The Institute of Cost and Management Accountants of Bangladesh

Questions of Assignment
Operational Level: Paper P1 –Performance Operations
Question No – 01
Saturn, a chocolate manufacturer, produces three products:
● The Sky Bar, a bar of solid milk chocolate.
● The Moon Egg, a fondant filled milk chocolate egg.
● The Sun Bar, a biscuit and nougat based chocolate bar.
Information relating to each of the products is as follows:
Sky Bar Moon Egg Sun Bar
Direct labour cost per unit ($) 0.07 0.14 0.12
Direct material cost per unit ($) 0.17 0.19 0.16
Actual production/ sales (units) 500,000 150,000 250,000
Direct labour hours per unit 0.001 0.01 0.005
Direct machine hours per unit 0.01 0.04 0.02
Selling price per unit ($) 0.50 0.45 0.43
Annual production overhead = $80,000
Required:
Using traditional absorption costing, calculate the full production cost per unit and the profit per unit for each
product. Explain the implications of the figures calculated.
Question No – 02
Keats plc commenced business on 1 March making one product only, the standard cost of which is as follows:
$
Direct labour 5
Direct material 8
Variable production overhead 2
Fixed production overhead 5
Standard production cost 20
The fixed production overhead figure has been calculated on the basis of a budgeted normal output of 36,000
units per annum.
You are to assume that actual fixed overheads were as expected and that all the budgeted fixed expenses are
incurred evenly over the year. March and April are to be taken as equal period months.
Selling, distribution and administration expenses are:
Fixed $120,000 per annum
Variable 15% of the sales value
The selling price per unit is $35 and the number of units produced and sold were:
March (units) April (units)
Production 2,000 3,200

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Sales 1,500 3,000
You are required to:
(a) prepare profit statements for each of the months of March and April using:
(i) absorption costing, and
(ii) marginal costing
(b) prepare a reconciliation of the profit or loss figures given in your answers to (a)(i) and (a)(ii)
accompanied by a brief explanation.
Question No – 03
A summary of a manufacturing company's budgeted profit statement for its next financial year, when it
expects to be operating at 75% capacity, is given below.
$
$
Sales 9,000 units at $32 288,000
Less:
direct materials 54,000
direct wages 72,000
production overhead - fixed 42,000
- variable 18,000
186,000
Gross profit 102,000
Less: admin., selling and dist'n costs:
- fixed 36,000
- varying with sales volume 27,000
63,000
Net profit 39,000
It has been estimated that:
(i) if the selling price per unit were reduced to $28, the increased demand would utilise 90 per cent of the
company's capacity without any additional advertising expenditure;
(ii) to attract sufficient demand to utilise full capacity would require a 15 per cent reduction in the current
selling price and a $5,000 special advertising campaign.
You are required to:
(a) Calculate the breakeven point in units, based on the original budget;
(b) Calculate the profits and breakeven points which would result from each of the two alternatives and
compare them with the original budget.
(c) The manufacturing company decided to proceed with the original budget and has asked you to calculate
how many units must be sold to achieve a profit of $45,500.
Question No – 04
SG plc is a long-established food manufacturer which produces semiprocessed foods for fast food outlets.
While for a number of years it has recognised the need to produce good quality products for its customers, it
does not have a formalised quality management programme.
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A director of the company has recently returned from a conference, where one of the speakers introduced the
concept of Total Quality Management (TQM) and the need to recognise and classify quality costs.
Required:
(a) Explain what is meant by TQM and use examples to show how it may be introduced into different areas
of SG plc's food production business.
(b) Explain why the adoption of TQM is particularly important within a Just-in-Time (JIT) production
environment.
(c) Explain four quality cost classifications, using examples relevant to the business of SG plc.
Question No – 05
A business makes four products, W, X, Y and Z. Information relating to these products is as follows:
W X Y Z
Sales price / unit $20 $25 $18 $40
Materials required / unit $10 $15 $11 $22
Labour hours / unit 4 5 2 6
Monthly sales demand (units) 500 800 1,000 400
There is a limit to the availability of labour, and only 8,000 hours are available each month.
Required:
Identify which products the business should produce.
Question No – 06
A company manufactures a product that requires machine time of 1.5 hours per unit. Machine time is a
bottleneck resource, due to the limited number of machines available. There are 10 machines available and
each machine can be used for up to 40 hours each week.
The product is sold for $85 per unit and the material cost per unit is $42.50. Total operating expenses are
$8,000 each week.
Required:
Calculate the throughput accounting ratio.
Question No – 07
Justin Thyme manufactures four products, A, B, C and D. Details of sales-prices, costs and resource
requirements for each of the products are as follows.
Product Product Product Product
A B C D
$ $ $ $
Sales price 1.40 0.80 1.20 2.80
Materials cost 0.60 0.30 0.60 1.00
Direct labour cost 0.40 0.20 0.40 1.00
Minutes Minutes Minutes Minutes
Machine time per unit 5 2 3 6
Labour time per unit 2 1 2 5
Units Units Units Units
Weekly sales demand 2,000 2,000 2,500 1,500
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Machine time is a bottleneck resource and the maximum capacity is 400 machine hours each week. Operating
costs, including direct labour costs, are $5,440 each week. Direct labour costs are $12 per hour, and direct
labour workers are paid for a 38-hour week, with no overtime.
(a) Identify the quantities of each product that should be manufactured and sold each week to maximise
profit and calculate the weekly profit.
(b) Calculate the throughput accounting ratio at this profit-maximising level of output and sales.
Question No – 08
Hensau Ltd has a single production process for which the following costs have been estimated for the period
ending 31 December 20X1:
$
Material receipt and inspection cost 15,600
Power cost 19,500
Material handling cost 13,650
Three products - X, Y and Z are produced by workers who perform a number of operations on material blanks
using hand held electrically powered drills. The workers have a wage rate of $9 per hour.
The following budgeted information has been obtained for the period ending 31 December 20X1:
Product Product Product
X Y Z
Production quantity (units) 2,000 1,500 800
Batches of material 10 5 16
Data per product unit
Direct material (sq. metres) 4 6 3
Direct material ($) 5 3 6
Direct labour (minutes) 24 40 60
Number of power drill operations 6 3 2
Overhead costs for material receipt and inspection, process power and material handling are presently each
absorbed by product units using rates per direct labour hour.
An activity based costing investigation has revealed that the cost drivers for the overhead costs are as follows:
Material receipt and inspection: number of batches of material.
Process power: number of power drill operations.
Material handling: quantity of material (sq. metres) handled.
You are required:
(a) to prepare a summary which calculates the budgeted product cost per unit for each of the products X, Y
and Z for the period ending 31 December 20X1 detailing the unit costs for each cost element:
(i) using the existing method for the absorption of overhead costs and
(ii) using an approach which recognises the cost drivers revealed in the activity based costing
investigation
(b) to explain the relevance of cost drivers in activity based costing. Make use of figures from the summary
statement prepared in (a) to illustrate your answer.

