CPAR

CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

MANAGEMENT ADVISORY SERVICES PAGE 1 OF 9

MAS 8708
1. FORECASTING.

The capital intensity ratio in 2019 = 5m/8m = 62.5%

Additional funds (AFN) needed for the coming year:

AFN = 5m/8m(2,400,000) – 800k/8m(2,400,000) – (10.4m x 30% x 20%)
= 1.5m – 240k – 624k = 636,000

2. EXTERNAL FINANCING NEEDED.

Increase in sales = 20m/60m = 33.33%

Increase in assets (45m x 33.33%) P 15,000,000

Increase in cash balance 3,000,000
Increase in liabilities (19m – 15m) (4,000,000)
Increase in retained earnings (12m – 2m) (10,000,000)
External financing needed P 4,000,000

3. OPTIMAL TRANSACTION SIZE

(a) Optimal transaction size = √ = P6,196.77

(b) the average cash balance = P6,196.77 = 2 = P3,098

(c) the number of times (during the year) the company has to convert marketable securities
to cash = P240,000 ÷ P6,196.77 = 38.73 times
(d) the total cost of converting marketable securities to cash = 38.73 x P4 = P154.9
(e) the total carrying cost of cash. P3,098 x 5% = P154.9

3. CORRECTION: Credit purchases = P10,560,000 should read PURCHASES – P10,560,000

a. Calculate the firm’s operating cycle. 40 + 24 = 64

b. Calculate the firm’s cash conversion cycle. 64 – 30 = 34
c. Calculate the amount of resources needed to support the firm’s cash conversion cycle.
= (P12,600,000 ÷ 360) x 34 = P1,190,000.
MANAGEMENT ADVISORY SERVICES PAGE 2 OF 9

Turnover Age
a. Accounts receivable
(P11,250,000 x 80%) ÷ 1,000,000 9 360/9 40
b. Inventory (4,320,000 ÷ 288,000) 15 360/15 24
c. Accounts payable
(10,560,000 x 90%) ÷ 792,000 12 360/12 30

4. a. What is the length of Alabang’s cash conversion cycle? 32 days

b. At a steady state in which Alabang produces 1,500 dolls a day, what amount of working capital
must it finance? P288,000
c. By what amount could Alabang reduce its working capital financing needs if it was able to
stretch its payables deferral period to 35 days? P45,000
d. 30; 378,000

5. 1. How much is the change in contribution margin? 500,000 x 0.30 = 150,000 decrease in CM
2. How much is the decrease in investment on accounts receivable?
(4.5m x 30/360 x 70%) – (5m x 40/360 x 70%) = 126,389
3. How much is the savings in capital cost?
126,389 x 0.10 = 12,639 savings in capital cost
4. How much is the savings in delinquency cost?
(4.5m x 2%) – (5m x 6%) = 210,000 savings in bad debt expense
5. How much is the incremental profit from the revised policy?
[(12,639 + 210,000) – 150,000] x 70% = 50,847 decrease in income after tax

6. [(P10,080,000/360 days) x (40-30)] x 5% = P14,000

7. 1. Compute the economic order quantity √ = 2,498

2. How many orders would Pakyawan place under the EOQ policy?
240,000 ÷ 2,498 = 96.08 times
3. Compute the annual ordering cost for the EOQ. 96.08 x P130 = P12,490
4. Compute the annual carrying cost for the EOQ. (2,498/2) x P10 = P12,490
5. Compute the total inventory-related cost at the EOQ. 12,490 + 12,490 =P24,980
6. Previously, Pakyawan had been purchasing 4,000 units of product X per order. What is the
ordering cost per year under the previous policy? (240,000/4,000) x P130 = P7,800 The
annual carrying cost? (4,000/2) x P10 = P20,000 How much money does using the EOQ policy
save the company over the policy of purchasing 4,000 units per order? P27,800 – P24,980 =
P2,820

8. 1. What is the reorder point assuming no safety stock is carried? 6,000 x 6 = 36,000
2. Should the company decide to carry safety stock, how many units should that be?
(8,000 – 6,000) x 6 = 12,000
3. What is the reorder point assuming that safety stock is carried? 8,000 x 6 = 48,000
MANAGEMENT ADVISORY SERVICES PAGE 3 OF 9

