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
Relevant Cost, Savings and Revenues
Sales revenue @ (128,126)
Material MKH-2
Savings (N-1 & 2)
Sale ( N-1)
Sale of machine (N-3)
Total revenue/ savings
Relevant Costs:
Labour Training
Contract labour costs (N-4)
Material MKH-1 Disposal (Fixed)
Disposal (Variable)
Variable overhead (@ Rs.18.2)
Salary of supervisor (N-5)
Advertising (N-6)
Total relevant costs
Excess of savings and revenues over
costs

Immediate
Closure

Operate at Operate at
25,000
20,000
compounds compounds
2,560,000

3,150,000

0.5+0.5

660,000
75,000
860,000
1,595,000

330,000

700,000
3,590,000

220,000

675,000
4,045,000

0.25+0.25+0.25
0.5
0.25+0.25+0.25
0.25+0.25+0.25

40,000
200,000

40,000

280,000

400,000
600,000
40,000
100,000
364,000
120,000
0
1,624,000

400,000
750,000
40,000
75,000
455,000
120,000
400,000
2,240,000

0.5+0.5
0.5+0.5
0.5+0.5+0.5
0.5+0.5+0.5
0.5+0.5
0.5+0.5+0.5
0.5
0.25+0.25+0.25

1,315,000

1,966,000

1,805,000

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.
(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)
(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
N-2: Production of 25,000 compounds will result in saving of substitute material MKH2 of 220,000 i.e. Rs10,000 kgs x Rs.22
N-3: Current market value of machinery Rs.860,000
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
N-4: Contract Labour costs @ Rs.30 per compound. Therefore, (30 x 20,000 = 600,000
and 30 x 25,000 = 750,000)
N-5: Immediate closure requires that Rs.40,000 will be paid to the supervisor.
Otherwise salary of supervisor is Rs.120,000.
N-6: For sales volume of 25,000 compounds, advertising campaign costing Rs.400,000
were undertaken.
(ii)

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

0.5
0.25

0.5
0.5
0.25
0.5
0.5
0.5
0.5

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 Pakistans 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)
Year 0
Operating cash inflows
Purchase of new
(7,000,000)
machine
Working capital
(1,000,000)
Disposal of old machine
800,000
Disposal of new
machine
Tax effects on
60,000
disposals*
Recovery of working
capital
Total cash flows

1,050,000

(90,000)

1,000,000

(7,140,000) 3,743,750 7,809,525 5,552,305 5,073,260 4,075,375

20% discount factor

Present values

Rupees
Year 1
Year 2
Year 3
Year 4
Year 5
3,743,750 7,809,525 5,552,305 5,073,260 2,115,375

0.833

0.694

0.579

0.482

0.25
0.25
0.25
0.5(0.25
each)
0.25
1.5(0.25
each)

0.402

(7,140,000) 3,118,544 5,419,810 3,214,785 2,445,311 1,638,301

Net present value

0.25

8,696,751

1.5(0.25
each)
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
(1,050,000 750,000) x 0.3 = Rs.90,000/- Tax on gain on disposal (new machine).

0.5

Working:
Year 1
Sales revenue

Year 2

Year 3

Year 4

Year 5

27,500,000 43,350,000 34,807,500 32,321,250 19,890,000

Variable manufacturing cost 12,100,000 21,505,000 17,887,100 16,609,450 10,221,200

Fixed manufacturing cost

5,000,000

5,000,000

5,000,000

5,000,000

5,000,000

Step-fixed production cost

3,000,000

4,500,000

3,500,000

3,500,000

2,000,000

Marketing cost

2,587,500

1,724,250

1,024,250

500,000

182,550

Depreciation

1,250,000

1,250,000

1,250,000

1,250,000

1,250,000

Taxable profits

3,562,500

9,370,750

6,146,150

5,461,800

1,236,250

Tax @ 30%

1,068,750

2,811,225

1,843,845

1,638,540

370,875

Net of tax cash flows

2,493,750

6,559,525

4,302,305

3,823,260

865,375

Add back non cash item

(Depreciation)

1,250,000

1,250,000

1,250,000

1,250,000

1,250,000

Net operating cash flows

3,743,750

7,809,525

5,552,305

5,073,260

2,115,375

Units
Selling Price Per unit
Variable manufacturing
cost per unit

55,000
500

85,000
510

70,000
497.25

65,000
497.25

40,000
497.25

220

253

255.53

255.53

255.53

1.25 (0.25
each
1.25 (0.25
each
1.25 (0.25
each
1.25 (0.25
each
1.25 (0.25
each
1.25 (0.25
each
1.25 (0.25
each
1.25 (0.25
each
1.25 (0.25
each
1.25 (0.25
each
1.25 (0.25
each

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 Pakistans 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
Conventional Cost Accounting
1
2
3
4
(b)

02

( Two points @ 1 mark each)

Throughput Accounting

Inventory is an asset.
Costs can be classified either as direct
or indirect.
Product profitability can be determined
by deducting a product cost from
selling price.

