SUGGESTED SOLUTIONS/ ANSWERS – FALL 2015 EXAMINATIONS 1 of 6

STRATEGIC MANAGEMENT ACCOUNTING – SEMESTER-6

Marks
Question No. 1
(a) (i) The relevant information is presented in the following table:
Rupees
Operate at Operate at
Immediate
Relevant Cost, Savings and Revenues 20,000 25,000
Closure
compounds compounds
Sales revenue @ (128,126) – 2,560,000 3,150,000 0.5+0.5
Material ‘MKH-2’
Savings (N-1 & 2) 660,000 330,000 220,000 0.25+0.25+0.25
Sale ( N-1) 75,000 – – 0.5
Sale of machine (N-3) 860,000 700,000 675,000 0.25+0.25+0.25
Total revenue/ savings 1,595,000 3,590,000 4,045,000 0.25+0.25+0.25
Relevant Costs:
Labour – Training – 400,000 400,000 0.5+0.5
Contract labour costs (N-4) – 600,000 750,000 0.5+0.5
Material ‘MKH-1’ Disposal (Fixed) 40,000 40,000 40,000 0.5+0.5+0.5
Disposal (Variable) 200,000 100,000 75,000 0.5+0.5+0.5
Variable overhead (@ Rs.18.2) – 364,000 455,000 0.5+0.5
Salary of supervisor (N-5) 40,000 120,000 120,000 0.5+0.5+0.5
Advertising (N-6) – 0 400,000 0.5
Total relevant costs 280,000 1,624,000 2,240,000 0.25+0.25+0.25
Excess of savings and revenues over
1,315,000 1,966,000 1,805,000
costs 0.5+0.5+0.5

NOTES:
N-1: (a) Immediate closure enables 30,000 kg @ 22 to be used as a substitute
material thus savings Rs.660,000. 0.5
(b) The remaining 5,000 kg are sold to yield net revenue of Rs.15 per compound,
i.e. (Rs. 27 – Rs 12 = Rs.15), (5,000 kg x Rs.15 = 75,000) 0.25
(c) Production of 20,000 compounds will result in 15,000 unused kgs of material
‘MKH-2’. This results in saving of substitute material of Rs.330,000 i.e.,
15,000 kg x Rs.22 0.5
N-2: Production of 25,000 compounds will result in saving of substitute material ‘MKH-
2’ of 220,000 i.e. Rs10,000 kgs x Rs.22 0.5
N-3: Current market value of machinery Rs.860,000 0.25
Sales value of machine in one year = Rs.800,000 – (Rs.5 x 20,000)= Rs.700,000
and Rs.800,000 – (Rs.5 x 25,000)= 675,000 0.5
N-4: Contract Labour costs @ Rs.30 per compound. Therefore, (30 x 20,000 = 600,000
and 30 x 25,000 = 750,000) 0.5
N-5: Immediate closure requires that Rs.40,000 will be paid to the supervisor.
Otherwise salary of supervisor is Rs.120,000. 0.5
N-6: For sales volume of 25,000 compounds, advertising campaign costing Rs.400,000
were undertaken. 0.5

(ii) Recommendations:
On the basis of above working, Reno Pak Ltd. should operate the SCC department at
20,000 units. 02

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakis tan 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 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 shall not be
liable to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – FALL 2015 EXAMINATIONS 2 of 6
STRATEGIC MANAGEMENT ACCOUNTING – SEMESTER-6
Marks
(b)
Rupees
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Operating cash inflows 3,743,750 7,809,525 5,552,305 5,073,260 2,115,375
Purchase of new 0.25
(7,000,000) - - - - -
machine
Working capital (1,000,000) - - - - - 0.25
Disposal of old machine 800,000 - - - - - 0.25
Disposal of new 0.25
- - - - - 1,050,000
machine
Tax effects on 0.5(0.25
60,000 - - - - (90,000) each)
disposals*
Recovery of working 0.25
- - - - - 1,000,000
capital
1.5(0.25
Total cash flows (7,140,000) 3,743,750 7,809,525 5,552,305 5,073,260 4,075,375
each)
20% discount factor 1 0.833 0.694 0.579 0.482 0.402
1.5(0.25
Present values (7,140,000) 3,118,544 5,419,810 3,214,785 2,445,311 1,638,301 each)
Net present value 8,696,751 0.5

Launch of the new product is recommended as it provides a positive NPV of Rs.8,696,751/- 0.5

*(1,000,000 – 800,000) x 0.3 = Rs 60,000 Tax shield on loss (existing machine) and 0.5
(1,050,000 – 750,000) x 0.3 = Rs.90,000/- Tax on gain on disposal (new machine).

