SUGGESTED SOLUTIONS/ ANSWERS – EXTRA ATTEMPT EXAMINATIONS, MAY 2016 1 of 7

STRATEGIC MANAGEMENT ACCOUNTING – SEMESTER-6

Marks
Question No. 1
(a) Rs.
Years 2016 2017 2018 2019 2020 2021 Total

Budgeted sales in units 42,000 43,000 51,000 58,000 61,000

Purchases minus variable cost (½ for each
31,416,000 32,164,000 38,148,000 43,384,000 45,628,000
of production year figure 2.5
Cost of supervisor (2,400,000) (2,400,000) (2,400,000) (2,400,000) (2,400,000)
1.25
Cash flow from operation
29,016,000 29,764,000 35,748,000 40,984,000 43,228,000
before tax [CFBT]
1.25
st
(1 for 1 year
Less: Tax depreciation 33,253,938 8,772,159 7,456,335 6,337,885 5,387,202 and ½ for
year 2-5) 3
Taxable income / (loss) (4,237,938) 20,991,841 28,291,665 34,646,115 37,840,798
1.25
Tax saving / (expense) [T] 1,440,899 (7,137,226) (9,619,166) (11,779,679) (12,865,871)
1.25
Cash flow from operation after
30,456,899 22,626,774 26,128,834 29,204,321 30,362,129
tax [CFAT] = CFBT + T
1.25
Cost of machine (91,735,000) 1
Working Capital 250,000 0.25
Sale Proceed of Machines 200,000 12,000,000 1
t
(0.5 for 2016
Tax impact of disposal (34,000) – – – – 6,299,344 year and 1
for 2021) 1.5
Total Cash outflow (91,319,000) 30,456,899 22,626,774 26,128,834 29,204,321 48,661,472

PV factor 1.000 0.877 0.769 0.675 0.592 0.519

Present Value [PV] (91,319,000) 26,710,700 17,399,989 17,636,963 17,288,958 25,255,304 12,972,914
1.5

In-house production with buying machine is recommended due to + ve NPV associated with this investment 01
Assumption:
(1) There will be no change in working capital if outside purchase is opted.

(2) Existing machine will not be sold if outside purchase is opted.

WORKINGS:
Cost of automatic machine
Purchase Price 91,200,000
Discount (2,736,000)
Freight Inward 1,061,000
Installation cost 2,210,000
91,735,000

Tax depreciation:
Cost / Initial Normal Total Ending
Year
Opening WDV Depreciation Depreciation Depreciation WDV
1 91,735,000 22,933,750 10,320,188 33,253,938 58,481,062
2 58,481,062 8,772,159 8,772,159 49,708,903
3 49,708,903 7,456,335 7,456,335 42,252,568
4 42,252,568 6,337,885 6,337,885 35,914,683
5 35,914,683 5,387,202 5,387,202 30,527,481

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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
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 SUGGESTED SOLUTIONS/ ANSWERS – EXTRA ATTEMPT EXAMINATIONS, MAY 2016 2 of 7
STRATEGIC MANAGEMENT ACCOUNTING – SEMESTER-6
Marks
Rupees per Unit
Outside purchase cost 2,700
Less : Variable Cost Existing Reduction Reduced
Direct Material 800 800
Direct Labour 1,000 280 720
Variable overhead 600 168 432
Total 1,952
Net difference 748 31,416,000

Machine
Tax Gain / (Loss) Old New
Sale Proceed 200,000 12,000,000
Tax WDV (100,000) (30,527,481)
Tax Gain / (Loss) 100,000 (18,527,481)
Tax Impact 34,000 (6,299,344)

(b) Many companies use the payback method, in addition to determine the present value,
because the payback method provides a preliminary screening of projects. It indicates how
fast an original investment can be recovered from the cash flows, which is of particular
interest when a project is considered risky. 03

(c)
Year Cumulative PV (Rs.)
0 (91,319,000) 0.5
1 (64,608,300) 0.5
2 (47,208,311) 0.5
3 (29,571,348) 0.5
4 (12,282,390) 0.5
5 12,972,914 0.5

As cumulative PV is positive (+ ve) in 5th year from negative in 4th year; the DPP is
between 4 years and 5 years. 01

(d) Schedule of net after tax, annual, real cash flows:

2016 2017 2018 2019 2020
Cost saving of wages and 01(0.25
168,000 168,000 168,000 168,000 each)
benefits
Cost of additional supplies (9,000) (9,000) (9,000) (9,000) 01(0.25
each)
Cost of additional power (13,000) (13,000) (13,000) (13,000) 01(0.25
each)
Net cost savings 146,000 146,000 146,000 146,000 01(0.25
each)
Net of Tax saving rate 0.66 0.66 0.66 0.66 -
After tax cost savings (A) 96,360 96,360 96,360 96,360 01(0.25
each)