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Question No – 09
A company produced three products, the standard costs of which are shown below:
$ $ $
Direct material 50 40 30
Direct labour (@ $10 per hour) 30 40 50
Production overhead* 30 40 50
110 120 130
Production units 10,000 20,000 30,000
* Absorbed on the basis of direct labour hours
Total production overheads are £2,600,000 giving rise to an overhead absorption rate of £10 per hour (being
£2.6 m overheads / 260,000 total direct labour hours worked).
The company wishes to introduce ABC, and has identified two major cost pools for production overhead and
their associated cost drivers.
Information on these activity cost pools and their drivers is given below:
Activity cost pool Cost driver Cost associated with activity cost pool
Receiving/ inspecting quality Purchase requisitions $1,400,000
assurance
Production Number of bathes $1,200,000
scheduling/machine set-ups

Further relevant information on the three products is also given below:

P R S
Number of purchase requisitions 1,200 1,800 2,000
Number of set ups 240 260 300
Required:
(a) Calculate the activity-based production cost of products, P, R and S. (8 marks)
(b) Comment on the differences between thee original standard costs and the activity-based costs you
calculate.
Question No – 10
Cabal makes and sells two products, Plus and Doubleplus. The direct costs of production are $12 for one unit
of Plus and $24 per unit of Doubleplus.
Information relating to annual production and sales is as follows:
Plus Double plus
Annual production and sales 24,000 units 24,000 units
Direct labour hours per unit 1.0 1.5
Number of orders 10 140
Number of batches 12 240
Number of setups per batch 1 3
Special parts per unit 1 4
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Information relating to production overhead costs is as follows:
Cost driver Annual cost
$
Setup costs Number of setups 73,200
Special parts handling Number of special parts 60,000
Other materials handling Number of batches 63,000
Order handling Number of orders 19,800
Other overheads - 216,000
432,000
Other overhead costs do not have an identifiable cost driver, and in an ABC system, these overheads would be
recovered on a direct labour hours basis.
(a) Calculate the production cost per unit of Plus and of Doubleplus if the company uses traditional
absorption costing and the overheads are recovered on a direct labour hours basis.
(b) Calculate the production cost per unit of Plus and of Doubleplus if the company uses ABC.
(c) Explain the reasons for the differences in the production cost per unit between the two methods.
(d) Explain the implications for management of using an ABC system instead of an absorption costing
system?
Question No – 11
The following data relates to the budget for a company producing widgets in March:
Budgeted production and sales 1,750
(widgets) units
Standard cost per unit: $
Direct materials 6.00
Direct labour 3.00
Variable production overhead 0.75
Fixed production overhead 2.50
12.25
Standard sales price 18.25
Standard profit per unit 6.00
Number of widgets produced and sold in March 1,800
units
Actual sales revenue $32,300
Required:
Calculate the sales price and sales volume profit variance. What would be the sales volume contribution
variance if standard marginal costing were used?
Question No – 12
Major Caldwell Ltd makes and sells a single product. Each unit of the product requires 3 kg of material at $4
per kg.

