Advanced management accounting

timer Asked: Jan 19th, 2021

Question Description

I'm working on a accounting question and need a sample draft to help me understand better.

Question 1

James East (JE) manufactures tinned fish products. The company is broken up into various divisions and each division operates as an investment centre.

Tinned Tuna

Division X manufactures the tins used for tinned tuna. Division X sells the tins to Division Y and also to external customers. Division Y cooks raw tuna and mixes it with spring water before packaging it into a tin and then selling it to external customers. Both divisions are located in the UK. Today’s date is 1st January2021. Provided below is some budgeted information for both divisions for the upcoming financial year-ending 31st December2021:

Division X

Market selling price per tin


Variable costs per tin


Fixed costs


Year-end capital invested


Production capacity

22m tins

External demand for tins

20m tins

Demand from Division D

9m tins

Division Y

Selling price per unit


Variable costs per unit (excluding the tin)


Costs of a tin from Division X

See below

Fixed costs


Year-end capital invested


Sales volume

9m units of tinned tuna

Other information

Division X must satisfy all demand from Division Y before making any external sales.

The transfer price per tin is currently set by head office. The transfer price is calculated as budgeted variable production cost plus 100%.

The target return on investment (ROI) for each division for the next year is 10%.


a) Produce statements that show the budgeted profit for the year ending 31st December 2021 for each of the two divisions and determine if each division is expected to hit its target ROI. Your profit statements should show sales and costs split into external sales and internal transfers where appropriate.

(11 marks)

Negotiated transfer price

JE’s senior management team are considering allowing the managers of Division X and Division Y to determine the transfer price through the means of negotiation for the next financial year ending 31st December 2021.

The question continues over the page…

Division X new investment opportunity

The manager of Division X has identified a new investment opportunity which would increase Division X’s production capacity through the acquisition of an additional tin manufacturing machine.

If the investment goes ahead it would take place immediately and have the following impact for the year ending 31stDecember 2021:

Division X’s production capacity would increase by 4m tins.

The variable cost of the additional tins produced would be £0.01 per tin.

The acquisition of the machine would increase the annual fixed costs by £0.2m and the year-end capital invested by £0.8m.


Assuming that the acquisition of the new machine goes ahead and that the internal transfer price will now be set by means of negotiation:

b) i) Calculate the minimum transfer price per can (rounded to 2 decimal places) that Division X could charge for the 9m cans required by Division Y in order for Division X to achieve its target ROI.

ii) Calculate the maximum transfer price per can (rounded to 2 decimal places) that Division Y would be willing to pay for the 9m cans transferred from Division X in order for Division Y to achieve its target ROI.

(14 marks)

Tinned Salmon

Division A and Division B are located in different countries, both of which use the Euro. Until recently the corporation tax rates in both countries had been 40%. The government where Division B operates has just announced a decrease in the rate of corporation tax to 15%.

Division A manufactures tins used for tinned salmon. Division B cooks raw salmon before packing it into a tin purchased from Division A and then selling it to external customers. Last year the transfer price was 0.09 Euro per tin and the internal revenue recognised by Division A for transfers to Division B was 9m Euro. The variable cost for Division A is 0.04 Euro per tin.

Division A only sells the tins to Division B however it could sell tins to external customers as there is an external market with many buyers and sellers. The average market price per tin is 0.10 Euro.


The finance director has asked for your advice as to whether or not the transfer price can be adjusted down to 0.04 Euro per tin, in an attempt to reduce the company’s overall corporation tax liability.

c) Please advise the finance director and provide any supporting calculations.

(8 marks)

Total for the question 33 marks

Question 2

Trustfull Air plc is a budget airline which offers flights to a wide range of destinations throughout Europe. Trustfull isplanning to expand its operations and launch a premium quality short haul airline service. Trustfull Air aims to target business executives and hopes offering regular flights out of all major European cities along with a premium quality of service will be attractive to their potential customers. The management of Trustfull Air have been in preliminary talks with European airport authorities and have negotiated a fixed fee that would be payable each year in order to operate flights out of their chosen airports.

The deal with the airport authorities is for a period of 5 years and Trustfull Air has already spent £2 million on market research.

The management accountant at Trustfull Air has prepared the following information:

Passenger numbers and ticket prices

Passenger numbers in Year 1 are estimated to be 100,000 and are expected to grow by 2% per annum.

The average ticket price in year 1 is estimated to be £400 and is expected to increase at 4% per year.

Capital investment

Trustfull Air plans to make a total capital investment of £60 million in two instalments. An investment of £40 million will be made initially and a further £20 million investment will be made at the beginning of Year 2. At the end of the 5 year period the capital investment is expected to have a residual value of £7 million. Both instalments of the capital investment will become eligible for tax depreciation when they are incurred.

Working Capital

Trustfull Air will also require an investment in working capital of £8 million initially; all working capital will be released at the end of the project and it will not be impacted by inflation.


