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

EF manufactures and sells three products, X, Y and Z. The following production overhead costs are budgeted for next year:

Required:
Calculate the total budgeted production overhead cost for each product using activity based budgeting.

• A. The total budgeted production overhead cost was $ 2 195 000
• B. The total budgeted production overhead cost was $ 1 305 000
• C. The total budgeted production overhead cost was $ 1 188 000
• D. The total budgeted production overhead cost was $ 1 285 000
• E. The total budgeted production overhead cost was $ 1 258 000

Explain the advantages of management participation in budget setting and the potential problems that may arise in the use of the resulting budget as a control mechanism.
Select all the correct answers.

• A. Participation in budget setting can cause problems; in particular, managers may attempt to negotiate budgets that they feel are easy to achieve which gives rise to "budget padding" or budgetary slack.
• B. Managers will not 'empire build' because they don't believe that the size of their budget reflects their importance within the organization.
• C. Participation in budget setting can reduce the information asymmetry gap that can arise when targets are imposed by senior management. Imposed targets are likely to make managers feel demotivated and alienated and result in poor performance.
• D. A purposes of budgeting is to act as a control mechanism, with actual results being compared against budget.
• E. Another purpose of a budget is to set targets to motivate managers and optimize their performance.
• F. The participation of managers in the budget setting process has several advantages. Managers are more likely to be motivated to achieve the target if they have participated in setting process has several advantages. managers are more likely to be motivated to achieve the target if they have participated in setting the target.

A company uses an activity based costing system. The company manufactures three products, details of which are given below:

• A. $0.31
• B. $0.23
• C. $0.35
• D. $0.27

JRL manufactures two products from different combinations of the same resources. Unit selling prices and unit cost details for each product are as follows:

* Refer to your answer in the previous question.
The optimal solution to the previous question shows that the shadow prices of skilled labour and direct material A are as follows:
Skilled labour $ Nil Direct Material A $11.70
Explain the relevance of these values to the management of JRL.
Select ALL the true statements.

• A. In a situation such as this, where a number of resources are scarce, the shadow price of any particular scarce resource will depend on whether or not the resource is not binding.
• B. Since material A is one of the binding constraints, if the availability of material A could be increased by one unit, this would change the optimal plan.
• C. The shadow price for skilled labour is NIL because although there is a shortage of skilled labour it does have a constraining effect on output of JR as other resources are more scarce.
• D. The decrease in contribution as a result of this change is the value of the shadow price of material A. The shadow price thus represents the maximum premium that should be paid for an additional unit of material A.
• E. The shadow price equals the additional contribution that would be earned from one extra unit of a scarce resource.