CMA JUNE-2019 EXAMINATION

OPERATIONAL LEVEL
SUBJECT: P1. PERFORMANCE OPERATIONS

Time Allocated: Three hours Total Marks: 100

Instructions to Candidates

There are three sections (that is A, B & C) in this paper. You are required to answer ALL
questions.
Answers should be properly structured, relevant and computations need to be shown
wherever necessary.
You are strongly advised to carefully read ALL the question requirements before attempting
the question concerned (that is all parts and/or sub-questions).
ALL answers must be written in the answer book. Answers written on the question paper will
not be submitted for marking.
Start answering each question from a fresh sheet. Your answers should be clearly numbered
with the sub-question number then ruled off, so that the markers know which sub-question
you are answering.
Section No of questions in the No of sub-questions Marks allocation
Section in the Section
A 01 08 20%
B 01 05 30%
C 02 50%

TURN OVER

Page 1 of 6
SECTION A – 20 MARKS
This section consists of 1 question and 8 sub-questions.
You are advised to spend no longer than 36 minutes on this section. Section will carry 20 marks
and one sub-question will carry 2.5 marks each.

QUESTION NO. 1
(a) State the difference between under-absorbed and over-absorbed overhead stating how
each should be treated in the cost accounts.
(2 ½ Marks)
(b) State how the information obtained from the activity based costing system could be used
for cost management purposes.
(2 ½ Marks)
(c) State the limitations of incremental budgeting.
(2 ½ Marks)
(d) Compare and contrast the economic order quantity (EOQ) model and a just-in-time (JIT)
approach to inventory management.
(2 ½ Marks)
(e) Define the meaning of expected value and the limitations of using expected values for
decision making.
(2 ½ Marks)
(f) What is the difference between budgeting and forecasting?
(2 ½ Marks)
(g) Define the ARR and IRR in project appraisal.
(2 ½ Marks)
(h) List the factors that determine the working capital requirements of a firm.
(2 ½ Marks)

END OF SECTION A

SECTION B Starts on page 3

Page 2 of 6
Section B
This section consists of 1 question and 5 sub-questions.
You are advised to spend no longer than 9 minutes on each sub-question in this section.
Section will carry 30 marks and one sub-question will carry 6 marks each.
QUESTION No. 2
(a) Apex Ltd is a shoe manufacturing company. The Managing Director decided some time
ago that Total Quality Management (TQM) and a Just-In-Time (JIT) management
approach were essential for long-term market success and profitability, and took a number
of practical initiatives in this regard. He recently obtained the following quarterly data for
last year, which he believes will help him to assess the progress which the company has
made towards TQM and JIT:
Quarter 1 Quarter 2 Quarter 3 Quarter 4
First pass yield 83% 89% 92% 99%
Stock turnover in each quarter 10 times 15 times 20 times 24 times
Cycle time from customer order to delivery 15 days 14 days 13 days 11 days
Late last year, a design change had the effect of considerably simplifying the composition
of one of the company’s main products. As a result, manufacture of a unit of this product
during Quarter 4 required just 5 standard components. Previously, manufacture of a unit of
the product required 20 smaller components, some of which had to be manufactured
specially for this product.
Required:
Does the above data indicate that the company is making significant progress towards
successful implementation of TQM and JIT? Justify your answer.
[Marks: 6]
(b) Environmental management is considered to be one of the most important issues facing
companies today. An effective environmental costing system will not only support a
company’s environmental management but may also improve the financial performance of
the organization.
Required:
Explain THREE ways in which an environmental costing system can lead to improved financial
performance.
[Marks: 6]
(c) A company uses “total cost plus” pricing. Recent results show that profits are falling and
that the company is losing market share in what is becoming a very competitive market.
Required:
(i) Explain TWO disadvantages of “total cost plus” pricing.
(ii) Explain how target costing could be of benefit to the company.
[Marks: 6]
(d) A manufacturing company is currently working at 50% capacity and produces 10,000 units
at a cost of Tk.180 per unit as per the following details.
Materials: Tk.100
Labor: Tk.30
Factory Overheads: Tk.30 [40% fixed]
Administrative Overheads: Tk.20 [50% fixed]
Total Cost Per Unit: Tk.180

SECTION B Continues on page 4

Page 3 of 6
The selling price per unit at present is Tk.200. At 60% working, material cost per unit increases
by 2% and selling price per unit falls by 2%. At 80% working, material cost per unit increases by
5% and selling price per unit falls by 5%.
Required:
Prepare a Flexible Budget to show the profits/losses at 50%, 60% and 80% capacity utilization.
[Marks: 6]
(e) You’ve worked out a line of credit arrangement that allows you to borrow up to Tk. 50
million at any time. The interest rate is 0.72 percent per month. In addition, 4 percent of
the amount that you borrow must be deposited in a non- interest-bearing account. Assume
that your bank uses compound interest on its line of credit loans.
Required:
(i) What is the effective annual interest rate on this lending arrangement?
(ii) Suppose you need Tk.15 million today and you repay it in six months. How much interest
will you pay?
[Marks: 6]

END OF SECTION B

SECTION C Starts on page 5

Page 4 of 6
Section C
This section consists of 2 questions.
You are advised to spend no longer than 45 minutes on each question in this section. Section
will carry 50 marks (each question carries 25 marks) and allocation of marks for each sub-
question is indicated next to the sub-question.

