Watt Lovell Ltd. Oil Drilling Assignment Help
1.Watt Lovell Ltd. (WLL) is trying to decide whether or not to drill for oil on a particular site in North Eastern Kenya. The Chief Engineer has assessed the probabilities that there will be oil as follow, based on past experience.
No oil 0.8
It is possible for WLL to hire a firm of international consultants to carry out a complete survey of the site. WLL has used the firm many times before and has made the following estimates:
1. If there really is oil, then there is a 95% chance that the report will be favourable.
2. If there is no oil then there is only a 10% chance that the report will indicate that there is oil.
The following additional information is also provided:
· The cost of drilling is Sh.10 million.
· The value of the benefits if oil is found is Sh.70 million
· The cost of obtaining information is Sh.3 million.
a) Advise the company on whether to acquire additional information from the consultants.
b) Compute the value of imperfect information.
2.Two grams of musk oil are required for each bottle of Mink Caress, a very popular perfume made by a small company in western Siberia. The cost of the musk oil is $2.20 per gram. Budgeted production of Mink Caress is given below by quarters for Year 2 and for the first quarter of Year 3: Musk oil has become so popular as a perfume ingredient that it has become necessary to carry large inventories as a precaution against stock-outs. For this reason, the inventory of musk oil at the end of a quarter must be equal to 20% of the following quarter’s production needs. Some 34,400 grams of musk oil will be on hand to start the first quarter of Year 2.
Prepare a direct materials budget for musk oil, by quarter and in total, for Year 2. (Round “Unit cost of raw materials” answers to 2 decimal places)
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3.Archie Ltd manufactures a product called Gizmo.It uses the following direct inputs:
|Price||Quantity||Cost per unit of output|
|Direct materials||$4per gram||10 grams per unit||$40per unit|
|Direct manufacturing labour-hours (DMLH)||$15per DMLH||2DMLH per unit||$30per unit|
Archie Ltd has no direct materials inventory. All manufacturing overhead costs are variable costs.
The manufacturing overhead cost is comprised of two activities: set-up and operations. The cost driver for set-up is set-up hours and the cost driver for operations is direct manufacturing labour-hours. Archie Ltd allocates set-up cost at a rate of $80 per set-up hour and each set-up takes two hours.
The company makes Gizmos in batches of 100 units. Operations costs are allocated at a rate of $1.60 per direct manufacturing labour-hour.
a. Archie Ltd plans to make and sell 20 000 Gizmos in the first quarter of next year. The selling price for the product is $120.Prepare the revenue budget for the first quarter.
b. Prepare the direct material usage budget for the first quarter of next year.
c. Prepare the direct manufacturing labour usage budget for the first quarter of next year.
d. Prepare the manufacturing overhead cost budget for each activity for the first quarter of next year.
e. Compute the budgeted unit cost of a gizmo for the first quarter of next year.
f. Prepare the cost of goods sold budget for the first quarter of next year. Assume Archie Ltd budgets 1000 units of beginning finished goods inventory at a cost of $72 per unit. The company uses the FIFO cost flow assumption for finished goods inventory. It expects to sell all 20 000 Gizmos made in the first quarter.
g. Calculate the budgeted gross margin for the first quarter of next year.
h. The company’s managers want to implement Kaizen Costing. They budget a 1% decrease in materials quantity and direct manufacturing labour-hours and a 3% decrease in set-up time per unit for each subsequent quarter. Calculate the budgeted unit cost and gross margin for quarters two and three. Assume no change in the budgeted output.
i. Refer to the above requirement. How could the reduction in materials and time be accomplished? Are there any problems with this plan?
4.Oak Creek Company is preparing its master budget for 2010. Relevant data pertaining to its sales, production, and direct materials budgets are as follows.
Sales: Sales for the year are expected to total 1,000,000 units. Quarterly sales are 20%, 25%, 25%, and 30% respectively.The sales price is expected to be $40 per unit for the first three quarters and $45 per unit beginning in the fourth quarter. Sales in the first quarter of 2011 are expected to be 10% higher than the budgeted sales for the first quarter of 2010.
Production: Management desires to maintain the ending finished goods inventories at 20% of the next quarter’s budgeted sales volume.
Direct materials: Each unit requires 2 pounds of raw materials at a cost of $10 per pound. Management desires to maintain raw materials inventories at 10% of the next quarter’s production requirements. Assume the production requirements for first quarter of 2011 are 500,000 pounds.
Prepare the sales, production, and direct materials budgets by quarters for 2010.
5.On January 1, 2011 the Batista Company budget committee has reached agreement on the following data for the 6 months ending June 30, 2011.
|Sales units:||First quarter 5,000; second quarter 6,000; third quarter 7,000|
|Ending raw materials inventory:||50% of the next quarter’s production requirements|
|Ending finished goods inventory:||30% of the next quarter’s expected sales units|
|Third-quarter production:||7,250 units|
The ending raw materials and finished goods inventories at December 31, 2010, follow the same percentage relationships to production and sales that occur in 2011.Three pounds of raw materials are required to make each unit of finished goods. Raw materials purchased are expected to cost $4 per pound.
(a) Prepare a production budget by quarters for the 6-month period ended June 30, 2011.
(b) Prepare a direct materials budget by quarters for the 6-month period ended June 30, 2011.
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