Gateway Assessment

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CIMA ProfessionalGateway Assessment (CPGA)

20 May 2009 – Wednesday Afternoon Session

Instructions to candidates

You are allowed three hours to answer this question paper.

You are allowed 20 minutes reading time before the examination begins during which you should read the question paper and, if you wish, highlightand/or make notes on the question paper. However, you will not be allowed,under any circumstances, to open the answer book and start writing or useyour calculator during this reading time.

You are strongly advised to carefully read ALL the question requirementsbefore attempting the question concerned (that is all parts and/or sub-questions). The question requirements for ALL questions are highlighted in adotted box.

ALL answers must be written in the answer book. Answers written on the

question paper will not be submitted for marking.

Answer ALL THREE compulsory questions in Section A on pages 2 to 7.

Answer ALL TWELVE compulsory sub-questions in Section B on pages 8 to

12.

Maths Tables are provided on pages 13 to 15. These are detachable for easeof reference.

The list of verbs as published in the syllabus is given for reference on the

inside back cover of this question paper.

Write your candidate number, the paper number and examination subject titlein the spaces provided on the front of the answer book. Also write yourcontact ID and name in the space provided in the right hand margin and sealto close.

Tick the appropriate boxes on the front of the answer book to indicate whichquestions you have answered. C

I M A P r o f e s s i o n a l G a t e w

a y A s s e s s m e n t

TURN OVER

© The Chartered Institute of Management Accountants 2009



SECTION A – 75 MARKS

ANSWER ALL THREE QUESTIONS

Question One

OPQ is a manufacturing company. It is currently considering its pricing policy for next year. Ithas completed market research into the expected levels of demand at various selling prices,for one of its key products.

The results are as follows:

Selling Price Annual Demand per unit (units)$100 50,000$120 45,000

$130 40,000$150 25,000$160 10,000$170 5,000

The product is manufactured in batches of 100 units. Analysis has shown that the totalproduction cost depends on the number of units as well as the number of batches producedeach year. This analysis has produced the following formula for total cost.

Z=70x + 80y + $240,000

Z represents the total production costX represents the number of units produced

Y represents the number of batches of production

Required

(a) Prepare calculations to identify which ONE of the six selling prices per unit willprovide the highest annual profit for this product.

(7 marks)

(b) Explain why your chosen selling price might not result in the highest possibleannual profit from this product.

(3 marks)

OPQ is due to launch a new manufactured product to market. This product will improveefficiency in the servicing of motor vehicles at garages. It is also considering its pricingstrategy for this new product. At present the product is unique as nothing similar is currentlyavailable on the market. However, this unique position is likely to remain for only a maximumof six months. Within this time one of OPQ’s competitors will develop and launch a similarproduct.

The product prototype took a long time to develop. Research and development costs for theproduct prototype were also substantial. OPQ is keen to recover these costs as soon aspossible.

CPGA 2 May 2009



Question Two

Mr P has recently returned to his regular job in the Finance Department of RST Company,after having spent the last six months as a member of a project team working on a keyinitiative for RST.

Mr P’s overall impression of his project work experience is negative. Thinking about hisexperiences while working on the project, Mr P feels, on reflection, that most of his time waswasted in pointless, time-consuming meetings. He also feels that the final stages of theproject were not dealt with effectively. Project members simply went back to their regular jobswithout any discussion or feedback on the performance or outcomes of the project.

Mr P has now been asked to take on the role of Project Manager for a new project within RSTCompany. He is determined to manage his project team in the most effective way and inparticular to ensure that members of this new team come away from the project with apositive experience.

Required

(a) Discuss the problems that may be associated with project meetings andrecommend methods Mr P could use to ensure that meetings Mr P arranges,as Project Manager, are effective.

(15 marks)

(b) Evaluate the contribution of the various activities that should be carried out aspart of project closure, post completion review and audit of a completed project.

