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CMA SEPTEMBER-2022 EXAMINATION ADVANCED LEVEL I
CM341. STRATEGIC COST & MANAGEMENT ACCOUNTING
MODEL SOLUTION
Solution to the Question No. 1 (a) Open Ended
(b) Open Ended (c) Req-i
ABC Inc.
Customer Profitability Analysis (Amount in Thousand)
Wholesale Customers Retail Customers Northern
Wholesaler
Southern Wholesaler
Green Energy
Global Power A. Revenues at list prices Tk.375,000 Tk.590,000 Tk.175,000 Tk.130,000 B. Discounts from list prices 25,800 47,200 8,400 590 C. Revenues [A-B] 349,200 542,800 166,600 129,410 D. Cost of goods sold 285,000 510,000 144,000 95,000 E. Gross Margin [C-D] 64,200 32,800 22,600 34,410 Customer-level Costs:
Delivery costs
Order processing costs Cost of sales visit
4,550 3,820 6,300
6,710 5,980 2,620
2,230 2,180 2,620
2,145 1,130 1,575 F. Total Customer-level
Costs 14,670 15,310 7,030 4,850
G. Customer-level
Operating Income [E-F] Tk.49,530 Tk.17,490 Tk.15,570 Tk.29,560 Req-ii
ABC Inc.
Customer Cost-Hierarchy Report (Amount in Thousand) Customer
Identity
Customer- level Operating
Income
Customer Revenue
CLOI Divided by
Revenue
Cumulative CLOI
Cumulative CLOI as a
% of Total CLOI
1 2 3 4 = 2 ÷ 3 5 6
Northern Tk.49,530 Tk.349,200 14.2% Tk.49,530 44%
Global Power
Tk.29,560 Tk.129,410 22.8% Tk.79,090 71%
Southern Tk.17,490 Tk.542,800 3.2% Tk.96,580 86%
Green Energy
Tk.15,570 Tk.166,600 9.3% Tk.112,150 100%
Total Tk.112,150 Tk.1,188,010
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(d) The costs are classified as follows:
Items Value-Added
Costs
Non-Value- Added Costs
Gray Area Making calculations and preparing
drawings for clients (Tk.390,000 * 77%)
Tk.300,300 - -
Checking calculations and drawings - - Tk.11,700
Correcting errors found in drawings (not billed to clients)
- Tk.31,200 -
Making changes in response to client requests (billed to clients)
- - Tk.19,500
Correcting own errors regarding building codes (not billed to clients)
- Tk.27,300 -
Total Tk.300,300 Tk.58,500 Tk.31,200
Revenues Tk.701,250
Salaries of Professional staff (6,375* hours @ Tk.52 per hour) Travel
Administrative and support costs**
Tk.331,500 15,000 145,860
Total costs Tk.492,360
Operating income Tk.208,890
* Hours related to NVA activities will be reduced and hence the costs (7,500
–7,500*15% = 6,375 Hours)
** Administrative and support costs are proportionate to the professional-labor costs.
Therefore, the revised administrative and support costs are = (Tk.171,600/390,000)*331,500 =
Solution to the Question No. 2 (a)
Information Given
Marginal Corporate Tax Rate 33%
Discount Rate 14.00%
Lease Payments (Yearly) $ 25,000
Equipment $ 75,000
Salvage Value $ 20,000
Furniture and Fittings $ 75,000
Salvage Value $ 15,000
First-year Sales $ 300,000
Initial Growth Period (Until Year) 2
Initial Growth Rate 10.00%
Steady-state Growth Rate 5.00%
Cost of Sales 60.00%
Up-front Advertising $ 75,000
Yearly Advertising and Promotions $ 15,000
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Estimating Cash Flows
Year 0 1 2 3 4 5
Capital Flows Equipment
(75,000)
Depreciation (11,000) (11,000) (11,000) (11,000) (11,000)
Salvage Value 20,000
Furniture and Fittings
(75,000)
Depreciation (12,000) (12,000) (12,000) (12,000) (12,000)
Salvage 15,000
Revenues
Sales Growth 10% 5% 5% 5%
Sales 300,000 330,000 346,500 363,825 382,016 Expenses
Lease Payments (25,000) (25,000) (25,000) (25,000) (25,000) Cost of Sales (180,000) (198,000) (207,900) (218,295) (229,210) Advertising (75,000) (15,000) (16,500) (17,325) (18,191) (19,101) Tax Cash Flow 24,750 (18,810) (22,275) (24,181) (26,182) (28,283) Tax Carry
Forward (24,75) 18,810 5,940
Net Cash Flow (225,0) 80,000 74,165 72,094 76,157 115,423 Discount Factor 1.0000 0.8772 0.7695 0.6750 0.5921 0.5194 PV Cash Flow (225,0) 70,175 57,068 48,662 45,091 59,947
NPV 55,943
(b)
Calculating Cash flows in Euros: (Amount in € million)
0 1 2 3 4 5 6
Initial Capital Expenditure (1,250) Initial Working Capital (500)
Net Pre-tax Cash Flows 800 800 800 800 800
Tax (see note) (220) (220) (220) (220) (220)
Recovery of Working Capital
500
Net Cash Flows (in €million)
(1,750) 800 580 580 580 1,080 (220)
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NPV Calculations under three conditions:
Perio d
CFs in €
million
Cash Flows in £ million
Constant Exchange Rate Sterling appreciates 5% per year Exchange
Rate (€/£)
Amount in £ million
Exchange
Rate (€/£)
Amount in £ million
0 (1,750) 1.60 (1,093.75) 1.60 (1,093.75)
1 800 1.60 500 1.68 476.19
2 580 1.60 362.5 1.764 328.80
3 580 1.60 362.5 1.8522 313.14
4 580 1.60 362.5 1.9448 298.23
5 1,080 1.60 675 2.0420 528.89
6 (220) 1.60 (137.5) 2.1441 (102.61)
Net Present Value at 10%
£521.83 £320.12
Solution to the Question No. 3(a)
i. Customer, nonfinancial, subjective, External
ii. Process (Postsales), Nonfinancial, Objective, External iii. Financial, Financial, Objective, External.
