18-C2_SMA_ans.pdf - SUGGESTED SOLUTIONS ANSWERS — EXTRA...

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Unformatted text preview: SUGGESTED SOLUTIONS/ ANSWERS — EXTRA ATTEMPT EXAMINATIONS, MAY 2017 STRATEGIC MANAGEMENT ACCOUNTING [C2] — CHARTERED LEVEL Question No. 1 (a) Transfer Prices using Activity Based Costing (ABC): Materials cost Labour cost (Rs.12 per hour) Overhead cost [W-1] Total cost Add:10% mark-up Transfer price using ABC Rupees Product Product ‘AXE’ ‘RAX’ 117.00 95.00 6.00 9.00 160.57 66.75 283.57 170.75 28.36 17.08 311.93 187.83 The transfer price for Product ‘AXE’ would be much higher than it is currently and the transfer price for Product ‘RAX’ would be much lower. At this lower cost, the manager of the retail division could sell Product ‘RAX’ more cheaply at his target price of RS230, but Product ‘AXE’ would make very little profit if it is sold at Rs.320 when its activity based cost is nearly Rs.312. Working: W-1: Overhead cost using ABC: Machine set up costs: Driver Total number of production runs Cost per run Machine maintenance costs: Driver Total number of machine hours Cost per machine hour Ordering costs: Driver Total number ofpurchase orders Cost per order Delivery costs Driver Total number of deliveries Cost per delivery Number of production runs 30(A) + 12(R) Rs.306,435 + 42 Machine hours 6,400(A) + 5,450(R) Rs.415,105 + 11,850 Number of purchase orders 82(A) + 64(R) Rs.11,680 +146 Number of deliveries 64(A) + 80(R) Rs.144,400 + 144 42 Rs.7,296.07 11,850 Rs.35.03 146 Rs.80.00 144 Rs.1,002.78 ‘lof9 Marks 0.5 0.5 0.5 01 O1 O1 O1 O1 DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of t can be reproduced, stored in a retrieval system or transmitted in any physical] or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or treated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has provided suggested answers on the basis of certain assumptions for general guidance ofthe students and there may be other possible answers] solutions based on different assumptions and understanding. The ICMA Pakistan and its Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents ofthese suggested answers. It is clarified that the ICMA Pakistan shall not be liable to attend or receive any comments, observations or critiques related to the suggested answers. SUGGESTED SOLUTIONS/ ANSWERS — EXTRA ATTEMPT EXAMINATIONS, MAY 2017 STRATEGIC MANAGEMENT ACCOUNTING [C2] — CHARTERED LEVEL Allocation of Overheads to Each Product: Rupees Product Product ‘AXE’ ‘RAX’ Materials set-up costs (Rs.7,296.07 per run) 218,882 87,553 Machine maintenance costs (Rs.35.03 per machine hr) 224,192 190,913 Ordering costs (R580 per order) 6,560 5,120 Delivery costs (Rs.1,002.78 per delivery) 64,178 80,222 Total overheads allocated 513,812 363,808 Number of units produced 3,200 5,450 Overhead cost per unit 160.57 66.75 (b) ABC Monthly Profit: Using the ABC transfer price from part (a): Rupees Product Product Total ‘AXE’ ‘RAX’ Assembly Division: (A) Production and sales (units) 3,200 5,450 (B)10% mark up 28.36 17.08 (C) Profit (A x B) 90,752 93,086 183,838 Retail Division: (D) Selling price 320.00 260.00 (E) Cost (311.93) (187.83) (F) Profit per unit (D-E) 8.07 72.17 (G)Total profit (A x F) 25,824 393,327 419,151 20f9 Marks 01 O1 O1 01 0.5 0.5 1.5 0.5 1.5 DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of t can be reproduced, stored in a retrieval system or transmitted in any physical] or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or treated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has provided suggested answers on the basis of certain assumptions for general guidance ofthe students and there may be other possible answers] solutions based on different assumptions and understanding. The ICMA Pakistan and its Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents ofthese suggested answers. It is clarified that the ICMA Pakistan shall not be liable to attend or receive any comments, observations or critiques related to the suggested answers. SUGGESTED SOLUTIONS/ ANSWERS — EXTRA ATTEMPT EXAMINATIONS, MAY 2017 3 of 9 STRATEGIC MANAGEMENT ACCOUNTING [C2] — CHARTERED LEVEL Marks 7f;HE?