P1 March 2011 for Publication

7/31/2019 P1 March 2011 for Publication

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The Chartered Institute of Management Accountants 2011

P 1

P e r f o r m a n c e

O p e r a t

i o n s

Performance Pillar

P1 Performance Operations

Tuesday 1 March 2011

Instructions to candidates

You are allowed three hours to answer this question paper.

You are allowed 20 minutes reading time before the examination begins during which you should read the question paper and, if you wish, highlightand/or make notes on the question paper. However, you will not be allowed,under any circumstances , to open the answer book and start writing or useyour calculator during this reading time.

You are strongly advised to carefully read ALL the question requirementsbefore attempting the question concerned (that is all parts and/or sub-questions).

ALL answers must be written in the answer book. Answers written on thequestion paper will not be submitted for marking.

You should show all workings as marks are available for the method you use.

ALL QUESTIONS ARE COMPULSORY.

Section A comprises 8 sub-questions and is on pages 2 to 6.

Section B comprises 6 sub-questions and is on pages 8 to 10.

Section C comprises 2 questions and is on pages 12 to 15.

Maths tables and formulae are provided on pages 17 to 20.

The list of verbs as published in the syllabus is given for reference on page23.

Write your candidate number, the paper number and examination subject titlein the spaces provided on the front of the answer book. Also write yourcontact ID and name in the space provided in the right hand margin and sealto close.

Tick the appropriate boxes on the front of the answer book to indicate whichquestions you have answered.

TURN OVER


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Performance Operations 2 March 2011

SECTION A 20 MARKS

[Note: The indicative time for answering this section is 36 minutes]

ANSWER ALLEIGHT SUB-QUESTIONS IN THIS SECTION

Instructions for answering Section A:

The answers to the eight sub-questions in Section A should ALL be written in youranswer book.

Your answers should be clearly numbered with the sub-question number then ruledoff, so that the markers know which sub-question you are answering. For multiplechoice questions, you need only write the sub-question number and the letter

of the answer option you have chosen . You do not need to start a new page foreach sub-question.

For sub-questions 1.6 to 1.8 you should show your workings as marks are availablefor the method you use to answer these sub-questions.

Question One

1.1 A documentary credit is

A A negotiable instrument, drawn by one party on another, who by signing thedocument acknowledges the debt, which may be payable immediately or at somefuture date.

B A document issued by a bank on behalf of a customer authorising a person to drawmoney to a specified amount from its branches or correspondents, usually in anothercountry, when the conditions set out in the document have been met.

C A series of promissory notes, guaranteed by a highly rated international bank, andpurchased at a discount to face value by an exporters bank.

D A form of export finance where the debt is sold to a factor, at a discount, in return forprompt cash.

(2 marks)


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March 2011 3 Performance Operations

1.2 A company is deciding which of four potential selling prices it should charge for a newproduct. Market conditions are uncertain and demand may be good, average or poor.The company has calculated the contribution that would be earned for each of thepossible outcomes and has produced a regret matrix as follows.

Regret Matrix

Demand level Selling price

$140 $160 $180 $200

Good $20,000 $60,000 $0 $10,000

Average $50,000 $0 $40,000 $20,000

Poor $0 $30,000 $20,000 $30,000

If the company applies the minimax regret criterion to make decisions, which sellingprice would be chosen?

A $140

B $160

C $180

D $200 (2 marks)

Section A continues on the next page

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The following data are given for sub-questions 1.3 and 1.4 below

A company operates a standard absorption costing system. Details of budgeted and actualfigures for February are given below:

Budget Actual Production (units) 29,000 26,000Direct labour hours per unit 3.0 2.8Direct labour cost per hour $10.00 $10.40

1.3 The labour rate variance for the period was:

A $34,800 A

B $34,800 F

C $29,120 A

D $31,200 A(2 marks)

1.4 The labour efficiency variance for the period was:

A $58,000 F

B $60,320 F

C $52,000 F

D $54,080 F

(2 marks)

1.5 A company is deciding whether to launch a new product. The initial investment requiredis $40,000. The estimated annual cash flows and their associated probabilities areshown in the table below.