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The actual details for last period were that 1,200 units of finished goods were produced, 3,600 kg of material
were purchased for $14,800 and 3,520 kg were used.
Major Caldwell Ltd maintains its raw materials account at standard.
Calculate appropriate variances for materials.
Question No – 13
May Ltd produces a single product for which the following data are given:
Standards per unit of product:
Direct material 4 kg at $3 per kg
Direct labour 2 hours at $6.40 per hour
Actual details for given financial period:
Output produced in units 38,000
Direct materials: $
purchased 180,000 kg for 504,000
issued to production 154,000 kg
Direct labour 78,000 hours worked for 546,000
There was no work in progress at the beginning or end of the period.
You are required to:
(a) Calculate the following variances:
(i) direct labour efficiency
(ii) direct labour rate
(iii) direct materials usage
(iv) direct materials price, based on issues to production.
(b) State whether in each of the following cases, the comment given and suggested as the possible reason for
the variance, is consistent or inconsistent with the variance you have calculated in your answer to (a)
above, supporting each of your conclusions with a brief explanatory comment.
Item in (a):
(i) Direct labour efficiency variance: the efficiency of labour was commendable
(ii) Direct labour rate variance: the union negotiatedd wage increase was $0.60 per hour lower than expected
(iii) Direct materials usage variance: material losses in production were less than had been allowed for in the
standard.
(iv) Direct materials price variance: the procurement manager has ignored the economic order quantity and,
by obtaining bulk quantities, has purchased material at less than the standard price
Question No – 14
Jack Doherty Ltd makes a single product with the following standard cost details per unit.

Direct materials 5 kg @ $4/kg 20

Direct labour 4 hrs @ $6/hr 24
Actual results were that 1,000 units were produced and sold. The actual hours paid for were 4,100 and the
hours worked were 3,900. The actual labour cost was $27,060. The number of kg purchased in the month was
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5,200 kg for $21,320 and the number of kg used was 4,900 kg. The company calculates the material price
variance at the time of purchase.
Calculate appropriate variances for materials and labour.
Question No – 15
Gooch Ltd makes a single product and operates a standard costing system. The following variances, standard
costs and actual results relate to period 6:
Variances
Favorable Adverse
Direct material price variance 1,012
Direct material usage variance 1,380
Direct labour rate variance 920
Direct labour efficiency variance 3,680
Variable overhead expenditure variance 1,288
Variable overhead efficiency variance 920

Standard cost data

$/unit
Direct materials 2 kg @ $3/kg 6
Direct labour 3 hrs @ $8/hr 24
Variable overheads 3 hrs @ $2/hr 6
Fixed overheads 3 hrs @ $4/hr 12
$48
Fixed overheads were budgeted at $24,000 and the budgeted profit per unit was 20% of the selling price.
Budgeted sales were 1,900 units.
Actual results
Material purchased and used $16,192
Labour cost $52,440
Variable overhead cost $14,168
Fixed overhead cost $23,500

Selling price per unit was $3 lower than budget and there was no change in stock levels.
You are required to calculate the:
(a) actual output
(b) actual material price per kg
(c) labour hours worked
(d) fixed overhead volume variance
(e) fixed overhead expenditure variance
(f) sales volume profit variance
(g) selling price variance

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(h) budgeted profit
(i) actual profit.
Question No – 16
CM Limited was formed 10 years ago to providee business equipment solutions to local businesses. It has
separate divisions for research, marketing, product design, technology and communication services, and now
manufactures and supplies a wide range of business equipment (copiers, scanners, printers, fax machines and
similar items).
To date it has evaluated its performance using monthly financial reports that analyse profitability by type of
equipment.
While on a course, the Managing Director of CM Limited overheard someone mention how the performance
of their company had improved after they introduced 'Benchmarking'.
Required:
Explain 'Bench marking' and how it could be used to improve the performance of CM Limited.
Question No – 17
A company manufactures a chemical using two components, A and B. The standard information for one unit
of the chemical are as follows:
$
Material A 10 kg at $4 per kg 40
Material B 20 kg at $6 per kg 120
160
In a particular period, 160 units of the chemical were produced, using 1,000 kgs of material A and 1,460 kgs of
material B.
Required:
Calculate the material usage, mix and yield variances for each material.
Question No – 18
Buzz Lightyear Ltd makes a single product, of which the standard labour input per unit is:
Skilled labour 6 hrs @ $12/hr
Unskilled labour 4 hrs @ $7/hr

