THE PUBLIC ACCOUNTANTS EXAMINATIONS BOARD

A Committee of the Council of ICPAU

CPA (U) EXAMINATIONS

LEVEL TWO

MANAGEMENT DECISION & CONTROL - PAPER 11

THURSDAY 31 MAY, 2018

INSTRUCTIONS TO CANDIDATES

1. Time allowed: 3 hours 15 minutes.

The first 15 minutes of this examination have been designated for reading
time. You may not start to write your answer during this time.

2. Section A has one compulsory question carrying 40 marks.

3. Section B has four questions and only three questions are to be

attempted. Each question carries 20 marks.

4. Write your answer to each question on a fresh page in your answer

booklet.
5. Please, read further instructions on the answer booklet, before attempting
any question.

 2018 Public Accountants Examinations Board

 Management Decision & Control - Paper 11

SECTION A
This section has one compulsory question to be attempted
Question1
Buliisa Oilcom Limited (BOL), an oil company whose accounting date is 30 June,
owns land in Uganda’s Albertine region. BOL classifies this land according to the
number of barrels that are expected to be obtained from the oil wells. The
classes are the 500,000 barrel well, 200,000 barrel well, 50,000 barrel well and a
dry well. BOL is currently faced with deciding whether to drill for oil,
unconditionally lease the land or conditionally lease the land at a rate depending
upon oil strike.
The cost of drilling a producing well is Shs 2.5 billion and a dry well is Shs 1.7
billion. For a producing well, the profit per barrel of oil is Shs 23,310 (after
deductions of processing and all other costs except drilling costs).
Under the unconditional lease agreement, BOL receives Shs 45 million for the
land whereas for the conditional lease agreement, BOL receives Shs 670 for each
barrel of oil extracted if it is a 500,000 or 200,000 barrel oil strike and nothing
otherwise.
The probability of striking a 500,000 barrel well is 0.10, probability of striking a
200,000 barrel well is 0.15 and the probability of striking a 50,000 barrel well is
0.25.
Also BOL runs a monthly magazine that gives details of the oil exploration in
Uganda. It has commissioned an advertising campaign to launch the 2018/19
magazine. This will invalidate the previous price and demand relationship. The
price of the 2018/19 magazine has been set at full cost plus a mark-up of 20%
and 50,000 copies are expected to be sold at this price during the month of
October. The management of BOL wishes to calculate the total profit for the
second quarter from the 2018/19 magazine.
The following information is available:
1. BOL expects 90% of October customers to buy the 2018/19 magazine
during November and afterwards retain 85% of the November customers.
2. As the magazine circulation increases, sales to additional new customers in
November and December will be 20% and 30% of October and November
sales respectively.
3. Fixed overhead costs are charged to magazines based on sales volume.
Annual fixed overhead cost of Shs 18 billion is expected to be incurred in
order to produce 12 million copies of the magazine during the year
2018/19.

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 Management Decision & Control - Paper 11

4. The variable costs per 2018/19 Magazine include:

Item Shs
Paper 830
Ink 1,200
Machine maintenance cost 220
Other variable costs 150
10% of the ink is wasted during printing.
Required:
(a) Prepare a profit payoff table for BOL and advise on the best course
of action it should take.
(12 marks)
(b) Explain the following decision rules and advise BOL on the best
course of action to take under each rule:
(i) Maximin. (2 marks)
(ii) Maximax. (2 marks)
(iii) Minimax. (2 marks)
(c) Prepare a statement that shows the total profit for the second
quarter of the 2018/19 Magazine.
(9 marks)
(d) Determine the percentage of new customers that need to purchase
the2018/19 magazine for a second consecutive month in order to
get a profit of Shs 100 million in the second quarter.
(5 marks)
(e) Distinguish between the following terms:
(i) ‘Price skimming’ and ‘penetration pricing’. (4 marks)
(ii) ‘Objective’ and ‘subjective’ probabilities. (4 marks)
(Total 40 marks)

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 Management Decision & Control - Paper 11