Probability Year 1 Year 2 Year 3 High 0.20 $20,000 $24,000 $18,000Medium 0.50 $14,000 $16,000 $15,000Low 0.30 $9,000 $12,000 $10,000

The companys cost of capital is 10% per annum. You should assume that all cashflows other than the initial investment occur at the end of the year.

The expected present value of the year 1 cash flows is

A $12,453

B $(27,547)

C $15,070

D $13,700(2 marks)


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1.6 JB has budgeted production for the next budget year of 36,000 units. Each unit ofproduction requires 4 labour hours and the budgeted labour rate is $12 per hourexcluding overtime.

Idle time is expected to be 10% of total hours available i.e. including idle time. Due to

labour shortages it is expected that 20% of the hours paid, including idle time, will bepaid at an overtime rate of time and a half.

Required:

Calculate the labour cost budget for the year.(3 marks)

1.7 An extract from a companys trial balance at the end of its financial year is given below:

$000 Sales revenue (85% on credit) 2,600Cost of sales 1,800Purchases (90% on credit) 1,650Inventory of finished goods 220Trade receivables 350Trade payables 260

Required:

Calculate the following working capital ratios:

(i) Inventory days(ii) Trade receivables days

(iii) Trade payables days (3 marks)

Section A continues on the next page

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1.8 A company is preparing its annual budget and is estimating the number of units ofProduct A that it will sell in each quarter of Year 2. Past experience has shown that thetrend for sales of the product is represented by the following relationship:

y = a + bx where

y = number of sales units in the quartera = 10,000 unitsb = 3,000 unitsx = the quarter number where 1 = quarter 1 of Year 1

Actual sales of Product A in Year 1 were affected by seasonal variations and were asfollows:

Quarter 1: 14,000 unitsQuarter 2: 18,000 unitsQuarter 3: 18,000 unitsQuarter 4: 20,000 units

Required: Calculate the expected sales of Product A (in units) for each quarter of Year 2, afteradjusting for seasonal variations using the additive model.

(4 marks)

(Total for Section A = 20 marks)

Reminder

All answers to Section A must be written in your answer book.

Answers to Section A written on the question paper will not besubmitted for marking.

End of Section A

Section B begins on page 8


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This page is blank


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SECTION B 30 MARKS


ANSWER ALL SIX SUB-QUESTIONS. YOU SHOULD SHOW YOURWORKINGS AS MARKS ARE AVAILABLE FOR THE METHOD YOU USE.

Question Two

(a) A zero-based budgeting system involves establishing decision packages that are thenranked in order of their relative importance in meeting the organisations objectives.

Required:

Explain the above statement and the difficulties that a not-for-profit organisation mayexperience when trying to rank decision packages.

(5 marks)

(b) A company has to decide which of three new mutually exclusive products to launch.The directors believe that demand for the products will vary depending on competitorreaction. There is a 30% chance that competitor reaction will be strong, a 20% chancethat competitor reaction will be normal and a 50% chance that competitor reaction willbe weak. The company uses expected value to make this type of decision.

The net present value for each of the possible outcomes is as follows:

Competitor reaction Product A Product B Product C

$000s $000s $000s

Strong 200 400 600

Normal 300 600 400

Weak 500 800 500

A market research company believes it can provide perfect information on potentialcompetitor reaction in this market.

Required:

Calculate the maximum amount that should be paid for the information from the marketresearch company.

(5 marks)


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(c) A company uses a third party delivery service to deliver goods to customers. Thecurrent average cost per delivery is $12.50. The company is trying to decide whether toestablish an in-house delivery service. A number of factors could affect the averagetotal cost per delivery for the in-house delivery service. The table below shows thepossible average total costs and the probability of each one occurring:

Average total cost Probability $10.50$10.70$11.00$12.10$12.50$12.60$14.20$15.60$15.80

0.050.100.080.120.140.160.120.180.05

The expected value of the average total cost, based on the probability distributionabove, is $13.

