MAC4863/2016

Questions for Assignment 4 for

2016
Enterprise Strategy
MAC 4863

Year Module

Department of Management Accounting

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Define tomorrow
 CONTENTS

 ASSIGNMENT 04: (OPTIONAL/SELF ASSESSMENT ASSIGNMENT)

Due date: 26 August 2016

Unique Number: 714351

THIS ASSIGNMENT CONTAINS OLD ASSIGNMENT QUESTIONS, OLD CIMA REVISION

QUESTIONS AND PREVIOUS EXAM QUESTIONS. THIS ASSIGNMENT DOES NOT CONTRIBUTE
TO YOUR YEAR MARK. THIS ASSIGNMENT COVERS THE WHOLE SYLLABUS. TRY DOING
THE QUESTIONS UNDER EXAM CONDITIONS.

Question 1 (32 marks)

A transport authority in the greater Eastern Cape, is committed to the provision of rural passenger
transport services in an area between two large cities, namely Port Elizabeth and East London. It has
received tenders from various operators they are as follows:

Bay Academy

Offers to operate a limited stop service between the two main cities in the authority’s area. Buses would
operate at hourly intervals from 6 am until 8 pm on condition that the authority would authorise no other
operator to service this route or any part of it. Bay Academy also requires that the district councils would
grant the required permissions to allow on-board catering.

African Juventus

Offers to operate social service vehicles for physically challenged passenger and others between the
urban areas. Services would operate half-hourly from 5:30 am to 11 pm at a cost to the authority of R50
000 per week for the service. All fares would go to the authority. It is estimated that the total fare
income could eventually amount to R30 000 per week but would initially be between R10 000 and R19
000 per week. Six months’ notice of termination would be required from the authority or the operator,
should it be found that some other service is more appropriate to traveler’s needs.

Tornado

Proposes to operate a dial-a-bus rural service (a service by which intending passengers can telephone
for a bus) Travelers from within the rural area between the two cities would be able to make use of these
out-of-town services to and from either centre at a reasonable cost. The authority would need to
subsidise the cost of this service by regular weekly payments of R15 000 and all fare income would be
retained by Tornado.

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Required:

(a) Discuss the criteria which should be applied to evaluate the three proposals, taking
into account the authority’s need to seek out the best value for money. (12 marks)

(b) Discuss how such an authority can quantify the value of such a public passenger
transport facility to a community. (10 marks)

(c) Describe and assess other sources of funding that might become available for the
successful operation of the rural passenger transport facility other than revenue
earned from passenger fares and public funds. (10 marks)

(Total marks = 32)

(CIMA adapted)

Question 2 (55 marks)

Introduction

C is a large civil engineering company which carries out various building contracts within both its
home and overseas markets. Its main area of work, particularly overseas, is in road
construction. The company has a strong financial track record and successfully survived a major
recession within its home market about ten years ago.
Economic circumstances in overseas markets

During the last three years, the overseas markets in which C has been carrying out building
contracts have suffered a serious economic recession. Business confidence in these markets
has been seriously weakened over this period. One country which has been affected by
adverse economic circumstances is Eastlandia. C has been engaged in carrying out contract
work in Eastlandia for several years. Government action in Eastlandia to protect its ailing
economy has also had an adverse impact on foreign contractors such as C operating in this
country.

The concern felt by C's directors regarding the economic situation in Eastlandia has been
increased as a result of recent events involving a large development company (D) which C has
worked with in the past. Company D, which is wholly owned by Eastlandian shareholders, had
previously received Eastlandian government backing. However, it has recently been allowed to
go into receivership without any further government support. The government announced that
partial repayment of debts owed by the development company to local investors would take
priority over those it owed to foreign investors. The result of this is that foreign investors are
unlikely to see any recovery of their loans.

The serious economic situation developing in Eastlandia has threatened to result in an

economic recession. There has been a consequent negative effect on related industries within
the country, such as steel, building materials and transport. Another major concern for C's
directors is the constant threat posed by currency fluctuations and the possibility of the
Eastlandian government being forced into currency devaluation.

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Work-in-progress
Currently, C is engaged in the construction of a major road linking two parts of a new
Eastlandian city, bypassing the central congested area. C is engaged as a subcontractor to a
major Eastlandian development company - a different company from D which went into
receivership recently. The contract was accepted by C after estimating that it would provide a
high positive net present value. At the time the investment appraisal calculation was made, the
expected currency exchange rate between Eastlands (Eastlandia's currency) and £ sterling (C's
home currency) was 7.26 to the £ in the current year and 7.54 to the £ next year. In fact, the
current exchange rate is 7.74 to the £ and the forward rate in twelve months’ time is quoted at
8.56 to the £.
As far as C's overall business is concerned, the contract represents about 10% of the total
turnover for the company. The contract commenced three months ago and payment to C is to
be in Eastlands. Progress payments for the work done so far have been delayed without any
explanation. The contract is about 15% complete and is expected to be finished in another 21
months, which is three months later than planned. This will result in penalty payments being
incurred by C.