(10 marks)

(Total for Question Two = 25 marks)

Section A continues on page 6

CPGA 4 May 2009



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May 2009 5 CPGA



Question Three

TT holds investments in three other entities. The draft income statements for TT and BB, CCand DD, the three other entities for the year ended 31 March 2009, are shown below:

TT BB CC DD

$000 $000 $000 $000 Revenue 2,450 1,200 675 840Cost of sales (1,862) (870) (432) (580)Distribution costs (94) (22) (77) (18)Administrative expenses (280) (165) (120) (126)Interest received - 2 - -Finance costs (26) - - -Profit before tax 188 145 46 116Income tax (40) (50) (12) (37)Profit for the period 148 95 34 79

NOTES

Note 1: Investments in BB, CC and DD Some years ago TT purchased 75% of the ordinary shares of BB. On 30 September 2008,TT purchased an additional 5% of BB’s ordinary shares. In 2005 TT, together with two otherinvestor entities, set up CC. Each of the three investors owns one-third of the ordinary sharesin CC. All managerial decisions relating to CC are made jointly by the three investor entities.On 1 January 2009, TT purchased 35% of the ordinary shares in DD. TT has significantinfluence over the management of DD but does not control this entity.

Note 2: Inter-group trading BB supplies inventories to TT. BB earns a gross profit margin of 20% on these sales. Duringthe financial year ended 31 March 2009, BB supplied a total of £80, 000 of inventory at sellingprice to TT. Of this £80,000, 25% remained in TT inventories at the year end. TT supplies arange of administrative services to BB, at cost. $12,000 is included in BB’s administrative

expenses. It is also shown in TT’s revenue, in respect of services supplied during the yearended 31 March 2009.

Note 3: The policy of the group is to adopt proportional consolidation wherever permitted byInternational Financial Reporting Standards.

Note 4: Revenue and profits accrue evenly throughout the year, unless otherwise stated.

Note 5: Finance costs The finance costs in TT’s income statements are in respect of short-term bank borrowingsonly. Finance costs in respect of TT’s long term borrowings have not yet been included so an

appropriate adjustment must be made. On 1 April 2006, TT issued bonds at par in theamount of $1,000,000. Issue costs were $50,000. The bonds carry a coupon rate of interestof 5% each year, payable on the last day of the financial year. The interest actually paid on31 March 2009 has been debited to a suspense account. This is included under currentassets in TT’s draft balance sheet. The bonds will be repaid on 31 March 2010 at a premiumof $162, 000. The effective interest rate associated with the bonds is 9%. The liability ismeasured at amortised cost, in accordance with IAS 39 Financial Instruments: Recognition and Measurement .

CPGA 6 May 2009



Note 6 Financial asset BB occasionally uses available cash surpluses to make short term investments in financialassets. Such assets are ‘’held for trading’’. These financial assets are usually sold within afew months. At 31 March 2009, BB held 4,000 shares in XX, which is a listed entity. Theshares were purchased on 20 January 2009 at 1332c per share. At 31 March 2009, themarket price per share was 1227c. No adjustment has been made to the draft income

statement above in respect of this financial asset.

Required:

Prepare the consolidated income statement for the TT group for the financial yearended 31 March 2009. Show full workings.

(Total for Question Three = 25 marks)

Notes: 8 marks are available for the adjustments in respect of notes 5 and 6 .Work to the nearest $100. For the purposes of this question it is not necessary tomake any adjustments to income tax.

End of Section A

Section B starts on page 8

TURN OVER

May 2009 7 CPGA



SECTION B – 25 MARKS

ANSWER ALL TWELVE SUB-QUESTIONS.

Instructions for answering Section B:

The answers to the twelve sub-questions in Section B must ALL be written in youranswer book.

Your answers should be clearly numbered with the sub-question number and thenruled off, so that the markers know which sub-question you are answering. Formultiple choice questions, you need only write the sub-question number andthe letter of the answer option you have chosen. You do not need to start a newpage for each sub-question.

