THE INSTITUTE OF ADMINISTRATION AND COMMERCE

COST AND MANAGEMENT ACCOUNTING 3

MAY 2022 COURSEWORK

TOTAL MARKS 100 DUE: 25 APRIL 2022

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INSTRUCTIONS TO CANDIDATES

1. Answer ALL questions

2. Answers should be submitted in typed softcopy
3. Use times new roman fond 12, line spacing 1.15
4. Observe Proper citing and acknowledgement of sources used
5. The cover Page should have: Name of Institute, National ID, Student Number,
Subject, a box indicating answered questions
6. ALL WORK TO BE SUBMITTED STRICTLY VIA STUDENT PORTAL ONLY

1
Question 1
The Rovers football club are languishing in the middle of the premier division
of the football league. The club have suffered a loss of $200 000 in their last
financial year end whilst receipts from spectators have declined over the last
five years, recently receipts have stabilized at approximately $1 000 000 per
season. The club is considering the purchase of one of two new football players
Craig Evans or Keith Ferguson.
Craig Evans is 21 years old and considered to be a future international
footballer. He is prepared to sign a five-year contract with Rovers for a salary
of $50 000 per annum. His present club would require a transfer fee of $200
000 for the transfer of his existing contract. With Craig Evans in the team the
rovers club would expect receipts to increase by 20 per cent.
Keith Ferguson is 32 years old and a leading international footballer who is
prepared to sign for Rovers on a two-year contract before retiring completely
from football. He would expect a salary of $200 000 per annum and his present
club would require a transfer fee of $100 000 for the transfer of his existing
contract. Rovers believe that as a result of signing Ferguson receipts would
increase by 40 percent.
The rate of interest applicable to the transaction is 12 per cent and the
following is an extract from the present value table for $1:
12%
year 1 0,893
2 0,797
3 0,712
4 0,636
5 0,567
It should be assumed that all costs are paid and revenues received at the end
of each year.

2
Required:
A report incorporating an evaluation of the financial result of engaging each
player by the net present value method, providing the Rovers club with
information to assist it in deciding which alternative to adopt. Indicate any
other factors that may be taken into consideration. (20)
Total: 20 marks
Question 2
a) Mega ltd make pipes of one type only. The budgets for 2018 are as
follows:
Units $
Sales 27 500 550 000
Variable Fixed
Costs: $ $
Direct materials 110 000 -
Direct labour 82 500 140 000
Overhead: production 55 000 -
administration - 102 000
247 500 242 000
You are required to calculate:
i) The contribution per unit
ii) The contribution margin ratio
iii) The break-even point in both units and sales
iv) The margin of safety ratio
b) Mega ltd is considering the acquisition of a new machine. This will add
$48 000 to fixed production overhead but will halve labour costs. All
other factors remain the same.
i) What is the new break-even point in both units and sales? (5)
ii) What level of sales is required to make the acquisition of the
machine worthwhile? (15)
Total: 20 marks

3
Question 3
As a result of an increase in demand for a town’s car parking facilities, the
owners of a car park are reviewing their business operations. A decision has to
be made now to select one of the following three options for next year.
Option 1: Make no change. Annual profit is $100 000. There is little likelihood
that this will provoke new competition this year.
Option 2: Raise prices by 50%. If this occurs there is a 75% chance that an
entrepreneur will set up in competition this year. The board’s estimate of its
annual profit in this situation would be as follows:
2A with a new competitor 2B without a new competitor
Probability Profit Probability Profit
0,3 $150 000 0,7 $200 000
0,7 $120 000 0,3 $150 000
Option 3: Expand the car park quickly, at a cost of $50 000, keeping the prices
the same. The profits are then estimated to be like 2B above, except that the
probabilities would be 0,6 and 0,4 respectively.
Required:
Draw a decision tree and determine the expected values (10)
Total: 10 marks
END OF PAPER