Performance Management · November 2025

Azuka Nig. Ltd

a. Optimal product mix that will maximise Lagos Plant profit using marginal costing approach. MI ME SU N N N Selling price 90,000 110,000 125,000 Direct material 50,000 71,000 90,000 Direct labour 12,000 15,000 18,000 Variable overhead 6,000 9,000 12,000 Total variable cost 68,000 95,000 120,000 Contribution 22,000 15,000 5,000 Machine hours per unit 2 hours 3 hours 4 hours Contribution per hour N 11,000 N 5,000 N 1,250 Ranking 1st 2nd 3rd Allocation of available Machine hours: Available machine hours 2,500 hrs Production of Product MI 500 units x 2 (1,000) hrs Balance 1,500 hrs Production of ME 300 units x 3 (900) hrs Balance 600 hrs Production of SU = 600hour /4 150 units = (600) hrs Contribution: N MI = 500 units x 22,000 = 11, 000,000 ME = 300 units x 15, 000 = 4,500,000 SU = 150 units x 5,000 = 750,000 Total contribution 16,250,000 Less fixed cost (12,000,000) Net profit 4,250,000 111

b. Determination of most profitable product and Lagos Plant net profit using throughput accounting. MI ME SU Selling Price N 90,000 N110,000 N125,000 Direct material N50,000 N71,000 N90,000 Throughput returns N40,000 N39,000 N35,000 Machine hours per unit 2 hours 3 hours 4 hours Throughput returns /hour N20,000 N13,000 N8,750 Operating costs N Variable costs less material N18,000 x 500 + N24,000 x300 + N30,000 x 200 = N9,000,000+ N7,200,000 + N6,000,000 = 22,200,000 Fixed cost = 12,000,000 Total operating cost = 34,200,000 Total hours = 2,500 Machine hours Operating cost per hour N34,200,000/2,500 = N13,680 Throughput Accounting ratio = Throughput return per hour/Operating cost per hour MI ME SU Throughput returns /hour N20,000 N13,000 N8,750 Operating cost per hour N13,680 N13,680 N13,680 Throughput Accounting ratio 1.4620 0.9503 0.6396 Ranking 1st 2nd 3rd Allocation of available machine hours: Available machine hours 2,500 hrs Production of Product MI = 500 units x 2 = (1,000) hrs Balance 1,500 hrs Production of ME = 300 units x 3 = (900) hrs Balance 600 hrs Production of SU = 600hour /4 150 units= (600) hrs 112 Throughput returns : N N N MI = 500 units x 40,000 = N20,000,000 ME = 300 units x 39,000 = 11,700,000 SU = 150 units x 35,000 = 5,250,000 36,950,000 Operating cost (34,200,000) Net Profit 2,750,000

c. Marginal costing statement showing the profit generated in the Port Harcourt Plant. Mini- class Medi-class Super-class Adjusted Sales quantity 1.15 x 500 0.90 x 300 200 575 270 200 Adjusted selling price 0.9 x N90,000 1.05 x N110,000 N125,000 N81,000 N115,500 N125,000 Variable costs: N N N N Direct material 50,000 71,000 90,000 Direct labour @N6,000 per hour 12,000 15,000 18,000 Variable overhead @ N3,000 per Machine hour 6,000 9,000 12,000 Variable cost 68,000 95,000 120,000 Contribution per unit 13,000 20,500 5,000 Total contribution 7,475,000 5,535,000 1,000,000 14,010,000 Fixed cost (9,000,000) Net Profit 5,010,000 113

