CMA SEPTEMBER-2022 EXAMINATION STRATEGIC LEVEL
SUBJECT: E3. ENTERPRISE STRATEGY
Time Allocated: Three hours Total Marks: 100
Instructions to Candidates
There are 3 Sections (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.
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 Section
No of sub-questions in the Section
Marks allocation
A 01 08 20%
B 01 05 40%
C 02 02 40%
TURN OVER
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 1
(a) State the various approaches to developing strategies.
(2 ½ Marks) (b) Discuss the objectives of a Public Sector Organization (PSO) and how performance of
a PSO is measured and controlled.
(2 ½ Marks) (c) Explain how uncertainty and risk could be considered in the investment process.
(2 ½ Marks) (d) A company is currently considering whether the foreign currency exposure could be managed more efficiently. Describe the following types of foreign currency exposure, how they could impact now and in the future:
(i) Economic risk (ii) Translation risk (iii) Transaction risk
(2 ½ Marks) (e) Explain the importance of manufacturing cycle efficiency (MCE) in measuring
performance.
(2 ½ Marks) (f) “If a product is generating a loss, then it should be discontinued.” Do you agree?
Explain.
(2 ½ Marks) (g) Define and give an example of a “loss leader pricing strategy.”
(2 ½ Marks) (h) What is meant by solvency? What information in the balance sheet can be used to
assess a company’s solvency?
(2 ½ Marks)
END OF SECTION A SECTION B Starts on page 3
SECTION B – 40 MARKS
This section consists of 1 question and 5 sub-questions.
You are advised to spend no longer than 14.4 minutes on each sub-question in this section.
Section will carry 40 marks and one sub-question will carry 8 marks each.
QUESTION 2
(a) Discuss the possible foreign exchange risk and economic implications of each of the following types of exchange rate system for multinational companies with subsidiaries located in countries with these systems:
(i) a managed floating exchange rate
(ii) a fixed exchange rate linked to a basket of currencies, and (iii) a fixed exchange rate backed by a currency board system.
[Marks: (2 + 3 + 3) = 8]
(b) Toytown is a company which distributes and sells a popular toy train. The company, which is based in Australia, imports trains from the USA which it packages and sells in New Zealand and larger countries in the Far East. The company is also considering establishing a subsidiary in South Africa which would buy products from Toytown and sell within Africa.
Toytown reports its results in its home currency. The company pays for its purchases from the USA in US dollars, but receives payment for the goods which it sells in Australasia and the Far East in local currency. All transactions carried out with the subsidiary in South Africa would be in US dollars. The company generally takes 6 weeks to pay its supplier in the USA and receives payment from debtors within 3months.
Over the last few years the company has found that sales have been quite predictable and it has been possible to plan sales levels and purchases of goods in advance.
However, there is increasing competition from companies in the Far East, which may make this more difficult in the future.
Describe the following approaches to managing or hedging transaction exposure and the disadvantages and advantages of each method:
(i) Leading and lagging (ii) Matching
(iii) Forward exchange contracts (iv) Currency options
[Marks: (2 + 2 + 2 + 2) = 8]
(c) The directors of PDQ Inc. have commissioned a firm of consultant’s to conduct a wide- ranging review of the company's public image and market position. Although this is not predominantly a financial review, the consultants need to examine the company's financial performance.
The company has the following summary information for the last five years:
SECTION B Continues on page 4
Notes:
(1) Each P/E ratio is the average for the year.
(2) The increased equity in year 4was partly the result of a share issue which took place at the beginning of the year. Some of the $20m raised was used to reduce debt.
For the past five years, PDQ Inc. has stated its objectives as: 'To maximize shareholder wealth whilst recognizing the responsibility of the company to its other stakeholders'.
As one of the consultants working on this assignment, you have been asked to assess whether the company has achieved its objectives in the five-year period under review and to discuss the key factors which have determined your assessment.
(i) to discuss whether the company has met its objectives, based solely on the information available.
(ii) to comment on what other financial information you would need in order to provide your client with a more accurate assessment.
[Marks: (4 + 4) = 8]
(d) Imagine Mr. X is thinking of starting a restaurant in your community. Answer the following questions:
(i) Who will be the stakeholders of the business?
(ii) What are some of policies Mr. X can adopt to benefit his community other than providing jobs?
(iii) How will Mr. X establish good relationships with his suppliers? With his employees.
(iv) Is there any conflict between Mr. X’s desire to be as profitable as possible and his desire to pay employees a living wage?
(v) Which of the environmental issues that might have the biggest impact on the business? How?
