Page 11 - OCS Workbook - Day 2 Tasks (May 2018)

MANAGEMENT ACCOUNTING (P1) - PRACTICE TASKS

EXERCISE 3 (RISK)

UPDATE
At a recent Board meeting of Mansako, Joseph Carelli, Creative Director, put forward a proposal
for the company to introduce a range of designer clothing. This would involve creating a new
range of scarves, blouses and gloves with designs created by the award-winning designer and
artist, Stig Yurgenson, a friend of Joseph. 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 Roberto Rossi:

From: Roberto Rossi (FD)
Date: Today
Subject: New designer clothes range

As you may have heard, the Board are considering extending the product range to include
clothing products designed by Stig Yurgenson. If you haven’t heard of him, then you would be
amazed at some of the bizarre things he has done in the past, whether in terms of new fabrics,
controversial designs and outrageous shows on the catwalk. Some people don’t really
understand his work but Joseph thinks he is a genius.

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 am 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 Roberto.
(Time allocation: 40 minutes)

KAPLAN PUBLISHING 31