Q16

Tasman Teleco Ltd has two divisions and operates out of Auckland, New Zealand. The Express Division manufactures and transfers a range of computer circuit boards to the Harris Division, which uses those circuits to produce telecommunications equipment for the Asia-Pacific market. The Express Division is operating at full capacity. One circuit board that it transfers to the Harris Division—circuit ABZ—has variable costs of $32 per unit, and it can be sold in the external market to other companies in the computer industry for $40 unit.

To produce its final product, the Harris Division incurs additional variable manufacturing and selling costs of $65 per unit and sells the final product to the external market for $120 per unit.

Required:

(a) Calculate the transfer price for circuit ABZ, using the general transfer pricing rule, assuming that the Express Division has no spare capacity. (1 mark)

(b) Recalculate the transfer price using the general transfer pricing rule, assuming the Express Division has spare capacity and has no other opportunities for that capacity. (1 mark)

(c) Assume that the Express Division has spare capacity. Calculate the transfer price if the company policy for transfer pricing is variable cost plus 20 per cent. Is the internal transfer likely to take place? (2 marks)

(d) The Harris Division has just been contacted by a Malaysian-based company that is offering a product similar to circuit ABZ at the very competitive price of $28. The manager of the Harris Division is very keen to take up this offer. 

(i) Is it in the best interests of each division and the company as a whole if the manager of the Harris Division purchases the circuit ABZ from the Malaysian company rather than from the Express Division? Assume that the Express Division has spare capacity and the company policy for transfer pricing is variable cost plus 20 per cent. (4 marks)

(ii) As the manager of the Express Division, what arguments might you use to encourage the manager of the Harris Division to continue to source the product from your division rather than from the Malaysian company? (2 marks)

Q17

Stamford Office Supplies is a small retailing business that sells stationery to businesses and consumers in its local area. It has a Sales Office, a Warehouse and an Accounts Office, and employs around 10 workers.

Sales staff are paid a base wage and do not receive any performance-based bonuses.  

Orders for stationery supplies are received from customers by the Sales Office via phone, fax or email and are printed off throughout the day and filed in a tray on Jenny’s desk. At the end of each day Jenny collects the printed sales orders, enters them into the computerised sales system, then delivers them to the Warehouse so they can be filled and delivered to the customers. 

Often the Warehouse boys are busy with receiving deliveries or packing shelves when Jenny delivers the orders, so she helps out by picking the ordered goods off the warehouse shelves and packing them in boxes ready for them to be delivered to the customers. The Warehousing staff appreciate her help and in the past, when she has offered to update their system with the orders she’s filled for them, they share their username and passwords with her to give her access to the inventory records.

Once the orders have been boxed, they sit in the dock until the courier arrives to deliver them to Stamford’s customers. The dock is an open space so the couriers can back up their van, check the paperwork stuck to boxes waiting in the dock and grab the delivery without needing to waste time waiting for the Warehousing staff to sign the consignment notes. 

Required:

(a) Identify four lapses in control and explain why they would pose a risk for the business. (4 marks)

(b) Suggest an internal control for each risk, and classify each control as preventive or detective. (4 marks)

Q18

Spectrum Ltd manufactures electronic devices and competes on the basis of quality and leading-edge designs. The company has $2,350,000 invested in assets in its Laptop Division. The operating profit before tax of the Laptop Division this year is $425,000. The Camera Division has $5,500,000 invested in assets and an operating profit before tax this year of $950,000. The weighted average cost of capital for Spectrum (which is also the required rate of return) is 11%. The CEO of Spectrum Ltd has told the manager of each division that the division that “performs best” this year will get a bonus.

Required:

(a) Calculate the return on investment (ROI) and residual income (RI) for each division, and briefly explain which manager will get the bonus based on these two measures. (4 marks)

(b) The manager of the Laptop Division is considering a proposal to invest $140,000 in a new quality testing system. It is estimated that the new system will decrease operating costs (and hence increase profits) by $18,000. Is the manager likely to accept the proposal if his bonuses are based on divisional ROI? Would his decision be in the best interests of Spectrum Ltd? (3 marks)

(c) The Laptop Division has $630,000 of current liabilities, whereas the Camera Division has only $130,000 of current liabilities. Given a tax rate of 30%, calculate the EVA for each division. (2 marks)

(d) The CEO of Spectrum Ltd is concerned that the focus on financial measures could have an adverse long-term effect on the viability of the company. Explain how the implementation of a balanced scorecard would help to address his concerns. (2 marks)

Q19

Starwood International hotel chain saw a sharp reduction in employee turnover rate and skyrocketing employee satisfaction after implementing a radical employee reward and recognition program. High-performing team members worldwide are gifted with prizes ranging from a month-long sabbatical after three years of service to a “Dream Maker” contest that subsidises an outstanding employee’s long-held wish or aspiration.

Required:

Briefly describe the following theories of motivation, and use them to explain the positive motivation associated with the reward and recognition program implemented by Starwood International hotel chain.

(a) Expectancy theory (3 marks)

(b) Herzberg’s two-factor theory (3 marks)

(c) Reinforcement theory (3 marks)

Q20

Allie Haroum is the owner of a small independent café in Sydney. Her café serves the local inner-city, which has an increasing number of female office workers. She sells high quality European and Middle Eastern food. A larger food court has just opened across the street from her store. It sells American and Australian fast food and offers lower prices on its food. It is a no-frills operation and its lower prices are attracting business away from Allie’s café. Assume you are part of a student team assigned to do a management accounting class project for Allie. Her question for the team is: “How can I apply Porter’s generic business strategies to better deal with my strategic planning challenges in this situation?” How will you reply?

Required:

(a) Explain Porter’s three (3) generic (or competitive) business-level strategies to Allie. (3 marks)

(b) Advise Allie on how she could apply Porter’s generic business strategies to better deal with the strategic planning challenges in this situation. (4 marks)

Q21

Hygenico manufactures plastic face shield, which can be moulded to the shape of the wearer’s face for maximum protection. Earlier this year, a Taiwanese company entered the market offering a similar face shield at a price of 20% below the Guardian price of $35 per unit. Hygenico’s parent company has a target profit margin of 40% on sales on each of its products.

Required:

(a)    What target cost would have to be set for the Guardian face shield to remain competitive and meet the requirements of Hygenico’s parent company? Calculate the cost reduction target. (2 marks)

(b)    Explain how Hygenico could apply the principles of life cycle management to achieve this cost. (2 marks)

(c)     Explain how value engineering could help in this process. (1 mark)

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