[Marks: 8]
(e) A food supplier company is currently selling 600 units per month, and information related to income statement is given below:
Per unit Selling price………. Tk.400 Operating expenses (Variable Costs)...………… 280 Contribution margin………. Tk.120
All other fixed costs are Tk. 25,000. The manager is considering the following three given strategies
SECTION B Continues on page 5
Strategy 1:
The sales manager feels that a Tk.10,000 increase in the monthly advertising budget would increase monthly sales by Tk.28,000 to a total of 700 units.
Strategy 2:
New equipment has come onto the market that would allow Morton Company to automate a portion of its operations. Variable expenses would be reduced by Tk. 10 per unit. However, the sales manager wants to increase sales to 680 speakers per month.
Strategy 3:
The sales manager would like to pay salespersons a sales commission of Tk.15 per unit sold, rather than the flat salaries that now total Tk.5,000 per month. The sales manager is confident that the change would increase monthly sales by 15% to 690 speakers per month.
Required:
Which Strategy the manager should choose and why?
[Marks: 8]
END OF SECTION B SECTION C Starts on page 6
SECTION C – 40 MARKS
This section consists of 2 questions.
You are advised to spend no longer than 36 minutes on each question in this section.
Section will carry 40 marks and allocation of marks for each sub-question is indicated next to the sub-question.
QUESTION 3
(a) Mr. Hamid conducts a wholesale merchandising business that sells approximately 5,000 items per month with a total monthly average sales value of Tk. 500,000. Its annual bad debt rate has been approximately 1½% of sales. In recent discussions with his bookkeeper, Mr. Hamid has become confused by all the alternatives apparently available in handling the Allowance for Doubtful Accounts balance. The following information has been presented to Pierce.
1. An allowance can be set up (a) on the basis of a percentage of sales or (b) on the basis of a valuation of all past due or otherwise questionable accounts receivable. Those considered uncollectible can be charged to such allowance at the close of the accounting period, or specific items can be charged off directly against (1) Gross Sales or to (2) Bad Debt Expense in the year in which they are determined to be uncollectible.
2. Collection agency and legal fees, and so on, incurred in connection with the attempted recovery of bad debts can be charged to (a) Bad Debt Expense, (b) Allowance for Doubtful Accounts, (c) Legal Expense, or (d) Administrative Expense.
3. Debts previously written off in whole or in part but currently recovered can be credited to (a) Other Revenue, (b) Bad Debt Expense, or (c) Allowance for Doubtful Accounts.
Required:
Which of the foregoing methods would be recommend to Mr. Hamid in regard to (i) Allowances and charge-offs,
(ii) Collection expenses (iii) Recoveries
State briefly and clearly the reasons for supporting the recommendations.
(b) Mr. Alam, an inventory control specialist, is interested in better understanding the accounting for inventories. Although Alam understands the more sophisticated computer inventory control systems, he has little knowledge of how inventory cost is determined. In studying the records of Royal Enterprises, which sells normal brand- name goods from its own store and on consignment through Chavez Inc., he asks you to answer the following questions.
Required:
(i) Should Royal Enterprises include in its inventory normal brand-name goods purchased from its suppliers but not yet received if the terms of purchase are f.o.b. shipping point (manufacturer’s plant)? Why?
(ii) Should Royal Enterprises include freight-in expenditures as an inventory cost?
Why?
(iii) If Royal Enterprises purchases its goods on terms 2/10, net 30, should the purchases be recorded gross or net? Why?
[Marks: (10+10) = 20]
SECTION C Continues on page 7
QUESTION 4
BCC Co introduced a new product, DV, to its range last year. The machine used to mould each item is a bottleneck in the production process meaning that a maximum of 5,000 units per annum can be manufactured.
The DV product has been a huge success in the marketplace and as a result, all items manufactured are sold. The marketing department has prepared the following demand forecast for future years as a result of feedback from customers.
The directors are now considering investing in a second machine that will allow the company to satisfy the excess demand. The following information relating to this investment proposal has now been prepared:
If production remained at 5,000 units, the current selling price would be expected to continue throughout the remainder of the life of the product. However, if production is increased, it is expected that the selling price will fall to $45 per unit for all units sold. Again, this will last for the remainder of the life of the product.
No terminal value or machinery scrap value is expected at the end of four years, when production of DV is planned to end. For investment appraisal purposes, BCC uses a nominal (money) discount rate of 10%per year and a target return on capital employed of 20% per year. Ignore taxation.
Required:
(a) Calculate the following values for the investment proposal:
(i) net present value;
(ii) internal rate of return;
(iii) return on capital employed (accounting rate of return) based on initial investment;
and.
(iv) discounted payback period
(b) Discuss your findings in each section of (a) above and advise whether the investment proposal is financially acceptable.
(c) Explain briefly the key steps that should be included in a company's capital budgeting
process.
[Marks: (3 X 4) + 4 + 4 = 20]
* End of Question Paper *