Required:

Explain the decision that the company manager is likely to make, based on theprobability distribution and the current delivery cost of $12.50 per delivery, if themanager is:

(i) Risk neutral(ii) Risk averse(iii) Risk seeking

(5 marks)

(d) A company is considering the use of without recourse factoring to manage its tradereceivables. It currently has a balance outstanding on trade receivables of $180,000and annual sales revenue of $1,095,000. It anticipates that this level of sales revenueand trade receivables will continue for at least the next year. It estimates that the use ofthe factoring company will result in a reduction in credit control costs of $20,000 perannum.

The factoring company will charge a fee of 2.5% of invoiced sales. It will give anadvance of 90% of invoiced sales and charge interest at a rate of 12% per annum.

Required:

(i) Calculate the annual cost of factoring net of credit control cost savings.(3 marks)

The company currently finances its accounts receivables with a bank overdraft at aninterest rate of 15% per annum.

(ii) Calculate whether there is a financial benefit from using the factor. You shouldignore bad debts.

(2 marks) (Total for sub-question (d) =5 marks)

TURN OVER


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(e) A company has surplus funds to invest for a period of 3 months. It is consideringpotential investment opportunities as follows:

Investment 1

Purchase treasury bills issued by the countrys central bank. The treasury bills can bepurchased now for a period of 91 days. The purchase price is $995 per $1,000.

Investment 2

Invest in a 30 day notice bank deposit account. The account will pay a variable rate ofinterest of 2.5% per annum, payable quarterly.

Required:

Explain the advantages AND disadvantages to the company of each of theinvestments.

Your answer should include relevant calculations.(5 marks)

(f) A bond has a coupon rate of 8% and will repay its nominal value of $100 when itmatures in 6 years time.

The bonds yield to maturity is 6.58%.

Required:

Explain why there may be a difference between a bonds coupon rate and itsyield to maturity.

(5 marks)

(Total for Section B = 30 marks)

End of Section B

Section C begins on page 12


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This page is blank

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SECTION C 50 MARKS


ANSWER BOTH QUESTIONS IN THIS SECTION. EACH QUESTION IS

WORTH 25 MARKS. YOU SHOULD SHOW YOUR WORKINGS AS MARKSARE AVAILABLE FOR THE METHOD YOU USE.

Question Three

A company sells and services photocopying machines. Its sales department sells themachines and consumables, including ink and paper, and its service department provides anafter sales service to its customers. The after sales service includes planned maintenance ofthe machine and repairs in the event of a machine breakdown. Service department customersare charged an amount per copy that differs depending on the size of the machine.

The companys existing costing system uses a single overhead rate, based on total salesrevenue from copy charges, to charge the cost of the Service Departments support activitiesto each size of machine. The Service Manager has suggested that the copy charge shouldmore accurately reflect the costs involved. The companys accountant has decided toimplement an activity-based costing system and has obtained the following information aboutthe support activities of the service department:

Activity Cost DriverOverheadsper annum

$000Customer accounthandling

Number of customers 126

Planned maintenance

scheduling

Number of planned maintenance visits 480

Unplanned maintenancescheduling

Number of unplanned maintenance visits 147

Spare part procurement Number of purchase orders 243

Other overheads Number of machines 600

Total overheads 1,596

The following data have also been collected for each machine size:

Smallphotocopiers

Mediumphotocopiers

Largephotocopiers

Charge per copy $0.03 $0.04 $0.05Average number of copies per year permachine

60,000 120,000 180,000

Number of machines 300 800 500Planned maintenance visits per machineper year

4 6 12

Unplanned maintenance visits per machineper year

1 1 2

Total number of purchase orders per year 500 1,200 1,000Cost of parts per maintenance visit $100 $300 $400Labour cost per maintenance visit $60 $80 $100

Each customer has a service contract for two machines on average.


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Required:

(a) Calculate the annual profit per machine for each of the three sizes ofmachine, using the current basis for charging the costs of supportactivities to machines.

(4 marks)

(b) Calculate the annual profit per machine for each of the three sizes ofmachine using activity-based costing.

