Page 11 - CIMA MCS Workbook August 2018 - Day 2 Tasks

MANAGEMENT ACCOUNTING (P1) - PRACTICE TASKS

EXERCISE 3 (RISK)

UPDATE
At a recent Board meeting of GymFiT, Bertram Durand (CEO) put forward a proposal to run a
portfolio of gyms as a joint venture with city councils throughout Celtland to encourage people in
target groups to lead more active lives. Key aspects of the proposal include the following:

• Gyms to be located in city centres or ‘disadvantaged’ neighbourhoods
• Councils to provide premises but GymFiT to fit them out, equip them and run them
• The Celtland Government to subsidise fees for members from low incomes
• Profits to be split equally between GymFit and the local council concerned

The Board is now considering the specific details of the proposal. To help make the decision an
external consultancy has been asked to prepare a report on the financial implications of the
investment. This report can be found in the reference materials below.

TRIGGER

This morning you received the following email from Nicola Collette:

From: Nicola Collette (CFO)
Date: Today
Subject: Joint venture

As you may have heard, the Board are considering a joint venture running gyms with local
councils. To assist the decision making process Yamazaki and Co, a firm of consultants, have
been asked to do some preliminary calculations. Extracts of their report are given in the
attachment to this email (see reference materials).

I have a meeting with the Board to discuss whether or not to proceed with the proposal and the
main emphasis will be on risk and return as far as the financial aspects are concerned. I am
concerned that some Board members will not understand the report but Steven Potter and I are
tied up with auditors today, so would appreciate you preparing me something on the following
that I could use to communicate to the Board:

• Can you start by outlining why we consider risk as well as return and what each of these
terms means.
• Which measures suggested by the consultants give an indication of the project “return”
and how the Board should interpret them.
• Similarly, which measures give an indication of the project “risk” and how the Board
should interpret them.
• Finally, your recommendations - do you think the risks are reasonable? Have all risks
been accounted for here?

Can you prepare me a draft report addressing the above issues.

TASK
Prepare the report requested by Nicola.
(Time allocation: 40 minutes)

KAPLAN PUBLISHING 31