CAP2 SFMA Assessment January 2012 - Details needed

TooLate

Hi all,

Being looking through the forum and case study, the theory seems pretty straight forward and all of it has already been mentioned on this site i think.

Still having a bit of trouble with the calculations,people seem to be taking different angels and approaches. Not sure which way to go myself
Would any one be willing to post or scan up their calculations,it would be really appreciated and helpfull as its nearly toolate for me:(

Thanks

Insider123

2802 wrote: »

Also not sure where the 475k is coming from - but I'm unsure about the quantities to use too.

I'm confused whether to use 360,000, as this was the quantity transfered last year or use the quantity that will be transfered/bought in the coming year 388,800 (360,000 x the 8% increase)
I'm swaying slightly toward using the 388,800

Has anyone else tried the figures for Transfer Pricing??

Hello everyone,

475k comes from:
2.8-0.9=1.9 cost of sales
1.9/4= 475 meals
If 360k meals were sold by the precooked meals dept. then cost of sales in frozen foods dept. must contain an element of fixed costs.

canny jock stewart

Hi all,

Just a couple of observations on the case, specifically on the possible investment appraisal question.Might be way off tho

I can't find anything on whether the staff are at full capacity or can make more sandwiches. Does mean we are to assume they are at full capacity?If they are not then are the only potential inflows those from efficiencies from the machine and the reduction in staff costs?

Also does anyone else think its a bit weird that 4 people made 13 million sandwiches in the previous year or am I missing something?

Thanks

princessmolly

TooLate wrote: »

Hi all,

Being looking through the forum and case study, the theory seems pretty straight forward and all of it has already been mentioned on this site i think.

Still having a bit of trouble with the calculations,people seem to be taking different angels and approaches. Not sure which way to go myself
Would any one be willing to post or scan up their calculations,it would be really appreciated and helpfull as its nearly toolate for me:(

Thanks

if you pm me your email address, i can send you on some stuff if this helps.

MindGuru

canny jock stewart wrote: »

Hi all,

I can't find anything on whether the staff are at full capacity or can make more sandwiches. Does mean we are to assume they are at full capacity?If they are not then are the only potential inflows those from efficiencies from the machine and the reduction in staff costs?

Also does anyone else think its a bit weird that 4 people made 13 million sandwiches in the previous year or am I missing something?

Thanks

1) I would assume the sandwich dept. can hire more people to meet future demand, if they did not purchase the machine. As a result I wouldn't include the extra sales figures.

2) The 4 people being made redundant are employed in packing not making the sandwiches (good point though if you had missed that part)

Also I have some questions of my own

1) Why are we given a month by month breakdown of the sandwich sales rather than just a total figure?

2) Would I be correct in assuming that the external Buy In price will be somewhere between 1.5 (marginal cost) and 3 (current transfer price),

As if it is that means frozen food will buy from an external supplier, as ready meals manager will not sell to frozen foods at a price less than 3 as it will damage their 50% margin.
and if this were to happen it wouldn't be the best policy for BK Ltd. as a whole.

If the external price was below 1.5 or above 3, the answer would be too simple considering there are no capacity restraints.

princessmolly

in relation to the maximum transfer price, is it not what the external supplier will offer to provide them for one unit.

so if for example, they got a quote of €2 per unit, would this not then be the maximum price the selling division could charge per unit?

what books and notes i have looked at on this matter, say its the €2 which is the maximum they could provide for.

MindGuru

princessmolly wrote: »

in relation to the maximum transfer price, is it not what the external supplier will offer to provide them for one unit.

so if for example, they got a quote of 2 per unit, would this not then be the maximum price the selling division could charge per unit?

what books and notes i have looked at on this matter, say its the 2 which is the maximum they could provide for.

Lets say the external price is 2
It is best for the company to buy internally as it 0.50 cheaper (2-1.5)

If the transfer price is set to 1.5, the supplying division will not sell to the receiving division as it is below their required 50% and it will look bad on the manager at the end of year review (remember they're appraised based on their margins). As a result receiving division must buy externally, that is not the best result for the company.