(14 marks)

(c) Explain the potential benefits to the company of using an activity-based

costing system.(7 marks)

(Total for Question Three = 25 marks)

Section C continues on the next page

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Question Four

A bus operator has been experiencing a fall in passenger numbers over the past few years asa result of intense competition from other transport providers. The company directors areconcerned to improve profit and are considering two possible alternatives.

Passenger volume last year was 20,000 passengers per day. The average fare was $2 perpassenger per day and variable costs per passenger per day were $0.50. If no investment ismade the current passenger volume, average fares and variable costs will remain the sameon current routes for the next five years. The company operates a full service for 365 days ofthe year.

Project 1 The company hired a management consultant, at a cost of $50,000, to review the companysfare structure. The consultant recommended that the company reduce fares by 10% whichwill result in a 20% increase in passenger volume in the first year. In order to maintain thislevel of passenger numbers, fares will remain at the reduced rate for years 2 to 5.

The increase in passenger numbers will result in the need for four new buses costing$250,000 each. The new buses will be depreciated on a straight line basis over their usefullife of 5 years. They will have no residual value at the end of their useful life. Other annualfixed costs, including advertising costs, will increase by $100,000 in the first year and willremain at that level for the life of the project. Variable costs will remain at $0.50 perpassenger per day for the life of the project.

Project 2 Increase the number of buses to enable new routes to be opened. The new buses areexpected to cost $5,000,000 in total and have a useful life of five years with no residual value.Fixed costs, including straight line depreciation, are expected to increase by $3,500,000 in thefirst year, as a result of opening the new routes. Fixed costs will remain at the higher level forthe life of the project. Additional working capital of $1,000,000 will also be required.

The passenger numbers for year 1 on the new routes are predicted as follows:

Passenger numbers per day Probability 6,000 50%9,000 30%

12,000 20%

It is expected that passenger numbers will increase by 3% per annum for the following fouryears. The average fare per passenger for year 1 will be $2 and will remain at that level forthe life of the project. Variable costs will remain at $0.50 per passenger per day for the life ofthe project.

Additional Information Taxation and inflation should be ignored.

The company uses a cost of capital of 8% per annum.


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Required:

(a)

(i) Advise the management of the company which project should beundertaken based on a financial appraisal of the projects.

You should use net present value (NPV) to appraise the projects.

(13 marks)

(ii) Explain TWO other major factors that should be considered before a finaldecision is made.

(4 marks)

(b) Calculate the sensitivity of the choice between Project 1 and Project 2 toa change in passenger numbers for Project 2.

(4 marks)

(c) Company D is planning its capital investment programme for next year. It isconsidering four potential projects all of which have a positive net present value. Theinitial investment, internal rate of return (IRR) and net present value (NPV), based on acost of capital of 12%, are given below for each project.

Project Investment $000

NPV at 12% $000

IRR

A 50 13.6 12.6%B 40 15.2 10.3%C 20 10.2 13.1%D 30 12.3 11.2%

Funding for the company is restricted to $110,000. The projects are independent and divisiblei.e. part of a project can be undertaken.

Required:

Prioritise the projects and determine how much funding should be allocated to

each project.

(4 marks)

(Total for Question Four = 25 marks)

(Total for Section C = 50 marks)

End of question paper


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Maths tables and formulae are on pages 17 to 20


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PRESENT VALUE TABLE

Present value of $1, that is ( ) n r +1 where r = interest rate; n = number of periods untilpayment or receipt.

Periods(n ) Interest rates ( r) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.9092 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.8263 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.7514 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.6835 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.6216 0.942 0.888 0.837 0.790 0.746 0705 0.666 0.630 0.596 0.5647 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.5138 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.4679 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424

10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.38611 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.35012 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.31913 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.29014 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263

15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.23916 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.21817 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.19818 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.18019 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.16420 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149

Periods(n )

Interest rates ( r) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%

1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.8332 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.6943 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.5794 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.4825 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.4026 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.3357 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.2798 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.2339 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194

10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.16211 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.13512 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.11213 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.09314 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.07815 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.06516 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.05417 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.04518 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.03819 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.03120 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026


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FORMULAE

PROBABILITY

A B = A or B . A

B = A and B (overlap).P(B | A) = probability of B , given A.

