Summer Exam-2014Corporate Sector

Management Accounting (06.05.2014)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 Script. Start each question from fresh page.

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Q.1. LTC is considering to invest in either of two mutually-exclusive projects, Project A andProject B. Both projects involve the purchase of machinery with a life of five years.

Project A: The machine would cost Rs.556,000 and would have a disposal value ofRs.56,000 at the end of Year 5. The project would earn annual Revenue of Rs.100 /unit and Expected No. of units to be sold are 7000 units each year .Total cost wouldbe Rs.500,000 per year.

Project B: The machine would cost Rs.1,616,000 and would have a disposal value ofRs.301,000 at the end of Year 5. The project would expected to earn annual salesrevenue of Rs.1 million and expected operating cost would be Rs.500,000.

LTC uses the straight-line method of depreciation. Its cost of capital is 15%.Required:

a) For each of the two projects, calculate: 16(i) The accounting rate of return ratio, over the project life (average annual

accounting profit as a percentage of the average book value of theinvestment, to the nearest one percent)

(ii) The payback period, to the nearest month(iii) The net present value, and(iv) The internal rate of return to the nearest one per cent.

b) State which project, if any, you would select for acceptance. 04Q.2. Big Co. have been producing LED TVs for last three years. The production of LED TV

requires the use of a specialized material Y which helps to increase the useful life of theLED. Each unit of LED produced will require 1 unit of material Y. The Each unit ofmaterial Y will cost Rs.20/Unit. Currently the company required 1000 units of material Yper year. The cost of ordering material Y will be Rs.10 per order and cost to store thatmaterial Y will be Rs. 2 per unit.Currently the company has been buying material from local supplier Mr. Bilal. Due to longterm relation, he had offered Big Co. bulk discounts .He allows a 2% discount at the orderof at least 200 units and 2.5% discount if the order quantity will be 250 or above.Required:

a) Calculate the EOQ of the Big Co. 03b) Calculate the Total Cost to the company at EOQ. 03c) Evaluate whether Big Co. should avail the Discounts Offer from the Supplier or not

and the optimum level at which cost would be minimum.06

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2Q.3. The Board of Directors of Lucky Group are considering to diversify and identify ELE, a

private limited company as a suitable target. The details of ELE are as follows.

ELE Co.ELE has Rs. 160 ordinary shares in

issue at par of Rs. 0.25 /shareYear PAT Dividend

Rs.000 Rs.0002009 143 85.02010 162 93.52011 151 93.52012 175 102.82013 183 113.1

The Directors of ELE Co. have identified 15% as a suitable discount rate for ELE.Required:

Calculate, by using dividend valuation model, the amount to be paid by Lucky Group toacquire ELE.

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Q.4. Salik Co. is considering to make investment in new industrial sector. For the purpose ofinvestment, they have decided to buy back their shares from existing share holders.Required:

a) Explain the advantages and disadvantages of share repurchase scheme. 06The Company is considering to issue the dividends to their share holders but unable tounderstand about which policy to be adopted.b) Explain the factors that may effect the company policy regarding Dividends. 04

Q.5. Sohaib Co. is a manufacturing company. A summary of the budgeted profit statement forits next financial year is provided .The company is expected to operate at 75% of itsproduction capacity. The detail is provided below:

Rs. Rs.Sales 9000 units at Rs.32 288,000Less: Direct Materials 54,000Direct Wages 72,000Production Over head:- Fixed 42,000- Variable 18,000 186,000

Gross Profit 102,000Less: Admin and Marketing cost:- Fixed 36,000- Variable 27,000 63,000

Net Profit 39,000Required:a) Calculate the amount of revenue and number of units at which company will be at

break even.07

Contd..

3b) Calculate Profits if the Company is operating at Full Production Capacity. 03c) Calculate the amount of profit if the company is operating at 90% capacity ,the revised

selling price at that level would assumed to be Rs. 28 per unit and no incrementaladvertisement cost will be incurred to utilize the full production capacity.

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d) Calculate the amount of profit if the company is operating at full production capacity,the revised selling price at that level would assumed to be 15% less than the budgetedand an incremental advertisement cost of Rs.5000 will be incurred to utilize the fullproduction capacity.

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e) Present a statement to management in which advise them regarding the suitable levelof Production Capacity.

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Q.6. Junaid Co is a transportation company. Junaid Co. operates a passenger transportationservice and is responsible for the operation of services and the maintenance of signalingequipment and other facilities such as bus stations.In recent years it has been criticized for providing a poor service to the travelling public interms of punctuality, safety and the standard of facilities offered to passengers. In the lastyear Junaid Co. has invested over Rs.20 million in new buses, station facilities and roadmaintenance programs in an attempt to counter these criticisms.Summarized financial results for Junaid Co. for the last two years are given below.

Summarized Income Statement for the year ended 31 December2013 2014Rs. million

Sales revenue 180.0 185.0Earnings before interest and tax 18.0 16.5Interest (3.2) (4.7)Tax (4.4) (3.5)Earnings available to ordinary shareholders 10.4 8.3

Summarized Statement of Financial Position (Balance Sheet) as at 31stDecember2013 2014

Rs. millionNon-current assets (net) 100.4 120.5Current assetsInventory 5.3 5.9Receivables 2.1 2.4Cash 6.2 3.6

13.6 11.9114.0 132.4

Ordinary share capital (Rs.1 shares) 25.0 25.0Reserves 45.6 48.2Amounts payable after more than one year8% Debenture 20X9 15.0 15.0Bank loan 20.0 35.0Payables due within one year 8.4 9.2

114.0 132.4

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4Required:

a) Calculate the following ratios for Junaid Co for 2013 and 2014, clearly showing yourworkings.

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i) Net Profit Marginii) Asset Turnoveriii) Current Ratio

b) Briefly comment on the financial performance of Junaid Co in 20X3 and 20X4 asrevealed by the above ratios and suggest causes for any changes.

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Q.7. ICI manufactures chemicals that are mostly used by the textile industry. One of itsChemical Bdox, is manufactured as a result of two processes. The detail of the process 2 isas follows:

Opening Work in process NilMaterial transferred from process 1 Rs. 49,875(50,000 liters)Labor Cost 500 hrs at Rs.5 per hrOverheads 44% of labor costOutput transferred to finished Goods 41,000 litersClosing work in progress 5000 liters

The company is well known for its quality and very strict quality control checks have beenmaintained by the company. The quality inspection will take place when units are 50%complete as regards to conversion costs and normally result in rejection of 5% of inputquantity.Closing Work in progress is 100% complete for material and 50% complete for conversioncosts.Required:

Prepare an account for the process 2 of product Bdox. 15Q.8. XYZ Co. is currently operating in Retail Business. As the business is newly established, the

management of the Co. are unable to understand to how to value the Inventory. The detailof the inventory will be as follows:

March 09 800 units purchased at Rs.50/UnitMarch 16 500 units purchased at Rs.60/UnitMarch 28 700 units purchased at Rs.70/Unit

In the month of March four Material Requisitions were completed for 300 units each at10th, 19th, 25th & 29th March 2013.Required:

Calculate the value of Closing stock and cost of Issue by using First in First Out Method. 05

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