SUGGESTED SOLUTIONS/ ANSWERS – SPRING 2016 EXAMINATIONS 1 of 6

STRATEGIC MANAGEMENT ACCOUNTING – SEMESTER-6

Marks
Question No. 1
(a)
Rs. / Unit Rupees
Sales 96,466 x 1,000) 96,466,000 01
Less: Sales commission @12% 11,576 x 1,000) 11,575,920 01
84,890 x 1,000) 84,890,080 01
Less: Variable Cost
Estimated direct material 15,866 x 1,000) 15,866,000 01
Estimated direct labour 30,800 x 1,000) 30,800,000 01
Estimated variable manufacturing
overhead at 30% of direct labour 9,240 x 1,000) 9,240,000 01
55,906 x 1,000) 55,906,000 01
Additional Contribution before tax 28,984 28,984,080 01
Taxes @ 33% (9,564,746) 01
Additional income on acceptance of bid 19,419,334 01

(b) Computer division should accept counter

offer. Explanation is as under: 01
Rs. / Unit Rupees
Sales 74,250 x 1,000) 74,250,000 01
Less: Sales commission @12% 8,910 x 1,000) 8,910,000 0.5
65,340 x 1,000) 65,340,000 0.5
Less: Variable Cost
Estimated direct material 15,866 x 1,000) 15,866,000 01
Estimated direct labour 30,800 x 1,000) 30,800,000 01
Estimated variable manufacturing
overhead at 30% of direct labour 9,240 x 1,000) 9,240,000 01
75.29
55,906 x 1,000) % 55,906,000 01
12.71
Additional Contribution before tax 9,434 % 9,434,000 01

(c) Variable Cost Rs./ unit

Estimated direct material 15,866 x 1,000) 15,866,000 0.5
Estimated direct labour 30,800 x 1,000) 30,800,000 0.5
Estimated variable manufacturing
overhead at 30% of direct labour 9,240 x 1,000) 9,240,000 0.5
55,906 x 1,000) 55,906,000 0.5
Selling commission (VC x 12% / 88%) 7,623.55 - 7,623,545 01
Bid price for breakeven 63,530 63,529,545 01

(d) Profits will probably be declined. ATL originally used a full-cost pricing formula to derive a
rupees 96,466 bid price. A drop in the selling price to rupees 74,250 signifies that the 02
firm is now pricing its orders at less than full cost, which would decrease profitability.
Reduced prices could lead to an increase in income if the company were able to generate
additional volume. This situation will not occur here, because the problem states that ATL 02
has operated, and will continue to operate, at 80 percent of practical capacity.
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 w ithout prior written permission of the ICMA Pakis tan. 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 – SPRING 2016 EXAMINATIONS 2 of 6
STRATEGIC MANAGEMENT ACCOUNTING – SEMESTER-6
Marks
(e)
Rupees
Carrying Cooling Positioning
Budgeted Total
Bag Pad Table
1(0.25
A Unit sales 25,000 25,000 50,000
100,000 each)
B Unit selling price 1,800 2,200 2,500
C Variable manufacturing cost unit 835 733 1,302
D Variable selling cost per unit 321 244 312
E Contribution Margin/ unit [B-C-D] 644 1,223 886 01
1(0.25
F Total Contribution [E x A]
16,100,000 30,575,000 44,300,000 90,975,000 each)
G Total fixed overhead
01
[56,000,000 + 16,800,000] 72,800,000
H Divisional income before tax [F - G] 18,175,000 01
I Tax @ 33% 5,997,750 01
J Divisional net income [H - I] 12,177,250 01

(f)
(a) × (b)
(a) Unit (b) Sales
Contribution proportion
Carrying bag Rs. 644 0.25 Rs. 161 01
Cooling pad Rs. 1,223 0.25 Rs. 305.75 01
Positioning table Rs. 886 0.50 Rs. 443 01
Weighted average unit contribution margin Rs. 909.75 01

Total fixed cost

Total units sales to break-even =
Weighted average unit contribution margin

= Rs. 72,800,000 / Rs.909.75 = 80,022 units 01

Sales Total units Product Line

Proportion Sales Sales
Carrying bag 0.25 80,022 20,006 0.5
Cooling pad 0.25 80,022 20,005 0.5
Positioning table 0.50 80,022 40,011 0.5
Total 80,022 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 w ithout prior written permission of the ICMA Pakis tan. 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 – SPRING 2016 EXAMINATIONS 3 of 6
STRATEGIC MANAGEMENT ACCOUNTING – SEMESTER-6
Marks
Question No. 2
(a) Profit statement
Rupees in thousand
Division A Division B Company
A Sales revenue:
External (1) 3,030,000 805,000 3,835,000 01
Inter-divisional transfers (2) - 360,000 0.5
Total 3,030,000 1,165,000 3,835,000
B Variable costs:
External material costs (3) (990,000) (78,750) (1,068,750) 01
Inter-divisional transfers (2) (360,000) - 0.5
Labour costs (4) (234,000) (227,500) (461,500) 01
Overhead (5) (132,000) (43,750) (175,750) 01
Total (1,716,000) (350,000) (1,706,000) 01
C Fixed costs (1,000,000) (500,000) (1,500,000) 01
Profit [A - B - C] 314,000 315,000 629,000 01
3 3 2
Workings:
(1) External sales Div A: 60,000 x Rs. 50,500 = Rs. 3,030,000,000
Div B: 115,000 x Rs. 7,000 = Rs. 805,000,000
(2) Inter-divisional transfers 60,000 x Rs. 6,000 = Rs. 360,000,000
(3) External material costs Div A: 60,000 x Rs. 16,500 = Rs. 990,000,000
Div B: 175,000 x Rs. 450 = Rs. 78,750,000