d. Breakeven sales in units and value for Port Harcourt Plant. Breakeven point in Units in a Multi-product:=Fixed Cost/Weighted Contribution Mini-class Medi-class Super-class Contribution per unit N13,000 N 20,500 N 5,000 Quantities in units 575 270 200 1045 Proportion 0.55 0.25837 0.19133 1.00 Weighted Contribution = N7150 + N5,296.585 + N958.15 = N13,404.735 BEP in Units = N9,000,000/N13,404.735 = 671 units Share of Product 369 173 129 Breakeven point in Value = FC/Weighted Contribution ratio Mini-class Medi-class Super-class Contribution per unit N13,000 N20,500 N5,000 Selling price N81,000 N115,500 N125,000 C/S ratio 0.1605 0.1775 0.04 Sales Revenue N46,575,000 N31,185,000 N25,000,000 N102,760,000 Sales Proportion 0.45324 0.30347 0.24329 1.00 Weighted C/S ratio 0.07275 0.05387 0.00973 0.13635 BEP in value = N9,000,000 / 0.13635 = N66,006,601 Share of Products = N29,916,832 N20,031,023 N16,058,746

e. Marginal costing statement of the company using solution in a and c. Marginal costing profit statement for the two plants and company) Particulars Lagos Plant Port Harcourt Plant Company N’000 N’000 N’000 Sales 96,750 102,760 199,510 Less: Variable costs (80,500) (88,750) (169,250) Contribution 16,250 14,010 30,260 Fixed cost (12,000) (9,000) (21,000) Net Profit 4,250 5,010 9,260 114

f. Use the residual income approach, explain the viability of the two plants. Particulars Plant one Plant two N’000 N’000 Sales 96,750 102,760 Less Variable costs (80,500) (88,750) Contribution 16,250 14,010 Fixed cost (12,000) (9,000) Net Profit 4,250 5,010 Imputed cost (3,500) (3,800) Residual Income 750 1,210 From the above report, the residual income referred to as the economic profit shows that both Plants are very viable generating positive residual incomes of N750,000 and N1,210,000 for Lagos and Port Harcourt plants respectively.

Examiner’s report This is a compulsory question under the new syllabus and dwells on advanced costing techniques with special emphasis on marginal costing, throughput accounting, breakeven analysis under conditions of limiting factor constraints. The question also tests candidates ability to determine the performance of the two plants (Lagos and Port Harcourt Plants) using the residual income parameter. The first part of the question tests candidates’ ability to compute maximum profit in the Lagos plant where there exists limiting factor. The second question tests candidates ability to determine company’s machine utilisation rate for each machine and also establish the machine hours per unit of product produced under the throughput accounting model. The third question dwells on the preparation of marginal costing statement for Port Harcourt Plant in view of issues of sensitivity analysis on selling price and quantity under a non-limiting factor situation in the plant. The fourth part of the question dwells on the determination of breakeven quantities and values for multi-product situation in the Port Harcourt Plant taking into consideration the effect of sensitivity analysis on product selling prices and quantities. The fifth part of the question is to prepare the company profitability statement using the marginal costing approach. The final part dwells on determination of the viability of the two plants using the residual income approach. The question being a compulsory question was well attempted. The candidates’ performance was however average (about 45%). The major pitfalls were: ► candidate inability to compute the operating costs as well as operating cost per available hour; and 115 ► inability of most candidates to differentiate between the use of limiting factor in conventional marginal costing and throughput analysis in preparing marginal costing statements. It is recommended that candidates use ICAN study manual and other Performance Management text books in preparing for future examination.

Marking guide Sect. Description Marks Marks Total a. Calculation of optimal product mix that maximises Lagos Plant profit using marginal costing approach (1/6 for each tick = 1/6 x 36) 6 b. Determination of most profitable product and Lagos Plant net profit using throughput accounting (¼ each for 28 ticks) 7 c. Marginal costing profit statement (1/4 each for 16 ticks) 4 d. Calculation of breakeven sales in units and value for Port Harcourt plant (1/4 each for 24 ticks) 6 e. Marginal costing profit statements for the two plants and the company (1/3 each for 12 ticks) 4 f. Preparation of residual income for the plants (1/4 each for 12 ticks) 3 30 116

