 90 000 labour hours at R15 per hour and the actual results of 8 000 units produced using 80 000 actual labour hours, calculate the labour efficiency variance for Prepaid Meters (Pty) Ltd for the period ended 31 October 2013.Show the full question

  19. Question 5(a)(iii) · Standard costing and variance analysis · 3 marks

    Prepaid Meters (Pty) Ltd manufactures prepaid electrical devices and supplies them to the City of Tshwane, operating a manufacturing plant in Rosslyn, Tshwane. The company applies standard costing and uses two raw materials in production, material CTA 1 and material CTA 2. You have been appointed as financial director to help the company become the best in terms of revenue and service levels, and your first task is to assist with standard costing matters. The budget for the year ended 31 October 2013 was based on budgeted sales of 9 000 units and specifies: labour hours of 90 000 at a rate of R15 per hour; material CTA 1 usage of 0,95 kg per unit at R19 per kg (R18,05 per unit); and material CTA 2 usage of 0,85 kg per unit at R20 per kg (R17,00 per unit). The actual results for the period were: actual production of 8 000 units; actual labour hours worked of 80 000; actual labour cost of R1 600 000; materials purchased and used comprising 500 kg of CTA 1 costing R12 000 and 400 kg of CTA 2 costing R6 000. Using the labour information provided (standard rate R15 per hour on 90 000 budgeted hours; actual labour cost of R1 600 000 for 80 000 hours worked to produce 8 000 units), calculate the total labour variance for Prepaid Meters (Pty) Ltd for the period ended 31 October 2013.Show the full question

  20. Question 5(b) · Standard costing and variance analysis · 4 marks

    Prepaid Meters (Pty) Ltd manufactures prepaid electrical devices and supplies them to the City of Tshwane, operating a manufacturing plant in Rosslyn, Tshwane. The company applies standard costing and uses two raw materials in production, material CTA 1 and material CTA 2. You have been appointed as financial director to help the company become the best in terms of revenue and service levels, and your first task is to assist with standard costing matters. The budget for the year ended 31 October 2013 was based on budgeted sales of 9 000 units and specifies: labour hours of 90 000 at a rate of R15 per hour; material CTA 1 usage of 0,95 kg per unit at R19 per kg (R18,05 per unit); and material CTA 2 usage of 0,85 kg per unit at R20 per kg (R17,00 per unit). The actual results for the period were: actual production of 8 000 units; actual labour hours worked of 80 000; actual labour cost of R1 600 000; materials purchased and used comprising 500 kg of CTA 1 costing R12 000 and 400 kg of CTA 2 costing R6 000. Calculate the material purchase price variance for material CTA 1 and, separately, for material CTA 2, given that the standard price for CTA 1 is R19 per kg and for CTA 2 is R20 per kg, while during the period Prepaid Meters (Pty) Ltd purchased and used 500 kg of CTA 1 for R12 000 and 400 kg of CTA 2 for R6 000.Show the full question

  21. Question 5(c)(i) · Standard costing and variance analysis · 1 marks

    Prepaid Meters (Pty) Ltd manufactures prepaid electrical devices and supplies them to the City of Tshwane, operating a manufacturing plant in Rosslyn, Tshwane. The company applies standard costing and uses two raw materials in production, material CTA 1 and material CTA 2. You have been appointed as financial director to help the company become the best in terms of revenue and service levels, and your first task is to assist with standard costing matters. The budget for the year ended 31 October 2013 was based on budgeted sales of 9 000 units and specifies: labour hours of 90 000 at a rate of R15 per hour; material CTA 1 usage of 0,95 kg per unit at R19 per kg (R18,05 per unit); and material CTA 2 usage of 0,85 kg per unit at R20 per kg (R17,00 per unit). The actual results for the period were: actual production of 8 000 units; actual labour hours worked of 80 000; actual labour cost of R1 600 000; materials purchased and used comprising 500 kg of CTA 1 costing R12 000 and 400 kg of CTA 2 costing R6 000. State whether the following statement is true or false: standard costing may assist the financial director of Prepaid Meters (Pty) Ltd in setting budgets and evaluating managerial performance.Show the full question

