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STRATEGIC MANAGEMENT ACCOUNTING [S4] WINTER 2018 EXAMINATIONS Extra Reading Th Writing Time: {) Attempt all questions. (ii) Write your Roll No. in the space provided above, (il) Answers must be neat, relevant and brie. tis not necessary to maintain the sequence (iv) Use of non-pragrammable scientific calculators of any model is allowed, Pakistan Thursday, the 8th November 2018 (v) Read the instructions printed inside the top cover of answer script CAREFULLY before attempting the paper. (vi) In marking the question paper, the examiners take into account clarity of exposition, logic of arguments, effective presentation, language and use of clear diagram chart, where appropriate, (vil) DO NOT write your Name, Reg. No, or Roll No., or any ielevant information inside the answer script (vill) Question Paper must be returned to invigilator before leaving the examination hall DURING EXTRA READING TIME, WRITING IS STRIGTLY PROHIBITED IN THE ANSWER SCRIPT EXAMINEES ARE ADVISED TO MANAGE SOLUTIONS/ ANSWERS WITHIN PROPOSED TIME Question No. 4 Proposed Time: Min. 30 | Total Marks : 15 (a) Explain the difference between, ‘value analysis’ and ‘functional analysis’ (b) Sialkot Sports is manufacturing new ‘cricket balls’ for a tournament. It is estimated that 400,000 Units of the new balls will be sold for Rs. 450 per ball throughout its expected life. The direct material and other non-labour related costs would be Rs. 350 per ball and the production will be in batches of 25,000 balls throughout the expected life of the balls. The direct labour cost is expected to reduce due to the effects of learning for the first 8 batches produced. Thereafter, the labour cost (per batch) would remain same as that of the &th batch. The direct labour cost of the ‘1st batch of 25,000 balls is expected to be Rs. 4,000,000 and 80% leaming effect is also expected to occur. There are no fixed costs that are specific to the balls. Required: ()) Calculate the following (1) Average direct labour cost per batch of the first 8 batches. (2) Direct labour cost of the 8th batch (3) Contribution to be earned from the sale of the product over its lifetime (li) Due to the low lifetime product volume of 400,000 units, the company now believes that learning may continue throughout its entire product life. Calculate the rate of leaming required (to the nearest whole percentage) to achieve a lifetime product contribution target of Rs. 16,000,000, assuming that a constant rate of learning applies throughout the life of cricket balls, Hint: The learning curve formula is available in formulas table and at the 80% learning rate, the value of 'b' is ~0.322 Question No. 2 Proposed Time: Min. 25| Total Marks : 15 Britano Limited is engaged in providing dry cleaning services to its clients at offices and at homes, Britano Limited is currently planning to launch a new facility for the clients. For this new facility, they are considering two options (‘Speedo’ and ‘Cheepo’), which are mutually exclusive and available. ‘The relevant details of the two new options are as under: Rupees ‘Options Speedo Cheepo Initial investment (eligible for an initial allowance of 25% in tax) ‘50,000,000 40,000,000 ‘Annual cash inflows — before tax 15,000,000 13,500,000 Disposal value ~ at the end of the useful life 5,000,000 4,000,000 Life (Years) 5 4 Required rate of return (as per risks associated with the option) 12% 11% ‘SMA.Wintr 2018 10f5 Marks 04 1 03 03 04 PTO Additional Information: + Taxrate is 29%. ‘© Depreciation rate of 15% per annum is charged on reducing balance method, ‘+ Year-1 depreciation will be in addition to the initial allowance. ‘+The tax gain’ (loss) to be calculated instead of depreciation in the year of disposal Required: ‘Advise which of the options (Speedo and Cheepo) is feasible for Britano Limited. (Support your answer with the working of annual equivalent cash-flows and perpetual value of investments) Question No. 3 Proposed Time: Min 25 | Total Marks : 14 (a) Alpha Gears Limited (AGL) is operating with two divisions, Forging Division and Machining (Finishing) Division. The Forging Division transfers partially completed sets of gears to the Machining (Finishing) Division at a predetermined transfer price. The Forging Division's standard variable production cost per unit is Rs. 20,000 per set. The division has no excess capacity and it could sell all of its production to outside buyers at Rs. 28,000 per set (a perfectly competitive market value). The Forging