Time Allowed: 03 Hours Maximum Marks: 500

 Multiple Choice Questions (MCQs) – Comprising 300 Marks

 Descriptive Questions – Comprising 200 Marks
 NOTE: The actual number of questions in the Final Exam Paper may
differ categorically, with respect to numerical and theoretical
questions [MCQs and Case Studies], as made available through
this Model Paper.

MULTIPLE CHOICE QUESTIONS (MCQs)

PART-A – STRATEGIC MANAGEMENT ACCOUNTING
1. Badar Limited has extracted the following data from a time-driven activity-based costing system designed for a
customer service department:

Time per Total Allocated

Activity Quantity
unit (mins) Time (mins)
Orders processing 9,500 30 285,000
Addressing customers complaints 200 300 60,000
Warrant claims 750 200 150,000

Total practical time available to department personnel is 625,000 minutes and the departmental budget for the period
is Rs. 6,750,000.

Customer W has submitted 150 orders, made 5 complaints and submitted 12 warranty claims.

The cost of servicing customer W is ____________

A Rs. 1,804

B Rs. 8,400

C Rs. 32,727

D Rs. 90,720
Reference :Traditional vs Modern Manufacturing Philosophy- Apply the techniques of activity based management in identifying multiple
cost drivers/activities
2. Bedford Limited with a 10% cost of capital is considering the purchase of two machine tools, M and N. Both can
produce the same component at identical rates per working hour and the relevant data on the machines is as follows:
Machine M Machine N
Capital cost (Rs.) 1,500,000 2,400,000
Operating costs per working hour : (Rs. Per hour)
Energy 45 75
Consumables 90 120
Variable overheads 90 105
 Maintenance costs
Service intervals (yearly) 12 10
costs of services (Rs.) 15,000 12,000
Random breakdowns 3 1
Cost of breakdowns (Rs.) 30,000 45,000
Expected Availability
(working hours per annum) 1,500 2,000
Contribution from production per hour
(excluding mc. Costs) (Rs.) 750 750
Expected Life (years) 5 5
Net salvage value at the end of year-5 (Rs.) 150,000 375,000

Which machine is preferable for Bedford Limited?

A Machine M, Rs. 517,500

B Machine N, Rs. 735,920
C Machine M, Rs. 855,000
D Machine N, Rs. 619,260
Reference :Cost Planning- Life Cycle Costing
3. Trolex Limited is the manufacturer of smart watches. The company is preparing a product life cycle budget for a new
smart watch YU-69. Development on the new watch is to commence shortly. Estimates for YU-69 are as follows:

Life-cycle units manufactured and sold 400,000

Selling price per watch (Rs.) 60,000
Research and Development Costs 1,500,000,000
Manufacturing:
Variable cost per watch (Rs.) 22,500
Variable cost per batch (Rs.) 900,000
Watches per batch 500
Fixed costs (Rs.) 2,700,000,000
Marketing: (Rs.)
Variable cost per watch 4,800
Fixed costs 1,500,000,000
Distribution:
Variable cost per batch (Rs.) 420,000
Watches per batch 160
Fixed costs (Rs.) 1,080,000,000
Customer-service cost per watch (Rs.) 2,250

Ignoring time value of money, calculate the percentage of the budgeted total life-cycle costs that will be incurred by the
end of the R & D and design stages.
A 7.36%
B 7.70%
C 8.13%
D 8.46%
Reference : Cost Planning- Life Cycle Costing
4. Salman Limited is engaged in the manufacturing of two products, A and B that go through same manufacturing process.
The company uses activity costing method for allocating the overheads to its products. The production data related to
both the products is as under:

A B
Quantity produced 30,000 10,000
Material cost per unit Rs.750 Rs.3,000
Direct Labour hours per unit 0.75 0.75
Direct Labour cost per direct labour hour Rs.1,800 Rs.1,800
Machine hours per unit 3 hours 9 hours
Set-ups period 40 60
Orders handled per period 50 200

Total Manufacturing overheads costs Rs.