SECTION B
Attempt any three of the four questions in this section
Question 2
Mbale Tourist Club (MTC) is a holiday complex serving both local and foreign
guests. Guests are charged for accommodation, meals and tour guides. The
present economic situation requires companies to have strict financial controls to
generate profits. MTC has three divisions headed by managers where there is
constant monitoring of costs. Division managers are always given annual
budgets which are further broken down into months. Every end of the month
division managers receive statements comparing actual costs against budget
with variance highlights.
The following statement relates to the Restaurant division for the month ended
31 July, 2017:
Performance statement:
Item Actual Budget Variance
Number of guests 13,950 12,000 1,950
Shs ‘000’ Shs ‘000’ Shs ‘000’
Food expenses 25,625 25,200 (425)
Sanitation expenses 2,790 2,400 (390)
Utilities 2,562.5 3,000 437.5
Wages 10,500 9,000 (1,500)
Fixed overheads 2,325 2,250 (75)
The budget was prepared on basis of 30 days calendar month and fixed
overheads were an apportionment of the annual fixed overheads.
MTC plans to expand its hotel and transport divisions because of the rapid
growth in the tourism industry. Hotel and transport division managers have
authority to plan for their revenues and costs. The transport division manager is
allowed to buy vehicles when they are needed. The expansion of the hotel
division will require an investment of Shs 150 million while the transport division
requires Shs 375 million. This investment will bring additional profits of Shs 27
million from hotel division and Shs 75 million from the transport division.
The following are financial extracts of MTC’s divisions for the year ended 30
June, 2017.
Division
Particulars Hotel Transport Restaurant
Shs ‘000’ Shs ‘000’ Shs ‘000’
Profits for the year 75,550 68,950 32,540
Investments 500,000 300,000 175,000

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 Management Decision & Control - Paper 11

Required:
(a) (i) Explain how feed-forward control has been applied at MTC.
(2 marks)
(ii) Using flexible budgeting, evaluate the performance of the restaurant
manager.
(6 marks)
(b) (i) Distinguish between a profit centre and investment centre with
examples from MTC.
(4 marks)
(ii) Assess the likely responses of divisional managers and advise MTC
top management on whether it should approve the proposed investments
using return on investment (ROI).
(8 marks)
(Total 20 marks)
Question 3
Kamunye Uganda Limited (KUL) is a renowned car dealer and intends to deal in
assembling of medium petrol engine cars and targets a 40% market share in
Uganda and 20% for export.
KUL has enjoyed a successful 50 years of existence and wishes to celebrate this
by assembling a modern double storied mini-bus model. The managing director
(MD), in his inaugural project speech, said that the new model would be sold at
Shs 40 million.
The following information is predicted for the forthcoming year due to expected
inflation in the country and after conducting a customer research to find out
what features will be desirable in the intended model. Based on the research
and knowledge of competitors’ products, the chief accountant has advised to
price this model using a cost plus mark up of 20%.
Forecast direct costs per car:
Shs ‘000’
Labour 17,893
Materials 16,800

Forecast annual overhead costs:

Shs ‘000’
Assembling costs (note 1) 620,000
Transportation costs (note 2) 240,000

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 Management Decision & Control - Paper 11

Note 1
Assembling a car of this model requires 8 hours and KUL has only 80,000
assembling hours per annum that are anticipated to be used in assembling other
car models while working at full capacity.
Note 2
Some models of cars are delivered to showrooms using car transporters. 60% of
the transportation costs relate to the number of deliveries made and the balance
relates to distance covered. The car transporters forecast to make a total of 600
deliveries in the year and carry 15 cars per delivery at full capacity.
The annual distance covered by the transporter is expected to be 250,000 km
and 20% of this is for the delivery of the new mini-bus model only. All the 1,500
new assembled mini-buses will be delivered in the same year using the car
transporter.
Required:
(a) Advise management of KUL on whether they should go ahead and charge
the MD’s stated price for each double storied mini-bus model.
(12 marks)
(b) Discuss any two methods that can be used to set transfer prices at KUL.
(4 marks)
(c) Describe ways of solving conflicts that arise during the setting of transfer
prices.
(4 marks)
(Total 20 marks)
Question 4
Urejesho wa Kituo cha Africa is a civil society organisation based in Kampala.
Their focus is on rehabilitating homosexuality victims in Africa. It is funded by
the Republic of Ikeland (Donor) with its rehabilitation centre in Gayaza.
The organisation’s executive secretary, Ms. Alice Mubali, has always found it hard
to convince the donors about the huge amounts of money spent on transport.
She argues that spending a lot on transport is due to travels made while looking
for victims and additional funding across Africa. The Donor feels that such huge
amounts of money should be spent on core activities like counseling, education,
feeding and starting business enterprises to the victims which are currently
constrained. However, Alice claims, without travelling, there will be no clients
because homosexuality victims live under fear and hiding. At the same time,
donor funds are not enough to sustain the organisation which requires
mobilization for additional funds from elsewhere and it involves transportation.