Question Four

4.1 The table below summarises data extracted from the cost accounting records of MM.

The data show the cost and the inflation index for the period in which the costs wereincurred.

Output level Total cost Inflation index 3,000 units $9,167 1·034,000 units $11,760 1·05

The uninflated variable cost per unit of output, to be used when predicting future costs, isclosest to

A $2·30

B $2·59

C $2·80

D $2·97(2 marks)

CPGA 8 May 2009



4.2 Company PPP is considering the following investments for the year ending 30 June2010.

Investment Capital required NPV $ $

L 100,000 56,000

M 150,000 75,000O 140,000 68,000P 190,000 91,000

None of the investments are divisible. All of the investments can only be undertakenonce within each year.

Company PPP has only $350,000 available to invest in the year to 30 June 2010.

There are no other investment opportunities available at this time.

Which investments, if any, should company PPP undertake?(2 marks)

4.3 A pastry shop produces fruit tarts in three different sizes. The fruit tarts all use thesame basic ingredients.

Details of the selling prices and the unit costs of the various sizes of fruit tarts, are asfollows:

Small Medium Large $ per tart $ per tart $ per tart

Selling price 3·00 5·00 9·00Ingredients 1·80 2·40 4·60Direct labour 0·40 0·50 0·60

Variable overhead 0·30 0·50 0·80

Weekly demand 200 500 300Fruit used per tart 0·2kg 0·3kg 0·6kg

The fruit used in the tarts is imported. The pastry shop has been told that it can buy nomore than 300kgs of fruit next week. The pastry shop has established its reputation byproducing its tarts using only fresh fruit. It is therefore not possible to buy the fruitrequired for the tarts in advance.

Calculate the mix of tart sizes that should be made and sold in order to maximise the pastryshop’s contribution for next week.

(2 marks)

Section B continues on the next page

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May 2009 9 CPGA



4.4 JJJ is a processing company. JJJ operates a common process which produces threedifferent products. These three products can readily be sold as there are plenty ofbuyers and sellers. Alternatively, all of these three products can be further processed.The further processing of each product is independent of the other products and usesthree other processes. After further processing, each of the products can be sold in thesame market at a higher unit selling price.

Which of the following information is required in order to decide whether or not any of theproducts should be further processed?

(i) Total cost of the common process

(ii) The basis of sharing the common process cost between the three products

(iii) The total cost of each of the three additional processes

(iv) The unit selling price of each product after further processing

(v) The unit selling price of each product before further processing

(vi) The percentage normal loss of each further process

(vii) The actual units of output of each product from the common process

A (iii), (iv), (vi) and (vii) only

B (i), (ii), (iii), (iv), (vi) and (vii) only

C (i), (ii), (v) and (vii) only

D (iii), (iv), (v), (vi) and (vii) only

(2 marks)

4.5 At which stage of group formation and development does establishing standards andagreeing ways of working occur?

A Forming

B Norming

C Performing

D Storming(2 marks)

4.6 Which ONE of the following types of flexibility is described as the ability to redeployemployees to different tasks through multi-skilling?

A Functional flexibility

B Numerical flexibility

C Organisational flexibility

D Temporal flexibility(2 marks)

CPGA 10 May 2009



4.7 Which ONE of the following refers to power which is derived from the personal qualitiesof the individual and the desire for followers to be like that person?

A Coercive power

B Expert power

C Referent power

D Reward power(2 marks)

4.8 Strategy, Style, Structure and Systems are four of the Ss in the McKinsey 7 SFramework.

Identify the remaining THREE Ss in the McKinsey 7 S Framework.(3 marks)

4.9 Describe the principal characteristics common to joint ventures arrangements, asidentified by IAS 31 Interests in Joint Ventures.

(2 marks)

4.10 The current cost accounting (CCA) method of accounting for changing price levelsrequires a series of adjustments to historical cost operating profit.