If the transfer price is 2, supplying division will refuse to sell as it is below their required 50% margin. So the receiving division will buy externally, that is not the best outcome for the company.

If the transfer price is 3, supplying division will supply as it meets their margin but receiving division will buy externally. No the best result for the company.
This creates a scenario in which the supplying manager refuses to sell to receiving division even though it's best for the company, as doing so will mean the 50% margin will be reduced and he may be fired.

Your job is to get a solution for this problem, i.e. dual transfer pricing

Ajwalsh7

Hi all,

I was just wondering if anyone can tell me what year zero's dates are exactly, ie. is it 1/12/11-30/11/12 or what??

Also,

Would the wastage savings not be included into the calculation as well as the savings on packaging as it states in the qoute that the machine will reduce wastage to nil (so the 0.1OZ cost is saved) and the packaging cost reduced by 3.5cent??! Clarification would be much apprectiated thanks!

Another thought I had was that labour time of 1minute for preparation and packaging.... would this be affected at all with the introduction of the machine!!

Ajwalsh7

thanks dtmckewon.... very appreciated!!

Gillian31

dtmckeown wrote: »

Not entirely sure which firm compiled this, but I got a copy via email today - enjoy!

Can you explain how you arrived at the cash flows in lease or buy?

Many thanks

CeevieD

Hi there folks,
I found this forum and it is a excellent idea. I am from a small firm and I dont know anybody in CAP2, so I feel I am the only one doing this assesment.
I have done some work on the assesment but I would like to see what angles you guys are going on.? I dont want to be going off the beaten track.!
From reading the case study I cant see past transfer pricing, target costing, discount payback. Do you think the questions will be more theory based or numbers based? How many questions do you think there will be.?
I would be grateful for any feedback
Thanks;)

Gillian31

Can someone explain how the pre-packed sandwich division did not meet the 50% sales margin if you take turn over of 18.2m/13m sales = £1.4 which is the standard cost set, am I correct in saying this?

MindGuru

Gillian31 wrote: »

Can someone explain how the pre-packed sandwich division did not meet the 50% sales margin if you take turn over of 18.2m/13m sales = £1.4 which is the standard cost set, am I correct in saying this?

They were told to add a 50% margin on their cost
Their cost being 10.9 Million
So the sandwiches should of sold for 10,900,000/1-0.5= 21,800,000

Instead they only sold it for 18,200,000 total
In which case the margin is 7,300,000/18,200,000=40.11%

So they missed their target

acc12345

I think you can just do this:
profit margin =
profit / sales:
7.3/18.2 = 40.11%

For the discounted payback in the leasing situation is anybody else going to show the redundancy saving in year zero, and then slot both lease payments into the discounted cash flows in year 1 and 2.

It will appear as though we are recovering only 140k (redundancy) in our calculation as there is no initial cash outlay for the machine.

MindGuru

Thanks dtmckeown, very comprehensive document and will help me a lot, although I have a different answer to some questions mainly due to different assumptions I'm currently making.

On a separate issue

In the DCF calculation should the lease payments be paid at the start of the year
i.e. They should be paid immediately on the start of the 2012 year and at the start of the 2013 year
In which case the 2012 payment is due now i.e. YR 0 , and is not discounted
and the payment to lease the machine for 2013, is due in one years time i.e YR1

fil_allen

@ rockman15,

just wondering what you meant when you said like macroeconomic austerity? is that like what the government are doing now in ireland?

Also could anyone tell me if your alloud to use coloured pens? like someone told me before that your not alloud use them and can loose marks for it. how sh*t is that like!

Serious shout out to dtmckeown for the notes, your a star!

any help is much apreciatted!

#SFMAsucks

Mr SFMA

Hi guys,

A group of us in work actually completed all the work that dtmckeown has posted.

We have no issue with our work being used (it is doing the rounds through email anyway) but if anybody has any feedback or different calculations or opinions or insights it would be welcomed.

