MANAGEMENT CASE STUDY PRACTICE EXAM ANSWERS

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The Chartered Institute of Management Accountants 2014 – no reproduction without prior consent
MANAGEMENT CASE STUDY PRACTICE EXAM ANSWERS
The Practice Exam can be viewed at
http://www.pearsonvue.com/cima/practiceexams/
Section 1
Report to the finance director
Strategic implications of an increase in fuel prices and an evaluation of activity-based
management
Fuel prices
The price of aviation fuel continues to be volatile. The political situation in major oil exporting countries
has caused a recent spike in prices. This paper discusses some of the implications of a prolonged
increase.
Fuel accounts for 1.7/6.8 = 25% of our cost per ASK (see pre-seen). That suggests that a prolonged
increase will prove costly to our operations.
Given the central role of fuel prices in the industry, we can expect to see other airlines increasing
ticket prices in response to this increase in cost. It may be that we can consider passing on the
increased cost of airfares to customers because prices will be rising across the industry.
Unfortunately, our position as a no-frills airline does not save us a significant amount in terms of fuel
costs and so we may lose ground to the traditional airlines. For example, National Air’s fuel cost is
only 1.8/9.6 = 19% of their cost per ASK. In other words, if we both pass on the same cost increase
for fuel our fares will rise by a larger proportion than theirs and so we could lose some of our
competitive position.
Clearly, many of our customers are forced to buy airline tickets and so a price rise will leave a
segment of the market unaffected. Unfortunately, there are also customers who have some discretion
over whether to travel (or travel is a luxury). We can expect total demand to decline in the event of a
price rise. Again, that could erode some of our competitive advantage because running our aircraft at
close to full capacity helps us to offer lower prices than our competitors.
ABM and target costing
Our use of ZBB (see pre-seen) and other techniques mean that we would have to do very little in
order to move further towards the use of activity based management and target costing. Arguably, we
have used both techniques to a large extent albeit under a different heading.
Activity based management requires that we understand the cost of providing our service. The
biggest area in which we might explore that is by looking at our route network and the costs of
operating from specific airports. Clearly, some routes will always be more profitable than others.
Some airports charge higher landing fees and so the profitability of routes cannot be directly
compared.
These answers have been provided by CIMA for information purposes only. The answers
created are indicative of a response that could be given by a good candidate. They are not to
be considered exhaustive, and other appropriate relevant responses would receive credit.
CIMA will not accept challenges to these answers on the basis of academic judgement.
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ABM would require us to study costs and revenues closely with a view to making a decision as to
whether we could utilise resources more effectively. For example, we should study customers’ buying
behaviour to establish whether we have routes that feed into other services. For example, some
routes may appear to be relatively unprofitable but they stimulate demand because passengers then
fly on to a final destination using Fly-jet. Closing some routes may lead to a more significant loss of
revenue when the onward connections are taken into account.
ABM might also help us to understand the impact of some of the processes that we use. For example,
the sale of inflight snacks is difficult to cost because we are using flight attendants who would be paid
anyway, but they could lead to unseen costs, such as additional cleaning costs and potential delays
when readying a plane for its next flight.
Target costing would be useful because there are market forces that restrict our prices. We are likely
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