SUGGESTED SOLUTIONS/ ANSWERS – SPRING 2018 EXAMINATIONS 1 of 8

STRATEGIC MANAGEMENT ACCOUNTING [C2] – CHARTERED LEVEL

Marks
Question No. 1
(a) Decision to Make or Buy the Tubes:
Variable overhead cost per box:
Rs. per Box
Total manufacturing overhead cost per box of tooth paste 100
Less: Fixed portion (4,000,000 ÷ 80,000) (50) 0.5
Variable overhead cost per box 50 0.5

The total variable cost of producing one box of tooth paste would be:
Rs. per Box
Direct materials 200
Direct labour 100
Variable manufacturing overhead 50
Total variable cost per box 350 0.5

If the tubes for the tooth paste are purchased from the outside supplier, then the variable cost
per box of tooth paste would be:
Rs. per Box
Direct materials (200 x 0.85) 170 0.25
Direct labour (100 x 0.75) 75 0.25
Variable manufacturing overhead (50 x 0.80) 40 0.25
285 0.25
Cost of tubes from outside. 75
Total variable cost per box 360 0.5

A savings of Rs.10 per box of tooth paste will be realized by producing the tubes internally.
Therefore, the company should reject the outside supplier’s offer. 1.0
(b) The company will be indifferent towards the decision at a price of Rs.65 per box. 1.0

(c) Decision to Make or Buy the Tubes with Revised Estimate:

The computations are:
Rupees
Cost of making (100,000 boxes x Rs.65 per box) 6,500,000 0.5
Rental cost of equipment. 2,000,000
Total cost 8,500,000 1.0
Cost of buying (100,000 boxes x Rs.75 per box) 7,500,000 1.0

At a volume of 100,000 boxes, the company should buy the tubes as the cost of buying is
lower than cost of making internally. 0.5

(d) Decision to Make or Buy the Tubes, with an Order of Any Size:
Under these circumstances, the company should make the 80,000 boxes of tubes and
purchase the remaining 20,000 boxes from the outside supplier. The costs would:
Rupees
Cost of making (80,000 boxes x Rs.65 per box) 5,200,000 0.5
Cost of buying (20,000 boxes x Rs.65 per box) 1,500,000 0.5
Total cost 6,700,000 1.0
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provided suggested answers on the basis of certain assumptions for general guidance of the 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 of these suggested answers. It is clarified that the ICMA Pakistan shal l not be liable
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 SUGGESTED SOLUTIONS/ ANSWERS – SPRING 2018 EXAMINATIONS 2 of 8
STRATEGIC MANAGEMENT ACCOUNTING [C2] – CHARTERED LEVEL
Marks
(e) Qualitative Factors for Make or Buy Decision: 5.0
The management should take into account at least the following additional factors:
 The ability of the supplier to meet required delivery schedules.
 The quality of the tubes purchased from the supplier.
 Alternative uses of the capacity that would be used to make the tubes.
 The ability of the supplier to supply tubes, if volume increases in future years.
 The problem of finding an alternative source of supply, if the supplier proves to be
undependable.

Question No. 2
Feasibility for Investment, using Net Present Value (NPV) Analysis:
Nominal rate = (1 + Real rate) x (1 + Inflation) – 1 = (1.080) x (1.0555) – 1 = 14% 1.0
Depreciation:
Rs. ‘000’
Acquisition Written Down Tax Shield on
Year Initial Normal Total
Cost Value (WDV) Depreciation
0 250,000 – – – – –
1 – 62,500 28,125 90,625 159,375 27,188 1.5
2 – – 23,906 23,906 135,469 7,172 1.0
3 – – 20,320 20,320 115,149 6,096 1.0
4 – – 17,272 17,272 97,877 5,182 1.0
5 – – 97,877 97,877 – 29,363 1.0
Rs. ‘000’
After-Tax Tax Shield Total Cash Present Value
Cost Present
Year Cost on Saving Factor
Savings Value
Savings Depreciation flow [@ 14%]
1 150,000 105,000 27,188 132,188 0.877 115,929 1.5
2 125,000 87,500 7,172 94,672 0.769 72,803 1.5
3 105,000 73,500 6,096 79,596 0.675 53,727 1.5
4 90,000 63,000 5,182 68,182 0.592 40,364 1.5
5 80,000 56,000 29,363 85,363 0.519 44,303 1.5
327,126
Initial investment (250,000) 0.5
Net present value (NPV) 77,126
Investment is feasible due to positive NPV. 0.5