Rules of AdditionIf A and B are mutually exclusive: P(A B) = P(A) + P (B) If A and B are not mutually exclusive: P(A B) = P(A) + P (B) P(A B)

Rules of MultiplicationIf A and B are independent : P(A B) = P(A) * P (B) If A and B are not independent : P(A B) = P(A) * P(B | A)

E(X) = (probability * payoff)

DESCRIPTIVE STATISTICS

Arithmetic Mean

n

x x

= f

fx x

= (frequency distribution)

Standard Deviation

n

x x SD

2)( = 22

xf

fxSD

= (frequency distribution)

INDEX NUMBERS

Price relative = 100 * P 1 /P 0 Quantity relative = 100 * Q 1 /Q 0

Price: 100xw

PP

wo

1

Quantity: 100x

1

w

Q

Q w

o

TIME SERIES

Additive ModelSeries = Trend + Seasonal + Random

Multiplicative ModelSeries = Trend * Seasonal * Random


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FINANCIAL MATHEMATICS

Compound Interest (Values and Sums)Future Value S , of a sum of X , invested for n periods, compounded at r % interest

S = X [1 + r]n

AnnuityPresent value of an annuity of 1 per annum receivable or payable for n years, commencing in oneyear, discounted at r % per annum:

PV =+

n r r ]1[

11

1

PerpetuityPresent value of 1 per annum, payable or receivable in perpetuity, commencing in one year,discounted at r % per annum:

PV =r

1

LEARNING CURVE

Y x = aX b

where:Y x = the cumulative average time per unit to produce X units;a = the time required to produce the first unit of output;X = the cumulative number of units;b = the index of learning.

The exponent b is defined as the log of the learning curve improvement rate divided by log 2.

INVENTORY MANAGEMENT

Economic Order Quantity

EOQ =h

o

C

D2C

where: C o = cost of placing an orderCh = cost of holding one unit in inventory for one yearD = annual demand


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LIST OF VERBS USED IN THE QUESTION REQUIREMENTS A list of the learning objectives and verbs that appear in the syllabus and in the question requirements foreach question in this paper.

It is important that you answer the question according to the definition of the verb.

LEARNING OBJECTIVE VERBS USED DEFINITION

Level 1 - KNOWLEDGEWhat you are expected to know. List Make a list of

State Express, fully or clearly, the details/facts ofDefine Give the exact meaning of

Level 2 - COMPREHENSIONWhat you are expected to understand. Describe Communicate the key features

Distinguish Highlight the differences betweenExplain Make clear or intelligible/State the meaning or

purpose ofIdentify Recognise, establish or select after

considerationIllustrate Use an example to describe or explain

something

Level 3 - APPLICATIONHow you are expected to apply your knowledge. Apply

CalculatePut to practical useAscertain or reckon mathematically

Demonstrate Prove with certainty or to exhibit bypractical means

Prepare Make or get ready for useReconcile Make or prove consistent/compatibleSolve Find an answer toTabulate Arrange in a table

Level 4 - ANALYSISHow are you expected to analyse the detail ofwhat you have learned.

AnalyseCategorise

Examine in detail the structure ofPlace into a defined class or division

Compare and contrast Show the similarities and/or differencesbetween

Construct Build up or compileDiscuss Examine in detail by argumentInterpretPrioritise

Translate into intelligible or familiar termsPlace in order of priority or sequence for action

Produce Create or bring into existence

Level 5 - EVALUATIONHow are you expected to use your learning toevaluate, make decisions or recommendations.

AdviseEvaluateRecommend

Counsel, inform or notifyAppraise or assess the value ofAdvise on a course of action


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Performance Pillar

Operational Level Paper

P1 Performance Operations

March 2011

P1 March 2011 for Publication

Documents

Transcript of P1 March 2011 for Publication