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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 – EXTRA ATTEMPT EXAMINATIONS, MAY 2016 3 of 7
STRATEGIC MANAGEMENT ACCOUNTING – SEMESTER-6
Marks
Annual depreciation 76,850 20,273 17,232 14,647 02(0.5
each)
Tax rate 0.34 0.34 0.34 0.34 -
Tax shield on depreciation 26,129 6,893 5,859 4,980 02(0.5
each)
Sale proceeds from machine - - - 80,000 0.25
Tax gain on sale of machine - - - 1,020 0.25
Nominal cash flows (B) 26,129 6,893 5,859 86,000
Price index 1.08 1.17 1.26 1.36 -
Real rupees cash flows (C) 24,194 5,891 4,650 63,235 01(0.25
each)
Cost of machine (212,000) - - - 0.5
Total after tax real cash flows (212,000) 120,554 102,251 101,010 159,595 01(0.25
(A+C) each)

WORKINGS:
Tax depreciation
Cost / Opening Initial Normal Total Ending
Year
WDV Depreciation Depreciation Depreciation WDV
2017 212,000 53,000 23,850 76,850 135,150
2018 135,150 20,273 20,273 114,877
2019 114,877 17,232 17,232 97,645
2020 97,645 14,647 14,647 83,000 (round off)

Equipment
Sale proceed 80,000
Tax WDV (83,000)
Gain / (loss) (3,000)
Tax shield (34%) 1,020

(e) Since the Division B, bases its analysis on real after tax cash flows, it should use the real
discount rate, computed as follows:
(1  n)
(1  r)  01
(1  i)

1  14
r 1 01
1.07
r = 6.54% 01

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan 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 – EXTRA ATTEMPT EXAMINATIONS, MAY 2016 4 of 7
STRATEGIC MANAGEMENT ACCOUNTING – SEMESTER-6
Marks
Question No. 2
Minimum price to be quoted for construction of shed work:
Rs. “000”
Direct materials:
Prime quality steel 160 tons @ Rs.96 per kg. 15,360 01
Galvanized steel 140 tons @ Rs.130 per kg. 18,200 01
Other materials – at purchase price 1,500 01
Direct Labor:
Adeeb’s time 125 01
Skilled labor 28,100 hours @ Rs.200 per hour 5,620 01
Unskilled labor 15,200 hours @ Rs.50 per hour (W-1) 760 01
Other costs:
Scaffolding, excavator, crane and lifter rent - incremental 900 01
Depreciation of general purpose machinery - 01
General over-heads - 01
Opportunity cost of using yard (80,000 × 25) 2,000 01
Feasibility reports, plans and drawing cost - 01
Total cost 44,465 01
Markup @ 30% 13,339.5 01
Minimum price 57,804.5 01

Minimum price that must be quoted is Rs.57,804,500 to earn a desired mark up 30% on
relevant cost. 01

(W-1) Unskilled Labor hours:

10× 40×12=4,800 hrs 0.5
20,000 hrs-4,800 hrs= 15,200 hrs 0.5

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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
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 SUGGESTED SOLUTIONS/ ANSWERS – EXTRA ATTEMPT EXAMINATIONS, MAY 2016 5 of 7
STRATEGIC MANAGEMENT ACCOUNTING – SEMESTER-6
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Question No. 3
(a) Return on Divisional Investment (ROI):
Before After
investment investment
Divisional profit 240,000 261,360 01
Divisional investment 1,200,000 1,320,000 01
Divisional ROI 20% 19.8% 01
The ROI will fall in the short term if the new investment is undertaken. This is a problem
which often arises with ROI.

(b) Divisional Residual Income (RI):

Before After
investment investment
Divisional profit 240,000 261,360 01
Less: imputed interest
1,200,000 * 17% 204,000 - 0.5
1,320,000 * 17% - 224,400 0.5
Residual income 36,000 36,960 01

The residual income will increase if the new investment is undertaken. The use of
residual income has highlighted the fact that the new project returns more than the cost
of capital (17.8% (21,360/120,000) compared with 17%). 02

Question No. 4
(a)
Plug Pin Total
(i) A Current selling price (S.P.) (Rs.) 30.00 40.00
B Reduction in S.P. 10% 15%
C Reduced S.P. [ A – (A x B)] (Rs.)
01 (0.5
27.00 34.00 each)
D Budgeted sales (Rs.) 2,700,000 1,870,000
E Budgeted sales in units [D ÷ C]
01(0.5
100,000 55,000 each)
(0.5 for
each
F Planned breakeven sales in units (70%) 70,000 38,500 108,500 product 02
and 1 for
total)=2

01(0.5
(ii) G Planned breakeven sales (Rs.) 1,890,000 1,309,000 each)
01(0.5
H Margin of safety [D - G] (Rs.) 810,000 561,000 each)
I Planned profit (Rs.) 259,200 93,500
J PV ratio [I ÷ H]
01(0.5
32.0% 16.7% each)
01(0.5
K Fixed cost at breakeven [G x J] (Rs.) 604,800 218,167 each)
L Current fixed expenses (Rs.) 632,060 222,940
02(01
M Reduction in fixed expenses [L - K] (Rs.) 27,260 4,773 each)

