Summer Exam-2014

Corporate 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.

Attempt all Questions

Q.1. LTC is considering to invest in either of two mutually-exclusive projects, Project A and
Project 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 of
Rs.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 would
be Rs.500,000 per year.
Project B: The machine would cost Rs.1,616,000 and would have a disposal value of
Rs.301,000 at the end of Year 5. The project would expected to earn annual sales
revenue 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:

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(i)

The accounting rate of return ratio, over the project life (average annual
accounting profit as a percentage of the average book value of the
investment, 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.

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b) State which project, if any, you would select for acceptance.

Q.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 the
LED. Each unit of LED produced will require 1 unit of material Y. The Each unit of
material Y will cost Rs.20/Unit. Currently the company required 1000 units of material Y
per year. The cost of ordering material Y will be Rs.10 per order and cost to store that
material Y will be Rs. 2 per unit.
Currently the company has been buying material from local supplier Mr. Bilal. Due to long
term relation, he had offered Big Co. bulk discounts .He allows a 2% discount at the order
of 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.

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b) Calculate the Total Cost to the company at EOQ.

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c) Evaluate whether Big Co. should avail the Discounts Offer from the Supplier or not
and the optimum level at which cost would be minimum.

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Contd. on back

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Q.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 /share
Year
2009
2010
2011
2012
2013

PAT
Rs.000
143
162
151
175
183

Dividend
Rs.000
85.0
93.5
93.5
102.8
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 to
acquire ELE.

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

a) Explain the advantages and disadvantages of share repurchase scheme.

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The Company is considering to issue the dividends to their share holders but unable to
understand about which policy to be adopted.
b) Explain the factors that may effect the company policy regarding Dividends.
Q.5.

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Sohaib Co. is a manufacturing company. A summary of the budgeted profit statement for
its next financial year is provided .The company is expected to operate at 75% of its
production capacity. The detail is provided below:
Rs.
Sales 9000 units at Rs.32

Rs.
288,000

Less: Direct Materials

54,000

Direct Wages

72,000

Production Over head:

- Fixed

42,000

- Variable

18,000

Gross Profit

186,000
102,000

Less: Admin and Marketing cost:

- Fixed

36,000

- Variable

27,000

Net Profit

63,000
39,000

Required:

a) Calculate the amount of revenue and number of units at which company will be at
break even.

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Contd..

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b) Calculate Profits if the Company is operating at Full Production Capacity.
c) 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 incremental
advertisement cost will be incurred to utilize the full production capacity.
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 budgeted
and an incremental advertisement cost of Rs.5000 will be incurred to utilize the full
production capacity.
e) Present a statement to management in which advise them regarding the suitable level
of Production Capacity.

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03
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Q.6. Junaid Co is a transportation company. Junaid Co. operates a passenger transportation

service and is responsible for the operation of services and the maintenance of signaling
equipment and other facilities such as bus stations.
In recent years it has been criticized for providing a poor service to the travelling public in
terms of punctuality, safety and the standard of facilities offered to passengers. In the last
year Junaid Co. has invested over Rs.20 million in new buses, station facilities and road
maintenance 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 December
2013

2014

Rs. million
Sales revenue

180.0

185.0

Earnings before interest and tax

18.0

16.5

Interest

(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 31st December

Non-current assets (net)

Current assets
Inventory
Receivables
Cash

Ordinary share capital (Rs.1 shares)

Reserves
Amounts payable after more than one year
8% Debenture 20X9
Bank loan
Payables due within one year

2013
2014
Rs. million
100.4
120.5
5.3
2.1
6.2

5.9
2.4
3.6
13.6
114.0
25.0
45.6

11.9
132.4
25.0
48.2

15.0
20.0
8.4
114.0

15.0
35.0
9.2
132.4
Contd. on back

Required:

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

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i) Net Profit Margin

ii) Asset Turnover
iii) Current Ratio
b) Briefly comment on the financial performance of Junaid Co in 20X3 and 20X4 as
revealed 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 its
Chemical Bdox, is manufactured as a result of two processes. The detail of the process 2 is
as follows:
Opening Work in process
Nil
Material transferred from process 1
Rs. 49,875(50,000 liters)
Labor Cost
500 hrs at Rs.5 per hr
Overheads
44% of labor cost
Output transferred to finished Goods
41,000 liters
Closing work in progress
5000 liters
The company is well known for its quality and very strict quality control checks have been
maintained 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 input
quantity.
Closing Work in progress is 100% complete for material and 50% complete for conversion
costs.
Required:

Prepare an account for the process 2 of product Bdox.

Q.8.

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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 detail
of the inventory will be as follows:
March 09

800 units purchased at Rs.50/Unit

March 16

500 units purchased at Rs.60/Unit

March 28

700 units purchased at Rs.70/Unit

In the month of March four Material Requisitions were completed for 300 units each at
10th, 19th, 25th & 29th March 2013.
Required:

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

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