{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

18-C2_SMA_QP.pdf - o STRATEGIC MANAGEMENT ACCOUNTING[C2...

Info icon This preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 4
Image of page 5

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: o STRATEGIC MANAGEMENT ACCOUNTING [C2] sewn 5 E I MA CHARTERED LEVEL W}: C Emma mmmmmmmmmm r mmmmmmmmmmm E XTRA ATTEMPT EXAMINATIONS, MAY 2017 mm mm Monday, the 15th May 2017 Extra Reading Time: 15 Minutes Maximum Marks: 100 Roll No.: Writing Time: 03 Hours (i) Attempt all questions. (ii) Write your Roll No. in the space provided above. (iii) Answers must be neat, relevant and brief. It is not necessary to maintain the sequence. (iv) Use of non-programmable scientific calculators of any model is allowed. (v) Read the instructions printed inside the top cover of answer script CAREFULLY before attempting the paper. (vi) In marking the question paper, the examiners take into account clarity of exposition, logic of arguments, effective presentation, language and use of clear diagram/ chart, where appropriate. (vii) DO NOT write your Name, Reg. No. or Roll No., or any irrelevant information inside the answer script. (viii) Question Paper must be returned to invigilator before leaving the examination hall. éiéiiiiééiiéfiiiléliiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiifiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiEESESéiéiiiiiiiiiiiéiiii11E;ii25iiiii1iiiiit5Eiiiii115E8éiiiéiiEé Spike Auto Parts Company is specialised in assembling replacement parts for automobiles. The company has two divisions the Assembly Division, and the Retail Division. It assembles and sells two special types of auto parts i.e. the ‘AXE’ and ‘RAX’. The company's policy is to transfer the auto parts from the Assembly Division to the Retail Division at full cost plus 10%. This has resulted in internal transfer prices, when ‘AXE’ and ‘RAX’ are being transferred to the Retail Division for Rs.220.17 and Rs. 241.69 per unit respectively. The Retail Division currently sells ‘AXE’ to the general public for Rs. 320.00 per unit and ‘RAX’ for Rs. 260.00 per unit. It is assumed that it incurs no other costs, except forthe transfer price. The Retail Division's Manager Mr. Ahmed is convinced that, if he could obtain ‘RAX’ at a lower cost and therefore reduce the external selling price from Rs. 260.00 to Rs. 230.00 per unit, he could significantly increase sales of ‘RAX’, which would be beneficial to both divisions. He observed that company allocates its overhead costs to the products on the basis of labour hours; but Mr. Ahmed thinks that they should use activity based costing (ABC). You have obtained the following information for the last month from the Assembly Division: ‘AXE’ ‘RAX’ Production and sales (units) 3,200 5,450 Materials cost per unit (Rs.) 117 95 Labour cost per unit (@ Rs.12 per hour) 6 9 Machine hours (per unit) 2 1 Total no. of production runs 30 12 Total no. of purchase orders 82 64 Total no. ofdeliveries to Retail Division 64 80 Overhead costs: Rupees Machine set-up costs 306,435 Machine maintenance costs 415,105 Ordering costs 11,680 Delivery costs 144,400 Total 877,620 Required: (a) Recalculate the transfer prices for ‘AXE’ and ‘RAX’ using activity based costing (ABC) for allocating the overheads. Also comment on the view of the Retail Division’s Manager. 11 (b) Calculate last month’s profit for each division, if ABC is used. Show calculations for each product and in total. 04 SMA-EAE—May 2017 1 of 6 PTO Marks Questl°nN°2ProposedT'meMm25|T°talMarks15 Royal Industries Ltd. is considering to purchase a machine costing Rs.28,800,000. If machine is purchased, the company would incur annual maintenance costs of Rs.2,250,000. The machine would be used for three years and at the end of this period would be sold for Rs. 4,500,000. Alternatively, the machine could be obtained under an operating lease for an annual lease rental of Rs. 10,800,000 per year, payable in advance. Royal Industries Ltd. can claim 15% capital allowances on reducing balance basis. The company pays tax on profits at an annual rate of 31% and all tax liabilities are paid one year in arrears. Royal has an accounting year that ends on June 30. If the machine is purchased, payment will be made in the month of July of the first year of operation. If leased, annual lease rentals would be paid in July of each year of operations. Required: Evaluate whether Royal Industries Ltd. should purchase or lease the new machine (Using an after-tax borrowing rate of 8%). 