Relating to machine activity 45,000,000

Relating to production run set-ups 7,500,000
Relating to order handling activity 10,500,000
63,000,000

The Full production cost per unit of Product A is ______________.

A Rs.920

B Rs. 3,020

C Rs.3,675

D Rs. 7,890
Reference : Traditional vs Modern Manufacturing Philosophy- Apply the techniques of activity based management in identifying multiple
cost drivers/activities
5. Pendulum Limited manufactures three products which have the following cost of demand data:

Product-M Product-N Product-P

Contribution to sales ratio 20% 25% 30%
Maximum sales value (Rs.000) 160,000 200,000 300,000
Minimum sales value (Rs.000) 20,000 20,000 20,000

There are fixed costs of Rs. 140,000,000 per period.

The lowest breakeven sales value per period, subject to meeting the minimum sales value constraints, is nearest to:

A Rs. 464,000,000

B Rs. 476,000,000

C Rs. 504,000,000

D Rs. 524,000,000
Reference :Multi-Product Breakeven Analysis- Analyze the sales product mix decisions
6. Zest Limited manufactures two products G and H. The details for the year 2020 are shown below:

Product-G Product-H
Rs. Rs.
Selling price 4,000 2,000
Variable cost 2,400 800

Total fixed costs are Rs. 46,000,000 per annum.

The company sells the two products in the sales value ratio of 7:3 and is operating at a margin of safety of 20%. During
the next year. 2021, the company anticipates that the variable costs of product G and H will go up 5% and 2.5%
respectively. The fixed expenses will also go up by 5%.

The quantity of product G and H sold in 2020 are:

A 17,500 units and 15,000 units

B 20,575 units and 16,500 units

C 17,500 units and 18,750 units

D 21,875 units and 18,750 units

Reference : Multi-Product Breakeven Analysis- Determine the optimal mix of product
7. Scholes printing press is in the business of publishing a leading magazine which has a wide customer base. It
measures quality of service in terms of print quality, on time delivery and number of damaged and unsold magazines.
In order to improve its business prospects and performance, the company is considering installing a scheduling and
tracking system which involve an annual additional cost of Rs. 4,500,000 besides equipment costing Rs. 6,000,000
needed for installation of system.
To purchase the equipment, Scholes is planning to utilize the proceeds of an investment fetching an annual income
of 10%.
Details regarding the present and future performance are given below:

Present Expected
On-time delivery 87% 95%
Variable cost per lot of magazine damaged or unsold 600 600
Fixed cost 750,000 750,000
Number of lots of newspaper damaged or unsold 6,500 1,500

It is expected that each percentage increase in on time performance will result in revenue increase of Rs. 540,000
per annum. Required contribution margin is 45%.
The net benefit/ loss of installing the new system by Scholes printing press will be:

A Rs. 2,916,000

B Rs. 3,156,890

C Rs. 600,000

D Rs. 816,000
Reference : Short term Decisions- make or buy decisions
8. HTM Limited manufactures a single product that requires two components. The company purchases one of the
components from two suppliers, KT Limited and GF Limited. The price quoted by KT Limited is Rs. 2,700 per hundred
units of components and it is found that on average 4% of the total receipts from this supplier is defective. The
corresponding quotation from GF Limited is Rs. 2,610 per hundred units, but the defective would go up to 6%. If the
defectives are not detected, they are utilized in production causing a damage of Rs 2,700 per hundred units of the
component.

HTM limited intends to introduce a system of inspection for the components on receipt. The inspection cost is
estimated at Rs. 360 per hundred units of the components. Such inspection will be able to detect only 90% of the
defective components received. No payment will be made for components found to be defective in inspection.

Assuming total requirement is 100,000 units of the components, if inspection at the point of receipt is undertaken
which of the two supplier should be asked to supply.