Describe the purpose and nature of the cost of sales adjustment (CoSA).(2 marks)

4.11 KAT made an issue of 5% cumulative preference shares during the financial yearended 31 January 2009. The shares have no fixed redemption date.

Note:Under the terms of the issue KAT does not have to pay the 5% distribution in a givenyear, but if it fails to do so in one year the obligation is carried forward to a future year.

Categorise the financial instrument as either equity or liability, and state the reason for yourcategorisation.

(2 marks)

Section B continues on the next page

TURN OVER

May 2009 11 CPGA



4.12 In respect of deprival value, which ONE of the following statements is correct?

A Recoverable amount is the higher of value in use and realisable value.

B Recoverable amount is the lower of realisable value and replacement cost.

C Value to the business is the higher of replacement cost and recoverable amount.D Value to the business is the lower of value in use and realisable value.

(2 marks)

(Overall Total for Section B = 25 marks)

Reminder

All answers to Section B must be written in your answer book.

Answers to Section B written on the question paper will not besubmitted for marking.

End of Question Paper

Maths Tables and Formulae are on pages 13-15

CPGA 12 May 2009



MATHS TABLES AND FORMULAE

Present value table

Present value of $1, that is (1 + r )-n

where r = interest rate; n = number of periods until payment orreceipt.

Interest rates (r) Periods(n ) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.9092 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.8263 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.7514 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.6835 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.6216 0.942 0.888 0.837 0.790 0.746 0705 0.666 0.630 0.596 0.5647 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.5138 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.4679 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424

10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386

11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.35012 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.31913 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.29014 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.26315 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.23916 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.21817 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.19818 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.18019 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.16420 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149

Interest rates (r) Periods(n ) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833

2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.6943 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.5794 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.4825 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.4026 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.3357 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.2798 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.2339 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194

10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.16211 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.13512 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.11213 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.09314 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.07815 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.06516 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.05417 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045

18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.03819 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.03120 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026

May 2009 13 CPGA



Cumulative present value of $1 per annum,

Receivable or Payable at the end of each year for n years r

r n −+− )(11

Interest rates (r )Periods(n )

1% 2% 3% 4% 5% 6% 7% 8% 9% 10%1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.9092 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.7363 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.4874 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.1705 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791

6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.3557 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.8688 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.3359 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759

10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145

11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.49512 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.81413 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.10314 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.36715 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606

16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.82417 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.02218 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.20119 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.36520 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514

Interest rates (r )Periods(n ) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.8332 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.5283 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.1064 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.5895 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991

6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.3267 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605

8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.8379 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031

10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192

11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.32712 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.43913 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.53314 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.61115 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675

16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.73017 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.77518 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.81219 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.84320 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

CPGA 14 May 2009



FORMULAE

AnnuityPresent value of an annuity of $1 per annum receivable or payable for n years, commencingin one year, discounted at r % per annum:

PV =⎥⎥⎦

⎤

⎢⎢⎣

⎡

+− n r r ][1

11

1

PerpetuityPresent value of $1 per annum receivable or payable in perpetuity, commencing in one year,discounted at r % per annum:

PV =r

1

Growing Perpetuity

Present value of $1 per annum, receivable or payable, commencing in one year, growing inperpetuity at a constant rate of g % per annum, discounted at r % per annum:

PV =g r −

1

Time seriesAdditive model:

Series = Trend + Seasonal + RandomMultiplicative model:

Series = Trend * Seasonal * Random

Regression analysis

The linear regression equation of Y on X is given by:

Y = a + bX or Y – Y = b(X – X ), where:

b =)(

)(

X

XY

Variance

Covariance=

22)(

))((

X X n

Y X XY n

∑−∑

∑∑−∑

and a = Y – b X or solve

∑ Y = na + b X ∑∑ XY = a X + b ∑ ∑ X

2

Exponential Y = ab x

Geometric Y = aX

b

Learning curveY x = aX

b

where:Y x = the cumulative average time per unit to produce X units;a = the time required to produce the first unit of output;X = the cumulative number of units;b = the index of learning.

