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The Chartered Institute of Management Accountants 2004 1
STRATEGIC LEVELMANAGEMENT ACCOUNTING PILLARPAPER P3 – RISK AND CONTROL STRATEGY
This is a Pilot Paper and is intended to be an indicative guide for tutors and students of the style and type of questions that are likelyto appear in future examinations. It does not seek to cover the fullrange of the syllabus learning outcomes for this subject.Risk and Control Strategy will be a three hour paper with onecompulsory section for 50 marks and one section with a choice of questions for 50 marks.
CONTENTS
Pilot Question Paper Section A: Case scenarioPages 2-3Section B: Two scenario questionsPages 4-8Indicative Maths Tables and FormulaePages 9-11Pilot SolutionsPages 12-26
   P   3  –   R   i  s   k  a  n   d   C  o  n   t  r  o   l   S   t  r  a   t  e  g  y
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P3 PILOT PAPER2
SECTION A – 50 MARKSANSWER THIS QUESTION
Question One
Crashcarts IT Consultancy is a £100 million turnover business listed on the StockExchange with a reputation for providing world class IT consultancy services to bluechip clients, predominantly in the retail sector. In 2000, Crashcarts acquired a newsubsidiary for £2 million based on a P/E ratio of 8, which it renamed Crashcarts CallCentre. The call centre subsidiary leased all of its hardware, software andtelecommunications equipment over a five-year term. The infrastructure provides thecapacity to process three million orders and ten million line items per annum. Inaddition, maintenance contracts were signed for the full five-year period. Thesecontracts include the provision of a daily backup facility in an off-site location.Crashcarts Call Centre provides two major services for its clients. First, it holdsdatabases, primarily for large retail chains’ catalogue sales, connected in real time toclients’ inventory control systems. Second, its call centre operation allows its clients’customers to place orders by telephone. The real-time system determines whether there is stock available and, if so, a shipment is requested. The sophisticatedtechnology in use by the call centre also incorporates a secure payment facility for credit and debit card payments, details of which are transferred to the retail stores’ owncomputer system. The call centre charges each retail client a lump sum each year for the IT and communications infrastructure it provides. There is a 12 month contract inplace for each client. In addition, Crashcarts earns a fixed sum for every order itprocesses, plus an additional amount for every line item. If items are not in stock,Crashcarts earns no processing fee.Crashcarts Call Centre is staffed by call centre operators (there were 70 in 2001 and 80in each of 2002 and 2003). In addition, a management team, training staff andadministrative personnel are employed. Like other call centres, there is a high turnover of call centre operators (over 100% per annum) and this requires an almost continuousprocess of staff training and detailed supervision and monitoring.A summary of Crashcarts Call Centre’s financial performance for the last three years:
200120022003£000£000£000 
Revenue
Contract fixed fee400385385Order processing fees2,5003,0253,450Line item processing fees600480390Total revenue£3,500£3,890£4,225
Expenses
Office rent & expenses200205210Operator salaries & salary-related costs1,5501,9202,180Management, administration & training salaries1,0201,0701,120IT & telecomms lease & maintenance expenses300310330Other expenses150200220Total expenses£3,220£3,705£4,060
Operating profit
£280£185£165
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P3 PILOT PAPER3Non-financial performance information for the same period is as follows:
200120022003
Number of incoming calls received1,200,0001,300,0001,350,000Number of orders processed1,000,0001,100,0001,150,000Order strike rate (orders/calls)83
⋅
3%84
⋅
6%85
⋅
2%Number of line items processed3,000,0003,200,0003,250,000Average number of line items per order 3
⋅
02
⋅
92
⋅
8Number of retail clients877Fixed contract income per client£50,000£55,000£55,000Income per order processed£2
⋅
50£2
⋅
75£3
⋅
00Income per line item processed£0
⋅
20£0
⋅
15£0
⋅
12Average number of orders per operator15,00015,00015,000Number of operators required66
⋅
773
⋅
376
⋅
7Actual number of operators employed70
⋅
080
⋅
080
⋅
0
Required:
(a)
Discuss the increase in importance of risk management to all businesses (with anemphasis on listed ones) over the last few years and the role of managementaccountants in risk management.
(10 marks)
(b)
Advise the Crashcarts Call Centre on methods for analysing its risks.
(5 marks)
(c)
Apply appropriate methods to identify and quantify the major risks facingCrashcarts at both parent level and subsidiary level.
(20 marks)
(d)
Categorise the components of a management control system and recommendthe main controls that would be appropriate for the Crashcarts Call Centre.
(15 marks)(Total = 50 marks)
End of Section A
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