étiE56fil!EIii?iifiiiiiii:ii:iiiiiii:ii:iiiiiii:i:iiiif:iii:ii:iiiif:ii:iiifiiii:i:iiiifiiii:i:iiiiiiii:ii:iiii:iiii:ii: NPV of purchasing machine: Rupees in ‘000’ Cash fIOWSi Year 0 Year 1 Year 2 Year 3 Year 4 Total Capital Costs (28,800) - - - - 0.5 Annual maintenance costs - (2,250) (2,250) (2,250) 0.75 Disposal proceeds - - - 4,500 - 0.5 Taxation (at 31% in following years) 698 698 698 0.75 Tax benefit on capital allowance(W) - - 1,339 1,138 5,055 1.5 Net cash flows (28,800) (2,250) (214) 4,086 5,753 02 Present value factor at 8% 1.000 0.926 0.857 0.794 0.735 Discounted cash inflows (28,800) (2,084) (183) 3,244 4,228 (23,595) 03 Net present value of leasing machine: Cash Flows Year 0 Year 1 Year 2 Year 3 Year 4 Total Annual lease rentals (10,800) (10,800) (10,800) Tax benefits - - 3,348 3,348 3,348 0.75 Net cash flows (10,800) (10,800) (7,452) 3,348 3,348 1.25 Present Value factor at 8% 1.000 0.926 0.857 0.794 0.735 Discounted cash inflows (10,800) (10,001) (6,386) 2,658 2,461 (22,068) 03 Therefore, the machine should be leased ratherthan purchased. 01 Working for Tax saving (purchasing option) Tax benefit on capital allowances Y1 Y2 Y3 Written down value at start 28,800 24,480 20,808 Capital allowance 4,320 3,672 16,308 Tax saving 1,339 1,138 5,055 DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of t can be reproduced, stored in a retrieval system or transmitted in any physical] or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or treated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has provided suggested answers on the basis of certain assumptions for general guidance ofthe students and there may be other possible answers] solutions based on different assumptions and understanding. The ICMA Pakistan and its Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents ofthese suggested answers. It is clarified that the ICMA Pakistan shall not be liable to attend or receive any comments, observations or critiques related to the suggested answers. SUGGESTED SOLUTIONS/ ANSWERS — EXTRA ATTEMPT EXAMINATIONS, MAY 2017 4 of 9 STRATEGIC MANAGEMENT ACCOUNTING [C2] — CHARTERED LEVEL Marks iii)9.E95iiiéiEBé}:Eiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiifiiiiiiiiiiiiiiiiiiifiiiifiiiiiiiiiiiiiiiiiiifiiiifiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiifiiiifiiiiiiiiiiiiiiiifiiiiiiiiiiiiiiiiiiifiiiifiiiiiiiiiiiiiiiiiiiiiiiii:iiiiiiiiiiifiifif.......__.. (a) Incremental Cash Flows of the Replacement Decision: Particulars 0 1 2 3 4 5 Incremental sales (cash) A — 113,750.00 113,750.00113,750.00 113,750.00 113,750.00 0.5 Saving in cash operating cost B _ 22,750.00 22,750.00 22,750.00 22,750.00 22,750.00 0_5 Depon New machine 15% — 39,600.00 33,660.00 28,611.00 24,319.35 20,671.45 Dep. on Old machine 15% _ (13,650.00) (11,602.50) (9,862.13) (8,382.81) (7,125.39) Incremental depreciation c _ 25,950.00 22,057.50 18,748.88 15,936.54 13,546.06 2_5 Earning before income tax (EBIT) (A+B-C) — 110,550.00 114,442.50117,751.13 120,563.46 122,953.94 1.25 Less: Tax 31% _ (34,270.50) (35,477.18) (36,502.85) (37,374.67) (38,115.72) 1_25 NOPAT — 76,279.50 78,965.33 81,248.28 83,188.78 84,838.22 Free operating (NOPAT cashinflow +Dep) — 102,229.50101,022.83 99,997.15 99,125.33 98,384.28 1.25 Capital expenditure (Rs.2,64,000 — Rs.45,500) — (218,500.00) — — — — — 0.50 Incremental salvage value (Rs.18,200 — Rs.4,550) — — — — — — 13,650 0.5 Incremental tax saving on loss on sale of machine (Rs.98,938 — Rs.35,827) x 31% — *14105 — — — — 19,564 0_5 Incremental cash flows of the replacement decision — (204,395.00) 102,229.50101,022.83 99,997.15 99,125.33 131,598.70 1.25 *91,000-45,500 X 0.31 (b) Computation of weighted average cost of capital of the company (WACC): D1 Rs.2 Ke = — = +8°/ =18°/ Po+g Rs.20 ° ° 0-5 Kd = 10.5% (1 — 0.31) 0.5 WACC= Kd>< D +Ke>< D D+E D+E = (7.245% X 0.15) + (18% X 0.85) = 16.38% or 16% 01 DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of t can be reproduced, stored in a retrieval system or transmitted in any physical] or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or treated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has provided suggested answers on