The exponent b is defined as the log of the learning curve improvement rate divided by log 2.

May 2009 15 CPGA



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CPGA 16 May 2009



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CPGA 18 May 2009



LIST OF VERBS USED IN THE QUESTION REQUIREMENTS

A list of the learning objectives and verbs that appear in the syllabus and in the question requirements for

each question in this paper.

It is important that you answer the question according to the definition of the verb.

LEARNING OBJECTIVE VERBS USED DEFINITION

1 KNOWLEDGE

What you are expected to know. List Make a list of

State Express, fully or clearly, the details of/facts of

Define Give the exact meaning of

2 COMPREHENSION

What you are expected to understand. Describe Communicate the key features

Distinguish Highlight the differences betweenExplain Make clear or intelligible/State the meaning of

Identify Recognise, establish or select after

consideration

Illustrate Use an example to describe or explain

something

3 APPLICATION

How you are expected to apply your knowledge. Apply

Calculate/compute

To put to practical use

To ascertain or reckon mathematically

Demonstrate To prove with certainty or to exhibit by

practical means

Prepare To make or get ready for use

Reconcile To make or prove consistent/compatible

Solve Find an answer to

Tabulate Arrange in a table

4 ANALYSIS

How are you expected to analyse the detail of

what you have learned.

Analyse

Categorise

Examine in detail the structure of

Place into a defined class or division

Compare and contrast Show the similarities and/or differences

between

Construct To build up or compile

Discuss To examine in detail by argument

Interpret To translate into intelligible or familiar terms

Produce To create or bring into existence

5 EVALUATION

How are you expected to use your learning to

evaluate, make decisions or recommendations.

Advise

Evaluate

Recommend

To counsel, inform or notify

To appraise or assess the value of

To advise on a course of action

May 2009 19 CPGA



The Examiners’ Answers for CIMA ProfessionalGateway Assessment

SECTION A

Answer to Question One

Requirement (a)

Selling Price

Demand (Units)

Total Revenue

$000

Total Cost $000

Total Profit $000

$100 50,000 5,000 3,780 1,220$120 45,000 5,400 3,426 1,974$130 40,000 5,200 3,072 2,128$150 25,000 3,750 2,010 1,740

$160 10,000 1,600 948 652$170 5,000 850 594 256

The maximum profit is achieved with a price of $130 per unit.

Requirement (b)

The solution makes an assumption concerning the slopes of the revenue and cost lines betweenthe demand levels of 25,000 and 45,000 units. It further assumes that the profit maximising pointoccurs at one of the data points provided when in fact it could be slightly higher or slightly lower than the price of $130. Also the market research may not be accurate and the estimates of costmay be incorrect.

Requirement (c)

When launching a new product, there are two alternative strategies that may be adopted. Theseare known as:

• Market skimming; and• Market penetration

Market skimming is the strategy of charging a very high price for the item which has effect of only being acceptable to a small part of the market, hence the term skimming, meaning takingthe top layer of the market. It is only possible to use this strategy for goods and services thatare unique and have a very high esteem value.

Market penetration is the strategy of using a price that is low enough to gain significant marketshare before your competitors are able to establish themselves in the market.

Examiner's Answers CPGA 20 May 2009



May 2009 Examiner's Answers CPGA21

Requirement (d)

OPQ is launching a new product that is unique and, therefore, OPQ could adopt a marketskimming strategy. If it were to adopt this approach, it would have the result of earningsignificant unit profits on those early sales, and these high profits might be large enough torepay most, if not all, of its research and development costs very quickly.

It would not be long, however, before competitors were attracted towards making a similar product of their own because of its high profitability (particularly if they can avoid the significantresearch and development costs by reverse engineering OPQ’s own product). To minimise theeffect of this, OPQ must be prepared to reduce the price of the product significantly just beforeits competitors enter the market. This should enable its product to reach the less wealthymembers of the market place and cause it to achieve volume sales that will then allow its coststo fall, because of the effect of the learning and experience curve as the volume of productionincreases. This cost reduction could compensate for the lower selling prices so that unit profitswill not be reduced significantly by the lower price.

