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Shifters Haulage (SH) is considering changing some of the vans it uses to transport crates
for customers. The new vans come in three sizes; small, medium and large. SH is unsure
about which type to buy. The capacity is 100 crates for the small van, 150 for the medium
van and 200 for the large van. Demand for crates varies and can be either 120 or 190 crates
per period, with the probability of the higher demand figure being 0.6.
The sale price per crate is $10 and the variable cost $4 per crate for all van sizes subject to
the fact that if the capacity of the van is greater than the demand for crates in a period then
the variable cost will be lower by 10% to allow for the fact that the vans will be partly
empty when transporting crates.
SH is concerned that if the demand for crates exceeds the capacity of the vans then
customers will have to be turned away. SH estimates that in this case goodwill of $100
would be charged against profits per period to allow for lost future sales regardless of the
number of customers that are turned away.
Depreciation charged would be $200 per period for the small, $300 for the medium and
$400 for the large van.
SH has in the past been very aggressive in its decision-making, pressing ahead with rapid
growth strategies. However, its managers have recently grown more cautious as the
business has become more competitive.
Required:
(a) Prepare a profits table showing the SIX possible profit figures per period. (9 marks)
(b) Using your profit table from (a) above discuss which type of van SH should buy
taking into consideration the possible risk attitudes of the managers. (6 marks)Hello sir,
I got this question from Kaplan.
I understand everything but one issue.On calculating the profits, costs of crates in excess of demand were not accounted for and this really confused me.
For example, Buying Medium sized van of 150 crates capability at 120 crates demand gives me 360 but they got 378.
Would you please direct me about this single payoff ?
Please don’t type out whole questions – it is breach of copyright and the ACCA get annoyed about it (because this is a past ACCA exam question).
I have all the past exams and so all you need to do is give the name of the question and which exam it was in 🙂If they buy the medium sized van and demand is 120, then the profit is neither 360 nor 378!! Either you have misread the Kaplan answer or they have made a mistake. The correct answer (and the examiners own answer!) is a profit of $468, as follows:
The revenue will be 120 x $10 = 1,200
The variable costs will be 120 x ($4 x 90%) = 432
The depreciation is $300So the profit is 1,200 – 432 – 300 = 468
Again, this is the answer the examiner wrote in his answer, and is the correct answer.
(If the demand is only 120, then they will not buy more than the 120 crates that they need, even though there would be room in the van!)
First of all, I am sorry for my misdeed.
Second, thank you for your answer.
I now realise that the number of crates is all about Vans capacity unlike those courses of action where you choose the path directly connected to number of crates. Thank u.
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