Institute of Certified Management Accountants of Sri Lanka

Transcription

1 Institute of Certified Management Accountants of Sri Lanka Strategic Management Accounting (SMA / 803) Professional II Stage September 2011 CMA Examination Suggested Answers Question No: 1 (40 Marks) (a) Income Statement Sri Lanka Canada Mexico Total Sales Manufacturing Variable (120.4) (101.2) (145.4) (367) Selling Variable (38) (28.4) (46.6) (113) Total Contribution Man. Fixed Cost (16.5) (13.5) (20) (50). (13.44) (9.6) (16.96) (40) Administrative (6) (10) (25) (41) Operating Profit Expenses (116 41) (75) 42 Working Sales Analysis Units Sri Lanka Canada Mexico Total Sales F S H Sales F S H Manufacturing Variable Cost F S H Selling Variable Cost F S H

2 (b) 1. Difference Pricing Strategies 2. Cost Cutting and Cost Controls - Variable Cost - Administration Cost - Selling Expenses - Staff Cost 3. Introducing New Layout 4. Quality Circle 5. Improving People 6. Benchmarking Strategy 7. Outstanding Different Activities (c) Average C/S Ratio 248 = 34% 728 Total Fixed Cost BEP Sales = 605,882,000 Margin of Safety 728,000, ,882, ,118,000 16% If Current (Total Sales) reduced by more than 16% this company making losses. Question Marks 1.14 (a) Real Rate = = Real Discount Rate 8% Contribution Rate x Sold 2000 [ ] = 650 Annual Cash flows (constant) 150, (1 0.33) [ 65,325, ] 50,000,000 NPV = 60,842, 725 2

3 IRR = (Annual Cash Flows) x The Cumulative Discount Factor of x% For 5 years Investment Outlay = 0 200,000,000 So = ,325,000 You can refer cumulative discount factor and find out the rate. IRR 19% Because the project has a positive NPV and the IRR excludes the real cost of capital of 8%of 8% the project is acceptable. (b) Sensitivity analysis enables managers to assess how responsive the NPV is to changes in the variables which are used to calculate. The application of sensitivity analysis can indicate those variables to which the NPV is most sensitive, and the extent to which these variables may change before the investment results in negative NPV. Sensitivity analysis indicates why a project might fail. Weaknesses: The method requires that changes in each key variable be isolated, but management is more interested in the combination of the effect of changes in two or more variables. As combination of these variables (c) Sensitivity Analysis of Price NPV = 0 = 0.15 million (P 1350) (1 0.33) (AF 8%, 5 years) 200 million Price = Rs Therefore price can be cropped by Rs. 150 (7.5%) before NPV become negative AF 8%, 5 years = Annuity Factor of 8% for 5 years. Volume NPV = 0 = V ( ) (1 0.33) (AF 8%, 5 years) 200 million Volume = 115,025 boxes Therefore volume can drop by 34,975 boxes (150, ,025) or 23% before NPV becomes negative. 3

4 The results suggest that the NPV of the project is more sensitive to price variations than to changes in volume. The company therefore should review the estimated price to ensure that it is confident that prices will not decline by more than 7%. If prices decline by more than 7%, and the other variables remain unchanged, the project will yield a negative NPV. Consideration should be given to advertising to ensure that demand is maintained of the proposed price by it should be. that NPV amount spent on advertising. Question Marks (a) Planning Annual Operations Coordinating the Activities Communicating Plans Motivating Managers Controlling Activities Evaluating Performance (b) 1. Managers are responsible for 2. Ability to negotiate 3. Ability to coordinate and review the budget 4. Better to original budget from lower level. (c) Real Rate When the market for the intermediate product is imported or even non-existent marginal cost transfer prices can motivate both the supplying and receiving division managers to operate at output level that will maximize overall company profits. Total Cost Total cost are widely used in practice. Managers view product related decision as any run decision and therefore require a measure of long run marginal cost. The major problem with full cost transfer prices is that they are devised from traditional costing supplying division can recover the full costs of production, although no profit will be obtained on the goods or services transferred. This transfer pricing method does not provide an incentive for the supplying division to transfer goods and services internally because they do not include a profit margin. If internal transfers are a significant part of the supplying division s business, they will understate the division s profit. Cost Plus 4