SHAGALA AGRO-ALLIED COMPANY LIMITED Monthly cash budget – First quarter JAN FEB MAR TOTAL Cash inflows: N’000 N’000 N’000 N’000 Cash sales 4,800 5,200 6,000 16,000 Cash from trade receivables 34,560 41,040 42,840 118,440 Disposal of asset - - 10,000 10,000 Dividend receipt - 6,500 - 6,500 Total receipts 39,360 52,740 58,840 150,940 Cash outflow: N’000 N’000 N’000 N’000 Payment for trade payable 26,000 30,600 33,000 89,600 Direct labour 9,060 9,480 10,710 29,250 Variable overhead 5,600 6,000 7,150 18,750 Indirect labour 600 600 600 1,800 Fire insurance 100 - - 100 Fixed overhead 500 600 700 1,800 Dividend payment 500 500 500 1500 Total payments 42,360 47,780 52,660 142,800 Net cash flow (3,000) 4,960 6,180 8,140 Balance b/f (3,250) (6,250) (1,290) (3,250) Balance c/f (6,250) (1,290) 4,890 4,890

Workings

1. Number of units produced November December January February March April Sales 40,000 60,000 60,000 65,000 75,000 80,000 Closing 10,000 10,000 12,000 15,000 25,000 25,000 Opening - (10,000) (10,000) (12,000) (15,000) (25,000) Production 50,000 60,000 62,000 68,000 85,000 80,000 117

2. Sales schedule November December January February March April Sales unit 40,000 60,000 60,000 65,000 75,000 80,000 Selling price x 800 x 800 x 800 x 800 x 800 x 800 Total Sales (N’000) 32,000 48,000 48,000 52,000 60,000 64,000 Cash (10%) 3,200 4,800 4,800 5,600 6,000 6,400 Cash (November) 14,400 12,960 - - - Cash (December) 21,600 19,440 Cash (January) 21,600 19,440 Cash (February) - - - - 23,400 21,060 39,360 46,240 48,840

3. Material purchase schedule November December January February March April Units purchased 60,000 62,000 68,000 85,000 80,000 Purchase price x 400 x 400 x 400 x 400 x 400 Total Purchase (N’000) 24,000 24,800 27,200 34,000 32,000 Cash (November) 12,000 12,000 - - - Cash (December) - 12,400 12,400 - - Cash (January) - - 13,600 13,600 - Cash (February) - - - 17,000 17,000 Cash (March) - - - - 16,000 16,000 26,000 30,600 33,000

4. Direct labour cost schedule November December January February March April Units produced 50,000 60,000 62,000 68,000 85,000 80,000 Unit cost x 150 x 150 x 150 x 150 x 150 x 150 Total Cost (N’000) 7,500 9,000 9,300 10,200 12,750 12,000 Cash (November) 1,500 6,000 - - - - Cash (December) - 1,800 7,200 - - - Cash (January) - - 1,860 7,440 - - Cash (February) - - - 2,040 8,160 - Cash (March) - - - - 2,550 10,200 9,060 9,480 10,710 118 Variable overhead cost Particulars December 24 January 25 February 25 March 25 April 25 Production in units 60,000 62,000 68,000 85,000 80,000 N’000 N’000 N’000 N’000 N’000 Production (x N100) 6,000 6,200 6,800 8,500 8,000 Less Depreciation 500 500 500 500 500 5,500 5,700 6,300 8,000 7,500 Accrual (50%) 2,850 3,150 4,000 Accrual (50%) 2,750 2,850 3,150 Total payment to VOH Accruals 5,600 6,000 7,150

Examiner’s report The question tests candidate’s ability to prepare cash budget. The question was well attempted and performance was average. The major pitfalls observed were: ► candidates’ lack of viewership of the principles of management of debtor and creditor balances as required in the question; ► candidates’ inability to treat the cash overdraft as a negative balance; and ► candidates’ inability to note that 3 months credit for obsolete equipment sold in December, 2024 , will be received in March, 2025. It is recommended that candidates use ICAN study manual and other approved text books on Performance Management when preparing for future examination.

