Gifets Ltd. Manufactures and distributes a line of Christmas gifts. The company had neglected to keep...
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Gifets Ltd. Manufactures and distributes a line of Christmas gifts. The company had neglected to keep its gifts line current. As a result, sales have decreased to approximately 25,000 units per year fro a previous high of 125,000 units. The gifts have been redesigned recently and is considered by company officials to be comparable to its competitors' models. The company plans to redesign the gifts each year in order to compete effectively. Steve Iregi, the Sales Manager, is not sure how many units can be sold next year, but she is willing to place probabilities on her estimates. Steve Iregi's estimates of the number of units that can be sold during the next year and the related probabilities are as follows: Estimated Sales in units 50,000 75,000 100,000 125,000 probabilities 0.10 0.40 Variable costs Fixed costs Total costs 0.30 0.20 The units would be sold for sh.500 each. The inability to estimate the sales more precisely is a problem for Gifets Ltd. the number of units of this product is small enough to schedule the entire year's sales in one production run. If the demand is greater than the number of units manufactured, then sales will be lost. If the demand is below supply, the extra units cannot be carried over to the next season and would be given away to various charitable organizations. The production and distributions cost estimates are as follows: UNITS MANUFACTURED 50,000 (Sh) 9,900,000 (Sh) 7.700.000 (Sh) 17,600,000 22.550.000 75.000 100,000 14,850,000 19,800,000 7,700,000 8.800,000 28.600.000 125,000 24,750,000 8.800,8000 33.550.000 The company intends to analyze the data to facilitate making a decision as to the proper size of the production run. Required: a) Prepare a payoff table for the different sizes of production runs required to meet the four sales estimates prepared by Steve Iregi for Gifets Ltd. If Gifets Ltd. relied solely on the expected monetary value approach to make decisions, what size of production run would be selected? marks) b) Identify the seven basic steps that are taken in any decision process. Explain each step by reference to the situation presented by Gifets Ltd. and your answer to requirement (a) (14 marks) (Total: 20 marks) The (BBL) Ltd has only two-branches. The head office branch is in the center of Kampala and the Kagema branch outside Kampala. The head office staff consists of the managing director and finance manager. With minor exceptions, the branch managers are permitted to conduct their affairs like the heads of two independent banks. The planning and control system centers on branch income statements prepared by the Finance Manager. The Kagema branch, on the other hand, is located outside Kampala in a large and growing retirement community and as primary retail branch. Mr. Obachi, the manager, is in his first year with the BBL.. In his attempts to sell the bank's services to the Kagera residents, he has found that his only success is the area of foreign deposits. Loan business, on the other hand, is both competitive and scarce. The interest rate he can charge is constrained by the fact that the manager of the local competing branch of the other bank while not actively soliciting loan business is apparently charging rates below the prevailing Kampala prime rate. Additionally, there seems to be fundamental resistance in the part of the Kagema residents to the idea of borrowing even at the 12% rate Obachi has been offering. The Kampala branch located in the growing central business district, serves primarily commercial customers. The manger, Mr. Kariuki, has found in recent years that while he faces a number of vigorous competitors the principal constraint on his ability to generate new loan business is lack of supporting deposits. The only alternative source of lending funds is the purchase of Euro currency, which are foreign deposits held in a bank outside Africa. This opinion is considered less than acceptable by Kariuki, as the 22% interest he would have to pay for such funds is higher than the rate he is able to charge loan customers currently at 20%. In spite of his frequent lectures on the merits of leverage, the best Obachi has been able to do is to generate a few goll-carat installment and social security cheque receivable loans. As a result, he finds himself with substantial excess savings deposits, which he has to keep in the vault to satisfy the government's 20% cash reserve requirement, the vault additionally contains excess lendable funds equal to almost 70% of total savings deposits. The finance manager has suggested that he lends these funds to Kariuki at the Kampala branch. This was acceptable to both managers, although some disagreement arose as to the interest rate appropriate for such a loan. The argument was finally settled by the finance manger, who indicated that the theoretically correct rate was the rate Obachi was paying on savings deposits, 10%. It has been further agreed that if Obachi could find additional loans, any or all of the funds lent to Kariuki would be returned. Required: a) Evaluate the 10% inter branch loan rate and suggest appropriate changes in relation to the following criteria: i Motivating managers to act in a manner consistent with the best interests of the bank as a whole. Evaluating the performance of individual branches. (4 marks) (3 marks) ii b) Would your answer change if the Kagera branch loan rate were to rise to 14%, while all other rates as well as the level of loan demand at Kampala branch, remained the same? (4 marks) c) Would your answer change if all rates were the same as in (a) above except that he cost of Euro currency dropped to 18%. (3 marks) d) Based on your answers to the above, what general statements can you make about the inter branch loan rate appropriate for evaluation of individual managers? (6 marks) (Total: 20 marks) Gifets Ltd. Manufactures and distributes a line of Christmas gifts. The company had neglected to keep its gifts line current. As a result, sales have decreased to