Division's full (absorption) cost is Rs. 25,000 per set, which includes Rs. 5,000 of applied fixed overhead costs. The transfer price has been fixed at Rs. 28,000 per set, which is the Forging Division’s full cost plus a 12% mark-up. Required: Calculate the transfer price for Alpha Gears Limited (AGL) using the general rule. (b) Considering the data of part (a) above and due to increase competition, Alpha Gears Limited (AGL) expects a decline in demand and due to this decline both the divisions of AGL will have free capacity and AGL can accept a special order for set of gears for Rs. 36,000. The Machining (Finishing) Division will incur variable costs of Rs. 10,000 per set in addition to the Forging Division’s transfer price. Required: (i) What should be the decision of Machining (Finishing) Division's manager, whether to accept or reject the special offer? And Why? i) Is the decision in the best interest of the company as a whole? Why? i) How could the situation be remedied using the transfer price? Question No. 4 Proposed Time: Min. 20 | Total Marks : 11 ‘Shahnawaz Autos are the producers and sellers of automobile engines, ranging from Rs. 75,000 to Rs. 100,000. The pricing policy of the company is based on the estimated costs of direct material, direct labour and the company's overheads plus mark-up of 25%. Recently, the company has set a pricing structure for a particular automobile engine, which is as follows: Rupees Direct materials (per unit) 30,000) Direct labour (per unit) 20,000 Factory overheads (per unit) 10,000 60,000 Mark-up (25%) 15,000 Selling price (per unit) 75,000 It is assumed that if the customers reject the selling price, the company would often need to review the strategy and reduce the mark-up to 10% over the estimated costs involved ‘SMA.Wintr 2018 20f5 Marks 15 02 03 04 05 The Head of Sales and Marketing of Shahnawaz Autos has suggested that the pricing structure, based on variable costs, only would be a better approach rather than the current approach. He has determined that the company’s total monthly overheads are expected to be Rs, 900,000, out of which Rs. 40,000 is fixed. The remainder is variable in proportion to direct labour costs of Rs. 1 million per month In December, the company normally have a slack capacity. A customer wants to buy an automobile engine for Rs. 60,000. The customer says that he is not willing to pay Rs. 75,000 and the revised offer of Rs. 65,000 (the seling price with a 10% mark-up) as these prices are not competitive. Required: (a) Should the company accept the offer of customer? (b) What is the minimum selling price the company can charge for the automobile engine in part (a) above without reducing or increasing net income? (c) Explain the advantages of using variable costing policy by Shahnawaz Autos. (d)_ Enlist the disadvantages of a pricing policy based on variable costs for Shahnawaz Autos, Question No. 5 Proposed Time: Min, 30| Total Marks : 18 Ms Icon (Pvt) Limited is a pharmaceutical company. The management of the company is considering expansion of its facilities by adding any one of the three divisions i.e. ‘Sterile Infusion’, “Soft Galeton Capsule’ and ‘Allergy Cream’ as either project ‘A’ or 'B' or ‘C’. As per the policy, new investment projects are appraised on the basis of risks associated with the projects. Three possible mutually exclusive alternates in relation to the expansion facilities are as under. Projects Proposed Divisions Required Rate of Return (ROR)" A Sterile Infusion 13% B Soft Galeton Capsule 12% C___ Allergy Cream 11% fate of relurn is required as per risks associated with the project The expected life of all three projects is 10-Year and it will require an initial investment of Rs, 9 milion, The expected annual cash-flows after-tax and tax savings on depreciation allowance under different economic conditions are as follows: Rs. ‘000° Probability ___Antual Cash-Flow After-Tax Project ‘A’ Project ‘B’ Project “ 03 1,840 4,770 1,700 05 1,800 1,740 1,660 0.2 1,780 1,700 1,620 Net disposal value (including tax effect) at the end of Year-10 will be zero. Required: (a) Calculate the net present value (NPV) and expected NPV of three alternates under three different economic conditions. (b) Which one of the three projects will be selected by M/s Icon (Pvt.) Limited under the following measures? + Risk-neutral (expected) + Risk-averse (minimum) + Risk-taking (maximum) (c) Determine the project to be selected under the ‘minimax regret’ rule. ‘SMA.Wintr 2018 30f5 Marks 04 o1 03 03 06 06 06 PTO