A GF Limited, Rs. 30.263

B KT Limited, Rs. 29.432

C GF Limited, Rs. 30.975

D KT Limited, Rs. 29.250

Reference : Short term Decisions- acceptance/ rejection of contracts
9. Sialkot Sports Club Limited (SSCL) is engaged in the manufacturing of hockey sticks. Following table shows the
budgeted figures for the coming year:

Rs. Per unit

Selling price 7,200
Components (1 set) 1,800
Assembling costs 3,000
Delivery cost 1,200
Contribution 1,200

Market is intensely competitive where SSCL currently holds 35% market share. Annual demand of theses sticks is
150,000 units.
On reviewing previous performance it is revealed that 4% of the sticks supplied to customers were returned for free
replacement because of faults. Defective components, which are initially bought in to assembling process, are held
responsible for this. These returned sticks cannot be repaired and have no scrap value. Supply of faulty sticks to
customers could be eliminated by implementing an inspection process immediately before the goods are delivered.
This would improve customer perception thus resulting in an increase of 7% in current market share (making in all a
total share of 42%).
The quality non-conformance cost for the coming year, based on the budgeted figures and sales returns rate would
be:

A Rs. 13,128,000

B Rs. 2,630,400

C Rs. 10,497,600

D Rs. 75,600,000
Reference : Cost Management Techniques- Total Quality Management
10. Which one of the following statements is not an appropriate description of an organization’s value chain?
A A the primary and support activities from which the organization can derive a competitive advantage

an aggregation of independent and strategically relevant activities that collectively contribute to the economic
B
value generated by the organization
a set of interrelated activities that provide opportunities for optimizing the collective value derived from the
C
interdependencies
a series of linked and strategically relevant activities that deliver products or services that the organization’s
D
customers value
Reference : Externally Oriented Cost Management Techniques-Value Chain
11. A software manufacturer is experiencing a high level of customer complaints. Customers say that the software products
are unreliable and do not meet their needs. The organization has decided to establish a relationship with two major
customers (who are both computer manufacturers) to ensure that the software meets their requirements.
Which one of the following statements is correct? The manufacturer
A is using collaboration as the value driver in its value chain.

B should focus on products that are popular with its customers.

C is improving customer value by creating upstream linkages in the value chain.

D is experiencing internal failures and needs to provide better training to its software developers.
Reference : Externally Oriented Cost Management Techniques-Value Chain
12. Which one of the following statements best describes the purpose of product life cycle analysis?

A to increase the probability that new products will become ‘stars’

B to determine the market share and growth potential of an organization’s products

C to identify and manage the risks associated with an organization’s product offerings

D to understand and plan for the cash flow required by an organization’s product offerings
Reference : Cost Management Techniques-Cost Planning
13. Lime Manufacturers Limited (LML) is considering whether to implement target costing, activity-based costing, kaizen
costing, customer-profitability analysis, and business-process management and continuous-improvement systems.
Management at LML should be aware that these concepts generally go together in pairs.
The two pairs that would most likely go together would be:

Pair 1 Pair 2
I business-process management and kaizen costing continuous-improvement programs and target costing
II business-process management and target costing continuous-improvement programs and kaizen costing
III customer-profitability analysis and kaizen costing continuous-improvement programs and target costing
IV business-process management and kaizen costing customer-profitability analysis and activity-based costing

Select the right pairs.

A I
B II
C III
D IV
Reference : Cost Management Techniques-Business Process Re-engineering
14. Identify the most accurate statements from the following about the undertaking of customer-profitability analysis.
The best measure of customer profitability is customer revenue less the activity-based manufacturing cost of the
A
products purchased.
Using activity-based costing to allocate marketing and sales administration costs to customers will provide a
B
useful measure of customer profitability.
Despite activity-based costing being used, the allocation of customer-related costs to each individual customer
C
as the final cost object is still problematic.
Customer-profitability analysis based on gross margins provides the basis for the development and
D
implementation of strategies tailored to improving the profitability of individual customers.
Reference : Cost Management Techniques-Traditional vs Modern Manufacturing Philosophy
15. HJH Limited is experiencing significant external failure costs. The management accountant uses a quality cost
framework to analyze the situation.
Which one of the following strategies would lead to the greatest likely reduction in overall quality costs?