The directors of C have expressed to the contract manager for the road development in
Eastlandia their concern regarding the need to undertake remedial work on what has been
completed so far. This has resulted from the use of faulty materials obtained from an
Eastlandian supplier. The remedial work has already consumed the total amount of the financial
contingency which was allowed within the contract estimates.
Strategic information and market size

C uses external databases to establish the levels of its own share of the market and overall
patterns of market growth and development. In addition, the management accounting
department of the company provides internal information on market share and growth and
internal capacity to meet its future contractual demands. Over the last two years, there has
been a general decline in market opportunities, but C has in fact managed to increase its overall
market share. This has been achieved because of its strong reputation for using good-quality
materials and applying high standards of workmanship.
One of the major criticisms being made in Eastlandia is the poor quality of the civil engineering
projects which have been completed quickly. There have been reports of numerous casualties
among the site workers during the construction process.
Some buildings have partially collapsed after completion and there have been instances where
roads have begun to break up shortly after they have been opened. This has caused civilian
casualties with some fatalities and resulted in noisy public protest in Eastlandia about the lack of
attention to safety in civil engineering and building work. C is well regarded by the Eastlandian
government. It has taken a long time for the directors of C to build the company's reputation and
gain recognition in Eastlandia for its workmanship.
Possible future development

The Eastlandian government has invited C's directors to tender for other civil engineering work.
C has taken up the invitation and if the company is successful in all its tenders, the total
commitment in Eastlandia would represent about 40% of its order book.

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In recognition of the importance of the Eastlandia market, and in order to reduce the potential
losses from developers which engage their services becoming insolvent, the directors of C have
proposed that a strategic alliance be formed. It is proposed that this alliance will be established
with an Eastlandian civil engineering contractor who, it is expected, will have an insight into the
financial integrity of potential customers. The alliance partner would be able to give clear advice
as to which of these Eastlandian customers would be suitable for the establishment of
contractual arrangements.

REQUIRED:

(a) Prepare a corporate appraisal for C in respect of its strengths, weaknesses and
opportunities. (10 marks)

(b) Discuss the threats posed to C by its involvement with the road-building project in
Eastlandia and explain how it can reduce the impact of these threats on its own
strategic position. (20 marks)

(c) Recommend appropriate sources of information which may be used by C's

management accountants when evaluating the potential future demand for its
services in its overseas markets. (10 marks)

(d) Discuss the strategic logic and practical considerations for C of entering into an
alliance with an Eastlandian civil engineering contractor. (15 marks)

(Total 55 marks)

(CIMA revision question)

Question 3 (30 marks)

A well known perfume house, Tuberose attains worldwide sales for its globally branded
products. Its products consist mainly of deodorants, perfume, after shave lotions, and body
washes for both men and
women.

In carrying out an analysis of its competitive environment, the Marketing director has applied
Porter’s five force model and analysed the factors that affect Tuberose under each of the
following headings:

• Threat of entry: Little threat as although major competitors do exist, the size of
Tuberose presents a large entry barrier.
• Power of buyers: This is very important as the customers globally have ample choice
from different competitor’s products.
• Power of suppliers: Little threat as most suppliers of materials are small scale and
Tuberose could easily source its raw materials from other suppliers if necessary. Labour
is relatively cheap in Tuberose production facilities which are mainly situated in
developing countries.
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 • Substitute products: There are many alternative products offered by competitors, but
the Marketing director feels there is little by way of substitute for Tuberose’s products,
and therefore this factor poses little threat.
• Rivalry among competitors: There is strong competition in the perfume industry with
new products and smells being constantly developed, therefore this is a major threat.

The Marketing director is reasonably confident that he has judged the impact of these
competitive forces correctly as they apply to Tuberose. However he would like some re-
assurance of this. He has asked you as the Management Accountant to provide some
appropriate performance indicators by which the strength of the five competitive forces as
applied to Tuberose could be judged.