Inventory is not an asset. It is a result

of unsynchronized manufacturing and
is a barrier to making profit.
Such classifications are no longer
useful.
Profitability is determined by the rate at
which money is earned.
Profit is a function of throughput as well
as costs.

Profit is a function of costs.

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
Material cost

90
14

62
14

0.5+0.5

Throughput contribution

76

48

0.5+0.5

76/ 20 =
3.80
1

48/16 =
3.00
2

0.5+0.5

Throughput contribution per minute of

process Zeta time
Ranking

0.5+0.5

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.
Demand Units
1,000
2,000
3,000
4,000
5,000

Selling Price
Variable
Contribution
per unit
Cost per unit Margin per unit

1200
1100
1000
800
700

600
600
600
600
600

600
500
400
200
100

Total
Contribution

Rupees
600,000
10,00,000
1200,000
800,000
500,000

0.25+0.25+0.25
0.25+0.25+0.25
0.25+0.25+0.25
0.25+0.25+0.25
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 Pakistans 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

Brake Division will produce 3,000 units of product zerox because contribution margin is
maximum at this level. Therefore, the division will order 3,000 units of SGP-01 fittings
from Electrical Division.

Marks
0.75

Revenue (W-1)
Variable costs (W-2)
Fixed costs
Profit

Electrical
Division

Brake
Division

1,200,000
750,000
350,000
100,000

3,000,000
1,800,000
700,000
500,000

Electro Ltd
Rupees
3,000,000
1,350,000
1,050,000
600,000

Electrical Division
Brake Division
W-1:
Revenue: (400 Transfer Price 1,000 x 3000
= 30,000,000
x 3,000 units) = 1,200,000
W-2:
Variable cost: (250 x 3,000)
= 750,000

(ii)

0.25+0.25+0.25
0.25+0.25+0.25
0.25+0.25+0.25
0.25+0.25+0.25

Electro Ltd

(400 + 200) = 600

(600 x 3,000) = 1,800,000

= 3,000,000

0.25+0.25+0.25

(450 x 3,000)
1,350,000

0.25+0.25+0.25

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
Demand Units

Selling
Price
per unit

1,000
2,000
3,000
4,000
5,000

1200
1100
1000
800
700

Contribution
Variable
Margin per
Cost per unit
unit

450
450
450
450
450

Total
Contribution

Rupees
750,000
1300,000
1,650,000
1,400,000
1,250,000

750
650
550
350
250

0.25+0.25+0.25
0.25+0.25+0.25
0.25+0.25+0.25
0.25+0.25+0.25
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)

Revenue (W-1)
Variable costs (W-2)
Fixed costs
Profit/ (Loss)

Electrical
Division

Brake
Division

750,000
750,000
350,000
(350,000)

3,000,000
1,350,000
700,000
950,000

Electrical Division
W-1:
Revenue (250 Marginal cost (TP)
x 3,000 units) = 750,000
W-2: Variable cost (250 x 3,000)
= 750,000

Electro Ltd
Rupees
3,000,000
1,350,000
1,050,000
600,000

0.25+0.25+0.25
0.25+0.25+0.25
0.25+0.25+0.25
0.25+0.25+0.25

Brake Division
3,000 x 1,000
= 30,00,000

0.5+0.5

(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 Pakistans 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
required to earn target after-tax
income

After tax net income

(1t)
Contribution margin per litres

Fixed expenses

725,000
X =

350,000
( 1 0.32 )

01

220 136

01

1,239,705
=
84

X = 14,758 Litres

01

(ii)
870,000
240 136

Break-even point (in litres) for

=
the chocolate fudge ice-cream

8,365 litres

02

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:
8,365

725,000
220 Y

01

(8,365) x (220 Y) =

725,000

1,840,300 8,365Y =

725,000

8,365Y =

1,115,300

0.5

Y =

133 (rounded)

0.5

0.5

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

(iii)

0.5

Contribution Margin (CM) per pack

Sales (240 x 2) + (220 x 3)
Variable cost (82 x 5)
Add: Packing cost
Contribution margin per pack

1140
410
100

0.5
0.5
01
01

(510)
630

Break even Point (Packs):

B/E point =

B/E point

Fixed cost
CM per pack
820,000
630

01

= 1,302 packs

01

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 Pakistans 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)

(b)

(i)

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.

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

Relevant cost per direct labour hour:
Direct material
Direct labour
Variable Overhead

Total relevant cost

Variable cost (150 x 5,000)
Incremental administrative cost
Add: Mark-up 15%

Rupees
100
50
150

0.5
0.5
0.5

750,000
20,000
770,000
115,500
885,500

0.5
0.5
0.5
0.5
0.5

= 885,000 500,000
= Rs.1.771
(W-1) 500,000 packages 100 packages per DLH
= 5,000 direct labour hours
Minimum bid price per package

0.5
0.5
0.5
0.5

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

Variable cost
Fixed overhead (Rs.70 x 5,000 hours)
Total cost
Add: Mark-up 15% (Full cost)
1,288,000 500,000
= Rs.2.58 or 2.6 per package

Rupees
770,000
350,000
1,120,000
168,000
1,288,000

0.5
01
01
01
01
01
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 Pakistans 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.