CMA MAY-2022 EXAMINATION

OPERATIONAL LEVEL
SUBJECT: P1. PERFORMANCE OPERATIONS

Time Allocated: Three hours Total Marks: 100

Instructions to Candidates
There are three sections (that is A, B & C) in this paper. You are required to answer ALL
questions.

Answers should be properly structured, relevant and computations need to be shown

wherever necessary.

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

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

Start answering each question from a fresh sheet. Your answers should be clearly numbered
with the sub-question number then ruled off, so that the markers know which sub-question
you are answering.

Section No of questions in the No of sub-questions Marks allocation

Section in the Section

A 01 08 20%

B 01 05 30%

C 02 50%

TURN OVER

Page 1 of 6
SECTION A – 20 MARKS
This section consists of 1 question and 8 sub-questions.
You are advised to spend no longer than 36 minutes on this section. Section will carry 20 marks
and one sub-question will carry 2.5 marks each.

Question 01
(a) Explain the purpose of sensitivity analysis in investment appraisal.
(2 ½ Marks)
(b) Explain the way in which the real cost of capital may be used to calculate the net present
value of a project when the cash flows are subject to inflation.
(2 ½ Marks)
(c) Explain the benefits that may result from the company using a decentralized purchasing
system.
(2 ½ Marks)
(d) Explain THREE benefits that organizations gain from using budgetary planning and control
systems.
(2 ½ Marks)
(e) State the primary activities in the value chain of a manufacturing company.
(2 ½ Marks)
(f) Explain the elements of purchasing mix.
(2 ½ Marks)
(g) Why can undue emphasis on labor efficiency variances lead to excess work in process
inventories?
(2 ½ Marks)
(h) Why are environmental costs important to the Management Accountant?
(2 ½ Marks)

END OF SECTION A

SECTION B Starts on page 3

Page 2 of 6
Section B
This section consists of 1 question and 5 sub-questions.
You are advised to spend no longer than 9 minutes on each sub-question in this section.
Section will carry 30 marks and one sub-question will carry 6 marks each.

QUESTION 2
(a) 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 competitor reaction.
There is a 30% chance that competitor reaction will be High, a 20% chance that
competitor reaction will be Medium and a 50% chance that competitor reaction will be
Low. 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 X Product Y Product Z
(Tk.000s) (Tk. 000s) (Tk.000s)
High 200 400 600
Medium 300 600 400
Low 500 800 500
A market research company believes it can provide perfect information on potential
competitor reaction in this market.
Required:
Calculate the maximum amount that should be paid for the information from the market
research company.
(6 Marks)
(b) Verijon, Inc., uses 15,000 pounds of plastic each year in its production of plastic cups.
The cost of placing an order is Tk. 10. The cost of holding one pound of plastic for one
year is Tk. 0.30. Verijon uses an average of 60 pounds of plastic per day. It takes five days
to place and receive an order.
Required:
(i) Calculate the EOQ.
(ii) Calculate the annual ordering and carrying costs for the EOQ.
(iii) What is the reorder point?
(6 Marks)
(c) Blue Ocean’s Management has designed an activity-based costing system with the
following activity cost pools and activity rates:
Activity Cost Pool Activity Rate
Supporting direct labor . . . . . . . . . . Tk.26 per direct labor-hour
Order processing . . . . . . . . . . . . . . Tk.284 per order
Custom design processing . . . . . . . Tk.186 per custom design
Customer service . . . . . . . . . . . . . . Tk.379 per customer

Management would like an analysis of the profitability of a particular customer, Big Sky
Outfitters, which has ordered the following products over the last 12 months:

SECTION B Continues on page 4

Page 3 of 6
 Standard Model Custom Design
Number of gliders . . . . . . . . . . . . . . . . . . . 20 3
Number of orders. . . . . . . . . . . . . . . . . . . . 1 3
Number of custom designs . . . . . . . . . . . . 0 3
Direct labor-hours per glider . . . . . . . . . . 26.35 28.00
Selling price per glider . . . . . . . . . . . . . . Tk.1,850 Tk.2,400
Direct materials cost per glider . . . . . . . . . Tk.564 Tk.634

The company’s direct labor rate is Tk.19.50 per hour.

Required:
Using the company’s activity-based costing system, compute the customer margin of Big
Sky Outfitters.
(6 Marks)
(d) Corrie produces three products, X, Y and Z. The capacity of Corrie's plant is restricted by
process alpha. Process alpha is expected to be operational for eight hours per day and can
produce 1,200 units of X per hour, 1,500 units of Y per hour, and 600 units of Z per hour.
Selling prices and material costs for each product are as follows.

Product Selling price Material cost Throughput contribution

(Tk. per unit) (Tk. per unit) (Tk. per unit)
X 150 70 80
Y 120 40 80
Z 300 100 200

Conversion costs are Tk.720,000 per day.