iv. Financial, Financial, Objective, External
v. Learning and growth, Nonfinancial, Subjective, Internal.
vi. Process (operations), Nonfinancial, Objective, Internal.
vii. Customer, Financial, Objective, External.
viii. Process (innovation), Nonfinancial, Objective, Internal.
ix. Learning and growth, Nonfinancial, Objective, Internal.
x. Customer, Financial, Objective, External.
xi. Financial, Financial, Objective, External.
xii. Process (Operations), Nonfinancial, Objective, Internal.
(b)
(i) Tk.200, because it could purchase the motor externally for that price.
(ii) Tk.195, because that is equal to variable cost; or Tk.135 if labor is considered fixed.
(iii) The environmental factor most important to this decision is the governmental prohibition against layoffs. This could turn direct labor into a strictly fixed cost. This particular prohibition is a serious one.
Some Spanish plants have been virtually closed for years, yet the firms must continue to pay the workers since the government has refused permission to lay off the workers.
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Solution to the Question No. 4:
(i) Revised target cost:
Manufacturing cost Taka Taka
Direct material (working 1) 2,160
Direct labor (working 2) 1,096
Machine costs 2,100
Quality control costs 1,000
Rework costs (working 3) 180
Total Manufacturing cost 6,536
Product development cost 2,500
Marketing cost 3,500
Non-manufacturing costs 6,000
Total cost 12,536
Working 1: Direct material cost
Parts to be replaced by standard parts= Tk.4,000x 0.80= Tk.3,200 New cost of those at 45% (100%-55%)= 1,440
Unique irreplaceable parts: original cost= Tk.4,000x 20% = Tk.800 New cost Tk.720. (Tk.800x0.90)
Revised direct material cost= Tk.1,440+Tk.720= 2,160
Working 2: Direct labor
Direct labor cost per unit for first one hundred units:
Y= axb
45 X 100-0.152= 22.346654 minutes Total time for 100 units = 2,234.6654 Calculation of time for 100th unit:
Time for 99 units= 45x99-0.152
=22.380818
For 99 units= 2,215.701 minutes
Therefore, time for 100th unit= 2,234.6654-2,215.701= 18.9644 minutes.
Time for remaining 49,900 units= 49,900x18.9644=946,323.56 Total labor time for 50,000 units= 948,558.23
Therefore total labor cost= 948,558.23/60 X Tk.3,467=54,810,856 Therefore average labor cost per unit=54810856/50,000=1,096
Working 3: Rework cost:
Total cost= 50,000 x 10% x Tk.1,800=Tk. 9,000,000 Cost per average unit= Tk.9,000,000/50,000= Tk.180
Page 6 of 7 (ii) Market skimming:
Market skimming is a strategy that attempts to exploit those areas of the market which are relatively insensitive to price changes. Initially, high prices for the webcam would be charged in order to take advantage of those buyers who want to buy it as soon as possible, and are prepared to pay high prices in order to do so.
The existence of certain conditions is likely to make the strategy as suitable one for Maxwell Company. These are as follows:
Where a product is new and different, so that customers are prepared to pay high prices in order to gain the perceived status of owning the product early. The Maxwell has superior audio sound and visual quality, which does make it different from other webcams on the market.
Where products have a short life cycle this strategy is more likely to be used, because of the need to recover development costs and make a profit quickly. The webcam does only have a two year life cycle, which does make it rather short.
Where high prices in the early stages of a products’ life cycle are expected to generate high initial cash inflows. If this were to be the case for the webcam, it would be particularly useful for Maxwell because of the current liquidity problems the company is suffering. Similarly, skimming is useful to cover high initial development costs, which have been incurred by Maxwell company.
Where barriers to entry exist, which deter other competitors from entering the market; as otherwise, they will be enticed by the high prices being charged. These might include prohibitively high investment costs, patent protection or unusually strong brand loyalty. It is not clear from the information whether this is the case for Maxwell Company.
Where demand and sensitivity of demand to price are unknown. In Maxwell Company’s case, market research has been carried out to establish a price based on the customers’ perceived value of the product. The suggestion therefore is that some information is available about price and demand, although it is not clear how much information is available.
It is not possible to say for definite whether this pricing strategy would be suitable for Maxwell Company, because of the limited information available. However, it does seem unusual that a high-tech, cutting edge product like this should be sold at the same price over its entire, short life cycle. Therefore, price skimming should be investigated further, presuming that this has not already been done by Maxwell Company.
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Solution to the Question No. 5(c):
Hender Chemicals Environmental Cost Report For the Year Ended December 31, 2021
Items Environmental Costs Total Percentage*
Prevention costs:
Evaluation suppliers Tk.120,000
Recycling products Tk.75,000 Tk.195,000 0.33%
Detection costs:
Inspection
products/processes
Tk.600,000
Developing perf. measures Tk.60,000 Tk.660,000 1.10%
Internal failure costs:
Treating toxic waste Tk.4,800,000 Operating equipment Tk.840,000
Licensing facilities Tk.360,000 Tk.6,000,000 10.00%
External failure costs:
Setting claims Tk.1,200,000
Cleanup of soil Tk.1,800,000 Tk.3,000,000 5.00%
Totals Tk.9,855,000 16.43%
*Of operating costs: Tk.60,000,000.