Marking guide Marks Marks Total Q2 Monthly cash budget including workings (1/4 mark for each tick) 20 20 119

Kolade Electronics (a) (i) Sales price variance and sales volume variance Sales price variance = (actual price – standard price) x actual volume Plasma TVs (660,000 - 700,000) = – 40,000 x 750 = 30,000,000 A LCD TVs (580,000- 600,000) = –20,000 x 650 = 13,000,000 A –––––––––––––– 43,000,000 A –––––––––––––– Sales volume contribution variance = (actual sales volume – budgeted sales volume) x standard margin Contribution Margin for Plasma = N380,000 Contribution Margin for LCD = N360,000 Plasma TVs 750 - 590 = 160 x 380,000 = 60,800,000 F LCD TVs 650 - 590 = 60 x 360,000 = 21,600,000 F –––––––––––––– 1,400 - 1,180 = 220 82,400,000 F ––––––––––––––

(ii) Material price planning and purchasing operational variances Material planning variance = (original target price – general market price at time of purchase) x quantity purchased (N120,000 – N170,000) x 1,400 = N70,000,000 A Material price operational variance = (general market price at time of purchase – actual price paid) x quantity purchased (N170,000 – N160,000) x 1,400 = N14,000,000 F

(iii) Labour rate and labour efficiency variances Labour rate variance = (standard labour rate per hour – actual labour rate per hour) x Actual hours worked by temporary workers: Total hours needed if staff were fully efficient = (750 x 2) + (650 x 1·5) = 2,475 hours. Permanent staff provide 2,200 hours, therefore excess = 2,475 – 2,200 = 275 hours. However, temporary workers take twice as long, therefore hours worked = 275 x 2 = 550. Labour rate variance relates solely to temporary workers, therefore ignore permanent staff in the calculation. 120 Labour rate variance = (N140,000 – N180,000) x 550 = N22,000,000 A Labour efficiency variance = (standard labour hours for actual production – actual labour hours worked) x standard rate (275 – 550) x N140,000 = N38,500,000 A

(b) Explanation of planning and operational variances Before the material price planning and operational variances were calculated, the only information available as regards material purchasing was that there was an adverse material price variance of N56,000,000. The purchasing department will be assessed on the basis of this variance, yet, on its own, it is not a reliable indicator of the purchasing department’s efficiency. The reason it is not a reliable indicator is because market conditions can change, leading to an increase in price, and this change in market conditions is not within the control of the purchasing department. By analysing the materials price variance further and breaking it down into its two components – planning and operational – the variance actually becomes a more useful assessment tool. The planning variance represents the uncontrollable element and the operational variance represents the controllable element. The planning variance is really useful for providing feedback on how skilled management is in estimating future prices. This can be very easy in some businesses and very difficult in others. Giving this detail could help to improve planning and standard setting in the future, as management will be increasingly aware of factors which could create volatility in their forecasts. The operational variance is more meaningful in that it measures the purchasing department’s efficiency given the market conditions which prevailed at the time. As can be seen in Kolade, the material price operational variance is favourable, which demonstrates that the purchasing department managed to acquire the component which was in short supply at a better price than expected. Without this breakdown in the variance, the purchasing department could have been held accountable for the overall adverse variance which was not indicative of their actual performance. This is, therefore, a fairer method of assessing performance and will, in turn, stop staff from becoming demotivated. The material Price planning variance + Material Price operational variance equals Material Price Variance = N70,000,000A + N14,000,000F = N56,000,000A 121

Examiner’s report This question tests candidates’ ability to deal with questions on advanced variance analysis. The question was well attempted by candidates but performance was below average. The major pitfalls observed were candidates’ inability to compute, determine and interpret sales related variances, material pricing variances as it relates to planning and operational aspects and labour variances. It is recommended that candidates use ICAN study materials on Performance Management when preparing for future examination.