During Period 1:
1,000 units were produced
5,250 hours of skilled labour were used and
5,250 hours of unskilled labour were used
Calculate the labour mix variances for each grade of labour and the labour yield variance in total.
Use both the weighted average method and the individual units method.
Question No – 19
Product XYZ is made by mixing three materials (X, Y and Z). There is an expected loss of 20% of the
total input.
The budgeted and actual results for Period 1 are shown below. There were no opening or closing inventories of
any materials or of the finished product.

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 Budget Actual
Output of XYZ 800 kg 960 kg
Material
X 500 kg @ $5.00 per kg 600 kg @ $4.70 per kg
Y 300 kg @ $6.00 per kg 380 kg @ $6.50 per kg
Z 200 kg @ $7.00 per kg 300 kg @ $7.10 per kg
Total input 1,000 kg 1,280 kg
Calculate for Period 1:
(i) the total materials mix variance;
(ii) the total materials yield variance
Question No – 20
A company budgeted to make and sell 2,000 units of its only product, for which the standard marginal cost is:
$
Direct materials 4 kilos at $2 per kilo 8
Direct labour 3 hours at $6 per hour 18
26
The standard sales price is $50 per unit and the standard contribution $24 per unit. Budgeted fixed costs were
$30,000, giving a budgeted profit of $18,000.
Due to severe material shortages, the company had to switch to a less efficient and more expensive material,
and it was decided in retrospect that the realistic (ex post) standard direct material cost should have been 5
kilos at $3 per kilo = $15 per unit.
Actual results were as follows:
Actual production and sales: 2,400 units
$ $
Sales revenue 115,000
Direct materials 12,300 kilos at $3 per kilo 36,900
Direct labour 7,500 hours at $6.10 per hour 45,750
Total variable costs 82,650
Actual contribution 32.350
Actual fixed costs 32,000
Actual profit 350
Required:
Prepare an operating statement with planning and operational variances that reconciles the budgeted and actual
profit figures.
Question No – 21
Fleming plc has established a new subsidiary company on 1 November specifically for the manufacture and
selling of a new product. The holding company will inject, for working capital purposes, $30,000 cash on 1
December. Fixed capital assets are being transferred from another company in the group.

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Using the data given you are required to prepare a cash budget for each of the months of December, January,
February and March. Calculations are to be made to the nearest $1.
Data
The variable production cost per unit is expected to be:
$
Direct materials 4.0
Direct wages 3.0
Variable production overhead 1.5
Variable production cost 8.5
Fixed overhead estimated at $48,000 per annum is expected to be incurred in equal amounts each month from
1 December.
Production will commence in December and sales on 1 January. The estimated sales for the first four months
are:
20X7 Units Sales Value
$
January 6,200 65,100
February 6,800 70,720
March 5,400 59,400
April 6,000 63,000
The following information is to be taken into consideration:
(1) Stocks, finished goods: 75% of each month's invoiced sales units to be produced in the month of sale
and 25% of each month's invoiced sales units to be produced in the previous month.
(2) Stocks, direct materials: 50% of direct materials required for each month's production to be purchased in
the previous month. Direct materials to be paid for in the month following purchase.
(3) Direct wages to be paid 75% in the month used and 25% in the following month.
(4) Variable production overhead: 40% to be paid in the month of use and the balance in the following
month.
(5) Fixed overhead: 30% to be paid in the month in which it is incurred and 40% in the following month, the
balance represents depreciation of fixed assets.
(6) Payments to be received from customers as follows:
January $12,369
February $45,987
March $59,666
Prepare a cash budget
Question No – 22
A company has achieved the following sales levels of its key product, article B, over the last four years:
Sales of article B ('000 units)
Q1 Q2 Q3 Q4
20X3 24.8 36.3 38.1 47.5
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 20X4 31.2 42.0 43.4 55.9
20X5 40.0 48.8 54.0 69.1
20X6 54.7 57.8 60.3 68.9