Required:
(i) Calculate the profit per day if daily output achieved is 6,000 units of X, 4,500 units of
Y and 1,200 units of Z.
(ii) Calculate the Throughput accounting ratio for each product.
(iii) In the absence of demand restrictions for the three products, advise Corrie's
management on the optimal production plan.
(6 Marks)
(e) Briefly discussing the importance of considering qualitative factors in relevant costing,
giving THREE examples of such factors.
(6 Marks)

END OF SECTION B

SECTION C Starts on page 5

Page 4 of 6
Section C
This section consists of 2 questions.
You are advised to spend no longer than 45 minutes on each question in this section. Section
will carry 50 marks (each question carries 25 marks) and allocation of marks for each sub-
question is indicated next to the sub-question.

QUESTION 03
Thai Chai, a Fast Food chain specialises in preparing tasty fast food for its consumers.
Extracts from the budget for last year are given below:
Pizza Burger Steak
Sales quantity (units) 8,000 26,000 6,000

Average selling price Tk.2,200 Tk.320 Tk.2,800

Direct material cost per unit Tk.1,000 Tk.160 Tk.1,200
Direct labour cost per unit Tk.400 Tk.60 Tk.600
Variable overhead cost per unit Tk.40 Tk.6 Tk.60
The budgeted direct labour cost per hour was Tk. 20.
Actual results for last year were as follows:
Pizza Burger Steak
Sales quantity (units) 7,200 31,000 7,800

Average selling price Tk.2,400 Tk.310 Tk.2,500

Direct material cost per unit Tk.1,100 Tk.150 Tk.1,300
Direct labour cost per unit Tk.450 Tk.60 Tk.600
Variable overhead cost per unit Tk.60 Tk.8 Tk.80
The actual direct labour cost per hour was Tk.18.75.
Actual variable overhead cost per direct labour hour was Tk.2.50.
The company operates a just-in-time system for purchasing and production and does not hold
any inventory.
Required:
(a) Calculate the following variances for the company for last year:
(i) the sales mix contribution variance
(ii) the sales quantity contribution variance
(b) Explain the meaning of the variances calculated in (a) above. You should refer to the
figures calculated to illustrate your answer.
(c) Prepare, for Steak only, a statement for last year on a marginal cost basis that reconciles
the budgeted contribution to the actual contribution. The statement should show the
variances in as much detail as possible.
(d) Explain THREE factors that a company would need to consider before deciding whether to
investigate a variance.
[Marks: (3+3)+5+11+3 = 25]

SECTION C Continues on page 6

Page 5 of 6
QUESTION 4

Saxon Products, Inc., is investigating the purchase of a robot for use on the company’s
assembly line. Selected data relating to the robot are provided below:

Cost of the robot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tk.1,800,000

Installation and software . . . . . . . . . . . . . . . . . . . . . . . . . Tk.900,000
Annual savings in labor costs. . . . . . . . . . . . . . . . . . . . . . ?
Annual savings in inventory carrying costs . . . . . . . . . . . Tk.210,000
Monthly increase in power and maintenance costs . . . . . Tk.2,500
Salvage value in 10 years . . . . . . . . . . . . . . . . . . . . . . . . Tk.70,000
Useful life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 years

Engineering studies suggest that use of the robot will result in a savings of 25,000 direct labor
hours each year. The labor rate is Tk.16 per hour. Also, the smoother work flow made possible
by the use of automation will allow the company to reduce the amount of inventory on hand by
Tk.400,000. This inventory reduction will take place at the end of the first year of operation; the
released funds will be available for use elsewhere in the company. Saxon Products has a 20%
required rate of return.

Shelly Martins, the controller, has noted that all of Saxon’s competitors are automating their
plants. She is pessimistic, however, about whether Saxon’s management will allow it to
automate. In preparing the proposal for the robot, she stated to a colleague, “Let’s just hope that
reduced labor and inventory costs can justify the purchase of this automated equipment.
Otherwise, we’ll never get it. You know how the president feels about equipment paying for itself
out of reduced costs.”
Required:
(Ignore income taxes.)
(a) Determine the annual net cost savings if the robot is purchased. (Do not include the
Tk.400,000 inventory reduction or the salvage value in this computation.)
(b) Compute the net present value of the proposed investment in the robot. Based on these
data, would you recommend that the robot be purchased? Explain.
(c) Assume that the robot is purchased. At the end of the first year, Shelly Martins has found
that some items didn’t work out as planned. Due to unforeseen problems, software and
installation costs were Tk.75,000 more than estimated and direct labor has been reduced
by only 22,500 hours per year, rather than by 25,000 hours. Assuming that all other cost
data were accurate, does it appear that the company made a wise investment? Show
computations using the net present value format as in (b) above.
(d) Upon seeing your analysis in (c) above, Saxon’s president stated, “That robot is the worst
investment we’ve ever made. And now we’ll be stuck with it for years.”
(i) Explain to the president what benefits other than cost savings might accrue from
using the new automated equipment.
(ii) Compute for the president the amount of cash inflow that would be needed each
year from the benefits in (i) above for the automated equipment to yield a 20% rate of
return.
[Marks: 4+6+9+(3+3) = 25]

*End of the Exam Paper*

Page 6 of 6