Marking guide Marks Marks Total a.i. Calculation of sales price variance and sales volume variance (1/3 mark each for 6 ticks) 4 a.ii. Material planning and operational variances (1/2 mark each for 8 ticks) 4 a.iii. Labour rate and labour efficiency variances (1/2 mark each for 10 ticks) 5 13

b. Explanation of planning and operational variances (3½ marks each for any 2 points) 7 20

ADAMU VENTURES (a)

i. Optimal transfer price or price range for product B Since the only consumer of product B is Division Y, the minimum transfer price should be set at marginal cost less any cost savings due to internal sales. The variable cost per unit of product B is N384, hence the minimum transfer price should be set at N384 per unit of B. The maximum transfer price per unit for B would be the price that the external supplier charges Division Y, which is N440. Hence, the optimal transfer price per unit would lie between a minimum of N384, and a maximum of N440. 122

ii. Optimal transfer price for product B if there is spare capacity If Division X has spare production capacity, then the units of product B have no opportunity cost and should be transferred to Division Y at variable cost less any cost savings due to internal sales. The transfer price would therefore be N384 per unit.

iii. Optimal transfer price for product B if division X operates at full capacity If Division X is at full capacity and would forego sales of product A to supply product B to Division Y, then the units of product B would have to be transferred at marginal cost less any cost savings plus the contribution forgone on sales of product A. The contribution per unit of A is N128 (i.e. N496 – N368). Thus, the optimal transfer price would be N384 + N128 = N512.

(b) i. Operating statement Division X Division Y Company N N N Sales: Product A to external parties (300,000 x N496) 148,800,000 148,800,000 Product B to Division Y (200,000 x N512) 102,400,000 - - Product C (N512 x 1.25 x 360,000) ___________ 230,400,000 230,400,000 Total Sales 251,200,000 230,400,000 379,200,000 Variable costs Product A (300,000 x N368) 110,400,000 110,400,000 Product B (200,000 x N384) 76,800,000 76,800,000 Transfer cost to Y (200,000 x 512) - (102,400,000) - External supply to Y(160,000 x N 440) ___________ 70,400,000 70,400,000 Total Variable cost 187,200,000 172,800,000 257,600,000 Contribution 64,000,000 57,600,000 121,600,000 Fixed costs Product A (300,000 x N152) (45,600,000) Product B (200,000 x N152) (30,400,000) ___________ 76,000,000 Profit /(Loss) (12,000,000) 57,600,000 45,600,000 Profit/(Loss) ii. Comparative analysis of performance Division X Division Y N N Profit/(loss) (12,000,000) 57,600,000 123 Investment 90,000,000 120,000,000 % % ROI -13.333 48 Cost of capital 15% 15% N N Profit/(loss) (12,000,000) 57,600,000 Charge on capital employed (13,500,000) (18,000,000) Residual Income (RI) (N25,500,000) 39,600,000 Due to the transfer price policy of operating at full capacity, Division X is not able to charge a share of its fixed costs to division Y, thus Division X having incurred fixed overhead on all 500,000 units produced is operating at a loss of N12m while Division Y with no fixed overhead cost is operating at a Profit of N57.6 million. The ROI for division X is therefore negative 13.333% on its investment while Division Y generates a 48% returns per Naira invested. Division X generates a residual loss of N25.5million while Division Y generates a residual income of N39.60 million. The cost of capital for both Divisions is the same at 15% but Division Y has a higher investment base.

Examiner’s report The question tests candidates’ knowledge of transfer pricing and calculation of the operating performance of the divisions of the company. The question was well attempted since it is a popular question and performance was above average. The major pitfall observed was candidates’ inability to decipher the transfer pricing implication on operating statement of Adamu Ventures Ltd when it is operating at full capacity with no spare capacity. It is advised that candidates use ICAN study materials on Performance Management when preparing for future examination.