5 Cost plus a make up transfer prices represent an attempt to meet the performance evaluation purpose of transfer pricing by enabling the supplying division to obtain a profit on the goods and services transferred. Opportunity Cost This is the general value for transfer pricing. Both receiving division and supplying division being better off. (d) With cost based transfer price systems, transfers are made either at actual or standard cost. Where actual costs are used, there is no incentive for the supplying centre to control costs because any inefficiencies arising in the supplying centre will be passed on to the receiving centre. Consequently, the receiving centre will be held accountable for the inefficiencies of the supplying division. Transfers at actual cost are revenue inappropriate for responsibility accounting. Where cost based transfer pricing systems are used transfers should be at standard cost not actual cost. This will result in the supplying centre being held accountable for the variances arising from the difference between standard and actual costs of transfers. The managers of the supplying centres are therefore motivated to minimize their costs. When transfers are made of standard cost any inefficiencies of the supplying centre are not passed onto the receiving centre. The receiving centre should be held accountable for usage of resources of the standard price, thus ensuring that the manager of the receiving centre is held accountable only for excessive usage of resources. Question Marks (a) Expected Value Approach (i) Variable Cost 10 ( 1, % ) 20 = 5,500 6 ( 1,000) 20 = 3,000 4 ( 1,000 5% ) 20 = 1,900 1,040 (ii) Fixed Cost 5

6 8,200, = 2,460,000 8,500, = 4,250,000 9,000, = 1,800,000 8,510,000 (iii) Rs. 1,700 Selling Price Units 21, = 4,200 19, = 9,500 16, = 4,950 18,650 (iv) Rs. 1,800 Selling Price Units 19, = 3,800 17, = 8,750 15, = 4,650 17,200 Rs. 1,700 Selling Price ( 1,700 1,040) 18,650 = Rs. 12,309,000 Rs. 1,800 Selling Price ( 1,800 1,040) 12,200 = Rs. 13,072,000 The existing selling price is Rs. 1,600 and if demand continue of 20,000 units per 11,200,000 (1,600 1,040) 20,000. annum then the total contribution will be Rs. [ ] Using the expected value approach, a selling price. (b) Expected Profit = Rs. 13,072,000 8,510,000 (TFC) = Rs. 4,562,000 EEP 8,510,000 = = 1,800 1,040 = 11,197 units 8,510, MS = Expected Demand BEP 17,200 11,197 = ,200 = 34.9% of Sales Note that the most pessimistic estimate is above the SEP. 6

7 (c) Expected value approach has been used. The answer should draw attention to the limitations of basing the decision solely on expected volumes. In particular, it should be stressed that risk is ignored and the range of possible outcomes is not considered. Question Marks (a) Calculation of WDV and Capital Employed Opening WDV Depreciation Closing WDV Opening Capital Employed WDC + WC Calculation of RI and ROCE Sales 4 Operating Cost 2.5 Depreciation 0.6 Net Profit Imported (0.8) (0.68) (0.56) (0.44) (0.32) RI ROCE 22.5% 26% 32% 41% 56& HHD management would be unlikely to undertake the project if they are evaluated on the basis of ROCE, since if yields a return of less than 308 for each of the first three years. RI is negative in the first year and positive for the remaining four years. If the management of HHD place more emphasis on the impact on the performance measure on the first year, they may reject the project. If they adopt a longer term perspective, they will accept the project. (b) Calculation of Annuity Depreciation 7

8 Annual 20% Capital Capital Repayment Interest Repayment Out standard () () () () Capital recovery factor of 20% Calculation of RI and ROCE Opening WDV Annuity Depreciation Closing WDV Total Capital Employed of the beginning Calculation of Income and ROCE Sales 4 Operating Cost 2.5 Operating Profit Less: Depreciation Net Profit Imputed Interest (0.8) (0.72) (0.62) (0.51) (0.36) RI ROCE 7.5% 8.3% 9.6% 11.8% 16% Since the projected ROCE is less than 30%. HHD management are likely to reject the project> IF performance is evaluated on the basis of ROCE. IF performance is evaluated on the basis of RI, the project is likely to accept. (c) PV of Net Cash Flow 8

9 Rs. 1.5 Million x Working Capital. Projects x Initial Investment (4) NPV 0.9 The project should be accepted since NPV is positive. Question Marks (a) Product decision such as product mix, promotion and pricing - Employment decision, except perhaps for the appointment of senior management. - Short term decisions. E.g.: Production scheduling. - Capital expenditure and disinvestment. - Short term financing decision. (b) - Strategic decisions which are critical to the survival of the company as a.. - Certain financing decision. E.g. Level of gearing. - Appointment of top management. - Sourcing decision. E.g. Bulk purchase of raw materials. - Capital expenditure decisions above certain limits. - Common survival required by all profit centres. (c) Answer should be to focus on goal congruent and few finance evaluation. 9