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Critically analyze the benefits and limitations of the Payback and NPV methods in decision making

Section A Question 1 Bakersland Ltd. is an artisan bakery based in Singapore and specialises in producing sourdough bread. The company currently has a small production factory and this is adequate to meet the demand from retailers. During last month, a popular gourmet television show featured Bakersland and its range of breads. As a result, the demand for Bakersland’s bread rose significantly. The directors of the company are looking into the possibility of moving to a larger premise and hiring more staff into the near future. Currently, their focus is to produce an optimal mix of products to maximise profits. The financial information relating to the company for the year ahead is provided below. 1. The company produces three (3) main types of sourdough bread: Wholemeal, Multigrain and Rye. 2. The company has 9,792 labour hours available for production for the year. 3. The budgeted fixed production overhead is $8,500 per month and the budgeted selling and distribution expenses are estimated to be $15,000 per quarter. 4. Details on the three types of bread are shown in the table Required: a) Does Bakersland Ltd have sufficient production capacity to meet budgeted demand for its products? Show detailed workings. b) Compute the optimal production plan for Bakersland Ltd and the expected annual profit c) In the current business environment, it is of vital importance that quality managerial decisions are made as they may have a profound impact on the performance and profitability of the company. Critically evaluate the importance of relevant costs in making quality managerial decisions. Question 2 Yummy Pte Ltd was founded 30 years ago to manufacture and sell premium cereal for adults and children. Manufacturing cereal requires the purchase of raw materials, followed by cleansing, mixing, testing and finally packaging the processed cereal in boxes Yummy is planning to automate the manual system by introducing a new Enterprise Resource Planning (ERP) system. This will help to improve efficiency in stock management and its supply chain systems. With the ERP system implemented, the estimated additional sales figures over the next five years are as follows: Other Information: The selling price of each unit of cereal is expected to stay at its current level of $30 per unit for the next two years but will increase by 10% in Year 3 of the project and remain at that level. Purchasing and implementing cost of ERP $250,000 Fixed manufacturing costs per year $60,000 Cost of additional production machinery $400,000 Scrap value of extra production machinery after 5 years $15,000 The company’s cost of capital is 10% per annum. Required a) Calculate the net present value (NPV) of making the investment in the new ERP system b) Explain, with reasons, whether the investment should be launched c) Critically analyse the benefits and limitations of the Payback and NPV methods in decision making. Section B Question 4 Research has revealed many successful cases of firms employing Total Quality Management (TQM) strategies in their organisation. Define TQM and critically evaluate its role in aiding organisations to achieve their business objectives as well as the obstacles that hinders the implementation of TQM from being successful. Question 5 The decentralised organisation comprises partly independent business units. Management has the responsibility to assess the performance of these business units. This requires the reported profit figure for the profit or investment centres for the relevant period to be objective and reliable. When these business units trade with each other, the transfer pricing system may have room for manipulation of profits to take place. Critically discuss the different types of transfer pricing determination and the behavioural implications of each type of transfer pricing

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