Marking guide Marks Marks Total a.i. Correct explanation of optimal transfer price or price range for product B 3 a.ii. Correct explanation for optimal transfer price for product B if there is spare capacity 3 a.iii. Correct explanation for optimal transfer price for product B if Division X operates at full capacity 5 11 b.i. Operating statement (¼ mark each for 16 ticks) 4 b.ii. Comparative analysis of performance (½ mark each for 10 ticks) 5 9 20 124

VESTAPRICY a. i. Selling Price per unit = Contribution divided by C/S ratio = N4,800/0.4 = N12,000 ii. Monthly sales in Value and units = Monthly contribution divided by C/S ratio Monthly contribution = Monthly profit + Monthly Fixed costs. N10,200,000 + N9,000,000 = N19,200,000 Monthly sales In value = N19,200,000/0.4 = N48,000,000 Monthly sales in units = N48,000,000/N12,000 = 4,000 units. iii. Current year’s BEP in value = Fixed cost divided by C/S ratio x 12 Months = N9,000,000 /0.4 = N22,500,000 x 12 = N270,000,000 BEP in units = N270,000,000/unit selling price = N270,000,000/N12,000 = 22,500 units iv. Margin of Safety in units and value In Units In Value Annual Total Sales (4,000 x12) 48,000 576,000,000 Sales in BEP 22,500 270,000,000 Margin of Safety 25,500 306,000,000 Alternatively, if monthly, Total sales 4,000 48,000,000 Sales in BEP 1,875 22,500,000 2,125 25,500,000

b. Determination of the strategy which the company should adopt Strategy A Strategy B Strategy C Sales Volume (Units) 4,400 4,800 5,200 Selling Price Per Unit (N) 11,400 10,800 10,200 Variable Cost per Unit (N) 7,200 7,200 7,200 Contribution Per Unit (N) 4k,200 3,600 3,000 N N N Total Contribution 18,480,000 17,280,000 15,600,000 Fixed cost (9,000,000) (9,000,000) (9,000,000) 9,480,000 8,280,000 6,600,000 Comment Based on the calculations above, strategy A is the strategy that will maximise the monthly profits of the company and should be adopted. 125

c. Challenges to the development of MIS in an organisation The major challenges confronted by organisations when developing a Management Information System (MIS) include:

• Employees resistance to change to existing systems and processes which can hinder user adoption;

• Lack of understanding of the new system may lead to lack of clear requirements and this may affect business alignment;

• Developing and implementing a robust MIS requires adequate funding. However, budget constraints may bring about insufficient funding and inadequate resource allocation;

• Developing an MIS that ensures data integrity, confidentiality, and ethical usage requires strong security protocols and careful consideration of legal and regulatory compliance. Data Security from unauthorised access and privacy concerns are critical issues that must be considered;

• An MIS developed today might become outdated quickly, making it difficult for organisations to keep pace with new innovations and maintain a system that remains relevant and competitive. There is, therefore, the need for adequate consideration on rapidity of technological advancements; and

• There is need to configure adequate training and skill gaps management in the development of MIS. Overcoming these hurdles requires strong management commitment, effective communication, and strategic planning.

Examiner’s report The question tests candidates’ knowledge of break-even analysis, sensitivity analysis and effect on company performance. The question also tests candidates’ knowledge of challenges that affect the development of management information system. The various sub-questions in this main question were well attempted and performance was above average. The observed major pitfall was the candidates’ inability to properly analyse the sensitivity issues that were brought about by the implementation of the three strategies adopted to generate better company performance. It is advised that candidates use ICAN study materials on Performance Management when preparing for future Institute Examination. 126

Marking guide Marks Marks Total a.i. Calculation of selling price per unit 2 a.ii. Monthly sales value and in unit 2 a.iii. BEP in units 2 a.iv. Margin of safety in value and units 2 8 b. Determination of strategy to adopt 4 c. Challenges to development of MIS in an organisation (1 mark each for any 3 points) 3 15