9. 1. d = 7,350 jerseys per year, a = P200, k = P6 per jersey per year

EOQ = √ = 700 jerseys

2. Number of orders per year = d/EOQ = 7350/700 = 10.5 = 11 orders

3. Ordering cost = 10.5 x P200 = 2,100; Carrying cost = 700/2 x 6 = 2,100

4. Reorder point = 7,350/365 x 7 days = 140.96 = 141 jerseys

5. Safety stock = 7,350/365 x 3 = 60.41 = 61 jerseys

Reorder point = 7,350/365 x 10 = 201.37 = 202 jerseys

10. 3/97 x 360/(60-10) = 22.27%

11. 2/98 x 365/40 = 18.62%

12. 600,000/40 x (60-40) = 300,000

13. a. 7%
b. 10%
c. 15.38%
d. 11.08% = 720,000 ÷ [(12M + 1,000,000) ÷ 2]

22. SPV 2,520U; SVV 6,720F; CPV 2,520U; CVV 5,040U

% change in SP 6.25%dec.; Vol 20% inc.; CP 8.33% inc.

OTHER FINANACIAL MAMAGEMENT TOPICS:

1. a. Immediate dilution potential for the new stock issue = from 1.6 to 1.33, dilution of 0.27
b. Should the new issue be undertaken based on earnings per share?
EPS = (4m + 2.4m) ÷ 3m = 2.13. Yes! (from 1.6)
c. (4m + 600,000) ÷ 3m = 1.53. No! (from 1.6)

2. a. P34,200,000 ÷ 28.50 = 1,200,000 shares

b. To make the stocks more attractive.
c. What are the earnings per share (EPS) and the price-earnings ratio before the issue (based on
a stock price of P35)? 20m÷8m = 2.5; 35÷2.5 = 14?

What will be the price per share immediately after the sale of stock if the P/E stays constant
(based on including the additional shares computed in part a)? EPS = 20m÷9.2m=2.17; 2.17
x 14 = 30.38
d. Compute the EPS and the price (P/E stays constant) after the new production facility begins to
produce a profit. P = 34.2m x 12% = 4.104m. EPS = 24.104m÷9.2m = 2.62; 2.62 x 14 =
36.68
MANAGEMENT ADVISORY SERVICES PAGE 4 OF 9

MAS 8709

1. 1. MP3 PLAYER: RI = P116,000 – (0.12 × P800,000) = P20,000

VOICE REC.: RI = P105,000 – (0.12 × P750,000) = P15,000

2. ADD ONLY ADD ONLY ADD BOTH MAINTAIN

MP3 PLAYER VOICE REC. PROJECTS STATUS QUO

OPERATING INCOME P 2,816,000 P 2,805,000 P 2,921,000 P 2,700,000

MINIMUM INCOME* 2,256,000 2,250,000 2,346,000 2,160,000
RESIDUAL INCOME P 560,000 P 555,000 P 575,000 P 540,000

*MINIMUM INCOME = OPERATING ASSETS × MINIMUM REQUIRED RATE OF RETURN

THE MANAGER WILL INVEST IN BOTH THE MP3 PLAYER AND THE VOICE RECORDER.

3. ROI MP3 PLAYER = P116,000/P800,000 = 0.145 OR 14.5%

ROI VOICE RECORDER = P105,000/P750,000 = 0.14 OR 14.0%

4. ADD ONLY ADD ONLY ADD BOTH MAINTAIN

MP3 PLAYER VOICE REC. PROJECTS STATUS QUO

OPERATING INCOME P 2,816,000 P 2,805,000 P 2,921,000 P 2,700,000

OPERATING ASSETS 18,800,000 18,750,000 19,550,000 18,000,000
ROI 14.98% 14.96% 14.94% 15.00%

THE MANAGER WILL INVEST IN NEITHER PROJECT.

3. 1. After-tax cost of mortgage bonds = (1 – 0.4)(0.06) = 0.036

Cost of common stock = 0.08 + 0.03 = 0.11

Peso Proportion After-Tax

Amount of Funds Cost Weighted Cost

Mortgage bonds P 3,000,000 0.25 0.036 0.0090

Common stock 9,000,000 0.75 0.110 0.0825
Total P 12,000,000
Weighted average cost of capital 0.0915

Cost of capital = P4,000,000 × 0.0915 = P366,000

2. After-tax operating income P 350,000

Less: Cost of capital 366,000
EVA P( 16,000)
 EVA is negative; Donegal is destroying wealth.

