Category Archives: Accounting

Explain the relevance of SSAE 18 and what does it report on.

Using an Internet web browser, search for AICPA’s Statement on Standards for Attestation Engagements (SSAE) No. 18, and perform the following: a. Explain the relevance of SSAE 18 and what does it report on. b. Identify advantages of SSAE 18 to auditors. c. Contrast SSAE 18 (as appropriate) with SSAE 16. Support your reasons and justifications with Audit literature and/or any other valid external source. Include examples as appropriate to evidence your case point. Submit a word file with a cover page, responses to the tasks above, and a reference section at the end. The submitted file should be between 5 and 7 pages long (double line spacing), including cover page and references. Be ready to present your work to the class.

 

What is the most profitable level of output per week for the new product

ABC plc is about to launch a new product. Facilities will allow the company to produce up to 20 units per week. The marketing department has estimated that at a price of £8,000 no units will be sold, but for each £150 reduction in price one additional unit per week will be sold.

 

Fixed costs associated with manufacture are expected to be £12,000 per week. Variable costs are expected to be £4,000 per unit for each of the first 10 units; thereafter each unit will cost £400 more than the preceding one. The most profitable level of output per week for the new product is

(A) 10 units

(B) 11 units

(C) 13 units

(D) 14 units

(E) 20 units

Calculate the unit selling prices which will: (a) maximise revenue; and (b) maximise profit.

B Ltd manufactures blodgets. It has been ascertained that the market for blodgets is follows:

 

● at unit price £20, no blodgets are demanded or sold;

● at unit price nil, 5,000 blodgets are demanded;

● for price levels intermediate between £20 and nil there is a linear relationship between

price and demand.

The variable cost of manufacturing a blodget is £5 at all levels of output.

Requirements

Calculate the unit selling prices which will: (a) maximise revenue; and (b) maximise profit.

 

Advise the company whether or not they should change their policy.

A company buys in sub-assemblies in order to manufacture a product. It is reviewing its

 

policy of putting each sub-assembly through a detailed inspection process on delivery, and

is considering not inspecting at all. Experience has shown that the quality of the sub-assembly

is of acceptable standard 90 per cent of the time. It costs £10 to inspect a sub-assembly and

another £10 to put right any defect found at that stage. If the sub-assembly is not inspected

and is then found to be faulty at the finished goods stage the cost of rework is £40.

Requirement

Advise the company whether or not they should change their policy.

decide whether to launch a new product or not.

The management of a business has to decide whether to launch a new product or not. If

 

the product is launched there are two elements of uncertainty:

● There is a 0.7 probability that sales will be 8,000 units per month but a 0.3 probability that

sales will be 5,000 units per month.

● If sales are 8,000 units per month, there is a 0.5 probability that the contribution per unit

will be £2 and a 0.5 probability that it will be negative _ £(1). If sales are 5,000 units per

month there is a 0.6 probability that the contribution per unit will be £3 and a 0.4 probability

that it will be £1.

Draw a decision tree and advise management as to their best course of action.

A company has prepared the design for a new product. It can either sell the design, for

 

£100,000, or attempt to develop the design into a marketable product at a cost of £150,000.

If the company decides to develop the product, the chances of success are 0.7. If the

attempt fails the design can only be sold for £20,000. If the attempt succeeds the business

has the choice of either selling the design and developed product for £180,000 or marketing

the product. If the product is marketed then there is a 0.6 probability that the product

will generate a cash inflow of £800,000 and a 0.4 probability that it will generate a cash outflow

of £(100,000). Both figures exclude items previously mentioned.

Requirement

Draw a decision tree….

Draw a decision tree and advise which course of action generates the greatest expected profit.

The launch of a new product is being considered. There is a 0.6 chance that demand for the

 

product will be strong and a 0.4 chance that demand will be weak. Two strategies for the

launch are possible. Strategy 1 involves high promotion costs and will generate a net cash

inflow of £120,000 if demand proves to be strong. However, if demand proves to be weak

then a net cash outflow of £(30,000) will result. Strategy 2 involves low promotion costs. If

demand proves to be strong then this will generate a net cash inflow of only £80,000 but if

demand proves weak then a net cash inflow of £20,000 is still generated.

Requirement

(a) Draw a decision tree and advise which course of action generates the….

What is the expected net gain from exhibiting at the show

The owner of a boat-building company is deciding whether or not to exhibit at a particular

 

boat show, which is to be held early in the season. The total cost of exhibiting

at the show will be £6,000. Sales will be dependent on the weather; there is a 0.3

chance that the weather will be dry and a 0.7 chance that the weather will be wet.

If the weather is dry, the owner expects to sell six yachts at the show. If the weather

is wet, he expects to sell only two yachts at the show. The contribution per yacht sold

is £10,000.

If the owner does not exhibit at this show, he believes that two of the yachts he expects to sell at this show would….

Advise FRS Ltd on whether or not the project is viable without the forecast.

FRS Ltd is considering undertaking a project, the cash flow outcome of which depends on

 

whether market demand proves to be weak (probability 0.25) or strong (probability 0.75).

Weak market demand will result in a negative cash flow of £180,000, while strong market

demand will give rise to a positive cash flow of £500,000.

A market research consultant has offered to prepare a forecast on whether the market

will be weak or strong for a fee of £80,000. Past experience with this firm indicates that

it has a 0.8 chance of correctly forecasting strong market demand and a 0.6 chance of

correctly forecasting weak market demand.

Requirements

(a) Advise FRS Ltd on whether or not the project is viable without the forecast.

(b) Advise FRS Ltd on….

Calculate the NPV of the project using the real rate of return as the discount rate.

A company is considering investing in a project which requires an initial investment of

 

£150,000. The cash inflows during years 1–3 are expected to be £55,000 per annum. The

company’s monetary cost of capital is 10 per cent and inflation is expected to be 6 per cent

during the life of the project.

Requirements

(i) Calculate the NPV of the project using the real rate of return as the discount rate.

(ii) Calculate the NPV of the project using the monetary cost of capital as the discount rate.