A increased spending on appraisal costs and decreased spending on external failure costs
B decreased spending on appraisal costs and increased spending on internal failure costs

C increased spending on prevention costs and decreased spending on external failure costs

D increased spending on internal failure costs and decreased spending on external failure costs
Reference: Cost Management Techniques—Total Quality Management

PART-B – STRATEGIC FINANCIAL MANAGEMENT

1. Dawar Limited wants to forecast its free cash flow for the next three years. Current free cash flow
along with expected annual increase in various items is as follows:

Expected annual increase Rs. million

EBIT 5.5% 2,250
Tax - 652.5
Depreciation 5.0% 382.5
Capital expenditure 3.5% 675
Working capital requirements 4.0% 270

The applicable tax rate for the company is 29%.

By what percentage will free cash flow have increased between now and the end of year-3?

A 20.77%

B 40.11%

C 15.05%

D 22.37%
Reference: Capital Investment Appraisal-Stakeholders and maximizing shareholders wealth
2. Gwadar Home Products Limited is evaluating following three investment proposals. If only the
project in question is undertaken, the expected present values and the amounts of investment
required are:
Rs. ‘000’
Project Investment Expected PV
1 200,000 290,000
2 115,000 185,000
3 270,000 400,000

If projects 1 and 2 are jointly undertaken, there will be no economies; the investments required and
present values will simply be the sum of the parts.
With projects 1 and 3, economies are possible in investment because one of the machines acquired
can be used in both production processes. The total investment required for projects 1 and 3
combined is Rs.440,000.
If projects 2 and 3 are undertaken, there are economies to be achieved in marketing and producing
the products but not in investment. The expected present value of future cash flows for projects 2
and 3 is Rs.620,000.
Which of the following project/ combination of projects is with highest NPV?
A Project 1 and 2
B Project 1 and 3
C Project 2 and 3
D Project 3
Reference: Capital Investment Appraisal-Investment Appraisal Methods
3. Global Textile Limited and National Textile Limited are considering the merger in a new company, Silver
Textile Limited that will increase the earnings by 20% due to synergy effect. Following information relates
to the companies before merger:
Rs. in million
GTL NTL
Equity and liabilities
Share capital (Rs. 10 each) 600 600
Retained earnings 300 80
Total equity 900 680
Debt 1,100 500
2,000 1,180
Earnings (net profits after tax) 250 200
The financial advisor of the firm has projected the growth in corporate earnings by 20%, if the economic
growth is slow and 50%, if the growth is high (applicable for both the companies). Probability of high
growth and slow growth are 0.20 and 0.70 respectively. P/E multiple of textile composite sector is 9 and
is projected to grow at 10 and 11 for slow and high growths, respectively while weaving sector companies
will remain trading at P/E multiple of 6 in any case. After the merger, the new company will be listed in
textile composite sector and will be valued accordingly.
Considering the above facts, expected value of National Textile Limited is ____________.

A 16.80
B 14.53
C 24.80
D 13.75
Reference: Capital Investment Appraisal-Stakeholders and maximizing shareholders wealth
4. Saad Limited is contemplating to make a bid to take over Khan Textile Limited. Both companies are in
the same industry having similar gearing levels of 18%. WACC of Saad Limited is 19%. Saad Limited
has estimated that the takeover will increase its annual cash flows over the next few years by the
following amounts:
Rs. in million
After-tax (but before
year interest) cash flows
2021 15.60
2022 18.30
2023 23.70
2024 onward 29.10

Khan Textile Limited has 8% irredeemable debentures of Rs.31.5 million trading at par.