Working:
Year 1 Year 2 Year 3 Year 4 Year 5
1.25 (0.25
Sales revenue 27,500,000 43,350,000 34,807,500 32,321,250 19,890,000 each
1.25 (0.25
Variable manufacturing cost 12,100,000 21,505,000 17,887,100 16,609,450 10,221,200
each
1.25 (0.25
Fixed manufacturing cost 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000 each
1.25 (0.25
Step-fixed production cost 3,000,000 4,500,000 3,500,000 3,500,000 2,000,000 each
1.25 (0.25
Marketing cost 2,587,500 1,724,250 1,024,250 500,000 182,550 each
1.25 (0.25
Depreciation 1,250,000 1,250,000 1,250,000 1,250,000 1,250,000
each
1.25 (0.25
Taxable profits 3,562,500 9,370,750 6,146,150 5,461,800 1,236,250
each
1.25 (0.25
Tax @ 30% 1,068,750 2,811,225 1,843,845 1,638,540 370,875
each
1.25 (0.25
Net of tax cash flows 2,493,750 6,559,525 4,302,305 3,823,260 865,375 each
Add back non cash item 1.25 (0.25
1,250,000 1,250,000 1,250,000 1,250,000 1,250,000 each
(Depreciation)
1.25 (0.25
Net operating cash flows 3,743,750 7,809,525 5,552,305 5,073,260 2,115,375
each

Units 55,000 85,000 70,000 65,000 40,000

Selling Price Per unit 500 510 497.25 497.25 497.25
Variable manufacturing
220 253 255.53 255.53 255.53
cost per unit

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakis tan 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 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 shall not be
liable to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – FALL 2015 EXAMINATIONS 3 of 6
STRATEGIC MANAGEMENT ACCOUNTING – SEMESTER-6
Marks
Question No.2
(a) Throughput accounting vs conventional cost accounting ( Two points @ 1 mark each) 02
Conventional Cost Accounting Throughput Accounting
Inventory is not an asset. It is a result
1 Inventory is an asset. of unsynchronized manufacturing and
is a barrier to making profit.
Costs can be classified either as direct Such classifications are no longer
2
or indirect. useful.
Product profitability can be determined
Profitability is determined by the rate at
3 by deducting a product cost from
which money is earned.
selling price.
Profit is a function of throughput as well
4 Profit is a function of costs.
as costs.

(b) Time available on Alpha = (14 – 1) x 60 minutes = 780 minutes 01

Time available on Zeta = (14 – 1.5) x 60 minutes = 750 minutes 01
Time required on Alpha = (5 x 50) + (7 x 70) = 740 minutes 01
Time required on Zeta = (20 x 50) + (16 x 70) = 2,120 minutes 01
 Zeta Process limits throughput.
Now we need to calculate throughput contribution per minute of process ‘Zeta’ time to
determine which product makes best use of the bottleneck resource.
Product Product
‘Neon’ ‘Zeon’
Selling price 90 62 0.5+0.5
Material cost 14 14 0.5+0.5
Throughput contribution 76 48 0.5+0.5
Throughput contribution per minute of 76/ 20 = 48/16 =
process Zeta time 3.80 3.00 0.5+0.5
Ranking 1 2
 Product Neon should be produced to maximum demand and any remaining time
allocated to product Zeon. 0.5
Available Zeta process time = 750 minutes
Number of Neon produced in this time = 750/ 20= 37.5 OR 38 01
 The optimum production plan is to produce 38 units of ‘Neon’ and none of ‘Zeon’. 0.5

Question No.3
(i) The situation is governed by the actions of the manager of Brake Division. Based on a
transfer price of Rs.400 per fitting, the total variable cost per unit of Product ‘Zerox’ will be
Rs.600.
Selling Price Variable Contribution Total
Demand Units per unit Cost per unit Margin per unit Contribution
Rupees
1,000 1200 600 600 600,000 0.25+0.25+0.25
2,000 1100 600 500 10,00,000 0.25+0.25+0.25
3,000 1000 600 400 1200,000 0.25+0.25+0.25
4,000 800 600 200 800,000 0.25+0.25+0.25
5,000 700 600 100 500,000 0.25+0.25+0.25
DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakis tan 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 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 shall not be
liable to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – FALL 2015 EXAMINATIONS 4 of 6
STRATEGIC MANAGEMENT ACCOUNTING – SEMESTER-6
Marks
Brake Division will produce 3,000 units of product ‘zerox’ because contribution margin is 0.75
maximum at this level. Therefore, the division will order 3,000 units of SGP-01 fittings
from Electrical Division.
`

Electrical Brake
Electro Ltd
Division Division
Rupees
Revenue (W-1) 1,200,000 3,000,000 3,000,000 0.25+0.25+0.25
Variable costs (W-2) 750,000 1,800,000 1,350,000 0.25+0.25+0.25
Fixed costs 350,000 700,000 1,050,000 0.25+0.25+0.25
Profit 100,000 500,000 600,000 0.25+0.25+0.25

Electrical Division Brake Division Electro Ltd

W-1:
Revenue: (400 Transfer Price 1,000 x 3000
x 3,000 units) = 1,200,000 = 30,000,000 = 3,000,000 0.25+0.25+0.25
W-2:
Variable cost: (250 x 3,000) (400 + 200) = 600 (450 x 3,000)
= 750,000 (600 x 3,000) = 1,800,000 1,350,000 0.25+0.25+0.25