(a) Explain what sort of trend and seasonal pattern would be expected to emerge from the analysis of this
data?
(b) Numbering 20X3 Q1 as t = 1, through to 20X6 Q4 as t = 16, calculate the equation of the trend (7) as a
linear regression line.
(c) Forecast the trend in sales for the four quarters of 20X7.
(d) Calculate the seasonal component. (S) using the multiplicative model. Adjust your average seasonal
variations so that they add to 4.
(e) Forecast the sales of B for the four quarters of 20X7.
(f) If actual sales for this company in a particular year were 60,000 units, seasonally adjust this figure to
estimate the underlying trend line.
The calculations so far have been based on the use of linear regression in order to determine the trend line.
Let's look at this same question but this time using time series analysis.
(g) Calculate the trend for the sales of article B as a centred four-point moving average.
(h) Evaluate the seasonal component for each quarter based on the moving average trend;
(i) Forecast the sales of B for the four quarters of 20X7 using trend forecasts of 66.7, 68.8, 70.9 and 73.
Note: This question totals more than 25 marks, but an exam question is unlikely to involve all of these
components. Some information or calculations would be provided so that not all of the above calculations
would be necessary in one exam question.
Question No – 23
For the past 20 years a charity organisation has held an annual dinner and dance with the primary intention of
raising funds.
This year there is concern that an economic recession may adversely affect both the number of persons
attending the function and the advertising space that will be sold in the programmee published for the
occasion.
Based on past experience and current prices and quotations, it is expected that the following costs and
revenues will apply for the function:
£
Cost: Dinner and
dance: Hire of premises 700
Band and entertainers 2,800
Raffle prizes 800
Photographer 200
Food at £12 per person (with a
guarantee of 400 persons
minimum)
Programme: A fixed cost of £2,000 plus £5
per page
Revenues: Dinner and Price of tickets £20 per

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 dance: person
Average revenue from:
Raffle £5 per
person
Photographs £1 per
person
Programme: Average revenue from £70 per
advertising Page
A sub-committee, formed to examine more closely the likely outcome of the function, discovered the
following from previous records and accounts:
Number of Number of
tickets sold past occasions
250 to 349 4
350 to 449 6
450 to 549 8
550 to 649 2
Number of Number of
programme past
pages sold occasions
24 4
32 8
40 6
48 2
Required:
Calculate the expected value of the profit to be earned from the dinner and dance this year.
Question No – 24
The RS Group owns a large store in Ludborough. The store is oldfashioned and profits are declining.
Management is considering what to do - there appear to be three possibilities:
(1) Shutdown and sell the site for £15m.
(2) Continue as before with profits declining.
(3) Upgrade the store.
The Group has had problems in the past and experience suggests that when stores are upgraded, 60% achieve
good results and 40% poor results.
Because of the doubts, management is considering whether to contact a leading market research company to
carry out consumer research in Ludborough for £1m. It has been fortunate in obtaining details of the track
record of the research company, as follows:
Actual outcome
Good Poor
Attitude predicted by research Positive 0.85 * 0.10
Negative 0.15 0.90
* This means that when the actual results were good the research had predicted this 85% of the time.

