Select the benefits to a company of using sensitivity analysis in investment appraisal.
(Select all the true statements.)

• A. Sensitivity analysis enables risk management strategies to be put in place to focus on those variables of special significance.
• B. Sensitivity analysis enables identification of fixed costs that are of special significance.
• C. Sensitivity analysis enables a company to determine the effect of changes to variables on the planned outcome.
• D. Sensitivity analysis enables a company to assess the risk associated with a project.

A medium-sized manufacturing company, which operates in the electronics industry, has employed a firm of consultants to carry out a review of the company's planning and control systems. The company presently uses a traditional incremental budgeting system and the inventory management system is based on economic order quantities (EOQ) and reorder levels. The company's normal production patterns have changed significantly over the previous few years as a result of increasing demand for customized products. This has resulted in shorter production runs and difficulties with production and resource planning. The consultants have recommended the implementation of activity based budgeting and a manufacturing resource planning system to improve planning and resource management.
What are the benefits for the company that could occur following the introduction of an activity based budgeting system?
Select ALL the correct answers.

• A. Activity based techniques including activity based budgeting focus on the outputs of a process rather than the input to the process. This approach provides a clear framework for understanding the link between costs and the level of activity. It allows the ranking of activities and the determination of how limited resources should be allocated across competing activities.
• B. The approach under an Activity based Budgeting System is to make arbitrary cuts in order to meet overall financial targets.
• C. Activity Based Budgeting Systems present costs under functional headings i.e. the emphasis is on the nature of the cost. The weakness if this approach is that it gives little indication of the link between the level of activity and the cost incurred.
• D. Under a traditional incremental budgeting system the focus is on existing resources and operations.
  Adjustments are then made for changes in activity and price which results in past inefficiencies being perpetuated. Under an activity based budgeting system, only resources that are needed to perform activities required to meet the budgeted production and sales volumes are included.
• E. Under an activity based budgeting system, resource allocation is linked to the strategic plan and is prepared after considering alternative strategies. This approach ensures that new activities that are required to meet the company's strategic objectives are included in the budget.

A company is preparing its annual budget and is estimating the number of units of Product A that it will sell in each quarter of year 2. Past experience has shown that the trend for sales of the product is represented by the following relationship:
y = a + bx where
y = number of sales units in the quarter a = 10,000 units b = 3,000 units x = the quarter number where 1 = quarter 1 of year 1 Actual sales of Product A in Year 1 were affected by seasonal variations and were as follows:
Quarter 1:14,000 units Quarter2: 18,000 units Quarter 3: 18,000 units Quarter 4: 20,000 units Calculate the expected sales of Product A (in units) for each quarter of year 2, after adjusting for seasonal variations using the additive model.

• A. The expected sales for year 2 Quarter 4 was 33000 units
• B. The expected sales for year 2 Quarter 4 was 40000 units
• C. The expected sales for year 2 Quarter 4 was 32000 units
• D. The expected sales for year 2 Quarter 4 was 32700 units

A university is trying to decide whether or not to advertise a new post-graduate degree programme. The number of students starting the programme is dependent on economic conditions. If conditions are poor, it is expected that the programme will attract 40 students without advertising. There is a 60% chance that economic conditions will be poor. If economic conditions are good it is expected that the programme will attract only 20 students without advertising. There is a 40% chance that economic conditions will be good.
If the programme is advertised and economic conditions are poor, there is a 65% chance that the advertising will stimulate further demand and student numbers will increase to 50. If economic conditions are good, there is a 25% chance the advertising will stimulate further demand and numbers will increase to 25 students.
The profit expected, before deducting the cost of advertising, at different levels of student numbers are as follows:

The cost of advertising the programme will be $15,000.
Required:
Demonstrate, using a decision tree, whether the programme should be advertised.

• A. Yes, the programme should be advertised as the profit will be $82 000
• B. No, the programme should not be advertised as there will be a loss $82 000
• C. Yes, the programme should be advertised as the profit will be $92 000
• D. No, the programme should not be advertised as there will be a loss $92 000

Assume that you have made profit calculations based on standard profit calculation methods and activity based costing methods.
In which ways will this information be beneficial to the management team?
Select all the true statements.

• A. The cost drivers that cause a change to the cost of activities are also identified and used as the basis to attach activity costs to a particular product or service.
• B. Under an activity based costing system the various support activities that are involved in the process of making products or providing services are identified.
• C. The identification of cost drivers provides information to management to enable them to take actions to improve the overall profitability of the company.
• D. Through the tracing of costs to product in this way ABC establishes less accurate costs for the product or service.
• E. Operational analysis will provide information to management on how costs can be incurred and managed.