Reference no: EM131208975
TASK 1: Profit Planning
Minh Lam Company intends to start business on 1 January. Production plans for the first four months are as follows:
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January
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20,000 units
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February
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50,000 units
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March
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70,000 units
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April
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70,000 units
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Each unit requires 2 kilograms of material. The company would like to end each month with enough raw material inventories on hand to cover 25 per cent of the following month's production needs. The material costs $7 per kilogram. Management anticipates being able to pay for 40 per cent of its purchases in the month of purchase. They will receive a 10 per cent discount for these early payments. They anticipate having to defer payment to the next month on 60 per cent of their purchases. No discount will be taken on these late payments. The business starts with no inventories on 1 January.
Required
a. Determine the budgeted payments for purchases of materials for each of the first three months of operations.
b. Minh Lam Company is preparing a master budget for the coming year. At present senior management are reviewing the inventory policies. Which budgets would policies concerning the level of inventories affects? Why?
c. Discuss the potential issues arising for an entity if it takes a budgetary approach in which budgetary data are imposed on business unit managers by the CEO. Contrast this with an approach whereby the budgetary data is developed in a more participatory environment.
TASK 2: Relevant Costs for Decision Making
Big M Superstore is a large discount supermarket. Profits have declined, so the manager has collected data on revenues and costs for different food categories. The following data pertain to some of the frozen foods that Big M Superstore sells. To facilitate comparisons, the manager has listed average price and cost for each category in equivalent square-foot packages:
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Ice Cream
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Juices
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Frozen
Dinners
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Frozen
Vegetables
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Selling price per unit (square-foot package) (VND'000)
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120
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130
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240
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90
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Variable costs per unit (square-foot package) (VND'000)
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80
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100
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205
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70
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Minimum square footage required
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24
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24
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24
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24
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Maximum square footage allowed
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100
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100
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100
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100
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The manager wants a maximum of 260 square feet devoted to the four categories in this table.
Required
a. Given the manager's constraints, and assuming that the store can sell whatever is displayed on the shelves, what shelf mix (i.e., what number of square feet for each category) will maximize Big M Superstore's profit from these four categories?
b. What other factors might the manager consider in deciding on the amount of shelf space per category?
c. Some people claim that fixed costs are always irrelevant in decision-making. Discuss.
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