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If the research indicates a positive attitude, management will consider deluxe upgrading which will generate
more profit but will cost £12m, as compared with standard upgrading costing £6m.
If the research indicates a negative attitude, then management will consider standard upgrading compared with
shutting down and selling the site.
The time scale for the analysis is 10 years and the following estimates of returns have been made:
With Deluxe upgrading: Good results £40m total present value
Poor results £20m total present value
With Standard upgrading: Good results £25m total present value
Poor results £10m total present value
If operations continue as before, returns over the next 10 years will be £13.03m in present value terms.
You are required:
(a) prepare a decision tree to represent the above information;
Note: No discounting is necessary for this question as the values are already expressed in present value terms.
(b) calculate what decisions should be taken;
(c) explain the basis of your analysis.
Question No – 25
Siteraze Ltd is a company which engages in site clearance and site preparation work. Information concerning
its operations is as follows:
(a) It is company policy to hire all plant and machinery required for the implementation of all orders
obtained, rather than to purchase its own plant and machinery.
(b) Siteraze Ltd will enter into an advance hire agreement contract for the coming year at one of three levels
- high, medium or low, which correspond to the requirements of a high, medium or low level of orders
obtained.
(c) The level of orders obtained will not be known when the advance hire agreement contract is entered into.
A set of probabilities have been estimated by management as to the likelihood of the orders being at
high, medium or low level.
(d) Where the advance hire agreement entered into is lower than that required for the level of orders actually
obtained, a premium rate must be paid to obtain additional plant and machinery required.
(e) No refund is obtainable where the advance hire agreement for plant and machinery is at a level in excess
of that required to satisfy the site clearance and preparation orders actually obtained.
A summary of the information relating to the above points is as follows:
Plant and machinery hire costs
Level of orders Revenue Probability Advance hire Conversion
£000 £000 premium
£000
High 15,000 0.25 2,300
Medium 8,500 0.45 1,500
Low 4,000 0.30 1,000
Low to medium 850
Medium to high 1,300
Low to high 2,150
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Variable cost (as a percentage of turnover) 70%
Required:
(a) Prepare a summary which shows the forecast net margin earned by Siteraze Ltd for the coming year for
each possible outcome.
(b) On the basis of maximising expected value, calculate for Siteraze whether the advance contract for the
hire of plant and machinery should be at the low, medium or high level.
(c) Explain how the risk preferences of the management members responsible for the choice of advance
plant and machinery hire contract may alter the decision reached in (b) above.
(d) Siteraze Ltd are considering employing a market research consultant who will be able to say with
certainty in advance of the placing of the plant and machinery hire contract, which level of site clearance
and preparation orders will be obtained. On the basis of expected value, calculate the maximum sum
which Siteraze Ltd should be willing to pay the consultant for this information.
Question No – 26
A project has a normal pattern of cash flows (i.e. an initial outflow followed by several years of inflows).
Identify what would be the effects of an increase in the company's cost of capital on the internal rate of return
(IRR) of the project and its discounted payback period (DPP)?
IRR DPP
A Decrease Decrease
B Decrease Increase
C No change Increase
D No change Decrease
Question No – 27
A business is considering a project which would last 5 years and have an initial investment of $40,000 in
machinery. At the end of the project the machinery would have a scrap value of $4,000. The project would
provide annual net cash inflows as follows:
Year Net cashflow
($000)
1 16
2 20
3 12
4 12
5 10
The company has a target payback period of 2.5 years and new projects must also provide and average
accounting rate of return of at least 15% p.a.
Advise the company on whether this project meets the company's targets.
Question No – 28
MN plc has a rolling programme of investment decisions. One of these investment decisions is to consider
mutually-exclusive investments A, B and C. The following information has been produced by the investment
manager.
Investment Investment Investment
decision A decision B decision C

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 £ £ £
Initial investment 105,000 187,000 245,000
Cash inflow for A: years 1 to 3 48,000
Cash inflow for B: years 1 to 6 48,000
Cash inflow for C: years 1 to 9 48,000
Net present value (NPV) at 10% each year 14,376 22,040 31,432
st nd
Ranking 1 2 3rd
Internal rate of return (IRR) 17.5% 14% 13%
Ranking 1st 2nd 3rd
Required:
(a) Prepare a report for the management of MN plc which includes:
- a graph showing the sensitivity of the three investments to changes in the cost of capital;
- a statement of the reasons for differences between NPV and IRR rankings - use investment A to
illustrate the points you make;
- a brief summary which gives MN plc's management advice on which project should be selected.
(b) One of the directors has suggested using payback to assess the investments. Explain to him the
advantages and disadvantages of using payback methods over IRR and NPV. Use the figures above to
illustrate your answer.
Question No – 29
The management of a company are making a decision on whether or not to purchase a new piece of plant and
machinery which costs £100,000. The new machine will generate a net cash flow of £30,000 each year for four
years. At the end of the fourth year it will be sold for £20,000. The company's cost of capital is 5%. Tax
depreciation is at 25% reducing balance and corporation tax is 30%. Corporation tax is payable in two
installments, with half paid in the current year and half paid in the following year.
Required:
Calculate the net present value of the project and advise management.
Question No – 30
Dralin Co is considering an investment of $460,000 in a non-current asset expected to generate substantial
cash inflows over the next five years. Unfortunately the annual cash flows from this investment are uncertain,
but the following probability distribution has been established:
Annual cash flow Probability
($)
50,000 0.3
100,000 0.5
150,000 0.2
At the end of its five-year life, the asset is expected to sell for $40,000. The cost of capital is 5%.

Calculate whether the investment should be undertaken

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Question No – 31
Smith has decided to increase its productive capacity to meet an anticipated increase in demand for its
products. The extent of this increase in capacity has still to be determined, and a management meeting has
been called to decide which of the following two mutually exclusive proposals - A or B - should be
undertaken.
The following information is available:
Proposal A Proposal B
$ $
Capital expenditure
Buildings 50,000 100,000
Plant 200,000 300,000
Installation 100,000 15,000
Net Income
Annual pre-depreciation profits (note (1)) 70,000 95,000
Other relevant income and expenditure
Sales promotion (note (2)) -- 15,000
Plant scrap value 10,000 15,000
Buildings disposable value (note (3)) 30,000 60,000
Working capital required over the project life 50,000 65,000
Notes:
(1) The investment life is ten years.
(2) An exceptional amount of expenditure on sales promotion of $15,000 will have to be spent in year 2 of
proposal. B. This has not been taken into account in calculating pre-depreciation profits.
(3) It is the intention to dispose of the buildings in ten years' time.
Using an 8% discount rate, calculate which of the two alternatives should be chosen.
Question No – 32
The following data relate to Mugwump Co, a manufacturing company.
Sales revenue for year: $1,500,000
Costs as percentage of sales: 30%
Direct materials
Direct labour 25%
Variable overheads 10%
Fixed overheads 15%
Selling and distribution 5%
Average statistics relating to working capital are as follows:
● receivables take 2½ months to pay
● raw materials are in inventory for three months
● WIP represents two months' half-produced goods
● finished goods represent one month's production
● credit is taken