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 it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mec hanical, 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 of the 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 of these suggested answers. It is clarified that the ICMA Pakistan shal l not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – SPRING 2018 EXAMINATIONS 3 of 8
STRATEGIC MANAGEMENT ACCOUNTING [C2] – CHARTERED LEVEL
Marks
Question No. 3
(a) Calculation of Weighted Average Cost of Capital (WACC):
Cost of equity = {4% + (7% – 4%) x 0.9} = 6.70% 0.5
Cost of debt = {6.95% x (1 – 30%)} = 4.87% 0.5
Value (Rupees) Share Cost WACC
Equity (10,000,000 x 96) 960,000,000 61.54% 6.70% 4.12% 1.0
Debt 600,000,000 38.46% 4.87% 1.87% 0.5
1,560,000,000 100.00% 6% 0.5

(b) Net Terminal Value (NTV):

Rs. ‘000’
Initial Normal
Acquisition Cost Taxable Tax Net Cash
Year Dep. Dep. Total
Cost Saving Income [30%] Flow
[25%] [15%]
0 (10,000) – – – – – – (10,000)
1 – 5,000 2,500 1,125 3,625 1,375 (413) 4,587 1.0
2 – 4,000 – 956 956 3,044 (913) 3,087 1.0
3 – 3,000 – 813 813 2,187 (656) 2,344 1.0
4 – 2,000 – 4,606* 4,606 (2,606) 782 2,782 1.0
*Balancing figure
Rs. ‘000’
Initial investment (10,000)
Interest in Year-1 (600) 0.5
Cash inflow in Year-1 4,587
Balance (6,013) 0.5
Interest in Year-2 (361) 0.5
Cash inflow in Year-2 3,087
Balance (3,287) 0.5
Interest in Year-3 (197) 0.5
Cash inflow in Year-3 2,344
Balance (1,140) 0.5
Interest in Year-4 (68) 0.5
Cash inflow in Year-4 2,782
Balance [net terminal value (NTV)] 1,574 0.5

(c) Modified Internal Rate of Return (MIRR):

Rs. ‘000’
Year Net Cash Flow Interest Rate Multiplier Future Value
1 4,587 1.191 5,463 0.5
2 3,087 1.124 3,470 0.5
3 2,344 1.060 2,485 0.5
4 2,782 1.000 2,782 0.5
14,200 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, mec hanical, 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 of the 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 of these suggested answers. It is clarified that the ICMA Pakistan shal l not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – SPRING 2018 EXAMINATIONS 4 of 8
STRATEGIC MANAGEMENT ACCOUNTING [C2] – CHARTERED LEVEL
Marks
Total return = 14,200 ÷ 10,000 = Rs.1.420 0.5

14,200
MIRR = 4  1 or 4 1.420  1 1.0
10,000
= 9.16% 0.5

Question No. 4
(a) Examples of Non-financial Considerations: [Any four (4)] 2.0
 Impact on employee morale
 Impact on the community
 Impact on the environment
 Ethical issues
 Learning

(b) (i) Financial Feasibility:

Rupees
Contribution margin (CM) per tile [Rs.{1,590 – (700 + 220 + 220 + 200)}] 250 1.0
Volume 180,000
CM before tax (Rs.250 x Rs.180,000) 45,000,000 1.0
Tax (@ 29%) (13,050,000) 1.0
CM after tax 31,950,000 0.5
Present value factor for an annuity [PVIFA (10%, 5)] 3.791
Present value (Rs.31,950,000 x 3.791) 121,122,450 1.0
Initial investment – Net of tax relief (99,900,000)
Net present value (NPV) 21,222,450 0.5
At internal rate of return (IRR), the present value (PV) factor should be:
Rupees
Initial investment net of tax relief 99,900,000
After tax annual cash flow 31,950,000
PV factor 3.127 1.0