No point in anyone hiding information so if you have any more information please share it like we have

SFMA?

Mr SFMA wrote: »

Hi guys,

A group of us in work actually completed all the work that dtmckeown has posted.

We have no issue with our work being used (it is doing the rounds through email anyway) but if anybody has any feedback or different calculations or opinions or insights it would be welcomed.

No point in anyone hiding information so if you have any more information please share it like we have

Hi Mr SFMA,

A group of us in work also got the pack posted by dtmckewon. However we have a few problems with the calculations. Would you be willing to email me your calculations so we can compare and see where we are going wrong?

Thanks

mickkellys

Does anybody now what figure we use for transfer pricing as the case states they sold 360,000 internally however when I work it out its in coming in at 475, 000 I believe this is down to closing stock from the previous period. So my question is when working out how different transfer prices will affect the company we will have to use the 360,000 for the selling department but what figure do we use for the buying department as they have about 115,000 previously ?? Will this stock from the previous period affect the cost figure and profit figure for this period??



if anybody could send me on their workings for transfer pricing i would be very greatful

MindGuru

mickkellys wrote: »

Does anybody now what figure we use for transfer pricing as the case states they sold 360,000 internally however when I work it out its in coming in at 475, 000 I believe this is down to closing stock from the previous period. So my question is when working out how different transfer prices will affect the company we will have to use the 360,000 for the selling department but what figure do we use for the buying department as they have about 115,000 previously ?? Will this stock from the previous period affect the cost figure and profit figure for this period??

No its not closing stock, it should be reasonable to assume that the turnover relates directly to the cost i.e closing stock cost is excluded
Now at first glance 1,900,000/4= 475,000 units but that's wrong here's why

look to page 5 again
Notice line 7 of that cost profile for frozen foods, there are fixed costs frozen meals incurs, now it doesn't matter if frozen food sells 1 meal or 10,000,000 meals fixed costs are fixed. Also notice line 8 apportioned office cost, now as we don't know how they are apportioned it could be a variable (if its on units produced) or fixed cost (given to the department)

So we can only safely say 4-(.1+.05)=3.85 is variable

Now they bought in around 360,000 meals, for simplicity lets call that an exact figure
So 3.85*360,000= 1,386,000 Euro = Total Variable Cost for frozen food

1,900,000-1,386,000= 514,000 Euro is made up of apportioned and fixed costs that frozen food has

I also as said before there are no capacity restraints i.e no opportunity costs for ready meals in the Transfer pricing question. So other than picking a transfer price and justifying it , I don't see where calculations are going to come into it, other than working out the selling price for frozen food per unit depending on the transfer price

mickkellys

MindGuru wrote: »

No its not closing stock, it should be reasonable to assume that the turnover relates directly to the cost i.e closing stock cost is excluded
Now at first glance 1,900,000/4= 475,000 units but that's wrong here's why

look to page 5 again
Notice line 7 of that cost profile for frozen foods, there are fixed costs frozen meals incurs, now it doesn't matter if frozen food sells 1 meal or 10,000,000 meals fixed costs are fixed. Also notice line 8 apportioned office cost, now as we don't know how they are apportioned it could be a variable (if its on units produced) or fixed cost (given to the department)

So we can only safely say 4-(.1+.05)=3.85 is variable

Now they bought in around 360,000 meals, for simplicity lets call that an exact figure
So 3.85*360,000= 1,386,000 Euro = Total Variable Cost for frozen food

1,900,000-1,386,000= 514,000 Euro is made up of apportioned and fixed costs that frozen food has

I also as said before there are no capacity restraints i.e no opportunity costs for ready meals in the Transfer pricing question. So other than picking a transfer price and justifying it , I don't see where calculations are going to come into it, other than working out the selling price for frozen food per unit depending on the transfer price

Sorry mind guru I am still unclear
how is it safe to assume that there is no closing stock??
Also are you assuming they didn’t meet expect budget sales so there is extra fixed cost that needs to be apportioned among the 360,000 for a higher cost per unit
However are these figures not actual figures as it are is the year end?? So would they not have noticed this and adjusted for it