AFAM Foods/ABIMBOLA Nig. Ltd.

a. Information required by Abimbola Nig Ltd - a food processing organisation can be internal and external information. The internal information are generated from internal sources while external information can be generated from external sources. Internal sources are from the internal units of sales, production, marketing, purchasing, accounting, Payroll, Administration etc. while the external sources of information like government units, creditors, debtors, banks, investors, general public, newspapers, bulletins, competitors bulletin etc. The following are internal accounting information: Sources Information Sales ledger system Invoices, sales volume, customers, value of sales Purchase ledger system Purchases, credit notes, debit notes, purchases Payroll system employees, hours worked, wages, tax deducted Fixed asset system date of purchase, depreciation charge, resale value. Production information Production machine break down, product scheduling, output Sales and marketing market research, demand pattern seasonal variation. The external sources of information include: Suppliers Product prices, product specification Newspapers and journals Share prices, competitors information, technology development, national and local market survey. Employees wage demand, working conditions Customers Product prices Banks Market and national finance information Government Tax policy, inflation rates, demographic statistics Internet e-mail, Goggle information 127

b. Key factors that determines the success of information system Many factors determine the success of an information system (IS). Key elements that determine the success of information system include:

• effective planning;

• change management;

• data quality and accuracy;

• user satisfaction;

• alignment with business goals;

• System and information quality;

• information quality; and

• the ability to facilitate better decision-making are crucial.

• Organisational Factors: Factors like top management support, resource allocation, and IT expertise play a crucial role in the overall success of the IS.

• Communication: Effective communication within the organisation is vital for understanding IS needs and for successful implementation

Examiner’s report The question tests candidates ability to knowledge of various sources of information relating to food processing and production businesses. The information bothers on importance of financial and non-financial information and their key success factors that will ensure the success of a new information system. The question was well attempted and performance was above average. The major pitfall observed was the candidates’ inability to mention critical and key success factors for the new information system. It is advised that candidates use ICAN study materials on performance management when preparing for future Institute’s Examination. 128

Marking guide Marks Marks Total a. Sources of accounting information (3 marks each for any 3 points) 9 b. Factors that determine sources of information system (2 marks each for any 3 points) 6 15

JOHN NIG. LTD

a) Variable cost per unit Material cost =₦2,400,000/200,000 = ₦12 per unit Labour cost = ₦1,200,000/200,000 = ₦6 per unit Variable overhead cost using high-low method: (₦1,850,000 - ₦1,400,000)/(350,000 - 200,000) = ₦3 per unit ₦ Direct material 12 Direct labour 6 Variable overhead 3 21 Fixed cost =N1,400,000 – (200,000 x 3) =₦800,000

b) Optimum price Demand function Demand function is P = a + bx, where: P = Price per unit x = quantity b = ∆P/∆x = -2/2000 = -0.001 Therefore P = a - 0.001x Find value for “a” by substituting the known values for P and x: 60 = a - (0.001 x 250,000) a = 310 (Note: This is the maximum selling price, that is, the price at which no quantity will be demanded.) Therefore P = 310 - 0.001x Identify marginal cost (MC) MC = unit variable = ₦21 Identify total revenue (TR) 129 TR = (P)(x) = (310 - 0.001x)(x) = 310x - 0.001x2 Identify marginal revenue (MR) MR = dTR/dx = 310 - 0.002x Equate MC and MR to find x 21= 310 - 0.002x x = 144,500 Substitute x into demand function to find P P = 310 - (0.001 x 144,500) = ₦165.50 Calculate profit Total contribution = 144,500 x (₦165.50 - 21) = ₦20,880,250 Fixed cost (800,000) Profit ₦20,080,250

c) Market skimming As the sales director suggests, market skimming is a strategy which initially charges high prices for the product in order to take advantage of those buyers who want to buy it as soon as possible, and are prepared to pay high prices in order to do so. If certain conditions exist, the strategy could be a suitable one for John Ltd. The conditions are as follows:

• Where a product is new and different, so that customers are prepared to pay high prices in order to gain the perceived status of owing the product early. All we know about John Ltd’s product is that it is “innovative’, so it may meet this condition.