By looking in cumulative PV factor table, the value falls under 18% column. 1.0
As NPV is positive and IRR is more than the cost of capital, therefore, the investment is
feasible. 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, mec hanical, 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 of the 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 of these suggested answers. It is clarified that the ICMA Pakistan shal l not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – SPRING 2018 EXAMINATIONS 5 of 8
STRATEGIC MANAGEMENT ACCOUNTING [C2] – CHARTERED LEVEL
Marks
(ii) Value of Price and Volume for a Zero NPV:
Let, Price = P that at zero NPV
180,000 x (P – Rs.1,340) x (1 – 29%) x PV factor – Rs.99,900,000 = 0 1.0
180,000 x 71% x 3.791 x (P – Rs.1,340) = Rs.99,900,000 0.5
484,489.80 x (P – Rs.1,340) = Rs.99,900,000 0.5
484,489.80P – Rs.649,216,332 = Rs.99,900,000 0.5
P = Rs.1,546.20 Drop by 43.80 (2.75%) 1.0
Let, Volume = V that at zero NPV
V x Rs.250 x 71% x 3.791 – Rs.99,900,000 = 0 1.0
Rs.672.9025 x V = Rs.99,900,000 0.5
V = 148,461 Drop by 31,539 (17.52%) 1.0

(iii) The results suggest that the NPV of the project is more sensitive to price variations than 3.0
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 2.75%. If prices decline by more
than 2.75%, and the other variables remain unchanged, the project will yield a negative
NPV.

Question No. 5
(a) Cost-plus Pricing: 3.0
Cost-plus pricing has following three major limitations:
 First, demand is ignored.
 Second, the approach requires that some assumption be made about future volume prior
to ascertaining the cost and calculating the cost-plus selling prices. This can lead to an
increase in the derived cost-plus selling price when demand is falling and vice-versa.
 Third, there is no guarantee that total sales revenue will be in excess of total costs even
when each product is priced above ‘cost’.

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, mec hanical, 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 of the 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 of these suggested answers. It is clarified that the ICMA Pakistan shal l not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – SPRING 2018 EXAMINATIONS 6 of 8
STRATEGIC MANAGEMENT ACCOUNTING [C2] – CHARTERED LEVEL
Marks
(b) Variable Cost per Motorcycle:
Rupees
Motorcycles 70 cc 100 cc
Direct material 40,000 44,000
Direct labour 20,000 25,000
Sets up 1,000 1,000 0.5
Materials handling 2,500 3,750 0.5
Inspection 2,000 2,000 0.5
Machining 4,250 8,500 0.5
69,750 84,250 1.0

Profit at Various Price Levels of Motorcycle 70 cc:

Rupees
Contribution per Total
Price Demand
Motorcycle Contribution
75,000 150,000 5,250 787,500,000 0.5
86,250 130,000 16,500 2,145,000,000 0.5
90,000 100,000 20,250 2,025,000,000 0.5
97,500 70,000 27,750 1,942,500,000 0.5
Therefore, profit maximising price is Rs.86,250 at output level of 130,000 motorcycles. 1.0
Profit at Various Price Levels of Motorcycle 100 cc:
Rupees
Contribution per Total
Price Demand
Motorcycle Contribution
86,250 150,000 2,000 300,000,000 0.5
93,750 120,000 9,500 1,140,000,000 0.5
97,500 90,000 13,250 1,192,500,000 0.5
112,500 70,000 28,250 1,977,500,000 0.5
Therefore, profit maximising price is Rs.112,500 at output level of 70,000 Motorcycles. 1.0

Question No. 6
Workings:
Products FD301 FD302 FD303 Total
W-1: Hours Required to Meet Maximum Demand:
External sales (Units) 1,600 1,000 600 –
Labour hours required per unit in FD 3 4 2 –
Hours required to meet maximum demand 4,800 4,000 1,200 10,000 2.0
W-2: Per Hour Contribution:
Selling price (Rupees) 2,400 2,300 2,000
Less: Variable cost per unit (Rupees) (1,650) (1,200) (1,400)
Per unit contribution (Rupees) [A] 750 1,100 600 1.0
Labour hours required per unit [B] 3 4 2
Per hour contribution (Rupees) [A ÷ B] 250 275 300 1.0
Ranking 3 2 1 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, mec hanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
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provided suggested answers on the basis of certain assumptions for general guidance of the 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 of these suggested answers. It is clarified that the ICMA Pakistan shal l not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – SPRING 2018 EXAMINATIONS 7 of 8
STRATEGIC MANAGEMENT ACCOUNTING [C2] – CHARTERED LEVEL
Marks
(a) Minimum Transfer Price if only 7,600 Hours are Available:
Products FD301 FD302 FD303 Total
Production (units) 800 1,000 600 –
Hours required 2,400 4,000 1,200 7,600 1.0

