Accounting for Decision Makers Level: MBA7001

1
Gulf College
MOCK EXAM
Module: Accounting for Decision Makers Level: 7
Mock Examination Module No: MBA7001
Time Allowed: 48 hours
5:00 pm of Wednesday the 13th May 2020 to 5:00 pm of Friday the 15th May 2020
Due to COVID19 PANDEMIC this Mock Exam has a 48 hours examination window.
Students have 48 hours from receiving the Mock Examination paper to submitting their
answers.
INSTRUCTIONS:
1. You can answer here in this Mock Exam Paper or in MS Excel sheets and you need to
submit all your answers to the link in the Moodle by 5:00 pm of Friday the 15th May
2020.
2. This paper consists of three questions, all questions are compulsory.
3. Question 1 is worth 50 marks and questions 2 and 3 are worth 25 marks each. A total
of 100 marks available.
4. Show workings for all calculations.
2
Question 1.
Ruby Jewellers Limited produces three distinct products. Its managers are concerned that the company’s
profit is not as high as its competitors. They believe they fall in profits could be caused due to the company’s
uncompetitive selling price(s), for one or more product, and losses on other products. Details of the
company’s costs and selling prices are as follows: –
Product Gold Bracelet Gold Earrings Ruby Ring
£ £ £
Selling Price 250.00 180.00 75.00
Direct Costs
Labour 45.00 30.00 15.00
Direct Material – ruby gemstones 20.00
Direct Material – gold 70.00 25.00 30.00
Total Direct Cost 115.00 55.00 65.00
Units produced 100 150 200
Labour hours 3 hour per unit 2 hour per unit 1 hour per unit
Currently the company uses the traditional method of allocating indirect overheads but is considering using
the ABC method for increasing the accuracy. The company’s indirect overheads are as follows: –
£
Depreciation 500
Purchasing Expenses 250
Direct Material – ruby gemstones delivery inspection costs 200
Direct Material – gold delivery inspection costs 200
Set-up costs 100
Canteen expenses 300
Activities associated with the overheads are: –
Gold Bracelet Gold Earrings Ruby Ring
Number of suppliers 3 4 6
Component deliveries per month 4 5 4
Production runs per month 6 4 30
No. of employees 10 10 5
Value of machinery 1000 900 900
Required
a) Calculate the profit per unit for the three products based on the company’s current Labour hours based
overhead method.
b) Calculate the profit per unit for the three products using the principles of ABC. Explain your reasons for
choosing the bases of overhead allocation
Total = 50 Marks
3
Question 2.
The Chief Executive Officer of GizmosRUs Ltd. is planning to diversify the company’s operations by
exploring two new business opportunities.
Opportunity ‘Arizona Desert’ has an expected working life of four years, requires £3,000,000 of initial
capital expenditure and a further £200,000 of working capital. At the end of year 4 the residual value is
forecast to be £400,000.
Opportunity ‘Phoenix’ also has an estimated working life of four years and has an initial cash outflow of
£4,000,000 which includes working capital of £900,000. At the end of year 4 the residual value is
estimated to be £800,000.
Estimates for net cash flow for both projects are as follows:
Year Opportunity Opportunity
Arizona Desert Phoenix
1 £1,200,000 £1,850,000
2 £1,250,000 £1,850,000
3 £1,200,000 £2,220,000
4 £1,225,000 £2,300,000
Years Present Value rates at 15% Present Value rates at 30%
1 0.870 0.769
2 0.756 0.592
3 0.658 0.455
4 0.572 0.350
Required:
a) Utilising the above information, numerically assess the projects using:
(i) Payback
(6 Marks)
(ii) Net Present Value using the present value rates at 15%
(6 Marks)
(iii) Internal rate of return using present value rates at 30%
(8 Marks)
b) On the basis of your evaluation make recommendations as to which project should be
undertaken and why.
(2 Marks)
4
c) Describe the advantages and disadvantages of using qualitative and quantitative factors for
investment decision making.
(3 Marks)
Total = 25 Marks
Question 3.
Alpha Limited was incorporated five years ago. Over the past two years, Alpha Ltd. has struggled to pay
its invoices on time. You are required to examine Alpha Ltd. Statement of Financial position, and the
notes which follow, to attempt questions which follow.
Statement of Financial Position of Alpha Ltd as at 31 January 20X9
£’000 £’000
Non-current assets at cost
Office Equipment 400
Less: accumulated depreciation on Office Equipment 80 320
Motor Vehicles 250
Less: accumulated depreciation on Motor Vehicles 125 125
445
Current assets
Cash at bank 0
Pre-paid Expenses 450
Closing Inventory 500
Trade Debtors 525 1475
TOTAL ASSETS 1920
Current liabilities:
Trade creditors 300
Outstanding Expenses 80
Dividends Declared Outstanding 100
Bank overdraft 290 770
Non-current liabilities
Long-Term Loans 560 560
Equity
Ordinary share capital 90
Retained Earnings 500 590
TOTAL EQUITY & LIABILITIES 1920
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Additional Notes
The directors of the company have prepared the following estimates for the next 6
months:
(a) Sales and purchases are expected to be as follows: Sales
£’000
Purchases
£’000
February 270 152
March 260 118
April 285 168
May 320 230
June 340 210
July 275 140
(b) All sales made are on credit. 30% of debtors pay one month after the month of sale; 50% of
debtors pay two months after the month of sale; and 20% of the debtors pay three months after
the sale. Sales in January 20X9 were £250,000. Sales in December 20X8 were £300,000.
(c) All purchases are on one month’s trade credit.
(d) The dividend outstanding is due for payment in June 20X9.
(e) The Outstanding expenses are due for payment in March 20X9.
(f) Administration and finance expenses (including depreciation of Office Equipment) are expected
to be £40,000 per month in February and £45000 per month in subsequent months.
(g) Selling and distribution expenses (including depreciation of Motor Vehicles) are expected to be
£60,000 per month in February and £68,000 per month in subsequent months.
(h) Depreciation of Office Equipment is at the rate of 20% of cost per annum.
(i) Depreciation of Motor Vehicles is at the rate of 25% of cost per annum.
Required:
a. Prepare a cash budget for XYZ Ltd for the six months ended 31 July 20X9 which shows the cash
balance at the end of each month.
(22 Marks)
b. Briefly discuss the cash flow problems will the company face over the next six months and how
might the company deal with them?
(3 Marks)
Total = 25 Marks

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