Answer to Question Two

Requirement (a)

Regular project meetings are critical to the project process but can take up a significant amountof time. A meeting should always be seen to benefit those who attend but often people leavemeetings feeling frustrated at the time spent without any useful outcomes from the meeting.

There are some common reasons why meetings are ineffective. By following best practice thesecan be minimised in order to make meetings effective for all those involved.

One of the main problems associated with meetings is poor preparation by both the projectmanager and those attending, there are no clear objectives and people have to attendunnecessarily. The action that Mr P, as project manager, could take would involve setting up a

schedule for the various meetings needed throughout the project, recognising additionalmeetings may need to be held due to problems or changes in customer requirements. Thepurpose of the various meetings should be determined, and Mr P should establish who needs toattend. This should ensure that time is not wasted for people who do not need to be there andensure the objectives of the meeting can be achieved. A practical aspect is to makearrangements in terms of the location and time of the meeting to encourage attendance.

An agenda should be drawn up by Mr P in advance and circulated to those attending. Theagenda should provide a focus for the discussion and allow people to prepare before coming tothe meeting, ensuring that they have relevant information with them.

Other common problems that can occur during the meeting stem from having an ineffectivechairperson, which can then result in the domination of discussion by a few people, conflictbetween attendees and the agenda items being unrealistic or badly structured. These problemscan be addressed by Mr P acting as an effective chairperson, a role often taken on by theproject manager. Ideally there will also be a secretary or administrator who will be responsiblefor taking the minutes at the meetings.

Mr P should impose some order on the meeting and ask participants to contribute in accordancewith meeting protocols, such as time constraints. His role is to facilitate discussion at themeeting rather than dominate. Mr P should also be able to manage conflict should it arise in ameeting and control any disruptive elements. Whilst encouraging constructive debate, the skill isin limiting the scope of discussion to agenda items.

Throughout the meeting, Mr P should summarise and clarify key points made. He should notethe actions that need to be taken, by whom and when so that it is clear who is responsible for what. At the end of the meeting a summary of the results should be gone through, so that allparticipants are clear on the action points and their commitment is gained.




Mr P needs to bear in mind that the level of attention of participants diminishes towards the endof a meeting, particularly when it goes on too long. People may agree to anything towards theend of the meeting simply to get away.

After the meeting the main problem is that actions are not always carried out. Therefore,minutes should be distributed to the attendees and other interested parties so that the outcomesare not lost and team members are reminded of their responsibilities, priorities and action points.This should be kept as brief as possible to improve the chances of the minutes being read andthe action points acted upon. The minutes should form the basis of the next meeting so thatfailure to carry out actions is identified.

Requirement (b)

Project closure is the final stage of the project lifecycle and occurs once the project work hasfinished. The purpose is to ensure benefits are gained in the final stages. It is important tomaintain the commitment of the team until all the work is completed since people tend to bemore motivated to move on to new projects rather than tying up the loose ends. It is alsoimportant to evaluate the conduct of the project in order to learn from experiences which willhelp the company improve on its performance in future projects. The questions that could beasked include:

Was the project completed to quality, on time and within budget?

Did the project deliver according to the objectives set?

Are there lessons to be learnt?

Is there any follow up action needed on this project?

Project closure activities would involve practical tasks such as organising and filing all projectdocumentation and ensuring that members of the project team have jobs to return to. It shouldalso involve formally agreeing with the ‘client’ that all the agreed deliverables have beenachieved. The business case should be reviewed to check that intended benefits are likely to berealised. In other words, examining project performance by comparing achievement with theoriginal project plan to show that the project has delivered the outputs.

In addition there should be a review of the project organisation and methods to recommendfuture improvements. This can be achieved through the post completion review and audit.