Estimated costs (at Year 1 prices unless stated otherwise) for each of the 5 years:

Variable costs

£125 per passenger

Maintenance costs

£1 million per annum

Other operating costs

£2 million per annum

Payment to the European airport authorities (see note 1)

£10 million per annum


The annual payment to European airport authorities will remain at Year 1 prices throughout the 5 year period.

All the other costs listed above will increase in line with the rate of inflation in future years.

The question continues over the page…


Tax depreciation: 25% per annum of the reducing balance, with a balancing adjustment in the year of disposal.

Taxation rate: 20% of taxable profits. Half of the tax is payable in the year in which it arises, the balance is paid in the following year.

Trustfull Air has sufficient taxable profits from other parts of its business to offset any taxable losses.

Other information

Inflation over the five year period is expected to be 3% per annum.

Trustfull Air require all capital investment projects to generate a positive Net Present Value at a cost of capital of 10%.


(a) Using the information prepared by the management accountant, and applying the company’s investment criteria, determine whether Trustfull Air should launch the new airline service.

(24 marks)

(b)i) Using your NPV calculation from part a) calculate the sensitivity of the project to changes in the average ticketprice.

ii) Comment on the sensitivity calculated in b) i)

(9 marks)

Total for the question 33 marks

Question 3

Luxe Leather (LL) is a UK manufacturer of handmade leather products. The company was established many years ago and has a strong brand reputation. LL’s products are renowned for their design, durability and quality.

LL’s core products are jackets, belts, handbags, wallets and purses. The company regularly releases new designs to try and stay in line with consumer demand. In recent years leather jackets have fallen out of fashion and demand has declined. Leather jackets have traditionally been a major source for revenue for LL and therefore the senior management is keen to find some new growth opportunities.

New product – MLS

The sales director (SD) is a keen motorcyclist and has observed that the market for motorcycle leathers (the all in one garment worn by motorcyclists for protection and weatherproofing), is large and growing, offering significant potential for LL. She is confident that LL’s reputation for design, durability and quality, combined with its strong brand name, would help the company grow rapidly in the market. The product development team has recently completed a preliminary design for motorcycle leathers called ‘MLS’.

The motorcycle leather market is dominated by two companies, Road Rash Ltd and Revvers Ltd. They are both known and trusted brands with a reputation for high-quality leathers, although they have been criticised in recent years for producing dated and boring designs. Competitor research has shown that the average price for a set of Road Rash leathers is £550 and for Revvers it is £580.

LL’s sales team have conducted some market research with a view to launching MLS. This research has shown that a target price of £560 per set for MLS would be the right level for LL to enter the market. It is felt that this price would allow LL to gain a significant market share while also reflecting the quality of the product.

LL set a required margin on selling price for all products of 25% ignoring any overheads.

Learning effect

The manufacture of MLS is fundamentally very different from the current processes used by LL. The leather requires a highly complex bonding and stitching technique to build up the protective padding that is required for MLS to meet the industry safety standards.

Two skilled production staff have been working on the initial production run of MLS and have found they have become quicker on each set of MLS produced. They have recorded the time taken for each of the first 4 sets and they are as follows:

MLS set number

Incremental time taken


10 hours


8 hours


7.39 hours


7.01 hours

The question continues over the page…

The finance director (FD), who is familiar with the use of learning curves in the costing of products, has established that the learning effect would cease after producing 25 sets of MLS, this being the steady state. He is concerned that the cost per set of MLS will still exceed the target cost even when the steady state has been reached.

MLS costings

The leather required for the MLS will be sourced from LL’s regular supplier who LL have worked with for many years. Each finished set will consist of 3m2 of leather, however 25% of the leather that goes into the process is wasted. The grade of leather costs £65 per m2.

The waste leather is sold to another company for £10 per m2.

Each set also requires buttons, zips and thread. These will be sourced from a range of regular suppliers and are expected to cost £45 per set.

Skilled production staff are paid £25 per hour.

Other product development – Belt

The chief designer for LL has designed a new belt which will soon be launched and they believe the learning effect should be considered in establishing the production costs of the belt. The design of the belt is new, however, the production process to be used is the same as the existing process used to manufacture the belts currently produced by LL. The process is quick, relatively straightforward and familiar to the production staff. The volume of belts sold by LL is low relative to their other products and, due to the quick production time, LL produces belts on a just-in-time basis.


(a) Using the data provided for the first four sets of MLS, calculate the learning rate that is being observed.

(4 marks)

(b) In the context of target costing, discuss the idea of value engineering, considering the four ‘values’ with reference to the new MLS product.

(8 marks)


(i) Explain what is meant by the term steady state and why it is important to LL and;

(ii) Using the learning rate calculated in part (a) calculate the expected cost for the 25th set of MLS manufactured and determine if a cost gap exists.

(14 marks)

(d) Discuss the chief designers’ comments regarding the use of the learning curve effect for establishing the production costs of the new belt.

(7 marks)

Note: The learning formula is y=axb

Total for the question 33 marks

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