QUESTION No. 3
Jamuna Resort Ltd (JR Ltd) is considering the purchase of an 80 bedroom resort from a
company in financial difficulty, situated in Gazipur. The asking price is Tk. 4,000,000 although
JR Ltd is confident that it will obtain a 20% discount if cash is paid at the outset.

JR Ltd’s Managing Director (MD) has visited the resort and is of the view that:

• Tk.1,500 will have to be invested immediately on fixtures and fittings in each room.
• Tk.200,000 must be spent on kitchen equipment immediately.
The MD has reviewed the occupancy rates of the resort being considered for purchase and is of
the view that:
• each twin room (occupied by two people) will be sold at an average nightly rate per room
of Tk.80 in the first year of business. Rates per room will be reduced in year 2 by Tk. 10
per room per night and by a further reduction of Tk. 5 per room per night in the next year.
• on average a 60% occupancy rate will be achieved during week nights (Monday through
Thursday) and 80% for each of the three weekend nights.
• The resort will be open 364 nights per year over 52 working weeks.
It is expected that each staying guest will spend an average of Tk. 20 per day in year 1 on
casual purchases within the resort(drinks & food), increasing by Tk. 5 per day each year
thereafter. These sales will achieve a net profit margin of 70%.
The costs of running the hotel are expected to be:
• Twelve members of staff at an average salary of Tk. 28,000 per annum. There will be a
salary uplift of 10% after each year of operation.
• Variable costs of Tk. 3 per night per staying guest to cover breakfast costs. These costs
will remain fixed for at least three years.
• The light and heat bill will be Tk. 200 weekly fixed charge plus Tk. 5 per room night
occupied, remaining fixed for three years.
• The monthly insurance will be Tk. 3,000 per month. This will be reduced by Tk. 500 per
month in year 2 and remain at that level for the next four years.
JR Ltd pays corporation tax at 12.50% one year in arrears. Fixtures and fittings attract a capital
allowance of 40% per annum on a reducing balance method whilst equipment attracts an
annual writing down allowance of 25% per annum straight line. JR Ltd’s after tax cost of capital
for the duration of the project is expected to be 8%.
JR Ltd’s policy is that each investment must:
• Deliver a positive NPV after three years, and
• Achieve a payback period of two years.

SECTION C Continues on page 6

Page 5 of 6
Required:
In light of the information provided on previous Page and JR Ltd’s investment policy, prepare a
report for the Managing Director in which you:
(a) Recommend whether or not the company should invest in the hotel. You are required to
justify your recommendation.
(b)Discuss relevant qualitative factors to be considered prior to making a final purchase
decision.
[Marks: (20+5) = 25]
QUESTION No. 4

Hexco Ltd. is operating at 75% level of activity produces and sells two products A and B. The
cost sheet of the two products is given below:

Particular Product A Product B

Units produced and sold 600 400
Direct materials Tk.2.00 Tk.4.00
Direct labour Tk.4.00 Tk.4.00
Factory overheads [40% fixed] Tk.5.00 Tk.3.00
Selling and administration overheads- 60% Fixed Tk.8.00 Tk.5.00
Total cost per unit Tk.19.00 Tk.16.00
Selling price per unit Tk.23.00 Tk.19.00

Factory overheads are absorbed on the basis of machine hours, which is the limiting [key]
factor. The machine hour rate is Tk.2 per hour.

The company receives an offer from Canada for the purchase of product A at a price of
Tk.17.50 per unit. Alternatively, the company has another offer from the Middle East for the
purchase of product B at a price of Tk.15.50 per unit. In both the cases, a special packing
charge of Tk. 0.50 per unit has to be borne by the company.

The company can accept either of the two export orders and in either case the company can
supply such quantities as may be possible to be produced by utilizing the balance of 25% of its
capacity.

Required:
(a) A statement showing the economics of the two export proposals giving your
recommendations as to which proposal should be accepted.
(b) A statement showing the overall profitability of the company after incorporating the export
proposal recommended by you.
[Marks: (12+13) = 25]

*End of the Exam Paper*

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