MANAGEMENT ADVISORY SERVICES

PAGE 5 OF 9

3. After-tax cost of new bonds = (1 – 0.4)(0.09) = 0.054

Peso Proportion After-Tax

Amount of Funds Cost Weighted Cost

Unsecured bonds P 2,000,000 0.143 0.054 0.0077

Mortgage bonds 3,000,000 0.214 0.036 0.0077
Common stock 9,000,000 0.643 0.110 0.0707
Total P 14,000,000
Weighted average cost of capital 0.0861

Cost of capital = P5,000,000 × 0.0861 = P430,500

4. After-tax operating income P430,000

Less: Cost of capital 430,500
EVA (P 500)

No, this is not a good idea. EVA is negative and Donegal is destroying wealth.

4. a. The minimum and maximum transfer price for each division is P2.30. The company is
indifferent to the transfer because it earns the same income whether or not it takes
place. If the transfer takes place, the price should be P2.30.

b. The minimum transfer price is P2.10, and the maximum price is still P2.30. The transfer
should take place because the company would save P30,000 (150,000 × P0.20) each
year.

c. The offer should be accepted because the Small Motor Division’s profits would increase
by P15,000 (representing an even split of the savings from internal transfer).
MANAGEMENT ADVISORY SERVICES PAGE 6 OF 9
6.

7. a. Delivery cycle time and delivery cycle efficiency. 34 days; 10/34 = 29.41%
b. Manufacturing time and manufacturing cycle efficiency. 31; 10/31 = 32.26%
c. As judged by the cycle efficiency, what percentage of the overall production time was
spent on (1) value-adding activities 32.26% and (2) non-value adding activities? 67.74%
MANAGEMENT ADVISORY SERVICES
PAGE 7 OF 9

8.

9. a. Value-added activities Time

Cutting/measuring materials 5
Assembling materials 7
Building boxes 12
Attaching hinges 3
Total production time (days) 27

b. Non-value-added activities Time

Receiving 1
Storing 2
Handling 3
Inspection 2
Total nonproduction time (days) 8

c. Total lead time = 27 + 8 = 35 days

MCE = 27/35 = 77.14%
MANAGEMENT ADVISORY SERVICES PAGE 8 OF 9
MAS 8711

GANTT CHART

1. B – Ahead of schedule

PERT/CPM

2.
5 3
3 4 5

30 2

1 4 10 8 7

1 2 6 7 8

0–1–2–6–7–8 = 30
0–1–4–5–7–8 = 15
0 – 1 – 3 – 4 – 5 – 7- 8 = 48

Critical path: 0-1-3-4-5-7-8 48 hours

2. d. Activity DE 1 week and activity EF 1 week. – P18,800

LEARNING CURVES

1.

1. The cumulative average time per unit is an average. It includes the 2.5 hours per unit
when 40 units are produced as well as the 1.024 hours per unit when 640 units are
produced. As more units are produced, the cumulative average time per unit will
decrease.

2. The standard should be 0.768 hour per unit as this is the average time taken per unit
once efficiency is achieved:
[(1.024 × 640) – (1.28 × 320)]/(640 – 320)

3. Std. Price Std. Usage Std. Cost

Direct materials P 4 25.000 P100.00
Direct labor 15 0.768 11.52
Variable overhead 8 0.768 6.14
Fixed overhead 12 0.768 9.22*
Standard cost per unit P126.88*
*Rounded
MANAGEMENT ADVISORY SERVICES PAGE 9 OF 9

4. There would be unfavorable efficiency variances for the first 320 units because the
standard hours are much lower than the actual hours at this level. Actual hours would
be approximately 409.60 (320 × 1.28), and standard hours would be 245.76 (320 ×
0.768).

2. d. Labor efficiency
3. c. P17,280
4. c. 7 additional bridges

PROBABILITY ANALYSIS:

1. Expected value of demand = 88,500

Machine A = 10,000 + 0.80(88,500) = 80,800

Machine B = 20,000 + 0.50(88,500) = 64,250
2. ANSWER: C - 50% (Five numbers out of ten)
3. d. Model S104
4. Sum of the midpoints x the probabilities = 210
5. d. 20%
Joint probability of occurrence of two independent events = product of their individual
probabilities
6. a. P 98,000 [(40 – 29) x 18,000] – 100,000 = 98,000

LINEAR PROGRAMMING

1. a. Objective Function 20x + 15y

Subject to:
5x + 3y ≤ 800
3x + 6y ≤ 1,200

b. How many units of each model (small and large) should be produced to maximize the
total contribution margin? 100 of small and 150 of large

c. Calculate the contribution margin at the optimal solution. P4,250

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