(4) Labour costs Div A: 60,000 x Rs. 3,900 = Rs. 234,000,000

Div B: 175,000 x Rs. 1,300 = Rs. 227,500,000
(5) Overhead costs Div A: 60,000 x Rs. 2,200 = Rs. 132,000,000
Div B: 175,000 x Rs. 250 = Rs. 43,750,000

(b) Bath Co’s profit if transfer pricing is optimised

Rupees in thousand
Division A Division B Company
A Sales revenue:
External (1) 3,030,000 1,050,000 4,080,000 01
Inter-divisional transfers (2) - 130,000 0.5
Total 3,030,000 1,180,000 4,080,000
B Variable costs:
External material costs (3) (1,172,000) (78,750) (1,250,750) 2
Inter-divisional transfers (2) (130,000) - 0.5
Labour costs (4) (234,000) (227,500) (461,500) 01
Overhead (5) (132,000) (43,750) (175,750) 01
Total (1,668,000) (350,000) (1,888,000) 01
C Fixed costs (1,000,000) (500,000) (1,500,000) 01
Profit [A - B - C] 362,000 330,000 692,000 01

3 3 3
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 w ithout prior written permission of the ICMA Pakis tan. 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 – SPRING 2016 EXAMINATIONS 4 of 6
STRATEGIC MANAGEMENT ACCOUNTING – SEMESTER-6
Marks

Workings:
(1) External sales Div A: 60,000 x Rs. 50,500 = Rs. 3,030,000,000
Div B: 150,000 x Rs. 7,000 = Rs. 1,050,000,000
(2) Inter-divisional transfers 25,000 x Rs. 5,200 = Rs. 130,000,000
(3) External material costs
Div A: 60,000 x Rs. 16,500 + (60,000 - 25,000) x 5,200 = Rs. 1,172,000,000
Div B: 175,000 x Rs. 450 = Rs. 78,750,000
(4) Labour costs Div A: 60,000 x Rs. 3,900 = Rs. 234,000,000
Div B: 175,000 x Rs. 1,300 = Rs. 227,500,000
(5) Overhead costs Div A: 60,000 x Rs. 2,200 = Rs. 132,000,000
Div B: 175,000 x Rs. 250 = Rs. 43,750,000

Question No. 3
In order to evaluate the three options, it is necessary to estimate the annual income
receivable from customers if the company undertakes to service the devices itself. The
calculation of income receivable from customers is as under:
Rs. ‘000’
Labour: Maintenance contract (3,300,000 x 100 ÷ 15) 22,000 01
Labour: Ad hoc work (1,360,000 x 100 ÷ 20) 6,800 01
Materials: *Maintenance contract (149.5 x 1,800,000 ÷ 15) 17,940 01
Materials: *Ad hoc work (149.5 x 600,000 ÷ 15) 5,980 01
52,720 0.5

*The material price calculations per Rs 100 cost is:

Rs.
Company cost 100
Contractors’ price (100 x 1.15) 115 0.5
Customers’ price (115 x 1.30) 149.5 0.5

In other words, it is assumed that for every Rs. 149.5 charged to customers the subcontractor
obtains Rs. 34.5 (149.5 – 115) profit and the remaining Rs. 15 represents income received by
the company from the sub-contractors. 0.5
Option 01 Rs. ‘000’
Sales from small devices (52,720 x 0.45) 23,724 01
Costs: Incremental fixed costs (budgeted) 11,800
Materials ((17,940 + 5,980) x 100 ÷ 149.5) x 0.45 7,200 19,000 01
Income from own operations 4,724
Income from subcontractors of large items (7,060 x 0.55) 3,883 01
Total net income 8,607 01

Option 02 Rs. ‘000’

Sales from large devices (52,720 x 0.55) 28,996 01
Costs: Incremental fixed costs (budgeted) 21,500
Materials ((17,940 + 5,980) x 100 ÷ 149.5) x 0.55 8,800 30,300 01
Loss from own operations (1,304)
Income from subcontractors of small items (7,060 x 0.45) 3,177 01
Total net income 1,873 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 w ithout prior written permission of the ICMA Pakis tan. 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 – SPRING 2016 EXAMINATIONS 5 of 6
STRATEGIC MANAGEMENT ACCOUNTING – SEMESTER-6
Marks
Option 03 Rs. ‘000’
Sales from large and small devices 52,720 01
Costs: Incremental fixed costs (budgeted) 27,620
Materials ((17,940 + 5,980) x 100 ÷ 149.5) x 1 16,000 43,620 01
Income from own operations 9,100 01
Option 3 is recommended since it yields the highest profit and is Rs.2,040,000 (7,060 – 01
9,100) in excess of existing operations.