• Where products have a short life cycle this strategy is more likely to be used, because of the need to recover development costs and make a profit quickly. John Ltd’s product have a three-year life cycle, which make it fairly short.

• Where high prices in the early stages of a product’s life cycle are expected to generate high initial cash inflows. If this is the case here, then skimming would be useful to help John Ltd cover the high initial development costs which it has incurred.

• Where barriers to entry exist, which deter other competitors from entering the market, otherwise, they will be enticed by the high prices being charged. These might include prohibitively high investment costs, patent protection or unusually strong brand loyalty. According to the information given, high development costs were involved in this case, which would be a barrier to entry. 130

• Where demand and sensitivity of demand to price are unknown. In John Ltd’s case, market research has been carried out to establish a price. However, this information is based on the launch of similar but not identical products, so it is not really known just how accurate it will be to cover the high initial development costs which it has incurred. John Ltd’s product in this case does only have a three-year life cycle, which makes it fairly short.

• Where high prices in the early stages of a product’s life cycle are expected to generate high initial cash inflows. If this is the case here, then skimming would be useful to help John Ltd cover the high initial development costs which it has incurred.

Examiner’s report This question tests candidates’ knowledge of optimum pricing techniques using marginal cost approach for new innovative product. The second part of the question tests candidates knowledge of price skimming strategy when the company is about to launch its product in a new market. The question was well attempted and performance was average. The major pitfall observed was candidates’ lack of understanding that marginal cost can be related to variable costs using the formula shown in the question: P=a - bx; Then MR = a – 2bx. It is recommended that candidates use ICAN study materials on Performance Management when preparing for future examination.

Marking guide Marks Marks Total a. Variable cost per unit (½ mark each for 4 points) Fixed overhead 2 1 3 b. Calculation of optimum price (½ mark each for 14 ticks) 7 c. Discussion of market skimming (2 ½ marks each for any 2 points) 5 15 131 Examination ICAN/252/Q/B5 No............... INSTITUTE STITUTE OF OF CHARTERED CHARTERE ACCOUNTANTS OF NIGERIA SKILLS SKILLS LEVEL LEVEL EXAMINATION EXAMIN – NOVEMBER 2025 FINANCIAL FINANCIAL MANAGEMENT EXAMINATION EXAMINATIO INSTRUCTIONS PLEASE READ THESE THESE INSTRUCTIONS INSTRUCTIONS BEFORE THE COMMENCEMENT OF THE

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5. Read all instructions instructions in in each each section of the question paper careful answering g the the questions. questions.

6. Do NOT answer answer more more than than the the number of questions required in each otherwise, , you you will will be be penalised. penalised

7. All solutions ons should should be be written written in BLUE or BLACK INK. Any solution w PENCIL or any any other other COLOUR OF INK will not be marked.

8. Cross out ALL ALL UNUSED UNUSED SPACES SPACES ON ALL PAGES of the Answer

9. You are required equired to to attempt attempt Question ONE (compulsory), any in Section n B B and and any any TWO TWO Questions in Section C.

10. Check that at you you have have collected collected the correct question paper for the exa you are writing. THURSDAY, NOVEMBER 20, 2025 DO DO NOT NOT TURN TURN OVER OVER UNTIL U YOU ARE TOLD TO DO SO 132 ination No......................... TANTS OF NIGERIA OVEMBER 2025 MMENCEMENT OF THE PAPER to ensure that you do not have t, electronic storage device, of written material on you in ontinuing with the examination ng cancellation of examination provided above. EXCEPT your examination uestion paper carefully before equired in each section, . Any solution written in the Answer Booklet. pulsory), any TWO Questions ion paper for the examination OLD TO DO SO INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA