CIMA Professional Gateway Assessment SAMPLE PAPER Examiner s Answers

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1 CIMA Professional Gateway Assessment SAMPLE PAPER Examiner s Answers SECTION A Answer to Question 1- From P2 Syllabus (a) Product/Component P4 P6 C3 C5 $/unit $/unit $/unit $/unit Selling Price/ Opportunity Cost Variable Cost Contribution M1(q. meters/unit) Contribution/sq. metre Rank 4 th 1 st 2 nd 3 rd Make (units) 1, Uses (Sq meters) The company should also consider: the effect on sales of P6; buying 750 units of C5 if the final product still has a positive contribution after all of the costs of the bought in components have been considered; the likelihood of the price of material M1 remaining at $20 per square metre; carrying out sensitivity analysis to evaluate the impact of changes in price; the validity of the fixed costs assumption that fixed costs will not alter. CIMA Professional Gateway Assessment - 1 -

2 (b) The first 375 square metres would be used to make C5. This saves $100 per square metre so the maximum price to be paid is $120 per square metre. The next 1,500 square metres would be used to make P4 and earn a contribution of $93.33 per square metre so the maximum price for these materials would be $ per square metre. Thereafter there is no use for any additional material so the maximum price is $0. (c) If 500 units of P4 were produced, this would require 375 square metres of M1. To do this the material would be taken from: C5 125 sq meters losing $100 per sq metre $12,500 C3 125 sq meters losing $124 per sq metre $15,500 P6 125 sq meters losing $200 per sq metre $25,000 $53,000 The minimum financial penalty is $53,000 less (500 x $70) = $18,000 Answer to Question 2 From P5 Syllabus (a) Project stakeholders are individuals or groups whose knowledge, views and actions can affect the outcome/success of the project and/or are affected by its outcomes/success. Identifying stakeholders is a primary task for F, since they can impact on important project decisions during the initiation, planning and execution stages of the project. Different groups will have different reasons for having a stake in the project. Managing the expectations and relationships with the different project stakeholders will require F to understand the power and interests of each group. F needs to identify and get to know the different stakeholders at the start of the project so that she can involve the right people throughout the different stages of the project. It is important that the different stakeholders are involved during the initiation stage when project objectives and requirements are being developed. F will have a responsibility to communicate to stakeholders the impact of the project and ongoing progress. Project stakeholders should all be committed towards a common goal, which is the successful project completion. However, the fact that stakeholders have different roles and interests in the IT project means that they are likely to have different points of view, hence there is the potential for disagreements and conflicts between the various stakeholder groups that F will need to manage. The stakeholders for the IT centralisation project can be characterised as outcome or process stakeholders. Outcome stakeholders will have an interest in seeing that the project objectives are achieved, for instance the Head of IT and staff in the departments who will use the new IT centralised support service. Process stakeholders CIMA Professional Gateway Assessment - 2 -

3 will have an interest in the way in which the project is conducted, including for example the project team. The stakeholders F will need to consider in the IT centralised support service project include, for example: The members of the project team who should be interested in making sure the project delivers its objectives. However, in the case of the IT project, horizontal conflict could arise, since members of the team will have different interests. This is due to the fact that the IT staff and representatives from the different departments are likely to view the way they currently operate as the best way and each will have a vested interest in the current approach. They may try to resist any changes to working practices. The project sponsor (the Head of IT) will provide the resources for the project and hence will be accountable for the resources invested into the project and is ultimately responsible for the achievement of the project s business objectives. F will need to communicate progress and any deviations to the Head of IT, who will put pressure on F to ensure the project is delivered on time and within budget. The project sponsor is a key stakeholder standing to lose if the project fails. He/She also controls the resources necessary to deliver the project, as well as the project budget. The Head of IT will, in this case, also be the project owner since he is the person for whom the project is being carried out. He will be interested in the desired result being achieved. That is, the successful implementation of the new IT centralised support service for the departments that delivers a better service. Project users are the individuals or groups that will utilise the new IT centralised support service. Their interest will be in making sure that the project delivers so that they get at least as good an IT support service, if not better, than they currently receive. IT staff will have a high interest in the project, not only because they will be the ones expected to deliver the service, but also because their roles and work are likely to change as a result of the project. In addition, some staff may no longer have a role once the new IT centralised support service has been established through the project. (b) Conflict between the different stakeholders in the IT centralised support service project is likely to arise because the project involves parties with different interests. People coming together from different departments will have a wide range of backgrounds and F will need to resolve conflicts if the project is to succeed. There are a number of different strategies that F could use to handle the disputes and conflict between the different stakeholder groups. The framework by Thomas (1976) is useful in identifying some of the different approaches. The framework is based on two conflict management dimensions, (i) the degree of assertiveness in pursuit of one s own interests and (ii) the level of cooperation in attempting to satisfy others interests. The strength of each of these in a particular situation will impact on the conflict handling strategy. Taking each in turn: CIMA Professional Gateway Assessment - 3 -

4 Avoidance: This is where one or more of the stakeholders involved in the conflict may seek to avoid, suppress or ignore the conflict. However, this approach would not be recommended for F to use since it does not end up resolving the conflict which could break out again in the future and have a negative impact on the project. Problems that are not resolved are likely to emerge once the IT support service is up and running and may impact on service delivery. Accommodation: This would involve F in putting the interest of the stakeholder first, suppressing his, or other stakeholders interest in order to provide some stability to the project. If the cause of the conflict is endemic then the accommodation strategy may not resolve the differences as would be the case between the views of different IT staff. If one group is accommodated this could result in further conflict later in the life of the project when the IT staff will have to work with each other. Compromise is normally seen as the optimum solution. This is where each stakeholder group would give something up and a deal somewhere between the two is accepted. Negotiation by F will be a key skill in managing the project which often results in compromise to resolve disputes. This might be, for example, between the project owner who wants to change the spec and the project team who may want to negotiate for more time and/or budget to deliver the project. Competition is where the different stakeholder groups will not cooperate and seek to maximise their own interests/goals. F would be advised not to use this strategy since it creates winners and losers. This can lead to further conflict and be damaging to at least one of the parties. Collaboration from the perspective of all stakeholders, is likely to be the optimum solution. This strategy is one in which differences are confronted and jointly resolved to reach a win-win situation. However, F will require good conflict handling skills, bringing together the various conflicting stakeholders and facilitating discussion between them. She could call on the Head of IT as project sponsor to assist her in allaying some of the fears of staff about job losses and seek information from HR about the opportunities for any IT staff displaced by the introduction of the new system. (Other appropriate conflict management handling strategies could be used to develop the answer). CIMA Professional Gateway Assessment - 4 -

5 Answer to Question 3 - From P8 Syllabus EAG Group: consolidated cash flow statement for the year ended 30 April 2008 $ million $ million Ref to workings Cash flows from operating activities Profit before taxation 2,604.2 Adjustments for: Depreciation 2,024.7 Impairment of goodwill (1, ,662.7) Amortisation of intangibles 93.1 Interest expense Profit on disposal of associate (3.4) Share of profit of associate (1.6) 2, ,430.5 Increase in inventories (5, ,881.0) (336.0) Decrease in receivables (4, ,633.6) 36.4 Increase in payables (5, ,356.3) Cash generated from operations 5,353.9 Interest paid (390.0) 3 Income taxes (831.0) 4 Net cash from operating activities 4,132.9 Cash flows from investing activities Purchase of property, plant & equipment (4,917.0) 1 Purchase of intangibles (27.2) 5 Proceeds from sale of associate 18.0 Dividend received from associate Net cash used in investing activities (4,925.4) (792.5) Cash flows from financing activities Proceeds from issue of share capital (4, ,600.0) Dividends paid to minority interest (88.0) 6 Net cash used in financing activities Net decrease in cash and cash equivalents (180.5) Cash at the beginning of the period ( ) (419.4) Cash at the end of the period ( ) (599.9) ======== Workings 1. Non-current assets and depreciation Net book value b/fwd 19,332.8 Depreciation (2,024.7) Additions (balancing figure) 4,917.0 Net book value c/fwd 22,225.1 CIMA Professional Gateway Assessment - 5 -

6 2. Investment in associate Balance b/fwd 13.8 Share of profit to Disposal proceeds (18.0) Dividend received (balancing figure) (0.8) Profit on disposal Interest The interest charged and the amortised costs of the financial instrument, over its fiveyear life, are as follows: Date Balance b/fwd Interest at Balance Interest paid 5% 7% c/fwd , (300.0) 6, , (300.0) 6, , (300.0) 6, , (300.0) 6, , (300.0) 6,549.8 Figure in bold is the interest charged against profit for the year ended 30 April Total finance cost in income statement Less: Interest on long-term borrowings (420.9) Balance = Interest on short-term borrowings 90.0 Total cash outflow in respect of interest: = Income taxes Balance b/fwd Income statement: provision Paid (balancing figure) (831.0) Balance c/fwd Intangibles Balance b/fwd Amortisation (372.4 x 25%) (93.1) Purchase of patent (balancing figure) 27.2 Balance c/fwd CIMA Professional Gateway Assessment - 6 -

7 6. Minority interest Balance b/fwd 1,870.5 Profit attributable to minority Dividend paid (balancing figure) (88.0) Balance c/fwd 2,010.5 Answers to Questions 4 From P2 Syllabus 4.1 A company has a real cost of capital of 6.00% per annum and inflation is currently 4.00% per annum. The company s annual money cost of capital is closest to Answer : 2.00% 4.2 A company is considering a short-term pricing decision to utilise some spare capacity. The item to be manufactured and sold would use 1,500kgs of raw material Q. Material Q is in regular use by the company. It currently has 1,000kgs in inventory, which was purchased last month at a cost of $4 per kg. The current replacement cost of material Q is $4.80 per kg and the current inventory could be sold for $4.30 per kg. Calculate the relevant cost of material Q for the purposes of this decision. Answer : 1,500 kgs x $4.80 = $7, A company is considering investing $100,000 in a new machine that will reduce its annual cash operating costs as follows: Year Operating cash costs saved $ Calculate the payback period to the nearest 0 1 years. CIMA Professional Gateway Assessment - 7 -

8 Answer: The cumulative operating costs saved are as follows: Year Operating costs saved $ Therefore payback occurs in year 3. To the nearest 0.1 years, the payback period is 2 full years plus 20/55 of the third year = 2.4 years. 4.4 A company has only $700,000 available for investment during the coming year. It has identified the following four investment opportunities, all of which are divisible, and have the same life. Investment Capital required $ Net Present Value $ J 400, ,000 K 250, ,000 L 300, ,000 M 350, ,000 Calculate the correct rank order for these investments (best first). Answer: Investment Capital required $ NPV Profitability Index $ J 400, , K 250, , L 300, , M 350, , The rank order is K J L M From P5 Syllabus 4.5 Mintzberg s organisational configuration is made up of the strategic apex, operating core and which three other components. Answer: Middle line, techno-structure, support staff. 4.6 In the hierarchy of objectives, what kind of objective is increase earnings per share? Answer: Primary CIMA Professional Gateway Assessment - 8 -

9 4.7 Which ONE of the following perspectives of strategy is where an organisation avoids radical strategies but instead takes small steps based on what has been done before and worked in the past? Answer: Logical incrementalism 4.8 Which ONE of the following leads to high buyer power? Answer: Low switching costs From P8 Syllabus 4.9 LPD buys goods from its 75% owned subsidiary QPR. QPR earns a mark-up of 25% on such transactions. At the group s year end, 30 June 2007, LPD had not yet taken delivery of goods, at a sales value of $100,000, which were despatched by QPR on 29 June At what amount would the goods in transit appear in the consolidated balance sheet of the LPD group at 30 June 2007? Answer: $80, Which ONE of the following is a valid reason for excluding a subsidiary from consolidation under current International Financial Reporting Standards? Answer: The subsidiary has been acquired exclusively with a view to its subsequent disposal AB owns 60% of the issued ordinary share capital of CD. CD owns 60% of the issued ordinary share capital of EF. Which ONE of the following statements is correct? The effective interest of AB in EF is Answer: 36% 4.12 Which ONE of the following statements is correct? A derivative financial instrument Answer: requires little or no initial net investment. CIMA Professional Gateway Assessment - 9 -