The main purpose of the post completion review is to evaluate the overall project and to learnfrom the experiences gained before the project team is disbanded. This might involve debriefingmeetings which enable all parties involved in the project to assess their own performance.

The post completion review provides a forum to discuss with individual team members their rolein the project and how they could improve their own performance for the future.

An evaluation from the client’s perspective will establish if the project was successful insatisfying their requirements and give them the opportunity to voice any concerns.

The review will provide an opportunity to discuss the successes and failures of the projectprocess. The feedback should provide reinforcement of good skills and behaviours and the

identification of areas for improvement or change in practice for the smooth running of futureprojects.

The post completion audit is the final stage and involves conducting a formal audit of the entireproject against a checklist. This will include an assessment of the extent to which:

the required quality of the project has been achieved; the efficiency of the solutioncompared with the agreed performance standards;

the actual cost of the project compared with budgets and reasons for over/under expenditure;

the time taken to develop the solution compared with target dates and reasons for anyvariances;

the effectiveness of project management methodologies.




Together the review and audit can provide a case history of the project, providing a repositoryfor the knowledge captured. The project manager should issue a report summarising projectperformance and advising on how it could be improved in the future.

The reason that post project activities are not always undertaken is that it is often difficult toquantify in a tangible way the benefits derived, given the associated costs of review and audit.

Answer to Question Three

TT Group: consolidated income statement for the year ended 31 March 2009

$000 Ref to working

Revenue 3,783 (1)Cost of Sales (2,800) (3)

Gross profit 983Distribution costs (141·7) (4)Administrative expenses (473) (4)Interest received 2Loss on investment in financial asset (4·2) (5)Finance costs (118·2) (6)Share of profit of associate 6·9 (7)

Profit before tax 254·8Income tax expense (94) (8)

Profit for the period 160·8

Attributable to: $000 Ref to working

Equity holders of the parent 141·1Minority interest 19·7 (9)

160·8

Workings:

(W1) Revenue

$000 TT 2,450BB 1,200

CC (⅓ x 675) 2253,875

Less: Intra-group sales and inventories (80)Less: Intra-group sales of admin. services (12)

3,783

(W2) Provision for unrealised profit

Closing intra-group inventories = $80,000 x 25% = 20,000Unrealised profit = 20% x $20,000 = $4,000




(W3) Cost of sales $000

TT 1,862BB 870CC (⅓ x 432) 144

2,876

Add: provision for unrealised profit (W2) 4Less: Intra-group sales of inventories (80)

2,800

(W4) Distribution costs and administrative expenses Distribution

Costs $000

Administrative Expenses

$000 TT 94 280BB 22 165CC (⅓ x 77)/(⅓ x 120) 25·7 40

141·7 485Less; Intra-group purchases of admin services - (12)

141·7 473

(W5) Loss on investment in financial asset Loss on investment in XX: 4,000 shares at (1332¢ - 1227¢ = $4,200.

(W6) Finance costs

y/e 31 March Principle b/fwd Effective interest @ 9% Interest charge C/fwd 2007 950·0 85·5 (50) 985·52008 985·5 88·7 (50) 1,024·52009 1,024·5 92·2 (50) 1,066·42010 1,066·4 96·0 (50) 1,112·42011 1,112·4 100·1 (50) 1,162·5

(W7) Share of profit of associate Profit after tax x

3/12 x 35% = $79 x 3

/12 x 35% = $6·9

(W8) Income tax $000

TT 40BB 50CC (⅓ x 12) 4

94 (W9) Minority interest

6 months to 30 September

2008

6 months to 30 September

2009 Adjusted profit of BB:Profit for the period, as stated 95Less: provision for unrealised profit (4)

91Split 1 : 1 45·5 45·5

(4·2) 45·5 41·3




Minority share of profit:

6 months to 30 September 2008: 45.5 x 25% = 11·46 months to 31 March 2009: 41.3 x 20% = 8·3

19·7

Gateway Assessment

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