  22. Question 5(c)(ii) · Standard costing and variance analysis · 1 marks

    Prepaid Meters (Pty) Ltd manufactures prepaid electrical devices and supplies them to the City of Tshwane, operating a manufacturing plant in Rosslyn, Tshwane. The company applies standard costing and uses two raw materials in production, material CTA 1 and material CTA 2. You have been appointed as financial director to help the company become the best in terms of revenue and service levels, and your first task is to assist with standard costing matters. The budget for the year ended 31 October 2013 was based on budgeted sales of 9 000 units and specifies: labour hours of 90 000 at a rate of R15 per hour; material CTA 1 usage of 0,95 kg per unit at R19 per kg (R18,05 per unit); and material CTA 2 usage of 0,85 kg per unit at R20 per kg (R17,00 per unit). The actual results for the period were: actual production of 8 000 units; actual labour hours worked of 80 000; actual labour cost of R1 600 000; materials purchased and used comprising 500 kg of CTA 1 costing R12 000 and 400 kg of CTA 2 costing R6 000. State whether the following statement is true or false: among other possible causes, the reason for a material price variance could be a failure to take advantage of quantity discounts on bulk purchases.Show the full question

  23. Question 6 · Sensitivity analysis, probabilities and decision trees · 5 marks

    Mac's Moments earns a contribution of R12 per unit sold on the wedding portraits it sells. Management has gathered the following demand estimates for 2014, together with the probability of each level of demand occurring: a demand of 40 000 units has a 15% probability; a demand of 60 000 units has a 5% probability; a demand of 80 000 units has a 35% probability; and a demand of 110 000 units has a 45% probability. You are required to draw up a probability distribution table for Mac's Moments that shows, for each level of demand, the weighted contribution, and then determine the expected value of contribution for 2014.Show the full question

  24. Question 7(a) · Nature and behaviour of costs; cost estimation · 3 marks

    The following figures were extracted from the accounting records of Buda Manufacturers for the six months ending June 2013, showing the number of units produced and the corresponding semi-variable manufacturing overhead costs incurred each month: January - 1 200 units, overheads of R4 560; February - 1 272 units, overheads of R4 932; March - 1 080 units, overheads of R4 202; April - 1 320 units, overheads of R5 364; May - 1 392 units, overheads of R5 520; June - 1 592 units, overheads of R5 994. Using Buda Manufacturers' six-month data for January to June 2013 (units produced and semi-variable manufacturing overheads as given in the introduction), apply the high-low method to calculate the total costs that should be expected in July if 1 530 units are manufactured.Show the full question

  25. Question 7(b) · Nature and behaviour of costs; cost estimation · 7 marks

    The following figures were extracted from the accounting records of Buda Manufacturers for the six months ending June 2013, showing the number of units produced and the corresponding semi-variable manufacturing overhead costs incurred each month: January - 1 200 units, overheads of R4 560; February - 1 272 units, overheads of R4 932; March - 1 080 units, overheads of R4 202; April - 1 320 units, overheads of R5 364; May - 1 392 units, overheads of R5 520; June - 1 592 units, overheads of R5 994. Using the same six months of data for Buda Manufacturers (January to June 2013, units produced and semi-variable manufacturing overheads as given in the introduction), apply the least squares (regression) method to calculate the variable cost per unit and the total fixed costs for the financial year. Use the two simultaneous equations Sigma(xy) = a*Sigma(x) + b*Sigma(x^2) and Sigma(y) = a*n + b*Sigma(x), and round off your final answers for both the variable cost per unit and the total fixed costs to two decimal places.Show the full question

