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					                                                      Winter Exam-2010
                                                            (Final)
                                     Management Accounting                                  [02-11-2010]

Duration: 3 hrs.                                                                                                          Marks-100
                                                                  [Instructions]
•    Ensure that the question paper delivered to you is the same, in which you intend to appear.
•    Read the instructions given on the title page of Answer Copy.

                                                    Attempt all Questions

    Q.1. A business entity has to decide which of three projects to select for investment. Only one of
            them can be selected.
            The expected profits from investing in each of the projects will depend on the market
            condition. Following are the expected profits and probability of the projects:
                                                                 Market Condition (Trade cycle)
                                                          Depression           Recovery              Boom
                                    Probability                0.1                 0.5                0.4
                                                               Rs.                 Rs.                Rs.
                                    Project A             2,300,000           3,400,000            7,600,000
                                    Project B                 0               9,500,000            10,600,000
                                    Project C             1,110,000           1,290,000            2,900,000
            Required:                                                                                                          (08)

            Identify which project would be selected and also explain one advantage and one
            disadvantage of expected value method.

    Q.2. Describe and compare the periodic and perpetual inventory system?                                                     (07)

    Q.3. A company is currently preparing revenue and cost budgets and has presented the
            following information to you:
                                                                     Production data per unit of output
                                  Products                           A             B            C           D
                                  Meters of material                 2             4             7           4
                                  Labour hours (L.H)                 2             7             7          15
                                  Machine hours (M.H)                4             9            10          30
            Additional Information:
            1.   The wage rate per hour is Rs. 6
            2.   The energy cost to drive the machine is Rs. 2 per hour.
            3. General fixed overheads are absorbed at the rate of Rs. 5 per machine hour based on a monthly
                 budgeted output of:
                                          Product                   A           B          C          D
                                          Units                   1,500        375        750        250
            4.   The Product profit margins are determined by the need to earn 20% annual return on the total
                 of Rs. 9,000,000. Each product is budgeted to contribute 25% of the total planned profit.
            5.   The company operates dedicated production lines, which prevents resource switching and
                 output exceeding the planned levels stated above.
            6.   The revenue and cost are spread evenly on a monthly basis throughout the year.
            7.   Material costs are Rs. 10 per meter.
            8. Selling price of product A, B, C and D are Rs. 85, Rs. 245, Rs. 232 and Rs. 490.

                                                                                                                 Contd. on back
                                                     2

      Required:
      Using the information provided above, answer the following questions that arise over a
      three-month period.
      January: Calculate the maximum profit for the month if a mechanical fault limits the                   (09)
      available machine hours to 16,875.
      February: What would be the maximum achievable profit if there were 1,500 L.H.                         (06)
      available? Explain your answer.
Q.4. Hafiz Co. places an advance order each year for units of X. It will enter into an advance
      contract for the coming year for units of X at one of three levels - high, medium or low. The
      cost per unit is Rs. 1.20.
          1. The level of demand will not be known when the advance order for X is entered into. A
              set of probabilities have been estimated by management as to the likelihood of the
              demand being at a high, medium or low level.
          2. It is not possible to increase the order level once the order has been placed. However
              where too much has been ordered a penalty payment of an extra Rs. 0.25 per kg is
              charged for the total quantity of X actually required.
                                      Reprocessing        Demand      Probability
                                             Level         Units
                                              High       5,000,000        0.3
                                          Medium         3,800,000        0.5
                                              Low        3,000,000        0.2
      X is sold after further processing and the resulting XX is sold at Rs. 6.50 per unit. Variable costs
      (excluding unit X purchase costs) are 60% of sales revenue.

      Required:
          a)   Prepare a summary which shows the budgeted contribution earned by Hafiz Co. for               (13)
               the coming year for each of nine possible outcomes.
          b) On the basis of maximizing expected value, advise Hafiz Co. whether the advance                 (03)
               order for X should be at low, medium or high level.
          c)   State the contribution for the coming year which corresponds to the use of;                   (04)
                   i) Maximax Decision Criteria
                  ii) Maxmin Decision Criteria

Q.5. Ajmad Co. a medium-sized company specializing in the manufacture and distribution of
      equipment for babies and small children, is evaluating a new capital expenditure project. In
      a joint venture with another separate company, it has invented a remote controlled
      pushchair, one of the first of its kind on the market. It has been unable to obtain a patent
      for the invention, but is sure that it will monopolize the market for the first three years.
      After this, it expects to be faced with stiff competition. The project has an immediate cost
      of Rs. 2,100,000. Sales are expected to be Rs. 1,550,000 per annum for years 1 to 3, falling
      to Rs. 650,000 per annum for the two years after that. No further sales of the product are
      expected after the end of this five-year period. Cost of sales is 40% of sales. Distribution
      costs represent 10% of sales. 20% of net profits are payable to the joint venture partner,
      the year after the profits are earned. The company's cost of capital is 5%.
      Required:
           a) Calculate the net present value of the project at the company's required rate of               (13)
               return. Conclude whether the project is financially viable.
           b) Calculate the project's internal rate of return (IRR) and comment on IRR.                      (07)

                                                                                                 Contd…
                                                  3



Q.6. Market values of the five shares are Rs. 205. Dividend for the upcoming year is Rs. 10 per
      share (in current terms) Dividends from the project in year 2007, 2008, 2009 and 2010 are
      Rs. 3,000, Rs. 2,700, Rs. 2,900 and Rs. 2,500 respectively.

      Required:                                                                                       (07)
      Calculate cost of equity for 2013.

Q.7. Ahmed Co. is a paint manufacturing organization. The corporate objectives of Ahmed Co. as
      stated in its Annual Report, are to maximize the wealth of its shareholders and to achieve
      continuous growth in earnings per share. Recent financial information on Ahmed Co. is as
      follows:
                                                       2009      2008     2007     2006
                  Turnover (Rs)                       28,000 24,000 19,100 16,800
                  Profit before interest and tax (Rs) 9,800 8,500 7,500 6,800
                  Earnings (Rs)                        5,500 4,700 4,100 3,600
                  Dividend (Rs)                        2,200 1,900 1,600 1,600
                  Ordinary shares (Rs)                 5,500 5,500 5,500 5,500
                  Reserve (Rs)                        13,700 10,400 7,600 5,100
                  8% Bonds, redeemable 2016(Rs) 20,000 20,000 20,000 20,000
                  Share Price (Rs per share)            8.64   5.74   3.35   2.67
      The par value of the shares of Ahmed Co. is Rs 1.00 per share. The general level of inflation
      has averaged 4% per year in the period under consideration. The bonds of Ahmad Co. are
      currently trading at their par value of Rs. 100. The following values for the business sector
      of Ahmed Co. are available:
                Average return on capital employed                      25%
                Average return on shareholders’ funds                   20%
                Average Interest Cover Ratio                            20 times
                Average Debt equity ratio (Market value basis)          50%
                                                                                                      (15)
      Required:
      Evaluate the financial performance of Ahmad Co. Analyze and discuss the extent to which
      the company has achieved its stated corporate objectives.

Q.8. A project X requires Rs. 75,000 as an initial investment. Cash inflows from the project in
      year 1, 2, 3, 4 and 5 are Rs. 15,000, Rs. 12,000, Rs. 8,000 Rs. 34,000 and Rs. 55,000
      respectively. The company’s cost of capital is 5% p.a.

      Required:                                                                                       (08)

       Calculate payback period


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MUHAMMAD SARMAD AKRAM MUHAMMAD SARMAD AKRAM MSA www.docstoc.com/profile/muaz007
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