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 - Materials 2 months
- Direct labour 1 week
- Variable overheads 1 month
- Fixed overheads 1 month
Selling and distribution '/2 month
WIP and finished goods are valued at the cost of material, labour and variable expenses.
Calculate the working capital requirement of Mugwump Co assuming that the labour force is paid for 50
working weeks in each year.
Question No – 33
Hottubes Co is a small company specialising in the supply of high quality amplifier do-it-yourself kits for sale
to Hi-Fi enthusiasts. These include superior electronic components, circuit boards and detailed instructions.
Promotion is carried out through adverts in electronics and Hi-Fi magazines. The .company buys most of its
components from a specialist supplier in Hong Kong and the remainder from a few local suppliers.
The CEO (and founder) is very proud of the company's performance and recently made the following
comment.
'We have excellent products as seen in the recent rave reviews in a major consumer electronics magazine. Our
business has grown rapidly over recent years and we have good profitability. We also have good liquidity with
current assets easily covering current liabilities. This is partly due to improved credit control over receivables.
However, our Hong Kong supplier demands payment at the end of each month for all items shipped in that
month...'
As with many other small businesses, Hottubes uses its bank overdraft to finance working capital and has no
other longer term funding. The current overdraft rate is 1.0% per month on the monthly outstanding balance.
Extracts from the management accounts for the last two years are as follows.
31 December
20X2 20X1
$000 $000
Sales 1,024 640
Cost of sales 640 400
Other expenses Inventories 132 81
Components 300 208
Finished kits 220 96
Trade receivables 320 204
Trade payables 135 104
Other payables 31 30
Corporation tax due 63 40
Purchases for the year 776 490
Bank overdraft 180 100

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Required:
Prepare briefing notes for a meeting with the CEO calculating the company's working capital position and
identify areas for improvement. Include in your answer a calculation of the working capital cycle and any
other calculations you feel are appropriate.
Question No – 34
D Co uses component V22 in its construction process. The company has a demand of 45,000 components pa.
They cost $4.50 each. There is no lead time between order and delivery, and ordering costs amount to $100 per
order. The annual cost of holding one component in inventory is estimated to be $0.65.
A 0.5% discount is available on orders of at least 3,000 components and a 0.75% discount is available if the
order quantity is 6,000 components or above.
Calculate the optimal order quantity.
Question No – 35
A company has estimated that for the coming season weekly demand for components will be 80 units.
Suppliers take three weeks on average to deliver goods once they have been ordered and a buffer inventory of
35 units is held.
If the inventory levels are reviewed every six weeks, calculate how many units will be ordered at a review
where the count shows 250 units in inventory.
Question No – 36
(a) Explain why the net present value (NPV) method of investment appraisal is thought to be superior to
other approaches.
(b) Hexicon Inc manufactures and markets automatic washing machines. Among the many hundreds of
components which it purchases each year from external suppliers for assembling into the finished article
are drive belts, of which it uses 40,000 units pa. It is considering converting its purchasing, delivery and
inventory control of this item to a just-in-time system. This will raise the number of orders placed but
lower the administrative and other costs of placing and receiving orders. If successful, this will provide
the model for switching most of its inwards supplies on to this system. Details of actual and expected
ordering and carrying costs are given in the table below:
Question No – 37
In the near future a company will purchase a manufacturing business for $315,000, this price to include
goodwill ($150,000), equipment and fittings ($120,000), and inventory of raw materials and finished goods
($45,000).
A delivery van will be purchased for $15,000 as soon as the business purchase is completed. The delivery van
will be paid for in the second month of operations.
The following forecasts have been made for the business following purchase:
(i) Sales (before discounts) of the business's single product, at a markup of 60% on production cost will be:
Month 1 2 3 4 5 6
($000) 96 96 92 96 100 104
25% of sales will be for cash; the remainder will be on credit, for settlement in the month following that
of sale. A discount of 10% will be given to selected credit customers, who represent 25% of gross sales.
(ii) Production cost will be $5 per unit. The production cost will be made up of:
Raw materials $2.50
Direct labour $1.50
Fixed overhead $1.00