If Saad Limited makes a bid of Rs. 97 million for the entire share capital of Khan Textile Limited, it
would increase shareholders’ wealth by ___________________.

Hint: Use the FCFs of the target company (i.e., cash flows before interest)

Year 0 1 2 3 4
PV factor at 19% 1 0.840 0.706 0.593 0.499

A Rs. 2.65 million

B Rs. 2.71 million
C Rs. 2.22 million
D Rs. 2.48 million
Reference: Capital Investment Appraisal-Stakeholders and maximizing shareholders wealth
5. Shariq Industries Limited desires to acquire 100% shares in Kamaal Limited. Both companies operate
in the same industry and have similar gearing levels of 17%. Cost of equity of Shariq Industries
Limited is 21%. Shariq Industries Limited has estimated that the takeover will increase its annual cash
flows over the next few years by the following amounts:

Rs. in million
After-tax (but before interest) cash
year
flows
2021 29.40
2022 37.20
2023 40.80
2024 onward 60.70
Kamaal Limited has 8% irredeemable debentures of Rs.77 million trading at par. Tax rate is 29%.

If Shariq Industries Limited makes a bid of Rs. 195 million for the entire share capital of Kamaal
Limited, it would increase the shareholders’ wealth by________________.

[Hint: Use free cash flow to equity (FCFE) of the target company (i.e., cash flows after interest)]

year 0 1 2 3 4
Discount factor at 21% 1 0.826 0.683 0.564 0.467
 A Rs. 22.44 million

B Rs. 21.81 million

C Rs. 19.61 million

D Rs. 20.07 million

Reference: Capital Investment Appraisal-Stakeholders and maximizing shareholders wealth
6. The conversion option on an 8% convertible bond expires in 3 years’ time; if unconverted it is redeemable
at par in 10 years’ time; conversion is for 20 ordinary shares, the current share price being 370 paisa.
The current required return on unconvertible bonds with a 10 year maturity is 12%.
The conversion value of its security is ________.

A Rs. 68.8

B Rs. 70

C Rs. 77.4

D Rs. 74
Reference: Cost of Capital-Investment decisions, Financing and the cost of capital
7. Which of the following firms would most appropriately be valued using an asset-based model?
A An energy exploration firm in financial distress that owns drilling rights for offshore areas.
B A paper firm located in a country that is experiencing high inflation.
A software firm that invests heavily in research and development and frequently introduces
C
new products.
D All of the above.
Reference: Capital Investment Appraisal- Stakeholders and maximizing shareholders wealth
8. Suppose an analyst estimates equity value by discounting free cash flow to equity (FCFE) at the weighted
average cost of capital (WACC) in the FCFE model and estimates firm and equity value by discounting
free cash flow to the firm (FCFF) at the required return on equity in the FCFF model. The analyst would
most likely:
Overestimate equity value with the FCFE model and underestimate firm value and equity
A
value with the FCFF model.
Underestimate equity value with the FCFE model and overestimate firm value and equity
B
value with the FCFF model.
Underestimate equity value with the FCFE model and underestimate firm value and equity
C
value with the FCFF model.
Overestimate equity value with the FCFE model and overestimate firm value and equity value
D
with the FCFF model.
Reference: Capital Investment Appraisal- Stakeholders and maximizing shareholders wealth
 PART-C – STRATEGIC MANAGEMENT

1. A company that manufactures ready-made garments produces two lines of clothing: winter and summer. The
clothing is produced to a high standard of design and manufacture and it is sold under a widely recognized and
prestigious label.
The strategy that the company is seeking to use in the highly competitive clothing market is referred to as a:
A Cost-focus strategy.

B Cost leadership strategy.

C Differentiation strategy.

D Differentiation-focus strategy.
Reference : Strategic Decision Making- Other aspects of business strategy
2. In comparison to the formal planning approach to strategy development, the emergent approach is not associated
with which of the following?

