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(ii) In order to achieve a contribution of Rs.16,000,000, the total labour cost over the products
lifetime would have to equal Rs.24,000,000 (Rs.40,000,000 – Rs.16,000,000). 1.0
This equals an average batch cost of Rs.1,500,000 (Rs.24,000,000 ÷ 16). 0.5
This represents 37.5% (Rs.1,500,000 ÷ Rs.4,000,000) of the cost of the first batch. 1.0
16 batches represents 4 doublings of output. 0.5
Therefore, the rate of learning required 78% ( 4 0.375 ). 1.0
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 it 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 tre ated 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 of the students and there may be other po ssible 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 of these 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 – WINTER 2018 EXAMINATIONS 2 of 7
STRATEGIC MANAGEMENT ACCOUNTING [S4] – STRATEGIC LEVEL-2
Marks
Question No. 2
Calculation of Feasible Option:
Rupees
Options Speedo Cheepo
A Annual cash inflows – before tax 15,000,000 13,500,000
B Tax (29%) [A x Tax rate] (4,350,000) (3,915,000) 1.0
C Net [A – B] 10,650,000 9,585,000 1.0
D Present value (PV) factor for annuity [PVIFA @ 12%] 3.605 3.102
E PV [C x D] 38,393,250 29,732,670 1.0
F Disposal value 5,000,000 4,000,000
G PV factor [PVIF @ 12%] 0.567 0.659
H PV of disposal [F x G] 2,835,000 2,636,000 1.0
I PV of tax saving [W-1] 9,671,816 8,135,172
J Initial investment (50,000,000) (40,000,000)
K Net present value (NPV) [E + H + I + J] 900,066 503,842 1.0
L Annual equivalent cash-flows [K ÷ D] 249,672 162,425 1.0
M PV of investment in perpetuity [L ÷ Required rate of return] 2,080,600 1,476,591 1.0
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 it 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 tre ated 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 of the students and there may be other po ssible 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 of these 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 – WINTER 2018 EXAMINATIONS 3 of 7
STRATEGIC MANAGEMENT ACCOUNTING [S4] – STRATEGIC LEVEL-2
Marks
Question No. 3
(a) Transfer Pricing:
Rs. per set
Market price 28,000
Variable cost 20,000
Opportunity cost 8,000 1.0
Transfer price (as per general rule):
Variable cost 20,000
Opportunity cost 8,000
28,000 1.0
(ii) The Machining (Finishing) Division’s Manager’s likely decision to reject the special order is
not in the best interests of the company as a whole, since the company’s incremental
revenue on the special order exceeds its incremental cost. 2.0
Rs. per set
Incremental revenue in special order 36,000
Incremental cost for special order:
Variable cost incurred – Forging Division 20,000
– Machining (Finishing) Division 10,000
Total variable cost 30,000 1.0
Profit in special order 6,000 1.0
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 it 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 tre ated 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 of the students and there may be other po ssible 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 of these 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 – WINTER 2018 EXAMINATIONS 4 of 7
STRATEGIC MANAGEMENT ACCOUNTING [S4] – STRATEGIC LEVEL-2
Marks
Now, the Machining (Finishing) Division’s manager will have an incentive to accept the
special order since the division's incremental revenue on the special order exceeds the
incremental cost. 1.0
Rs. per set
Sale price 36,000
Transfer in cost (20,000)
16,000 1.0
Additional variable cost (10,000)
Profit in special order 6,000 1.0
Question No. 4
(a) Decision-Making to Accept the Offer:
Rs. per engine
Selling price 60,000
Variable costs:
Direct materials 30,000
Direct labour 20,000
Factory overheads [Rs.20,000 x (Rs.900,000 – Rs.540,000) ÷
Rs.1,000,000] 7,200 1.0
Total 57,200 1.0
Profit 2,800 1.0
The price offered by customer is above the cost and the sale of the automobile engine will
make a contribution to profit and as it is a special order, without an impact on future sales, the
offer should be accepted. 1.0
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 it 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 tre ated 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 of the students and there may be other po ssible 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 of these 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 – WINTER 2018 EXAMINATIONS 6 of 7
STRATEGIC MANAGEMENT ACCOUNTING [S4] – STRATEGIC LEVEL-2
Marks
Question No. 6
(a) Calculation of Expected Net Present Value (NPV) and Profitability Index (PI):
Rupees
Expected Net Present Values (NPV) of Projects
AP BD CS SR G1 MC
Year-1 3,125,500 3,348,750 2,143,200 2,768,300 1,786,000 1,562,750 1.5
Year-2 2,789,500 3,466,950 1,912,800 2,470,700 1,992,500 3,267,700 1.5
Year-3 2,492,000 2,278,400 2,242,800 2,207,200 2,136,000 2,919,200 1.5
Year-4 2,226,000 – 2,321,400 1,971,600 2,226,000 – 1.0
Year-5 1,984,500 – – – 1,134,000 – 0.5
Present value
(PV) of inflow 12,617,500 9,094,100 8,620,200 9,417,800 9,274,500 7,749,650
Out-flow (12,300,000) (9,000,000) (8,750,000) (9,000,000) (9,000,000) (7,500,000)
Net present
value (NPV) 317,500 94,100 (129,800) 417,800 274,500 249,650 1.5
Profitability
Index (PI) 1.026 1.010 0.985 1.046 1.031 1.033 1.5
OR 1.5 + 1.5 + 1.5 + 1.5 + 1.5 + 1.5 = 9.0
Question No. 7
(a) Computation of Segment Margin and Average Assets:
Rupees
Sales 9,000,000
Variable costs (3,650,000)
Direct fixed costs (4,770,000)
Segment margin 580,000 0.5
Average assets [(Rs.3,600,000 + Rs.5,300,000) ÷ 2] 4,450,000 0.5
(c) The target return on investment (ROI) for the division was 15% (2.5 x 6). The division 1.0
generated an ROI of only 13%. Thus the division did not achieve its target rate of return
(ROR). The poor performance resulted from the division’s failure to achieve its targeted asset
turnover.
(f) Return on investment (ROI), residual income (RI), and economic value added (EVA) are all 1.0
measures of short-term performance. These measures may be particularly inappropriate for
divisions that have long-term missions (such as high growth). In this case, the relatively large
growth (47.22%) in assets of Innovative Furnishing Solutions (IFS) products from the
beginning to the end of the period could indicate that this division is oriented toward growth. If
so, the ROI, RI, and EVA measures will provide an incentive contrary to the growth mission.
THE END
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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 tre ated 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 of the students and there may be other po ssible 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 of these 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.