  26. Question 8(a) · Sensitivity analysis, probabilities and decision trees · 3 marks

    The management of Incredible Products (Pty) Ltd has drawn up a decision tree to help decide whether to add new products to its range, where the possible outcomes represent the increase in contribution associated with each specific outcome number. The decision node offers three choices: add 1 new product, add 2 new products, or do not add any new products. If the company chooses to add 1 new product, there is a chance node with a 30% probability leading to outcome 1 (a conditional increase in profit of R50 000) and an unspecified (marked with a '?') probability leading to outcome 2 (a conditional increase in profit of R80 000); since the probabilities at this chance node must sum to 100%, the missing probability for outcome 2 must be inferred. If the company chooses not to add any new products, this leads directly to outcome 3, with a conditional increase in profit of R0. If the company chooses to add 2 new products, there is a first chance node with a 40% probability leading to outcome 4 (a conditional increase in profit of R90 000), and a 60% probability leading to a second chance node; from this second chance node there is a 90% probability leading to outcome 5 (a conditional increase in profit of R100 000) and a 10% probability leading to outcome 6 (a conditional increase in profit of R150 000). Using the decision tree described for Incredible Products (Pty) Ltd, calculate the expected effect on contribution if the company decides to add 1 new product, taking into account the 30% probability outcome yielding R50 000 and the remaining probability outcome yielding R80 000.Show the full question

  27. Question 8(b) · Sensitivity analysis, probabilities and decision trees · 5 marks

    The management of Incredible Products (Pty) Ltd has drawn up a decision tree to help decide whether to add new products to its range, where the possible outcomes represent the increase in contribution associated with each specific outcome number. The decision node offers three choices: add 1 new product, add 2 new products, or do not add any new products. If the company chooses to add 1 new product, there is a chance node with a 30% probability leading to outcome 1 (a conditional increase in profit of R50 000) and an unspecified (marked with a '?') probability leading to outcome 2 (a conditional increase in profit of R80 000); since the probabilities at this chance node must sum to 100%, the missing probability for outcome 2 must be inferred. If the company chooses not to add any new products, this leads directly to outcome 3, with a conditional increase in profit of R0. If the company chooses to add 2 new products, there is a first chance node with a 40% probability leading to outcome 4 (a conditional increase in profit of R90 000), and a 60% probability leading to a second chance node; from this second chance node there is a 90% probability leading to outcome 5 (a conditional increase in profit of R100 000) and a 10% probability leading to outcome 6 (a conditional increase in profit of R150 000). Using the decision tree described for Incredible Products (Pty) Ltd, calculate the expected effect on contribution if the company decides to add 2 new products, taking into account the 40% probability outcome yielding R90 000 and the 60% probability branch which splits further into a 90% probability outcome yielding R100 000 and a 10% probability outcome yielding R150 000.Show the full question

  28. Question 8(c) · Sensitivity analysis, probabilities and decision trees · 2 marks

    The management of Incredible Products (Pty) Ltd has drawn up a decision tree to help decide whether to add new products to its range, where the possible outcomes represent the increase in contribution associated with each specific outcome number. The decision node offers three choices: add 1 new product, add 2 new products, or do not add any new products. If the company chooses to add 1 new product, there is a chance node with a 30% probability leading to outcome 1 (a conditional increase in profit of R50 000) and an unspecified (marked with a '?') probability leading to outcome 2 (a conditional increase in profit of R80 000); since the probabilities at this chance node must sum to 100%, the missing probability for outcome 2 must be inferred. If the company chooses not to add any new products, this leads directly to outcome 3, with a conditional increase in profit of R0. If the company chooses to add 2 new products, there is a first chance node with a 40% probability leading to outcome 4 (a conditional increase in profit of R90 000), and a 60% probability leading to a second chance node; from this second chance node there is a 90% probability leading to outcome 5 (a conditional increase in profit of R100 000) and a 10% probability leading to outcome 6 (a conditional increase in profit of R150 000). Based on the quantitative results calculated for Incredible Products (Pty) Ltd, indicate which one of the three possible decisions (add 1 new product, add 2 new products, or do not add any new products) is the best choice from a quantitative perspective.Show the full question

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