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 Southern Green Global
Wholesaler Wholesaler Energy 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 4,550 6,710 2,230 2,145
Cost of sales visit
3,820 5,980 2,180 1,130
6,300 2,620 2,620 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 Customer- Customer CLOI Cumulative Cumulative
Identity level Revenue Divided by CLOI CLOI as a
Operating Revenue % of Total
Income CLOI
1 2 3 4=2÷3 5 6
Northern Tk.49,530 Tk.349,200 14.2% Tk.49,530 44%
Global Tk.29,560 Tk.129,410 22.8% Tk.79,090 71%
Power
Southern Tk.17,490 Tk.542,800 3.2% Tk.96,580 86%
Green Tk.15,570 Tk.166,600 9.3% Tk.112,150 100%
Energy
Total Tk.112,150 Tk.1,188,010

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 (d) The costs are classified as follows:
Items Value-Added Non-Value- Gray
Costs Added Costs Area
Making calculations and preparing Tk.300,300 - -
drawings for clients (Tk.390,000 *
77%)
Checking calculations and drawings - - Tk.11,700
Correcting errors found in drawings - Tk.31,200 -
(not billed to clients)
Making changes in response to client - - Tk.19,500
requests (billed to clients)
Correcting own errors regarding - Tk.27,300 -
building codes (not billed to clients)
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) Tk.331,500
Travel 15,000
Administrative and support costs** 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 500
Capital
Net Cash Flows (in € (1,750) 800 580 580 580 1,080 (220)
million)

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 NPV Calculations under three conditions:

Perio CFs in € Cash Flows in £ million

d million Constant Exchange Rate Sterling appreciates 5% per year
Exchange Amount in £ Exchange Amount in £ million
Rate (€/£) million Rate (€/£)
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 £521.83 £320.12
Value at 10%

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

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(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 Tk.600,000
products/processes
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.

= THE END =

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