the basis of certain assumptions for general guidance ofthe students and there may be other possible answers] solutions based on different assumptions and understanding. The ICMA Pakistan and its Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents ofthese suggested answers. It is clarified that the ICMA Pakistan shall not be liable to attend or receive any comments, observations or critiques related to the suggested answers. SUGGESTED SOLUTIONS/ ANSWERS — EXTRA ATTEMPT EXAMINATIONS, MAY 2017 5 of 9 STRATEGIC MANAGEMENT ACCOUNTING [C2] — CHARTERED LEVEL Marks (c) Net Present Value: Particulars 0 1 2 3 4 5 Incremental cash flows of the replacementdecision — (204,395.00) 102,229.50 101,022.83 99,997.15 99,125.33 131,598.70 PV factor 16% 1.000 0.862 0.743 0.641 0.552 0.476 Net Present value — (204,395.00) 88,128.88 75,076.42 64,063.94 54,746.04 62,655.85 140,276.13 03 (d) Discounted Payback Period: Particulars 0 1 2 3 4 5 Net Present value — (204,395.00) 88,128.88 75,076.42 64,063.94 54,746.04 62,655.85 Cumulative Present value — (204,395.00) (116,266.12)(41,189.70) 22,874.24 77,620.27 140,276.13 1.25 Discounted Payback period = 2+41,189.70/64,063.94 = 2.64 Years 0.75 Advise — The company should replace the existing machine with new machine. III-(Ia) Base case NPV Use the beta of the printing industry to estimate the cost of capital. [3a 2 Be[E + {E + D(1-t)}] Assuming debt is risk free [3 =1.2i—=0.71 01 a 0.5+0.5(1—0.31) Using CAPM : k6 = 6 +(11.6 - 6) 0.71 = 9.98% , say 10% 01 Rs’000’ Cash flow Discount Present Years Rs.000 factor value 0 Investment (30,000) 1.000 (30,000) 0.5 1 — 10 Aftertax cash flows [6,000 (1-0.31)] 4,140 6.145 25,440.3 01 10 Residual value 6,000 0.386 2,316 01 (2,243.7) 0.5 Tax shield Tax relief = (Rs.10 million x 0.1 x 31%) + (Rs.5 million x 0.07 x 31%) = 418,500 1.25 Present value of tax shield discounted at the risk free rate = Rs.418,500 x 7.36 = Rs.3,080,160 1.25 DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of t can be reproduced, stored in a retrieval system or transmitted in any physical] or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or treated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has provided suggested answers on the basis of certain assumptions for general guidance ofthe students and there may be other possible answers] solutions based on different assumptions and understanding. The ICMA Pakistan and its Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents ofthese suggested answers. It is clarified that the ICMA Pakistan shall not be liable to attend or receive any comments, observations or critiques related to the suggested answers. (b) (C) SUGGESTED SOLUTIONS/ ANSWERS — EXTRA ATTEMPT EXAMINATIONS, MAY 2017 STRATEGIC MANAGEMENT ACCOUNTING [C2] — CHARTERED LEVEL Subsidy Benefits of lower interest rate, discounted at risk free rate = Rs.5 million x 0.03 x 0.69 x 7.36 = Rs.761,760 Issue costs Debt Rs.10 million x 1% = Rs.100,000 Equity Rs.9 million x 4% = Rs.360,000 Adjusted present value Rupees Base case NPV (22,43,700) Tax shield 3,080,160 Subsidy 761,760 lssue costs (460,000) Adjusted present value 1,138,220 The adjusted present value is positive, and therefore the project is worthwhile. A typical NPV will use the weighted average cost of capital (VVACC) as the discount rate. This will not be suitable if a significant project is funded mainly by debt. The use of debt finance can bring distinct advantages in terms of the tax savings on the interest payments and also disadvantages in terms of the issue costs of such finance. Both issues should be included in the assessment of projects funded mainly by debt. Only the adjusted present value (APV) technique does this. APV is a Modigliani and Miller (MM) technique and ignores the financial distress costs associated with high levels of gearing. Financial distress costs are often triggered by a fall in the credit rating ofthe company and include falling sales and higher costs from suppliers. Risks of Diversification: (Any two) Following are the risks of diversification to Golden Industries Ltd: Expertise This investment is outside the existing mainstream activities of Golden Industries