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan 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
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 SUGGESTED SOLUTIONS/ ANSWERS – EXTRA ATTEMPT EXAMINATIONS, MAY 2016 6 of 7
STRATEGIC MANAGEMENT ACCOUNTING – SEMESTER-6
Marks
(b) Weighted average contribution per unit:
“A” per unit “B” per unit “C” per unit
Selling price per unit 33 28 31
Variable cost per unit 24 21 22
Contribution per unit 9 7 9 1.25

Rs.
Contribution from 3 units of A 27 0.25
Contribution from 2 units of B 14 0.25
Contribution from 3 units of C 27 0.25
Total contribution from sale of 8 units 68 0.5

Weighted average contribution per unit = Rs.68/ 8 = Rs.8.50 01

The required number of sales units:
= (Fixed costs + Required profit)/Weighted average contribution per unit
= (Rs.130,000 + Rs.108,000) / Rs.8.50
01
= 28,000 units 0.5

The required sales in terms of the number of units of the products and sales revenue of each
product:
Product Units Selling price per unit Sales revenue required.
A 28,000 × 3/8 10,500 33 Rs.346,500 0.5
B 28,000 × 2/8 7,000 28 Rs.196,000 0.5
C 28,000 × 3/8 10,500 31 Rs.325,500 0.5
Total 28,000 Rs.868,000 01

The sales revenue of Rs.868,000 will generate a profit of Rs.108,000 if the products are sold
in the mix 3:2:3. 0.5

Question No. 5
(a) [Any four (04)] 04
 It may be difficult to identify which resources are likely to be in short supply and what
amount of their availability will be.
 Management may not make product mix decisions which are profit maximizing. They may
be more concerned to develop a production/sales plan.
 The assumptions of linearity may be totally invalid except over smaller ranges.
 The linear programming model is essentially static and is therefore not really suitable for
analyzing in detail the effects of changes in the various parameters, for example over time.
 The shadow price of a scarce resource only applies up to a certain limit.
 In some circumstances, a practical solution derived from a linear programming model may
be of limited use as, for example, where the variables may only take on integer values. A
solution must then be found by a combination of rounding up and trial and error.
DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan 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 – EXTRA ATTEMPT EXAMINATIONS, MAY 2016 7 of 7
STRATEGIC MANAGEMENT ACCOUNTING – SEMESTER-6
Marks
(b) (i) Since the Division “A” has idle capacity, it does not have to give up any outside sales to
take on the Division B’s business. Applying the formula for the lowest acceptable
transfer from the viewpoint of the selling division, we get:
Transfer price ≥ Variable Cost per unit + (Total Contribution margin on the lost sale/
Number of units transferred)
Transfer Price ≥ Rs. 65 + (Rs. 0 / 25,000) = Rs. 65 per unit 02
Division “B” would be unwilling to pay more than Rs. 116 per unit, the price it is
currently paying an outside supplier for its batteries. Therefore, the transfer price must
fall within the range:
Rs. 65 ≤ Transfer price ≤ Rs. 116. 01

(ii) Since the Division is “A” selling all of its production to the outside customers, it would
have to give up some of these outside sales to take on the Division A’s business. Thus,
Division “A” has an opportunity cost, which is the total contribution margin on lost sales:
Transfer price ≥ Veritable Cost per unit + Total Contribution margin on the lost sale
…………………………………………………………..Number of Units Transferred

Transfer price ≥ Rs. 65 + (Rs. 120 - Rs. 65) × 25,000 = Rs 65 + Rs. 55= Rs 120
25,000 02
Since the Division “B” can purchase batteries from outside supplier at only Rs. 116 per
unit, no transfers will be made between the two divisions. 02

(iii) Applying the formula for the lowest acceptable price from the viewpoint of the selling
division, we get:

Transfer price ≥ Veritable Cost per unit + Total Contribution margin on the lost sales
Number of Units Transferred
Transfer price ≥ (Rs.65 - Rs.7) + (Rs.120 - Rs.65) × 25,000 = Rs.113
25,000 02
In this case, the transfer price must fall within the range:
Rs. 113 ≤ Transfer price ≤ Rs. 116 02

(iv) [Any three (03)] 03

Potential benefits of operating a transfer pricing system within a divisionalised company
 It can lead to goal congruence by motivating divisional managers to make
decisions, which improve divisional profit and improve profit of the organisation as a
whole.
 It can prevent dysfunctional decision making so that decisions taken by a divisional
manager are in the best interests of his own part of the business, other divisions
and the organisation as a whole.
 Transfer prices can be set at a level that enables divisional performance to be
measured commercially'. A transfer pricing system should therefore report a level of
divisional profit that is a reasonable measure of the managerial performance of the
division.
 It should ensure that divisional autonomy is not undermined. A well-run transfer
pricing system helps to ensure that a balance is kept between divisional autonomy
to provide incentives and motivation, and centralised authority to ensure that the
divisions are all working towards the same target, the benefit of the organisation as
a whole.
THE END

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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.