Page 6 - CIMA MCS Workbook May 2019 - Day 1 Suggested Solutions

CIMA MAY 2019 – MANAGEMENT CASE STUDY

It would therefore be very difficult to establish revenue streams for the divisions and so the
conversion of the cost centres to profit centres would involve a lot of arbitrary calculations (e.g. of
transfer prices, mark ups on cost) for no real benefit.

Keeping the divisions as cost centres allows the divisional managers to focus on what is genuinely
under their control – productivity, efficiency and costs.

As cost centres, the divisional managers would not have control over spend on capital equipment.
Some of the divisions, for example the foundations, main build and external completion divisions,
will need significant levels of capital equipment to do their work. It may be that the managers, if
they are not given decision making capability for purchases of the equipment, may feel that they
are restricted in their ability to perform at the highest level.

It may be that these managers are involved in the decisions to a degree, despite their divisions
not being classified as investment centres, as they are the most appropriate people within the
business to determine what equipment will be best for the job.

2. CAPITAL INVESTMENT PROCESS

A formal capital investment process helps a company ensure that it is picking the best of all
available capital investment options and that there is a process of review to ensure that the
process is improved over time.

There are three phases to the process – the creation phase, the decision phase and the
implementation phase.
Creation phase. In this phase the company determines which of the available projects will be a
good fit.

The first stage of this phase is to determine the objectives of the investment. These should tie
into the objectives of the organisation. For companies, generally the main objective is that of
shareholder wealth maximisation. Jord is 60% owned by private investors and 40% by
institutional ones, but this is still likely to be its primary objective. The company appears to have a
policy of high dividend payments, so it may also have an objective of ensuring cash flows are high
enough to keep this policy going. A project that ties up significant amounts of cash for a long time
may compromise this objective.

The objectives may come from a SWOT analysis and subsequent evaluation. For instance, if the
evaluation determines that the current market for luxury prefabricated homes in Corvola is
saturated then an objective may be to take the company into a different geographical market.

The second stage of this phase is to search for appropriate investment opportunities. This will
involve looking for projects that tie into the objectives. So it may only look at projects in different
geographical markets.

It will also involve rejecting potential projects because they don’t fit into the company’s
objectives. For instance, Jord has a commitment to sustainability and ethical working, so projects
where these may be compromised would be rejected straight away.

The search for investment opportunities should involve staff who are familiar with the company’s
operational processes, i.e. those who are able to decide whether the projects being looked at are
within the company’s operational capabilities. It should also involve members of the senior

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