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 Management Decision & Control - Paper 11

Alice wants to show the donor that transport is a vital activity for the
organisation’s existence before submitting the 2018/19 budget. She feels that by
using a quantitative model, her reasons can easily be justified to the Donor.
The following data relates to transport costs for the year 2017/18:
Month Cost Additional victims Additional funds
Shs ‘000’ Shs ‘000’
April 10,500 5 2,500
May 7,500 2 8,650
June 15,750 12 6,320
July 12,840 6 3,255
August 5,420 550
September 7,600 1 9,800
October 9,650 15 12,500
November 13,445 4 5,230
December 11,340 9 1,250
January 8,160 3 4,165
February 6,230 235
March 3,235 1 75
The Donor has assigned you to engage Ms Alice Mubali on the quantitative
model.
Required:
(a) Derive a regression equation of the line between transport costs and
additional victims.
(5 marks)
(b) Using coefficient of determination, advise the Executive Secretary on the
effect of transport costs on:
(i) additional victims. (2 marks)
(ii) additional funds. (5 marks)
(c) Using standard error of coefficient, advise the Executive Secretary on the
relationship between transport costs and: Using standard error of
coefficient, advise the Executive Secretary on the relationship between
transport costs and:
(i) additional victims. (2 marks)
(ii) additional funds. (2 marks)
(d) Evaluate the results from parts (b) and (c) above and advise the Executive
Secretary on what should be done for transport costs in the 2018/19
budget.
(4 marks)
(Total 20 marks)

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 Management Decision & Control - Paper 11

Question 5
Bright Limba is a retired civil servant that has three wholesale business centre in
the municipalities of Kabale (K), Gulu (G) and Fort Portal (F). He trades in maize
grain, irish potatoes and groundnuts which are supplied to various customers.
The following linear programming (LP) model was developed using his business
data to establish the optimal number of customers per business center.
Maximize profits (Z) 15K + 20G + 14F (in million shillings)
Subject to the constraints:
Maize grain 5K + 6G + 4F ≤ 210 (in thousand sacks)
Irish potatoes 10K + 8G + 5F ≤ 200 (in thousand sacks)
G-nuts 4K + 2G + 5F ≤ 170 (in thousand sacks)
Non-negativity K, G, F ≥ 0
The following final simplex tableau was derived from the above LP model:
Solution variable Business centres Slack variables Solution quantity
K G F S1 S2 S3
3 11 1
S1 -2 /5 0 0 1 - /15 - /15 52
1
G 1 1 0 0 /6 -1/6 5
2 1 4
F /5 0 1 0 - /15 /15 32
3 2
Z -10 /5 0 0 0 -2 /5 -2/5 -548
Where,
 S1, S2, and S3 are slack variables to the constraints of maize grain, Irish
potatoes and g-nuts respectively.
 K, G, and F are number of customers in the municipalities of Kabale, Gulu and
Fort Portal respectively.
Required:
(a) Interpret the final tableau above.
(8 marks)
(b) Advise Bright Limba, the effect of an additional sack of groundnuts on
business profitability.
(4 marks)
(c) Discuss uses of linear programming to business enterprises.
(8 marks)
(Total 20 marks)

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