ACCA

P5 Advanced Performance Management

Mock Exam Dec 2010

Section A BOTH questions are compulsory and MUST be attempted QUESTION 1

A motor car manufacturer has been specialising in the production and sale of one model of car. The model is somewhat dated, and the current sales forecast indicates that the sales will decline from the current level (2003) of 170,000 cars per annum to 150,000 in 2004, 130,000 in 2005 and 110,000 in 2006. The company supplies to order and no stocks are held. Carbon monoxide emission regulations will prevent the model being manufactured and sold after December 2006. The companys current estimates of the selling price and costs in 2004 are as follows: Per car $ Selling Price 9,500 Production costs: Material and labour (vary with production volume) 3,600 Assembly* 4,000 *75% of the assembly costs are fixed and the remainder vary with production volume. In addition, the company estimates that it will incur the following non-production costs: Marketing costs of $60 million. 50% of these vary with sales volume Delivery costs of $75 million. 20% of these vary with sales volume. The Administration costs of $10 million are fixed. The selling price, variable costs per car and total fixed costs are expected to remain constant throughout the period from 2004 to 2006. The companys Managing Director is unhappy with the current annual profit forecasts for 20042006 based upon the information above and believes that the company has the potential to increase the profit to $280m in each of the years 2004 to 2006. The Managing Director has undertaken a strategic review and developed the following strategies: Strategy 1 A marketing proposal will enable the company to enter a new overseas market with the result that the total (including the overseas market) sales level will be stabilised at 160,000 cars per annum from 2004 to 2006. The market entry costs will be $30 million for each of the three years.

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P5 Advanced Performance Management
Strategy 2

Mock Exam Dec 2010

A re-design of the car will enhance its sales appeal and will permit the company to increase its selling price to $10,000. The re-design costs are $30 million and are to be amortised over three years on a straight line basis. Strategy 3 A radical cost reduction programme will improve efficiency and lower all variable costs by 20%. This will add $70 million to the annual fixed overheads each year from 2004 to 2006. Required: (a) Prepare a financial analysis showing the current annual forecast of costs, revenues and profits for each of the years 2004 to 2006 and briefly comment on the figures. Ignore inflation. (6 marks) (b) Estimate the profit in 2004 if: (i) Strategy 1 was implemented; (ii) Strategy 2 was implemented; (iii) Strategy 3 was implemented. (2 marks) (2 marks) (2 marks)

(c) Estimate the profit in 2004 if all three strategies were implemented. (4 marks) (d) Explain why the total of the increase in profit arising from the three strategies implemented separately in (b) is different from the total profit calculated in (c). Illustrate your answer with a numerical reconciliation of the differences in the two profit figures. (5 marks) (e) Explain how Gap Analysis can be used to assist a company to plan the achievement of its strategic profit objective. Illustrate your answer with a diagram which quantifies the effect of your calculations in (a), (b),(c) and (d) above. (7 marks) (f) (i) Explain how sensitivity analysis could be used in conjunction with the profit estimates that you have made for the company and illustrate your answer with reference to each of the strategies; (ii) Calculate and comment on the percentage change in the key variable in each of strategies 1, 2 and 3 from its original forecast level in order that the desired profit level of $280m for 2004 will be achieved in each case. (8 marks) (g) What major external environmental factors need to be considered in assessing the success of the three strategies? (4 marks) (40 marks)

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P5 Advanced Performance Management QUESTION 2

Mock Exam Dec 2010

UKCOM is a large US owned company that was formed in 2007 and operates only within the UK. The company has grown rapidly via acquisition and concentrates in the rapidly growing and highly competitive mobile phone market. The acquired companies have substantial infrastructure assets with only 10% of the available network capacity being utilized in the provision of services to customers. 35% of the assets are categorized as intangible and are composed of goodwill and license acquisition expenditures. The Board has announced that it will not acquire any further companies and will maintain that same level of debt for the next decade. The Board Of Directors based in the US take all the strategic decisions concerned with financing and acquisition policy but leave the operating activities to the UK based Chief Operating Executive. Financial Highlights ($millions) 2008 2009 2010 173 491 747 76 87 40 (30) 301 169 153 203 (335) 2,347 1,529 $34 376 293 273 336 (531) 6,318 4,214 $76