Required:

Recommend to the Marketing director suitable performance indicators which could be used to
judge the strength of the five competitive forces as they apply to Tuberose.
Discuss why you consider your recommendations to be appropriate.
Include in your discussion whether you agree or not with the Marketing directors judgement
regarding the impact of each force on Tuberose.
(Total 30 marks)

(CIMA – adapted)

Question 4 (25 marks)

PART A

Fusion manufactures running shoes, it has three divisions. Each of these divisions develop and
produce running shoes. The Life division produces running shoes that can be sold to the
general public through retail stores. The Elite division produces running shoes for the elite
sports person, this division works together with the individual sports person to develop a shoe
specifically for their needs. The Fusion division produces fashionable cross trainer shoes that
are not meant to train in but more for casual wear.
Fusion has built a global reputation for running shoe design and quality. The Elite division has
not been performing well for some time now, and the sales in high end running shoes produced
by the Life division have dropped. Unfortunately the market for expensive high end running
shoes is changing. Exchange rate movements and increased production costs have also made
Fusion less competitive, and its rivals are rapidly catching up in terms of running shoe
technology and quality. As a result, the latest annual reports show that turnover is down and
margins have reduced that the organisation is just barely breaking even.
You as the Management Accountant have just attended a strategy meeting at Fusion in which:
Manager A argued that the Life Division’s strategy was wrong.
Manager B claimed that the major problem had been the failure to properly implement functional
strategies.

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REQUIRED:
For the benefit of all the managers present at the meeting the CEO has asked you to explain
the following:

The differences between corporate level strategy, business level strategy and functional level
strategy for Fusion.
(13 marks)

PART B

Thabang is looking for finance in order to open a chain of yoghurt ice cream stores. Despite the
competition in this sector having undertaken market research amongst his target market,
Thabang is convinced that he can succeed with his yoghurt ice cream stores.
He is currently in the process of putting together a business plan which will outline his strategy
to enter the market place. Having recently attended a workshop on what to include in a
business plan, Thabang remembers that he will need to determine what the critical success
factors (CSFs) for his business are, but he is confused about how these differ from core
competences.

REQUIRED:

i) Explain why it important for Thabang to determine the CSFs as part of the
development of his strategy and how they differ from core competences.
(8 marks)

ii) Identify what the CSFs might be for Thabang’s chain of ice cream stores. (4 marks)

(Total 25 marks)

(CIMA – adapted)
Question 5 (25 marks)

Torque is an organisation that develops high performance engines for the motor industry. It was
founded seven years ago by three mechanical engineers that studied together at university. The
organisation employs 10 other engineers. All of these employees are receiving relatively low
salaries but participate in a share option scheme. The means that when Torque is successfully
floated on the stock exchange they will receive shares in the company.
Torque currently has a number of new, innovative engines in development. Specially engines
that not harmful to the environment and are fuel efficient, for example electric drive motors.
Torque has to invest a significant amount of resources into the development of each potential
engine, whether they are successfully accepted by the car manufacturers or not. Currently, it
has 12 new engine types in development, a number of which may not be successful when
tested by the car manufacturers. Due to the speculative nature of the industry, companies such
as Torque are unable to obtain bank loans on commercial terms.
Torque is funded by an exclusive arrangement with a venture capital company. However, there
is only sufficient cash in place to maintain the present level of activity for a further nine months.
The venture capital company owns 15% of the equity of the organisation. The rest is owned by
the three founders. It has always been the intention of the venture capital company and the
founders that, once the organisation has a sufficient number of engines in production and on the

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market, the organisation would be floated on the stock exchange. This is expected to happen in
five years’ time.
Recently there have been a number of options available to Torque which might solve its cash
flow problems. The three founders have identified the following options:
1. The venture capital company has suggested that it will guarantee the cash flow until the
first engine is successfully launched in commercial quantities. However, it would expect its
equity holding to rise to 60% once this offer is accepted.

2. A large car manufacture has offered to buy Torque outright and retain the services of the
three founders (in research roles) and a few of the staff.

3. Another engine development organisation has offered to enter into a merger with Torque.
This organisation has also been in existence for seven years and has one engine which
will be launched in six months. However, of the four other potential engines it has in
development none are likely to be commercially viable for 5 years. This company would
expect the three founders to stay with the newly merged company but feels a
rationalisation of the combined staff would be needed.

REQUIRED:

(a) Using the Johnson and Scholes strategic option framework, evaluate the strategic
options identified by the founders.
(15 marks)

(b) Identify and evaluate one other strategic option that the founders might pursue.
(6 marks)

(c) Recommend the most appropriate strategic option based on your analysis above.
(4 marks)

(Total 25 marks)

(CIMA – adapted)

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Question 6 (20 marks)

(a) Briefly explain how the measurement of divisional performance differs when
assessing the achievement of strategic targets versus that from operational targets.