A Visionary entrepreneurs

B A response to unexpected contingences

C Goal congruence

D Strategy can be tried and developed as it is implemented

Reference : Strategic Decision Making- Strategic Planning
3. Which one of the following best describes that part of the strategic management process within an organization
that examines its competitive position in relation to products, production facilities, non-current assets, people,
organizational structures and current operating results?

A Internal Analysis

B External Analysis

C SWOT Analysis

D Stakeholder Analysis
Reference : Strategic Decision Analysis- Organization to its environment
4. The ______________ is a comprehensive approach to strategy that suggests a logical sequence that
involves analyses of current situation, generating choices and implementing the chosen strategy.
A Freewheeling opportunism

B Incrementalism

C Rational model

D Emergent strategies

Reference: Strategic Decision Making- Strategic Planning

5. In an organization, growth continues in an environment of more formal communications, budgets and
focus on separate activities like marketing and production. Incentive schemes replace stock as a financial
reward. However, there comes a point when the products and processes become so numerous that
there are not enough hours in the day for one person to manage them all, and he or she can't possibly
know as much about all these products or services as those lower down the hierarchy.
According to Grenier organizational growth model, which of the following crises does this phase ends
with?
A Crises of control

B Crises of red tape

C Crises of Autonomy

D Crises of ?
Reference: Directions and method of growth
6. Which one of the following activities would be part of the performance element of corporate governance?
A Responding to changes in the business environment

B Monitoring the internal control system

C Establishing an audit committee

D Designing and implementing a corporate code of conduct

Reference : Strategic planning- other aspects of business strategy
7. ___________________ decisions commit an organization to specific products, markets, resources, and
technologies over extended period of time.
A Strategic planning

B Strategic formulation

C Strategic evaluation

D Strategic implementation
Reference : Strategic Decision Making- Strategic planning
 DESCRIPTIVE QUESTIONS
PART-A – STRATEGIC MANAGEMENT ACCOUNTING [100 Marks]

Question:
New Horizon Limited (NHL) is manufacturing and selling of a single product ‘Tetra’
currently having an order for 6,000 product units per period to be fulfilled by the
company. There are no stocks of product units at the beginning or end of the period
under review. The stock level of material R remains unchanged throughout the period.
The unit specifications are as follows:-

Direct Materials R 9 Sq. meter at Rs. 55 per square

meter
Machine Time 0.8 Running hours
Machine cost per gross Rs. 400
hour
Selling price Rs. 2,500

NHL is planning to implement a Quality Management Programme (QMP) the following

additional information regarding costs and revenues are given as of now and after
implementation of Quality Management Programme.
Before the implementation of QMP After the
implementation
1: 7% of incoming material from suppliers scrapped due to 1: Reduced to 5%.
poor receipt and storage organization
2: 5% of materials R input to the machine process is 2: Reduced to 3.5%
wasted due to processing problems.
3: Inspection and Storage of Material R costs Rs. 2 per 3 No change in the
square meter purchased. unit rate.
4: Inspection during the production cycle, calibration checks 4 Reduction of 40%
on inspection equipment vendor rating and other checks of the existing cost.
cost Rs. 250,000 per period.
5 Production Qty. is increased to allow for the downgrading 5 Reduction to 10.5%
of 15.5% of the production units at the final inspection stage.
Downgraded units are sold as seconds at a discount of 40%
of the standard selling price.
6: Production Quantity is increased to allow for return from 6 Reduction to 3.5%
customers (these are replaced free of charge) due to
specification failure and account for 7% of units actually
delivered to customer. Replacement units incur a delivery
cost of Rs. 250 per unit. 70% of the returns from the
customers are rectified using 0.3 hours of machine running
time per unit and are re-sold as ‘third quality’ products at a
 discount of 50% on the standard selling price. The
remaining return units are sold as scrap for Rs. 125 per unit

7: Product liability and other claims by customers is 7: Reduction to 2%

estimated at 4% of sales revenue from standard product
sale.
8: Machine idle time is 30% of Gross machine hrs. used 8: Reduction to 12.5%
(i.e. running hour = 70% of gross/ hrs.)
9: Sundry costs of Administration, Selling and Distribution9: Reduction by 20%
total- Rs. 6,00,000 per period. of the existing.
10: Prevention programme costs Rs. 2,00,000 10: Increase to Rs.
6,00,000
The Total Quality Management Programme will have a reduction in Machine Run Time
required per product unit to 0.7 hr.