Transfer Price:
Rs. per Unit
Variable cost of ‘FD302’ 1,200
Opportunity cost* (4 x Rs.250 [W-2]) 1,000 1.0
2,200 0.5

(b) Minimum Transfer Price if only 11,200 hours are Available:

Hours available 11,200
Less: Hours required to meet maximum external demand [W-1] (10,000)
Balance hours available 1,200 0.5
‘FD302’ can be produced from available hours (1,200 ÷ 4) (Units) 300 1.0
Total variable cost (Rs.1,200 x 600) (Rupees) 720,000 1.0
Opportunity cost*:
Internal demand (Units) 600
‘FD302’ can be produced from available hours (Units) (300)
Balance to be produced (Units) 300 0.5
Opportunity cost per units of ‘FD302’ (300 x Rs.1,000) (Rupees) 300,000 1.0
Total cost (Rupees) 1,020,000 0.5
Average transfer price (Rs.1,020,000 ÷ 600) (Rs. per Unit) 1,700 1.0
*Contribution relating to ‘FD301’ forgone for producing additional units of ‘FD302’

Question No. 7
(a) Actual and Budgeted Selling Prices and Variable Costs:
Rs. per Unit
(i) Actual selling price (Rs.2,860 million ÷ 260,000) 11,000 0.5
Budgeted selling price (Rs.1,680 million ÷ 240,000) 7,000 0.5
(ii) Actual variable cost per unit (Rs.2,060 million ÷ 260,000) 7,923 0.5
Budgeted variable cost / unit (Rs.960 million ÷ 240,000) 4,000 0.5

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 it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mec hanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
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provided suggested answers on the basis of certain assumptions for general guidance of the 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 of these suggested answers. It is clarified that the ICMA Pakistan shal l not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – SPRING 2018 EXAMINATIONS 8 of 8
STRATEGIC MANAGEMENT ACCOUNTING [C2] – CHARTERED LEVEL
Marks
(b) Performance Report:
Flexible Budget Working:
Revenue = 260,000 x Rs.7,000 per unit = Rs.1,820
Variable cost = 260,000 x Rs.4,000 per unit = Rs.1,040
Rs. in million
Flexible Sales
Actual Flexible Static
Budget Volume
Results Budget Budget
Variances Variances
Unit sold 260,000 – 260,000 – 240,000
Revenue 2,860 1,040 F 1,820 140 F 1,680 1.25
Less: Variable cost (2,060) (1,020) U (1,040) (80) U (960) 1.25
Contribution margin (CM) 800 20 F 780 60 F 720 1.25
Less: Fixed costs (560) (80) U (480) – (480) 1.0
Operating Income 240 (60) U 300 60 F 240 1.25
Note: ‘F’ means favourable and ‘U’ means unfavourable

(c) Analysis of Performance Report: 2.0

A closer look at the variance components reveals some major deviations from plan. Actual
variable costs increased from Rs.4,000 to Rs.7,923 per compressor causing an unfavourable
flexible budget variable cost variance of Rs.1,020 million. Such an increase could be a result
of a jump in direct material prices.
Opel Appliances (Pvt.) Limited was able to pass most of the increase in costs onto their
customers – actual selling price increased by 57% [(Rs.11,000 – Rs.7,000) ÷ Rs.7,000],
bringing about an offsetting favourable flexible budget revenue variance in the amount of
Rs.1,040 million.
An increase in the actual number of units sold also contributed to more favourable results. The
company should examine why the units sold increased despite an increase in direct material
prices.

THE END

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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 shal l not be liable
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