15 Farhan Textiles Ltd. is engaged in manufacturing a wide range of denim fabric products since many years. The Director Finance, Mr. Adnan, is considering replacement of its existing machine by a new and advanced machine. He argued that new machine will save annual cash expenses and will generate more cash revenues. Mr. Adnan asked Manager Finance of the company to find out the feasibility of new machine. Following information is available regarding existing and advanced machines: Rupees Existing Machine Advanced Machine Cost — 264,000 Life (year) 5* 5 Annual cash revenues 455,000 568,750 Annual cash expenses 318,500 295,750 Salvage value 4,550 18,200 Book value 91,000 — Sales value 45,500 — *Remaining Additional Information: . Farhan Textiles Ltd. is in 31% tax-bracket, and writes off depreciation at 15% on written down value method. . The company has a target debt to value ratio of 15%. In past years, company has raised debt at 11% and it can raise fresh debt at 10.5%. . Farhan Textiles Ltd. plans to follow dividend discount model to estimate the cost of equity capital. The company plans to pay a dividend of Rs. 2 per equity share in the next year. The current market price of the company’s equity share is Rs. 20 per equity share. . The dividend per equity share of the company is expected to grow at 8% per annum. Required: You are required to advice the company regarding machine replacement and compute the following: (a) Incremental cash flows of the replacement decision 10 (b) Weighted average cost of capital (WACC) of the company 02 (c) Net present value (NPV) ofthe replacement decision 03 (d) Discounted payback period of the replacement decision 02 SMA-EAE—May 2017 2 of 6 Quest'°"N°4Pr°P°sedTImeM'"3°'T°ta"V'arks17 Golden Industries Ltd. is involved in various stationery products’ retail business since last two decades. The financial management of company is discussing to appraise new investment of Rs. 30 million. The investment would be a diversification from existing mainstream activities of stationery into the printing industry. It has been decided that Rs. 6 million of the investment would be financed by internal funds, Rs. 9 million by a right issue and Rs. 15 million by long-term loans. The investment is expected to generate pre-tax net cash flows of approximately Rs. 6 million per year, for a period often years. The forecasted residual value at the end of Year-10 would be Rs. 6 million aftertax. Financial gearing and equity beta of both companies would be: Existing Industry Printing Industry Financial Gearing (%): Equity 60 50 Debt 40 50 Average equity beta 0.85 1.2 Other Information: . The risk-free rate is 6% per annum and the market return is 11.6% per annum. . Issue costs are estimated to be 1% for debt financing (excluding the subsidized loan), and 4% for equity financing. . The corporate tax rate is 31%. As the investment is in an area that the government wishes to develop, a subsidized loan of Rs. 5 million out of Rs. 15 million is available. This will cost 3% below the company's normal cost of long-term debt finance, which is 10%. Required: (a) Estimate the adjusted present value (APV) of the proposed investment. 12 (b) Discuss the circumstances under which APV might be a better method of evaluating a capital investment than net present value (NPV). 