CIMA Updated P3 Exam Questions and Answers by ivar

K Ltd is an on-line travel agency specialising in budget package holidays to a small number of popular locations. The holidays that it sells are made up of a "package" of flights, hotel accommodation and food. K Ltd's Finance Director is concerned that the company's scope of operation is too narrow and wishes to diversify.

Identify TWO actions that K Ltd should take immediately.

K has several subsidiary companies. The directors of K's subsidiaries are paid an annual bonus based upon their particular subsidiary's reported profits.

The directors of one of K's subsidiaries are considering the choice between two models of a machine.

Which of the following is most likely to explain the decision to choose model X over model Y?

Company W produces mobile phone components and has recently tendered for a substantial contract. The results of the tendering process will not become available until three months from now. If the company is successful it will require 2,000 units of a commodity which is currently traded in an open commodity market for $740 per unit. However, there has been speculation that this commodity could increase substantially in price over the next three months and so the company is considering purchasing the commodity now and storing it for three months.

The funds to buy the commodity would be borrowed at an annual interest rate of 7% and the storage cost of the product would be $5.40 per unit per month. The storage costs would be paid at the end of the three month storage period.

Which of the following represents the gain or loss (to the nearest thousand dollars) that will accrue to Company W assuming that the price of the commodity rises to $800 in three months' time?

Division A of X plc produced the following results in the last financial year.

Net profit      $200,000   Gross capital employed   $1,000,000

For evaluation purposes all divisional assets are valued at original cost.

The division is considering a project that has a positive NPV, will increase annual net profit by $15,000, but will require average inventory levels to increase by $50,000 and non-current assets to increase by $50,000.

X plc imposes a 16% capital charge on its divisions. Given these circumstances, will the evaluation criteria of return on investment (ROI) and residual income (RI) motivate division A managers to accept the project?