Required:

a) Prepare summaries showing the calculation of (i) Total production units (pre
inspection), (ii) Purchase of Materials R (Square meters), (iii) Gross machine Hours.
In each case, the figures are required for the situation both before and after the
implementation of the Quality Management Programme so that orders for 6,000
products can be fulfilled. (50 Marks)

b) Prepare Profit and Loss Account for NH for the period showing the profit earned both
before and after the implementation of the total Quality programme. (50 Marks)

Reference: Cost Management Techniques- Total Quality Management

 PART-B – STRATEGIC FINANCIAL MANAGEMENT [50 Marks]

Question:

Chamber Sanitary Limited (CSL) is a multinational company primarily engaged in the manufacturing of
of wide range of sanitary products for both national and international market. The higher management
of the company is considering to setup a manufacturing unit of product 'R' in UAE. The life cycle of
Product 'R' is almost complete but production for further 2 years is under review, which is expected to
produce a net cash inflow of Rs. 600 Million next year and Rs. 460 Million in the last year of Product 'R'
life.

Product 'F':
CSL has already decided to replace Product 'R' with Product 'F' whose production will commence in 2
years' time. Product 'F' is expected to have life cycle of 10 years. It could be either manufactured in
factory situated in Karachi or in Faisalabad manufacturing unit owned by the company. The location of
factory situated in Karachi is near the market place, therefore, if Product 'F' is manufactured in
Faisalabad, the company will have to bear a transportation cost of Rs. 2,000 per unit. Production costs
will be the same for both factories. Product 'F' will require additional equipment and workers will need
training: this will cost Rs. 1,200 Million at either location. 250,000 units of Product 'F' will be made each
year and each unit is expected to generate a net cash inflow of Rs. 5,000 in addition to transportation
costs. If Product 'F' is made in Karachi, the factory will be closed and sold at the end of product's life.

Product 'G'
The higher management is considering the further possibility: Product 'G' could be produced in Karachi
factory and Product 'F' at Faisalabad unit. Product 'G' must be introduced in 1 year's time and will remain
in production for the period of 3 years. If it is introduced, the manufacturing of Product 'R' will have to
cease a year earlier than planned. If this happened, output of Product 'R' will be increased by 15% to
maximum capacity next year, its last year, to build stock prior to product's withdrawal. The existing staff
would be transferred to Product 'G'.

The equipment required to make Product 'G' would cost Rs. 800 Million. 65,000 units of Product 'G'
would be made in the first year: afterwards production would rise to 90,000 units a year. Product 'G' is
expected to earn net cash inflow of Rs. 14,000 per unit. After 3 years' production of Product 'G', the
factory located in Karachi would be discontinued and sold. (Product 'F' would not be transferred back to
the factory located in Karachi at that stage; production would continue at Faisalabad unit)

Sale of Factory:
It is expected that the factory in Karachi could be sold for Rs. 1,100 Million at any time between the
beginning of Year-2 and the end of Year-12. If the factory is sold, CSL will make redundancy payments
of Rs. 400 Million and the sale of equipment will raise Rs. 70 Million.
 Equity Beta of CSL is 0.5. The risk-free rate is 8% and the market premium is 9%.
The cost of debt net of tax is 9%.
The capital structure of the CSL is 60% Debt and 40% Equity.

