MerSoft Ltd (MSL) operates in the Tech sector in Singapore. The company, at the end of...

 
 

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MerSoft Ltd (MSL) operates in the Tech sector in Singapore. The company, at the end of 2018, had a range of three apps (Chi, Psi, and Omega) that compete successfully in the local and international markets. MSL has a strong track record in developing software applications that run on all major computer, tablet, and mobile phone platforms. At the beginning of 2020, MSL launched a new app 'BidQuest' that enables its users to win bidding contests on eBay and other auction websites. The total development investment in the 'BidQuest' app was $6,450,000. MSL expected 2.5 million users to download the app during 2020, from which the company were expected to achieve sales turnover of $7,475,000 in this first year of operations. They budgeted, at the beginning of 2020, for operating and maintenance costs which they set at $2,240,000, of which $940,000 were fixed. The budgeted variable costing statement for 2020 was as follows: 2020 - Full Cost Basis Volume Sales VC Contribution Controllable overheads Operating profit Allocated cost Full cost Profit before tax Budget 2,500,000.00 $ 7,475,000.00 1,300,000.00 6,175,000.00 940,000.00 5,235,000.00 1,500,000.00 3,740,000.00 3,735,000.00 Per Unit $ 2.99 0.52 2.47 0.38 2.09 0.60 1.50 1.49 The actual annual sales during 2020 amounted to 2,400,000 downloads with operating and maintenance costs applicable to the 'BidQuest' app of $2,448,000, of which $1,200,000 were fixed costs. These actual fixed costs are expected to remain unchanged in the 2020 forecast period. Each app is assigned a dedicated manager, a programmer, a social media marketeer, and two administration assistants. Each app team is remunerated through a combination of fixed salary and a group performance bonus. This bonus is calculated at 25% of profits that exceed budgeted profitability, based upon full cost. Head Office overheads are allocated to each of the apps based upon estimates at the commencement of each year. For 2020, the Head Office allocated overhead was $20 million. These Head Office allocated overhead costs are apportioned on the basis of the proportion of budgeted turnover, independent of turnover actually achieved by each app. BidQuest was allocated $1.5 million of these overhead costs. Fiona Tau, the manager for the BidQuest app, and the niece to the operations director, Harry Tau, recently had a meeting with Janice Wu (CIMA qualified management accountant) and has learned that the established app teams (Chi, Psi, and Omega) had made very good bonuses based upon excellent results in excess of the budget plan. During the discussion, Fiona pressured Janice to transfer half of the BidQuest group's overhead allocation to the three established teams, arguing that the BidQuest app was new to market and that it should, therefore, not attract the full cost allocation of overheads. Janice objected to the request citing her professional obligation to comply with ethical standards, and to conform to company policy. Shortly after the meeting with Fiona, Janice received a phone call from Harry insisting that she accommodate Fiona's request and halve the allocation of overheads to the BidQuest app, arguing that it is only reasonable to treat the new app team more compassionately. Required: a) The company currently operates a cost +100% mark-up pricing strategy. Budgeted expectations set the price for the new BidQuest app at $2.99 per app download. Sales revenue was actually achieved despite lower volumes for the year. Prepare a variable cost statement for the actual results for 2020 showing both total cost and unit costs. From this determine the actual required selling price based upon actual full cost +100%. (15 marks) b) In the context of the current competitive environment, critically discuss the merits of target costing as a pricing strategy using the information gained above. (5 marks) (Total 20 marks) MerSoft Ltd (MSL) operates in the Tech sector in Singapore. The company, at the end of 2018, had a range of three apps (Chi, Psi, and Omega) that compete successfully in the local and international markets. MSL has a strong track record in developing software applications that run on all major computer, tablet, and mobile phone platforms. At the beginning of 2020, MSL launched a new app 'BidQuest' that enables its users to win bidding contests on eBay and other auction websites. The total development investment in the 'BidQuest' app was $6,450,000. MSL expected 2.5 million users to download the app during 2020, from which the company were expected to achieve sales turnover of $7,475,000 in this first year of operations. They budgeted, at the beginning of 2020, for operating and maintenance costs which they set at $2,240,000, of which $940,000 were fixed. The budgeted variable costing statement for 2020 was as follows: 2020 - Full Cost Basis Volume Sales VC Contribution Controllable overheads Operating profit Allocated cost Full cost Profit before tax Budget 2,500,000.00 $ 7,475,000.00 1,300,000.00 6,175,000.00 940,000.00 5,235,000.00 1,500,000.00 3,740,000.00 3,735,000.00 Per Unit $ 2.99 0.52 2.47 0.38 2.09 0.60 1.50 1.49 The actual annual sales during 2020 amounted to 2,400,000 downloads with operating and maintenance costs applicable to the 'BidQuest' app of $2,448,000, of which $1,200,000 were fixed costs. These actual fixed costs are expected to remain unchanged in the 2020 forecast period. Each app is assigned a dedicated manager, a programmer, a social media marketeer, and two administration assistants. Each app team is remunerated through a combination of fixed salary and a group performance bonus. This bonus is calculated at 25% of profits that exceed budgeted profitability, based upon full cost. Head Office overheads are allocated to each of the apps based upon estimates at the commencement of each year. For 2020, the Head Office allocated overhead was $20 million. These Head Office allocated overhead costs are apportioned on the basis of the proportion of budgeted turnover, independent of turnover actually achieved by each app. BidQuest was allocated $1.5 million of these overhead costs. Fiona Tau, the manager for the BidQuest app, and the niece to the operations director, Harry Tau, recently had a meeting with Janice Wu (CIMA qualified management accountant) and has learned that the established app teams (Chi, Psi, and Omega) had made very good bonuses based upon excellent results in excess of the budget plan. During the discussion, Fiona pressured Janice to transfer half of the BidQuest group's overhead allocation to the three established teams, arguing that the BidQuest app was new to market and that it should, therefore, not attract the full cost allocation of overheads. Janice objected to the request citing her professional obligation to comply with ethical standards, and to conform to company policy. Shortly after the meeting with Fiona, Janice received a phone call from Harry insisting that she accommodate Fiona's request and halve the allocation of overheads to the BidQuest app, arguing that it is only reasonable to treat the new app team more compassionately. Required: a) The company currently operates a cost +100% mark-up pricing strategy. Budgeted expectations set the price for the new BidQuest app at $2.99 per app download. Sales revenue was actually achieved despite lower volumes for the year. Prepare a variable cost statement for the actual results for 2020 showing both total cost and unit costs. From this determine the actual required selling price based upon actual full cost +100%. (15 marks) b) In the context of the current competitive environment, critically discuss the merits of target costing as a pricing strategy using the information gained above. (5 marks) (Total 20 marks)

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Question a Actual Variable Cost Statement for 2020 for volume of 2400000 downloads Particulars Total ... View the full answer