Turnover Costs Operating Selling Depreciation Interest Profit/(Loss)

2011 1591 813 566 791 689 (1,268) 12,261 8,997 $110

Average Net Assets (NBV) 463 Average Long Term debt Year End Share Price Further Information $5

Management have provided the following estimates of projected cash flows*: Year 2012 2013 2600 4700 2014 2700 6100 2015 2800 7500 2016 2900 9000

Cash Outflows2500 Cash Inflows 4100

These cash flows are based on the current level of competition and the current state of governmental legislation. *Received and paid at the end of each year The cash outflows can be estimated with a high degree of certainty owing to the fixed nature of the costs. On the other hand, the cash inflow estimates are subject to considerable uncertainty because of the alternative outcomes that may arise. There are three possible market scenarios that are likely to impact on the inflows:

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P5 Advanced Performance Management

Mock Exam Dec 2010

1. Intensified competition there is a 40% probability of this occurring and the consequence will be reduction of 10% on the estimate of cash inflows. 2. Government price regulation there is a 20% probability of this occurring and it will reduce the estimated inflows by 20%. 3. Less competition- this would result in cash inflows increasing by 5%. There is a 40% probability of this scenario developing. The company cost of capital is set at 4% above the average weighted cost of debt interest in the year prior to the first year of the forecast period (rounded up to the nearest percentage point). Required: (a) Provide a report on the financial performance of UKCOM from 2008 to 2011 from the perspective of the parent company. (8 marks) The UK based Chief Operating Executive maintains that his/her team financial performance has continued to improve throughout the period. Explain how this claim might be substantiated. Your answer should include a relevant indicator for each of the year 2008-2011 which the COE could use. (6 marks) (i) Calculate the NPV of the future cash flows for the period 2012-2016. Your answer should show all relevant working notes and explain the basis of your calculation (a decision tree type analysis is not required) (4 marks) (ii) Comment on the relevance of your answer in the evaluation of future performance. (2 marks) (20 marks)

(b)

(c)

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P5 Advanced Performance Management Section B TWO questions ONLY to be attempted QUESTION 3

Mock Exam Dec 2010

The Dental Health Partnership was established in 1992 and provides dentistry and other related services to the population of Blaintopia, a country in which the public health service is partially funded by the Government. Additional information relating to the Dental Health Partnership for the year ended 31 May 2005 is as follows: (1) (2) (3) The partnership was open for five days per week during 48 weeks of the year. Each dentist treated 20 patients per day. The maximum number of patients that could have been treated by a dentist on any working day was 24 patients. (i) The partnership received a payment from the government each time any patient was consulted as shown in the following table: Category of treatment Payments from Government ($s) 12 50 100

No treatment required Minor treatment Major treatment

(ii) In addition, adult patients paid a fee for each consultation which was equal to the amount of the payment shown per category of treatment in the above table. Children and Senior Citizens were not required to pay a fee for any dental consultations. (4) The partnership received an annual fee of $20,800 from a well-known manufacturer of dental products under a fixed-term contract of three years duration. The contract commenced on 1 June 2004 and relates to the promotion of the products of the manufacturer. The total of material and consumable costs (which are 100% variable) during the year ended 31 May 2005 amounted to $446,400. Staff costs were paid as follows: Category of Employee Dentist Dental Assistant Administrator Salary per annum, per employee ($s) 60,000 20,000 16,000

(5)

(6)

Note: A fixed bonus payment amounting to 4% of their basic salary was paid to each Dental Assistant and Administrator.