MindGuru

I have issues with the transfer price solution, that is in the attachment

specifically the calculations at the end under the assumed transfer price of 2.25

We know that it costs 1.50 to make a meal, a 50% margin leaves us at 3 euro charge per meal.
Under the assumption that ready meals will not sell for less than a 50% margin, why would they agree to a transfer price of 2.25, which would leave them with a margin of 33.33% = (2.25-1.5)/2.25

Now why would frozen foods reject a lower transfer price than their current one of 3 euro, they haven't met their margin and have missed it miserably (32%). They will accept any external price as long as its lower than what they're currently paying as it will improve their margin, even if it won't bring their margin up to 50% if they secure a price that will give them a 33% they'll accept.

Now I'll do some calculation (which I maintain are unnecessary)
Lets take the 360,000 units sold as an exact figure

Turnover/Units Sold = Average selling price
2,800,000/360,000= 7.78 Euro

Cost/1-margin = Selling price

Now we know they should of sold for 8 under the current transfer price
4/1-0.5=8
but selling at this price it uncompetitive (any price under 7.78 is a competitive selling price)

If we employed a marginal cost transfer price its Selling Price is 5
2.5/1-0.5=5

If they were to buy from an external supplier for 2.25 their selling price is
3.25/1-0.5=6.50
i.e. marginal cost and external buying result in a competitive price and the margin being met

Now for the final calculation assuming that 360,000 is an exact number and knowing that for every unit sold 1.50 euro of ready meals profit is included in frozen foods costs. If we were to take out ready meals profit from frozen foods costs (360,000*1.5), frozen food costs become 540,000 lower and their profit improves by the same amount.
so Frozen foods actual performance looks like this

Turnover
2,800,000
Profit
1,440,000 = (900,000+540,000)
Margin
1,440,000/2,800,000= 51.4%
i.e In line with company policy (as 360,000 is an estimate, the actual margin could be +/- 1 or 2%)

MindGuru

mickkellys wrote: »

Sorry mind guru I am still unclear
how is it safe to assume that there is no closing stock??
Also are you assuming they didn’t meet expect budget sales so there is extra fixed cost that needs to be apportioned among the 360,000 for a higher cost per unit
However are these figures not actual figures as it are is the year end?? So would they not have noticed this and adjusted for it

(1) I assume it safe to assume that there is no closing stock, as no closing stock should not be expensed , as next year Jim could sell the closing stock in 2012 and no expense will be recorded as it is in the 2011 report.

But lets assume it does represent closing stock for a second, 475,000-360,000 = 115,000 meals in the closing stock that has been expensed. in 2011.
Jim sells these in the first quarter of 2012 for 7 euro each, thats income of 805,000 Euro and he decides to not produce any
When it comes to his quarterly review the board will think of Jim as a fantastic manager for somehow generating that much income while only incurring fixed costs beyond his control

Therefore unless Jim is secretly buying ready meals in or is increasing his costs for some reason, I will assume they are fixed costs

(2) As I said total cost consists of fixed and variable costs, we know that as we can see an attempt to absorb it in the cost profile for frozen food.
Now to divide Total Cost by expected cost to try and get the number of units made is wrong, I'll illustrate with this example

Factory X makes candy bars for bears
It incurs fixed costs of 100,000 Euro per annum
The cost to make 1 candy bar is 1 Euro (this includes apportioned fixed costs)
Due to the obscure nature of the product they only sold 5 bars last year
So they incurred total costs of 100,005 Euro last year
Now using your method of dividing to Total Cost by (standard/budget) Cost per unit
we get 100,005/1= 100,005 candy bars were produced last year

Ajwalsh7

Mr SFMA wrote: »

Hi guys,

A group of us in work actually completed all the work that dtmckeown has posted.

We have no issue with our work being used (it is doing the rounds through email anyway) but if anybody has any feedback or different calculations or opinions or insights it would be welcomed.