(5 marks)

(b) J is a hospital which supplies a wide range of healthcare services. The government
has created a competitive internal market for healthcare by separating the function of
service delivery from purchasing. The government provides funds for local health
organisations to identify healthcare needs and to purchase services from different
organisations which actually supply the service. The service suppliers are mainly
hospitals.
J is a service supplier and has established contracts with some purchasing
organisations. The healthcare purchasing organisations are free to contract with any
supplier for the provision of their healthcare requirements.
Previously, J was organised and controlled on the basis of functional responsibility.
This meant that each specialist patient function, such as medical, nursing and
pharmacy services, was led by a manager who held operational and financial
responsibility for its activities throughout the hospital. J now operates a system of
control based on devolved financial accountability.

Divisions comprising different functions have been established and are responsible
for particular categories of patient care such as general medical or general surgical
services. Each division is managed by a senior medical officer.
J's board recognises that J exists in a competitive environment. It believes there is a
need to introduce a system of divisional appraisal. This measures performance
against strategic as well as operational targets, using both financial and non-financial
criteria. The board is concerned is to develop a system which improves the
motivation of divisional managers. This will encourage them to accept responsibility
for achieving strategic as well as operational organisational targets.

In particular, the board wishes to encourage more contractual work to supply services to
healthcare purchasing organisations from both within and outside its local geographical
area. It is a clear aim of the board that a cultural change in the management of the
organisation will result from the implementation of such a system.

REQUIRED:

Discuss the issues which the board of J should take into consideration in establishing a system
of performance measurement for divisional managers in order to ensure the attainment of its
strategic targets.
(15 marks)

(Total 20 marks)

(CIMA revision question)

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Question 7 (25 marks)

WAL is a manufacturer of biscuits, which it sells to retailers. Its current year’s revenue of
£120 million represents approximately 3% of the UK market. WAL has a centralised marketing
information system based on a software package bought in 2005. This package is financial
accounts orientated: the only management information provided to support the marketing staff
consists of reports showing revenue, profit, inventory value, receivables and payables
balances. WAL’s marketing staff and the Marketing Director, M, have complained that they are
not provided with information such as customers’ profitability, market share and market growth
which would support their strategic decision making.

They consider the inadequacies of the current marketing information system to be so serious
that they would like a Big Bang* change which would mean moving straight away to a new
marketing information system that would give them the information they need. They feel WAL
is being left behind by its competitors and is losing customers.

The Company Secretary, R, manages WAL’s IS/IT staff. R was responsible for buying the
existing marketing information software in 2005 and he would also be responsible for the
procurement of its replacement. R has identified three possible solutions to meeting the
marketing staff’s needs: the first two are evolutionary, the third would be a 'Big Bang'.

Option 1

Modification: the existing marketing information system would be redesigned by WAL’s

inhouse IS/IT staff to meet the needs of the marketing staff. Although WAL’s IS/IT staff have
limited experience of the type of work which would be required, they are confident the
redesign could be done within a year. The IS/IT staff are unsure of the cost.

Option 2

Development: WAL’s inhouse IS/IT staff would develop new bespoke software to meet the
marketing staff’s needs. The IS/IT staff have stated that ‘because WAL’s needs are unique,
costs can only be roughly estimated. However, this solution is likely to be considerably more
expensive than the 'Modification' option. The final cost would be dependent upon the length of
the project. It should take a minimum of six months to develop new software but it might take
as long as two years. We have little experience of software development but are very
enthusiastic about trying’.

Option 3

Purchase: WAL could purchase the biscuit industry standard marketing information system
software: this would be an expensive purchase but the product is well proven. Some of WAL’s
marketing staff have experience of using this software in other companies, are very
appreciative of its benefits and believe it would help them considerably in their jobs. The
software supplier claims that ‘90% of the biscuit industry uses our product and if you buy it we
guarantee to have it working inside WAL within three months of you buying it’.

R believes that he represents the majority of opinion within the IS/IT staff who very much
prefer that change should be evolutionary. They would be very resistant to change if it was
carried out in any other way. R also pointed out that WAL has experience of 'Big Bang'
organisational change in the recent past which failed because WAL’s culture didn’t change to
reflect this.

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R stated, ‘It looks straightforward to go out and buy a software package but it’s a lot more
complicated than people think and it’s my department that would have to do all the work.
* 'Big Bang': any sudden forceful beginning or radical change

REQUIRED:

(a) Explain the circumstances in which it would be appropriate to use

i. Evolutionary change
ii. “Big Bang” change (4 marks)

(b) i) Evaluate each of the three options proposed by R. (9 marks)

ii) Recommend, with reasons, which of the three options identified by

R should be adopted (3 marks)

(c) Advise how WAL could overcome the resistance to change which would arise
if option 3, the purchase option were to be adopted. (9 marks)

(Total 25 marks)

(CIMA revision question)

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UNISA 2016

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