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ACCA
P5 Advanced Performance Management
(7) (8)

Mock Exam Dec 2010

Establishment costs and other operating costs amounted to $85,000 and $75,775 respectively for the year ended 31 May 2005. All costs other than materials and consumables costs incurred by the Dental Health Partnership are subject to contracts and are therefore to be treated as fixed costs. A table of non-financial information relating to the Dental Health Partnership for the year ended 31 May 2005 is as follows: Number of Dentists: Dental Assistants Administrators Patient Mix: Adults Children Senior Citizens Mix of patient appointments (%): No treatment required Minor treatment Major treatment 6 7 2

(9)

50% 40% 10%

70% 20% 10%

Required: (a) Prepare a summary Profit and Loss Account of the Dental Health Partnership for the year ended 31 May 2005 and calculate the percentage of maximum capacity that was required to be utilised in order to break even in the year ended 31 May 2005. (12 marks) Discuss FOUR factors that distinguish service from manufacturing organisations and explain how each of these factors relates to the services provided by the Dental Health Partnership. (5 marks) Excluding the number of complaints by patients, identify and briefly explain THREE quantitative non-financial performance measures that could be used to assess the quality of service provided by the Dental Health Partnership. (3 marks) (20 marks)

(b)

(c)

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ACCA
P5 Advanced Performance Management QUESTION 4

Mock Exam Dec 2010

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P5 Advanced Performance Management QUESTION 5

Mock Exam Dec 2010

Swan is a government department that issues licences to road users. It employs 2,000 people. The costs of the department have two main elements staff, and information technology. Swans funding has been provided by the government, and this determined the spending on staff and on information technology. The licences issued by Swan have to be paid for by the road users. However, Swan did not benefit from the revenues raised from the sale of licences as these were passed directly to government. Swan has no tradition of management accounting and it has never prepared a profit and loss account. The government has a policy of reducing the size of public sector. Other government departments, similar to Swan, have been turned into agencies. Although the government retains ownership, the agencies are very similar to private sector companies. Their managers are set profitability targets, and receive salaries similar to those in the private sector. The agencies are able to raise loan capital in the open market. It is not thought that Swan will be made into an agency imminently. However, there is a feeling that such a change is very likely within the next five years. In order to improve efficiency, the government has decided to introduce modern business practices into Swan. In the case of Swan, the government intends to introduce management accounting and strategic planning, which were previously not carried out at Swan. REQUIRED: (a) Describe how Swan could prepare for the implementation of management accounting and strategic planning. (8 marks) Discuss the extent to which management accounting and strategic planning are applicable in: (i) (ii) a government department. an agency (as described above). (12 marks) (Total: 20 marks)

(b)

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Present Value Table Present value of 1 i.e. (1 + r)n Where r = discount rate n = number of periods until payment Discount rate (r) Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 1% 0990 0980 0971 0961 0951 0942 0933 0923 0941 0905 0896 0887 0879 0870 0861 2% 0980 0961 0942 0924 0906 0888 0871 0853 0837 0820 0804 0788 0773 0758 0743 3% 0971 0943 0915 0888 0863 0837 0813 0789 0766 0744 0722 0701 0681 0661 0642 4% 0962 0925 0889 0855 0822 0790 0760 0731 0703 0676 0650 0625 0601 0577 0555 5% 0952 0907 0864 0823 0784 0746 0711 0677 0645 0614 0585 0557 0530 0505 0481 6% 0943 0890 0840 0792 0747 0705 0665 0627 0592 0558 0527 0497 0469 0442 0417 7% 0935 0873 0816 0763 0713 0666 0623 0582 0544 0508 0475 0444 0415 0388 0362 8% 0926 0857 0794 0735 0681 0630 0583 0540 0500 0463 0429 0397 0368 0340 0315 9% 0917 0842 0772 0708 0650 0596 0547 0502 0460 0422 0388 0356 0326 0299 0275 10% 0909 0826 0751 0683 0621 0564 0513 0467 0424 0386 0305 0319 0290 0263 0239 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