03 (c) Discuss the risks of this diversification to Golden Industries Ltd. 02 Question No.5 Proposed Time: Min. 25| Total Marks : 15 Luxury Fashion House (LFH) manufactures T-shirts which are sold directly to retailers in Karachi. The company has suffered a steady decline in output in the year 2016 and it just managed to achieve the break-even sales. LFH’s statement of profit or loss for the year 2016 is as follows: Rupees Sales (100,000 T-shirts @ Rs. 100) 10,000,000 Cost of goods sold: Direct material 3,500,000 Direct labour 1,000,000 Variable factory overhead 600,000 Fixed factory overhead 2,200,000 7,300,000 Gross profit 2,700,000 Administrative overhead (Fixed) 1,950,000 Selling and distribution costs: Commission (2% of sales) 200,000 Delivery costs (variable per unit) 50,000 Fixed costs 500,000 750,000 2,700,000 Profit/ (loss) — SMA-EAE—May 2017 3 of 6 PTO Marks A forecast for the year 2017 indicates that the declining trend will continue. The Board of Directors of the company asked to review the present pricing and marketing policies. The Marketing Department has completed this review and provided following three proposals for consideration: Proposal-A: A 10% reduction in selling price which is expected to increase the demand forthe T-shirts by 40%. Proposal-B: A wholesaler located in the Punjab is willing to buy 50,000 T-shirts annually. The wholesaler will bear the transportation cost and these sales would not attract any sales commission. However, LFH would have to incur additional fixed costs of Rs.600,000 per annum. Additionally, it would be necessary for LFH to provide for special packaging at Re. 0.75 per T-shirt. The Marketing Department considers that this order will not affect the sales from the existing business which would remain unchanged at 100,000 T-shirts based on selling price of Rs. 100 per T-shirt. Proposal-C: A 10% reduction in price, together with an advertising campaign in the Karachi region costing Rs. 300,000 may increase the sale to 165,000 T-shirts. Required: (a) Evaluate the Proposal-A and state is the proposal beneficial for Luxury Fashion House (LFH)? 05 (b) Calculate the minimum price that should be charged to the wholesaler in Punjab, if the company earned target profit of Rs.1 million. 05 (c) Evaluate Proposal-C and recommend which proposal is better from financial perspective? 05 QuesttonNoGProposedTImeM|n25|TotalMarks11 Dietary Care Foods (Pvt.) Ltd. is specialized in manufacturing food products for customers who suffer from allergies which give rise to special dietary needs. For example, one product which Dietary Ltd has been producing since the company was found is lactose-free milk, which is sold in both liquid and powdered form. Several other product lines have been developed to meet the needs of customers who require foods which are free of soya, nuts, wheat, orfish. Most of the products are sold through health food stores and other specialized retail outlets. The company recently introduced two new food supplementary products ‘Alpha’ and ‘Beta’. It is expected that these two products will earn per unit contribution of Rs. 500 and Rs. 875 respectively. At current selling prices, there is no limit to sales demand for ‘Beta’, but maximum demand for ‘Alpha’ would be 1,800 units. The company aims to maximize its annual profits and fixed costs are expected to be Rs. 1,386,000 per annum. Due to recent economic recession, the company expects to have a limited availability of resources and estimates of availability are as follows: Direct labour— Maximum (hours) 225 Machine time — Maximum (hours) 100 Direct material — Maximum (kgs) 7,000 The usage of these resources per unit of product is as follows: Alpha Beta Direct labour time per unit (minutes) 2.0 3.0 Machine time per unit (minutes) 1.0 1.5 Direct material (kgs) 1.0 0.5 SMA-EAE—May 2017 4 of 6 Required: (a) Formulate the problem using the simplex method of linear programming. (b) Determine how many variables will have a positive value and how many a value of zero in any feasible solution with six variables. QuestionNWProposedTImeMmzolTotaIMarks1° (a) An investment centre has reported operating profits of Rs. 32 million. This was after charging Rs.6 million for the development and launch costs of a new product that is expected to generate profits for six years. Taxation is paid at the rate of 