Page 11 - CIMA OCS Workbook May 2019 - Day 1 Tasks

MANAGEMENT ACCOUNTING (P1) ‐ PRACTICE TASKS

EXERCISE 3 (RISK)

UPDATE
At a recent Board meeting of VitaMine, Suresh Patel (MD) put forward a proposal to make and
sell a new liquid supplement containing elderberry, zinc and astragalus. He explained that
elderberry has been used traditionally to maintain health and well‐being, astragalus is an herb
that has been included to support a healthy immune system response to seasonal challenges and
zinc has been added to promote normal immune system function. The new product would be
aimed at children, who would take a spoonful each day like a medicine.

Having considered a range of methods, strategies and investment vehicles, the Board have
decided that selling via a single major retailer, VitaSite, would be less risky than other alternatives
and would allow VitaMine to learn more about consumer response and trends before committing
to a larger investment. 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 Juliette Goh (FD):

From: Juliette Goh (FD)
Subject: Elderberry Supplement

As you may have heard, the Board are considering a proposal to make and sell a new elderberry
based supplement for children. 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 Ashok Kumar 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 Juliette.
(Time allocation: 40 minutes)

KAPLAN PUBLISHING 29