and there may be a lack of knowledge and expertise in, the printing industry within the company. This could affect the ability to make the investment successful. Change of focus The investment in the printing industry may make management lose focus on its core mainstream activities. If this is the case the mainstream activities may suffer from reduced profitability and/or increased customer dissatisfaction. Additional risk Using the average equity beta forthe printing industry and the existing equity beta of Golden, It looks as though the printing industry is riskierthan the existing operations of Golden lnd. Given Golden’s relatively low asset beta, its shareholders may not be happy with a diversification into a riskier area. 60f9 Marks 01 01 0.5 0.25 0.25 0.5 0.5 0.5 01 O1 O1 02 DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of t can be reproduced, stored in a retrieval system or transmitted in any physical] or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or treated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has provided suggested answers on the basis of certain assumptions for general guidance ofthe students and there may be other possible answers] solutions based on different assumptions and understanding. The ICMA Pakistan and its Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents ofthese suggested answers. It is clarified that the ICMA Pakistan shall not be liable to attend or receive any comments, observations or critiques related to the suggested answers. SUGGESTED SOLUTIONS/ ANSWERS — EXTRA ATTEMPT EXAMINATIONS, MAY 2017 7 of 9 STRATEGIC MANAGEMENT ACCOUNTING [C2] — CHARTERED LEVEL (a) Financial Evaluation of Proposal-A: Rupees Sales (140,000 T shirts* Rs.90) 12,600,000 0.5 Cost of goods sold: Variable cost (5,100,000*140%) 7,140,000 0.5 Fixed factory overhead 2,200,000 9,340,000 0.5 Gross profit 3,260,000 0.5 Administrative overhead (Fixed) 1,950,000 0.5 Selling and distribution cost: Commission (2% of sales) 252,000 0.5 Delivery cost (R505 per unit) 70,000 0.5 Fixed cost 500,000 822,000 2,772,000 0.5 Profit 488,000 0.5 The proposal is beneficial and will produce profit of Rs.488,000 as compared to the last year’s break-even. 0.5 (b) Minimum Price: Revised variable cost for Punjab supply: Rupees Production cost (existing ) 51.00 0.5 Packaging cost (additional) 0.75 0.5 51.75 0.25 Existing sales + sale to Punjab - (variable cost + fixed cost)- target profit = 0 10,000,000 + 50,000x - (100,000*53.50+ 50,000*51.75+5,250,000) -1,000,000 = 0 1.5 10,000,000 + 50,000 x— 13,187,500 — 1,000,000 = 0 0.5 50,000 x = 4,187,500 0.25 x = 83.75 0.5 Minimum Price should be Rs.83.75 per T- Shirt. W-1 Existing production cost 5100,000 0.25 Commission (10,00,0000*2%) 200,000 0.25 Delivery cost (100,000*Re.0.5per unit) 50,000 0.25 5350,000/100,000 = 53.5 0.25 DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of t can be reproduced, stored in a retrieval system or transmitted in any physical] or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or treated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has provided suggested answers on the basis of certain assumptions for general guidance ofthe students and there may be other possible answers] solutions based on different assumptions and understanding. The ICMA Pakistan and its Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents ofthese suggested answers. It is clarified that the ICMA Pakistan shall not be liable to attend or receive any comments, observations or critiques related to the suggested answers. SUGGESTED SOLUTIONS/ ANSWERS — EXTRA ATTEMPT EXAMINATIONS, MAY 2017 8 of 9 STRATEGIC MANAGEMENT ACCOUNTING [C2] — CHARTERED LEVEL Marks (c) Financial Evaluation of Proposal-C: Rupees Sales (165,000 T shirts* Rs.90 14,850,000 0.5 Cost of Goods sold: Variable cost @ Rs.51 8,415,000 0.5 Fixed factory overhead 2,200,000 10,615,000 0.5 Gross profit 4,235,000 0.25 Administrative overhead 1,950,000 0.25 Selling & distribution cost: Commission (2% of sale) 297,000 0.5 Delivery cost (R505 per unit) 82,500 0.5 Fixed costs (including advertising) 800,000 3,129,500 0.5 P...
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