Question No. 4
(a) People may be Risk seekers, Risk neutral, Risk averse which can be explained as follows:
Risk seekers: a decision maker who is interested in the best outcomes no matter how small
the chance that may occur. 01
Risk neutral: decision maker is concerned with what will be the most likely outcome. 01
Risk averse: decision maker acts on the assumption that the worst outcome might occur. 01

(b) (i)
Selling Unit Expected
Demand Probability Probability Combined Contribution
Price Variable Contribution
(units) (a) (b) Probability (Rs.)
(Rs.) Cost (Rs.) (Rs.)
(1) (2) (3) (4) (5) (6) = 3 x 5 (7) = (1- 4) x 2 (8) = 7 x 6
27.5 30,000 0.2 22.70 0.1 0.02 144,000 2,880 0.5
27.5 30,000 0.2 23.40 0.7 0.14 123,000 17,220 0.5
27.5 30,000 0.2 24.80 0.2 0.04 81,000 3,240 0.5
27.5 35,000 0.5 22.70 0.1 0.05 168,000 8,400 0.5
27.5 35,000 0.5 23.40 0.7 0.35 143,500 50,225 0.5
27.5 35,000 0.5 24.80 0.2 0.10 94,500 9,450 0.5
27.5 45,000 0.3 22.70 0.1 0.03 216,000 6,480 0.5
27.5 45,000 0.3 23.40 0.7 0.21 184,500 38,745 0.25
27.5 45,000 0.3 24.80 0.2 0.06 121,500 7,290 0.25
143,930
29.8 8,600 0.2 22.70 0.1 0.02 61,060 1,221 0.5
29.8 8,600 0.2 23.40 0.7 0.14 55,040 7,706 0.5
29.8 8,600 0.2 24.80 0.2 0.04 43,000 1,720 0.5
29.8 17,500 0.5 22.70 0.1 0.05 124,250 6,213 0.5
29.8 17,500 0.5 23.40 0.7 0.35 112,000 39,200 0.5
29.8 17,500 0.5 24.80 0.2 0.10 87,500 8,750 0.5
29.8 36,000 0.3 22.70 0.1 0.03 255,600 7,668 0.5
29.8 36,000 0.3 23.40 0.7 0.21 230,400 48,384 0.25
29.8 36,000 0.3 24.80 0.2 0.06 180,000 10,800 0.25
131,661

(ii)
Rupees
Selling Expected Expected Expected Profit
Price Contribution(Rs.) Fixed Cost * / (Loss)
27.50 143,930 89,000 54,930 01
29.80 131,661 89,000 42,661 01

Selling price of rupees 27.50 is recommended due to better expected level of

01
profit.

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 w ithout prior written permission of the ICMA Pakis tan. 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 – SPRING 2016 EXAMINATIONS 6 of 6
STRATEGIC MANAGEMENT ACCOUNTING – SEMESTER-6
Marks

(W-1)
Expected Fixed
*Fixed Cost (Rs.) Probability
Cost (Rs.)
80,000 0.25 20,000 0.25
90,000 0.60 54,000 0.25
100,000 0.15 15,000 0.25
89,000 0.25

Question No. 5
Schedule showing unit cost and gross margins of Spark Plugs using the activity-based
costing approach
Rupees Rs. / Unit
Direct Material 315,000 90.00
Direct labour 57,750 16.50
Factory overhead (see working below) 58,579 16.74 0.5
Total cost 431,329 123.24 0.5
Sales price quoted 200.00 0.5
Gross margin 76.76 0.5
Gross margin percentage 38.38% 01

Working of factory overhead:

To Produce
Annual 3,500 Units of
Spark Plugs
Traceable Cost
Cost- Total
Cost - Drivers Factory per Cost
Activity Centre Driver Cost
(numbers) Overhead Drivers Drivers
Quantity (Rs.)
costs (Rs.) (Rs.)
Quality piece scrapped 1,572,000 12,000 131 210 27,510 01
Production scheduling setups 98,100 600 164 9 1,472 01
Set up setups 1,180,800 600 1,968 9 17,712 01
Shipping containers shipped 590,000 3,000 197 15 2,950 01
Shipping administration shipments 97,500 1,500 65 5 325 01
Production machine hours 2,952,000 12,000 246 35 8,610 01
Total 6,490,400 58,579 01

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 w ithout prior written permission of the ICMA Pakis tan. 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.