approximately 25,000 units per year fro a previous high of 125,000 units. The gifts have been redesigned recently and is considered by company officials to be comparable to its competitors' models. The company plans to redesign the gifts each year in order to compete effectively. Steve Iregi, the Sales Manager, is not sure how many units can be sold next year, but she is willing to place probabilities on her estimates. Steve Iregi's estimates of the number of units that can be sold during the next year and the related probabilities are as follows: Estimated Sales in units 50,000 75,000 100,000 125,000 probabilities 0.10 0.40 Variable costs Fixed costs Total costs 0.30 0.20 The units would be sold for sh.500 each. The inability to estimate the sales more precisely is a problem for Gifets Ltd. the number of units of this product is small enough to schedule the entire year's sales in one production run. If the demand is greater than the number of units manufactured, then sales will be lost. If the demand is below supply, the extra units cannot be carried over to the next season and would be given away to various charitable organizations. The production and distributions cost estimates are as follows: UNITS MANUFACTURED 50,000 (Sh) 9,900,000 (Sh) 7.700.000 (Sh) 17,600,000 22.550.000 75.000 100,000 14,850,000 19,800,000 7,700,000 8.800,000 28.600.000 125,000 24,750,000 8.800,8000 33.550.000 The company intends to analyze the data to facilitate making a decision as to the proper size of the production run. Required: a) Prepare a payoff table for the different sizes of production runs required to meet the four sales estimates prepared by Steve Iregi for Gifets Ltd. If Gifets Ltd. relied solely on the expected monetary value approach to make decisions, what size of production run would be selected? marks) b) Identify the seven basic steps that are taken in any decision process. Explain each step by reference to the situation presented by Gifets Ltd. and your answer to requirement (a) (14 marks) (Total: 20 marks) The (BBL) Ltd has only two-branches. The head office branch is in the center of Kampala and the Kagema branch outside Kampala. The head office staff consists of the managing director and finance manager. With minor exceptions, the branch managers are permitted to conduct their affairs like the heads of two independent banks. The planning and control system centers on branch income statements prepared by the Finance Manager. The Kagema branch, on the other hand, is located outside Kampala in a large and growing retirement community and as primary retail branch. Mr. Obachi, the manager, is in his first year with the BBL.. In his attempts to sell the bank's services to the Kagera residents, he has found that his only success is the area of foreign deposits. Loan business, on the other hand, is both competitive and scarce. The interest rate he can charge is constrained by the fact that the manager of the local competing branch of the other bank while not actively soliciting loan business is apparently charging rates below the prevailing Kampala prime rate. Additionally, there seems to be fundamental resistance in the part of the Kagema residents to the idea of borrowing even at the 12% rate Obachi has been offering. The Kampala branch located in the growing central business district, serves primarily commercial customers. The manger, Mr. Kariuki, has found in recent years that while he faces a number of vigorous competitors the principal constraint on his ability to generate new loan business is lack of supporting deposits. The only alternative source of lending funds is the purchase of Euro currency, which are foreign deposits held in a bank outside Africa. This opinion is considered less than acceptable by Kariuki, as the 22% interest he would have to pay for such funds is higher than the rate he is able to charge loan customers currently at 20%. In spite of his frequent lectures on the merits of leverage, the best Obachi has been able to do is to generate a few goll-carat installment and social security cheque receivable loans. As a result, he finds himself with substantial excess savings deposits, which he has to keep in the vault to satisfy the government's 20% cash reserve requirement, the vault additionally contains excess lendable funds equal to almost 70% of total savings deposits. The finance manager has suggested that he lends these funds to Kariuki at the Kampala branch. This was acceptable to both managers, although some disagreement arose as to the interest rate appropriate for such a loan. The argument was finally settled by the finance manger, who indicated that the theoretically correct rate was the rate Obachi was paying on savings deposits, 10%. It has been further agreed that if Obachi could find additional loans, any or all of the funds lent to Kariuki would be returned. Required: a) Evaluate the 10% inter branch loan rate and suggest appropriate changes in relation to the following criteria: i Motivating managers to act in a manner consistent with the best interests of the bank as a whole. Evaluating the performance of individual branches. (4 marks) (3 marks) ii b) Would your answer change if the Kagera branch loan rate were to rise to 14%, while all other rates as well as the level of loan demand at Kampala branch, remained the same? (4 marks) c) Would your answer change if all rates were the same as in (a) above except that he cost of Euro currency dropped to 18%. (3 marks) d) Based on your answers to the above, what general statements can you make about the inter branch loan rate appropriate for evaluation of individual managers? (6 marks) (Total: 20 marks)
Expert Answer:
Answer rating: 100% (QA)
a Payoff Table Production Run Units 50000 75000 100000 125000 Probability 010 040 030 020 Revenue Sh 25000000 37500000 50000000 62500000 Variable Costs Sh 9900000 14850000 19800000 24750000 Fixed Cost... View the full answer
Related Book For
Management Accounting
ISBN: 978-0132570848
6th Canadian edition
Authors: Charles T. Horngren, Gary L. Sundem, William O. Stratton, Phillip Beaulieu
Posted Date:
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