No point in anyone hiding information so if you have any more information please share it like we have

Just a quick note to make is that in 1.DCF you have the pay awards set at 3,600.... I think it is actually 3,000 which you have in on your calculations in 3.Discounted Payback Period

Ajwalsh7

Just curious is everyone of the opinion that BKL's Pre-cooked meals division is incorrectly using Cost-Plus Pricing when company policy is to use a Target Costing approach?!?

Another thought is that we would be asked to come up with a special circumstance pricing for the transfer pricing as they have spare capacity so could make a one-off deal perhaps!!

acc12345

Yes I thought it was cost plus pricing.
If it was target costing they would have started with the target price and worked backwards

MindGuru

Does any one know what we can bring into the exam with us?

Is there a limit?

Is there specifically anything we cannot bring in? (I'm going to take it as a given we cannot bring anything in that can be used to contact people outside the exam hall)

Can we submit calculations we have performed in advance, with are exam paper?

So far I'm bringing in both SFMA books, the notes that were posted here and my own notes, am I forgetting anything that I should bring

Also in regards if Ready meals pricing policy:
It actually could be target costing, just the layout is different. If you were to start from the bottom of that cost profile and work you way up, it is in the format of target costing and it just show how they achieved the target price of 1.5.
For the sake of presentation the ready meals manager ,might of decided to lay it out that way.
The only way to know if it is target costing or cost plus pricing is to ask the manager himself

gh001

Hi all,

I am seriously confused and think I may have left it too late to figure all this stuff out.
Can someone please confirm if I am at least sorta thinking along the correct lines in terms of topics. I would really appreciate it.

I know institute has indicated that one area will come from CAP 1 Management Accounting one area from CAp 1 Finance and one area from CAp 2 SFMA.

So Finance - I'm thinking

Capital investment appraisal - lease v's buy, NPV, Payback etc.

Mngt accounting -
Std costing - budgeting??

SFMA -
Company Valuation, merger acquisition
Divisional Performance Meaures
Tansfer Pricing

From my thinking it seems to be heavily weighted in CAP 2 SFMA material.

Could someone give me their opinion?? Would really appreciate it.

Also in terms of calculation I am still unsure exactly what I need to prepare.
Obviously the lease v's buy - discounted cash flow & payback
TRansfer pricing recommendation.

What else should I be prepraring I am very confused.

REally appreciate any help... THANKS!!

QueenV

MindGuru wrote: »

Does any one know what we can bring into the exam with us?

Is there a limit?

Is there specifically anything we cannot bring in? (I'm going to take it as a given we cannot bring anything in that can be used to contact people outside the exam hall)

Can we submit calculations we have performed in advance, with are exam paper?

So far I'm bringing in both SFMA books, the notes that were posted here and my own notes, am I forgetting anything that I should bring

Also in regards if Ready meals pricing policy:
It actually could be target costing, just the layout is different. If you were to start from the bottom of that cost profile and work you way up, it is in the format of target costing and it just show how they achieved the target price of 1.5.
For the sake of presentation the ready meals manager ,might of decided to lay it out that way.
The only way to know if it is target costing or cost plus pricing is to ask the manager himself

You can bring anything you want into exam hall except electronic gadgets.Colour pens not allowed.You're not allowed to submit any pre prepared calculations with exam script.You'd have to do up calculations on exam script on day on exams.the exams is 90mins so there's only a certain amount of stuff we could be asked.

in relation to this where did you get the 2.5 and 3.25 from?I actually agree with your logic

If we employed a marginal cost transfer price its Selling Price is 5
2.5/1-0.5=5

If they were to buy from an external supplier for 2.25 their selling price is
3.25/1-0.5=6.50

bordsie

Do yas reckon if i go through all the attached files and on the previous page and print them to bring to the exam and just read through the obvious topics such as Transfer Pricing I will be ok?

pretty rusty on CAP1 did it a few years ago only doing CAP2 now. Will they care that half of dublin will be pretty much submitting the same answer?