Required:
(a) Evaluate the three options for CSL and determine the best financially viable option for the company. 30
(b) Calculate and discuss the sensitivity of the option in Part (A) to: 20
(i) changes in transportation costs
(ii) changes in the selling price of the factory
Reference: Capital Investment Appraisal- Investment Appraisal/ Risk and uncertainty- Risk Analysis Techniques
 PART-C – STRATEGIC MANAGEMENT [50 Marks]

Question:

Glasgow Corporation is one of the largest conglomerated public limited company operating in Pakistan for the
last 50 years. It was a venture of Dynamic Pvt. Limited which started their business primarily as chemical
manufacturing company later acquiring existing chemical distributors and retailers as the result of many
successful mergers and acquisitions embarking growth pace of the business. The company was keen to
proceed further and not restricted itself in only one industry, thus pulling itself out of its comfort zone and
expanding its roots in diversified industries typically including textile, cosmetic, pharmaceuticals and automobile
companies. Presently, the company is governed by the pioneers of the business Dynamic Pvt. Limited having
40% shares, while 30% stake was held by financial institutions, 25% by Glasgow employees and remaining 5%
with the general public.

Environmental Implications:

It has been more than 5 decades since the establishment of Glasgow Corporation chemical factory which from
inception, was surrounded by agricultural land connected with a lake that stretches alongside the factory area
ultimately dropping down to the sea. All the chemical untreated waste of the company forms a passage from
the vicinity of factory dumping into the lake. Over the years, with increased urbanization need for proper
infrastructure and facilities became essential for the locality like residential areas, schools, hospital and market
as well as increasing need of operating factory at 100% capacity required employees to be settled near the
premises of the factory area along with their families.

The factory is located in the area controlled by the Government and requires renewal of license each year to
continue its operations. The present government, discovered about the activities of the companies and
hazardous waste that forms the part of lake leading to sea and showed deep concern on the impact this would
have on the lives of habitants. Considering the severity of the event, the government decided to penalize the
company and withheld its license in order to restrict it from further polluting the environment. As a response
during the court trial, the company countered its activity by mentioning it as a core requirement for the operations
else whole of the process would become rather uneconomical to the level that it could develop going concern
issues for the company.

The court after final hearing, gave verdict of penalizing the company for dumping untreated waste in the lake
as it was against the applicable law that is, The Pakistan Environmental Protection Act 1997, and breach of
corporate social responsibility and thus, summoned it to ensure adherence to the guidelines to avoid any strict
action for the future, however, the court finally directed the government to renew the license of the company
allowing it to dump only treated waste in the lake as the licensing includes no restrictions and the activity is
critical to the sustenance of the company.
Changing Dynamics of Automobile Industry:

The auto sector continues to flourish as one of the best performing creating avenues for revenues, employment
creating room for research and development and innovations for the market players. Despite probability of
deceleration in growth, Government’s auto policy has been foreseen to uplift industrial progress pulling down
the barriers for many new players in the market with entirely new models. Patron Pvt. Limited a subsidiary of
Glasgow Corporation is one of the key market players in the industry having considerable market share and
huge investment in place which is expected to increase in the coming years. The company is primarily involved
in the manufacturing of all scale trucks to facilitate the transportation business. Although trucking industry has
been exposed to consistent declination where the work at certain government projects have halted due to
imposition of high taxes on non-filers, so are the supplies of trucks and the respective payments, resulting
disruption of the work flow and the multiple upward price revisions due to currency depreciation, economic
slowdown to curtail domestic demand and price-sensitive potential buyers refrained from making purchases.

Required:

You are a CMA Corporate Consultant, having wide range of experience, and have been appointed as an Advisor
to provide guidance on plan of action to the management on the following:

Question Number 1

How being a diversified conglomerate could be beneficial for Glasgow Corporation in achieving economies of
scale and creating competitive advantage? (35 Marks)

Question Number 2

Discuss how crucial is the synchronization and harmony amongst the team members to bring forth synergic
affect in the decision making? (15 Marks)

Reference: Strategic Decision Analysis- Directions and Methods of Growth/ Change Management- Managing resistance to Change

THE END