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(iii) Production will be arranged so that closing inventory at the end of any month is sufficient to meet sales
requirements in the following month. A value of $30,000 is placed on the inventory of finished goods,
which was acquired on purchase of the business. This valuation is based on the forecast of production
cost per unit given in (ii) above.
(iv) The single raw material will be purchased so that inventory at the end of a month is sufficient to meet
half of the following month's production requirements. Raw material inventory acquired on purchase of
the business ($15,000) is valued at the cost per unit that is forecast as given in (ii) above. Raw materials
will be purchased on one month's credit.
(v) Costs of direct labour will be met as they are incurred in production.
(vi) The fixed production overhead rate of $1.00 per unit is based upon a forecast of the first year's
production of 150,000 units. This rate includes depreciation of equipment and fittings on a straight-line
basis over the next five years. Fixed production overhead is paid in the month incurred.
(vii) Selling and administration overheads are all fixed, and will be $208,000 in the first year. These
overheads include depreciation of the delivery van at 30% pa on a reducing balance basis. All fixed
overheads will be incurred on a regular basis, and paid in the month incurred, with the exception of rent
and rates. $25,000 is payable for the year ahead in month one for rent and rates.
Required:
(a) Prepare a monthly cash flow forecast. You should include the business purchase and the first four
months of operations following purchase.
(b) Calculate the inventory, receivables, and payables balances at the end of the four-month period.
Describe briefly the liquidity situation.
Question No – 38
Zed Co has the following balance sheet(Statement of financial position) at 30 June 20X3:
$ $
Non-current assets:
Plant and machinery 192,000
Current assets:
Inventory 16,000
Receivables 80,000
Bank 2,000
98,000

Total assets 290,000

Equity and liabilities:

Issued share capital 216,000

Retained profits 34,000

250,000

Current liabilities
Trade payables 10,000

Dividend payable 30,000

40,000

Total equity and liabilities 290,000

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(a) The company expects to acquire further plant and machinery costing $8,000 during the year to 30 June
20X4.
(b) The levels of inventories and receivables are expected to increase by 5% and 10% respectively by 30
June 20X4, due to business growth.
(c) Trade payables and dividend liabilities are expected to be the same at 30 June 20X4.
(d) No share issue is planned, and retained profits for the year to 30 June 20X4 are expected to be $42,000.
(e) Plant and machinery is depreciated on a reducing balance basis, at
the rate of 20% pa, for all assets held at the balance sheet date.
Prepare a balance sheet (statement of financial position) forecast as at 30 June 20X4, and identify what the
cash balance or bank overdraft will be at that date.
Question No – 39
Marton Co produces a range of specialised components, supplying a wide range of customers, all on credit
terms. 20% of revenue is sold to one firm. Having used generous credit policies to encourage pastt growth,
Marton Co now has to finance a substantial overdraft and is concerned about its liquidity.
Marton Co borrows from its bank at 13% pa interest. No further sales growth in volume or value terms is
planned for the next year.
In order to speed up collection from customers, Marton Co is considering two alternative policies:
Option one
Factoring on a non-recourse basis, the factor administering and collecting payment from Marton Co's
customers. This is expected to generate administrative savings of $200,000 pa and to lower the average
receivable collection period by 15 days. The factor will make a service charge of 1 % of Marton Co's revenue
and also provide credit insurance facilities for an annual premium of $80,000.
Option two
Offering discounts to customers who settle their accounts early. The amount of the discount will depend on
speed of payment as follows.
Payment within 10 days of despatch of invoices 3%
Payment within 20 days of despatch of invoices 1.5%
It is estimated that customers representing 20% and 30% of Marton Co's sales respectively will take up these
offers, the remainder continuing to take their present credit period.
Extracts from Marton Co’s most recent accounts are given below:
($000)
Sales (all on credit) 20900
Cost of sales (17,000)
Operating profit 3000
Current assets:
inventory 2500
Receivables 4,500
cash Nil

Calculate the relative costs and benefits in terms of annual profit before tax of each of the two proposed
methods of reducing receivables, and identify the most financially advantageous policy.
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Question No – 40
On 1 April 20X4 a company placed $5 million on deposit at an interest rate of 6.25%. The deposit has a
maturity date of 30 June 20M.
Calculate the amount of cash that the company will receive on maturity of the deposit.
Question No – 41
A company treasurer has a short term surplus of funds. He believes that there may be around $50,000 to
$80,000 surplus cash available for the next month. At the end of the month the cash will be needed again in the
business. He is unsure where he should invest this cash but he is considering a choice between treasury bills
and a fixed interest bank account with 30 days notice. He expects the base rate in the country to increase in the
next month.
Evaluate which investment, if either, he should make.

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