(ii) The situation for the group would be judged using the total marginal costs of the divisions.
This will give a variable cost per Product ‘Zerox’ of Rs. 450
Selling Contribution
Variable Total
Price Margin per
Demand Units Cost per unit Contribution
per unit unit
Rupees
1,000 1200 450 750 750,000 0.25+0.25+0.25
2,000 1100 450 650 1300,000 0.25+0.25+0.25
3,000 1000 450 550 1,650,000 0.25+0.25+0.25
4,000 800 450 350 1,400,000 0.25+0.25+0.25
5,000 700 450 250 1,250,000 0.25+0.25+0.25

The profit maximizing output is 3,000 units of Product ‘Zerox’. This will earn a total monthly
profit for the Electro Ltd of 1,650,000 - 1,050,000 = 600,000. 0.25

(iii)
Electrical Brake
Electro Ltd
Division Division
Rupees
Revenue (W-1) 750,000 3,000,000 3,000,000 0.25+0.25+0.25
Variable costs (W-2) 750,000 1,350,000 1,350,000 0.25+0.25+0.25
Fixed costs 350,000 700,000 1,050,000 0.25+0.25+0.25
Profit/ (Loss) (350,000) 950,000 600,000 0.25+0.25+0.25

Electrical Division Brake Division

W-1:
Revenue (250 Marginal cost (TP) 3,000 x 1,000
0.5+0.5
x 3,000 units) = 750,000 = 30,00,000
W-2: Variable cost (250 x 3,000)
= 750,000 (450 x 3,000) = 1,350,000 0.5+0.5

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakis tan 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 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 shall not be
liable to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – FALL 2015 EXAMINATIONS 5 of 6
STRATEGIC MANAGEMENT ACCOUNTING – SEMESTER-6
Marks
Question No.4
(i)
Number of units of sales After tax net income
(1–t)
Fixed expenses + 01
required to earn target after-tax =
income Contribution margin per litres
350,000
( 1 – 0.32 )
725,000 + 1,239,705 01
X = =
220 – 136 84

X = 14,758 Litres 01

(ii)
Break-even point (in litres) for 870,000
240 – 136
= = 8,365 litres 02
the chocolate fudge ice-cream

Let Y denote the variable cost of the chocolate crunch such that break-even point for the
chocolate fudge is 8,365 litres
Then we have:

725,000
220 – Y
8,365 = 01

(8,365) x (220 – Y) = 725,000 0.5

1,840,300 – 8,365Y = 725,000

8,365Y = 1,115,300 0.5

Y = 133 (rounded) 0.5

Thus, the variable cost per unit would have to decrease by Rs.3 (Rs.136 – 133). 0.5

(iii) Contribution Margin (CM) per pack

Sales (240 x 2) + (220 x 3) 1140 0.5
Variable cost (82 x 5) 410 0.5
Add: Packing cost 100 (510) 01
Contribution margin per pack 630 01

Break even Point (Packs):

Fixed cost
B/E point = 01
CM per pack

820,000
B/E point = = 1,302 packs 01
630

Chocolate fudge ice-cream:

1,302 x 2 litres = 2,604 Litres 01

Chocolate crunch ice-cream:

1302 x 3 litres = 3,906 Litres 01
DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakis tan 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 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 shall not be
liable to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – FALL 2015 EXAMINATIONS 6 of 6
STRATEGIC MANAGEMENT ACCOUNTING – SEMESTER-6
Marks
Question No.5
(a) Following are the consequences or problems a company can face while setting price at
higher margin: ( 3 points @ 1 mark each)
 Possibility of loss of reputation due to very high price.
 Very high profit margin attracts competitors very fast.
 Loss of market share
 Customers will opt for a substitute product at lower price.
 Possibility of decline in revenue due to low sale at higher price.

(b) (i) Minimum Bid Price (by adding mark-up on relevant cost):
Relevant cost per direct labour hour: Rupees
Direct material -
Direct labour 100 0.5
Variable Overhead 50 0.5
150 0.5

Total relevant cost

Variable cost (150 x 5,000) 750,000 0.5
Incremental administrative cost 20,000 0.5
770,000 0.5
Add: Mark-up 15% 115,500 0.5
885,500 0.5

Minimum bid price per package = 885,000 ÷ 500,000 0.5

= Rs.1.771 0.5
(W-1) 500,000 packages ÷ 100 packages per DLH 0.5
= 5,000 direct labour hours 0.5

(ii) Minimum Bid Price (by adding mark-up on full cost):

Rupees
Variable cost 770,000 0.5
Fixed overhead (Rs.70 x 5,000 hours) 350,000 01
Total cost 1,120,000 01
Add: Mark-up 15% (Full cost) 168,000 01
1,288,000 01

1,288,000 ÷ 500,000 01
= Rs.2.58 or 2.6 per package 0.5

THE END

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakis tan 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 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 shall not be
liable to attend or receive any comments, observations or critiques related to the suggested answers.