(n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

11% 0901 0812 0731 0659 0593 0535 0482 0434 0391 0352 0317 0286 0258 0232 0209

12% 0893 0797 0712 0636 0567 0507 0452 0404 0361 0322 0287 0257 0229 0205 0183

13% 0885 0783 0693 0613 0543 0480 0425 0376 0333 0295 0261 0231 0204 0181 0160

14% 0877 0769 0675 0592 0519 0456 0400 0351 0308 0270 0237 0208 0182 0160 0140

15% 0870 0756 0658 0572 0497 0432 0376 0327 0284 0247 0215 0187 0163 0141 0123

16% 0862 0743 0641 0552 0476 0410 0354 0305 0263 0227 0195 0168 0145 0125 0108

17% 0855 0731 0624 0534 0456 0390 0333 0285 0243 0208 0178 0152 0130 0111 0095

18% 0847 0718 0609 0516 0437 0370 0314 0266 0225 0191 0162 0137 0116 0099 0084

19% 0840 0706 0593 0499 0419 0352 0296 0249 0209 0176 0148 0124 0104 0088 0074

20% 0833 0694 0579 0482 0402 0335 0279 0233 0194 0162 0135 0112 0093 0078 0065 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Annuity Table (1 + r)n Present value of an annuity of 1 i.e. 1 r Where r = discount rate n = number of periods Discount rate (r) Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 1% 0990 1970 2941 3902 4853 5795 6728 7652 8566 9471 1037 1126 1213 1300 1387 11% 0901 1713 2444 3102 3696 4231 4712 5146 5537 5889 6207 6492 6750 6982 7191 2% 0980 1942 2884 3808 4713 5601 6472 7325 8162 8983 9787 1058 1135 1211 1285 12% 0893 1690 2402 3037 3605 4111 4564 4968 5328 5650 5938 6194 6424 6628 6811 3% 0971 1913 2829 3717 4580 5417 6230 7020 7786 8530 9253 9954 1063 1130 1194 13% 0885 1668 2361 2974 3517 3998 4423 4799 5132 5426 5687 5918 6122 6302 6462 4% 0962 1886 2775 3630 4452 5242 6002 6733 7435 8111 8760 9385 9986 1056 1112 14% 0877 1647 2322 2914 3433 3889 4288 4639 4946 5216 5453 5660 5842 6002 6142 5% 0952 1859 2723 3546 4329 5076 5786 6463 7108 7722 8306 8863 9394 9899 1038 15% 0870 1626 2283 2855 3352 3784 4160 4487 4772 5019 5234 5421 5583 5724 5847 6% 0943 1833 2673 3465 4212 4917 5582 6210 6802 7360 7887 8384 8853 9295 9712 16% 0862 1605 2246 2798 3274 3685 4039 4344 4607 4833 5029 5197 5342 5468 5575 7% 0935 1808 2624 3387 4100 4767 5389 5971 6515 7024 7499 7943 8358 8745 9108 17% 0855 1585 2210 2743 3199 3589 3922 4207 4451 4659 4836 4988 5118 5229 5324 8% 0926 1783 2577 3312 3993 4623 5206 5747 6247 6710 7139 7536 7904 8244 8559 18% 0847 1566 2174 2690 3127 3498 3812 4078 4303 4494 4656 4793 4910 5008 5092 9% 0917 1759 2531 3240 3890 4486 5033 5535 5995 6418 6805 7161 7487 7786 8061 19% 0840 1547 2140 2639 3058 3410 3706 3954 4163 4339 4486 4611 4715 4802 4876 10% 0909 1736 2487 3170 3791 4355 4868 5335 5759 6145 6495 6814 7103 7367 7606 20% 0833 1528 2106 2589 2991 3326 3605 3837 4031 4192 4327 4439 4533 4611 4675 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

End of Question Paper