31% ofthe operating profit. The company has a risk adjusted weighted average cost of capital (VVACC) of 14% per annum and is paying interest at 10% per annum on a substantial long-term loan. The investment centre’s non-current asset value is Rs. 60 million and the net current assets have a value of Rs. 25 million. The replacement cost of the non-current assets is estimated to be Rs. 70 million. Required: Calculate the investment centre’s economic value added (EVA) for the period. (b) Crown Manufacturers Ltd. operates a number of divisions i.e. ‘Sales’, ‘Production’, ‘Finance’ and ‘Administration’. The Production Manager is upset about the latest performance report given below. He argued that cost amounting to Rs.4,000 was incurred solely because the Sales Manager ordered changes in production for rush orders from customers. Performance Report Production Division Rupees Controllable Costs Budgeted Actual Variance Materials 40,000 39,500 500 (F) Direct labour 80,000 81,000 1,000 (U) Other labour 23,000 26,500 3,500 (U) Idle time* 500 2,000 1,500 (U) Other production costs 10,500 10,000 500 (F) Total 154,000 159,000 5,000 (U) *Wages paid to workers while they are idle, as when machines are being reset because of a change from one product to another. The report argues that the Production Manager shows Rs. 1,500 in idle time caused by changing the production process to meet the special orders. In addition, about Rs.2,500 in ‘other labour’ was for costs incurred to make the necessary changes and for the overtime premium paid to workers to get the work finished. Required: What is wrong with the performance report and what would you recommend? THE END SMA-EAE—May 2017 5 of 6 Marks 09 02 05 05 PTO PRESENT VALUE INTEREST FACTOR PVlF(r, n) = (1 + r)-n Year Interest Rate (r) 6% 8% 9% 10% 1 1% 12% 13% 14% 15% 16% 18% 0.943 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.847 0.890 0.857 0.842 0.826 0.812 0.797 0.783 0.769 0.756 0.743 0.718 0.840 0.794 0.772 0.751 0.731 0.712 0.693 0.675 0.658 0.641 0.609 0.792 0.735 0.708 0.683 0.659 0.636 0.613 0.592 0.572 0.552 0.516 0.747 0.681 0.650 0.621 0.593 0.567 0.543 0.519 0.497 0.476 0.437 0.705 0.630 0.596 0.564 0.535 0.507 0.480 0.456 0.432 0.410 0.370 0.665 0.583 0.547 0.513 0.482 0.452 0.425 0.400 0.376 0.354 0.314 0.627 0.540 0.502 0.467 0.434 0.404 0.376 0.351 0.327 0.305 0.266 0.592 0.500 0.460 0.424 0.391 0.361 0.333 0.308 0.284 0.263 0.225 _x A omethwN—xs v 0.558 0.463 0.422 0.386 0.352 0.322 0.295 0.270 0.247 0.227 0.191 PRESENT VALUE INTEREST FACTOR FOR AN ANNUITY PVI FA(r, n) = 17 (1+ r)“ 1 I' Year Interest Rate (r) 6% 8% 9% 10% 1 1% 12% 13% 14% 15% 16% 18% 0.943 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.847 1.833 1.783 1.759 1.736 1.713 1.690 1.668 1.647 1.626 1.605 1.566 2.673 2.577 2.531 2.487 2.444 2.402 2.361 2.322 2.283 2.246 2.174 3.465 3.312 3.240 3.170 3.102 3.037 2.974 2.914 2.855 2.798 2.690 4.212 3.993 3.890 3.791 3.696 3.605 3.517 3.433 3.352 3.274 3.127 4.917 4.623 4.486 4.355 4.231 4.111 3.998 3.889 3.784 3.685 3.498 5.582 5.206 5.033 4.868 4.712 4.564 4.423 4.288 4.160 4.039 3.812 6.210 5.747 5.535 5.335 5.146 4.968 4.799 4.639 4.487 4.344 4.078 6.802 6.247 5.995 5.759 5.537 5.328 5.132 4.946 4.772 4.607 4.303 _x A omemLfl-th—‘S v 7.360 6.710 6.418 6.145 5.889 5.650 5.426 5.216 5.019 4.833 4.494 FORMULAS Cost of equity (Ke) 2- Weighted average cost of capital (WACC) Asset beta (Ba) Adjusted present value (APV) Debt to value ratio Payback period Where, A B C Economic value added (EVA) Where, Capital charge rf + {E(rm) — rf} x Beta Keg{E + (E+D)} + Kd(1 — t) x D + (E + D) BelE + {E + D(1 - t)}] Unlevered NPV of free cash flows + PV of debt financing advantages Debt + (Equity + Debt) A + (B + C) Last period negative cumulative cash flow; Absolute value of cumulative cash flow at the end of period ‘A’; Total cash flow during the period after ‘A’. Net operating profit after tax — Capital charge Weighted average cost of capital x Net assets SMA-EAE—May 2017 60f6 ...
View Full Document

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern