515 AMA Must DO Questions
515 AMA Must DO Questions
515 AMA Must DO Questions
PRACTICE QUESTIONS
Q-1 Entertain U Ltd. hires an air-conditioned theatre to stage plays on weekend evenings. One
play is staged per evening. The following are the seating arrangements: VIP rows – the first 3
rows of 30 seats per row, priced at Rs 320 per seat. Middle level – the next 18 rows of 20 seats
per row, priced at Rs 220 per seat. Last level – 6 rows of 30 seats per row, priced at Rs 120 per
seat. For each evening, a drama troupe has to be hired at Rs 71,000, rent has to be paid for the
theater at Rs 14,000 per evening and air conditioning and other stage arrangement charges
work out to Rs 7,400 per evening. Every time a play is staged, the drama troupe's friends and
guests occupy the first row of the VIP class, free of charge, by virtue of passes granted to these
guests. The troupe ensures that 50% of the remaining seats of the VIP class and 50% of the
seats of the other two classes are sold to outsiders in advance and the money is passed on to
Entertain U. The troupe also finds for every evening, a sponsor who puts up his advertisement
banner near the stage and pays Entertain U a sum of Rs 9,000 per evening. Entertain U supplies
snacks during the interval, free of charge to all the guests in the hall, including the VIP free
guests. The snacks cost Entertain U Rs 20 per person. Entertain U sells the remaining tickets and
observes that for every one seat demanded from the last level, there are 3 seats demanded
from the middle level and 1 seat demanded from the VIP level. You may assume that in case
any level is filled, the visitor buys the next higher or lower level, subject to availability.
(i) You are required to calculate the number of seats that Entertain U has to sell in order to
break-even and give the category wise total seat occupancy at BEP.
(ii) Instead of the given pattern of demand, if Entertain U finds that the demand for VIP, Middle
and Last level is in the ratio 2:2:5, how many seats in each category will Entertain U have to sell
on order to breakeven?
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A-1 (i) When demand in Ratio 3:2:1
(Rs)
(verification)
(Rs)
Weighted average contribution per seat as per std. demand pattern 1,000 /5 = Rs 200
No. of seats for SEP = Net Fixed Cost / Av. Contribution = Rs30,000 /Rs 200 = 150 seats
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ii) When demand in ratio 2:2:5
Level Level
unit
ratio (units)
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BEP seats adjusted 30 60 90 180
Q-2 Apex Limited manufactures two products, P and Q, using the same production facility. The
following information is available for a production period:
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P and Q can be produced only in batches of 100 units, and whatever is produced has to be sold
or discarded. Inventory build-up is not possible from one production period to another. The
total fixed costs for each level of production and directly attributable to P and Q are given
below:
Product P Product Q
(i) Calculate the quantities of P and Q in the best product mix to achieve the maximum profit
and compute the maximum profit.
(ii) What will be the opportunity cost of meeting P's demand fully?
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A-2 (i) Statement Showing "Contribution / Machine Hour"
'P' 'Q'
units) units0
(Rs12 × 100
(Rs 10 × 100 units) units)
Rank I II
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25hrs.
(Rs) (Rs)
'P' 'Q'
(Rs) (Rs)
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Next 1,000 batches 520000 330000
For producing additional batches above 2,000 batches of Product 'P' Apex Limited have to incur
additional fixed cost of Rs 5,20,000 to earn additional contribution of Rs 2,00,000 (200 batches
× Rs 1,000) which is not beneficial. However, hours saved on 200 batches i.e. 3,000 hrs (200
batches × 15 hrs.) can be utilized for production of 'Q' to the extent of 70 batches (1,750
batches i.e. maximum demand of 'Q'- 1,680 batches).
The contribution from producing additional 70 batches of Product 'Q' will be Rs 84,000 (70
batches × Rs1,200). Accordingly best product mix will be 2,000 batches of 'P' and 1,750 batches
of 'Q'.
Contribution 4100000
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Net Profit 1530000
Particulars Total
Additional Fixed Cost Not Covered by Producing 'P' in the Maximum 320000
Q-3 During the last 20 years KL Ltd.'s manufacturing operation has become increasingly
automated with computer-controlled robots replacing operators. KL currently manufactures
over 100 products of varying levels of design complexity. A single plant wise overhead
absorption rate, based on direct labour hours is used to absorb overhead costs.
In the quarter ended March, KL's manufacturing overhead costs were:
(Rs '000)
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Equipment operation expenses 125
Total 310
During the quarter, the company reviewed the Cost Accounting System and concluded that
absorbing overhead costs to individual products on a labour hour absorption basis was
meaningless and that overhead costs should be attributed to products using an Activity Based
Costing (ABC) system. The following are identified as the most significant activities:
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During the quarter:
(i) 980 component consignments were received from suppliers.
(ii) 1020 production runs were set up
(iii) 640 quality inspections were carried out.
(iv) 420 orders were despatched to customers.
KL's production during the quarter included component R. The following information is
available.
Component
R
Component Consignments received 45
Production runs 16
Quality Inspections 10
Orders (goods) despatched 22
Quantity produced 560
Calculate the unit manufacturing overhead cost of component R using ABC system.
A-3
initially allocated to
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= ' 25,500 & then
on maintenance
inspections
Note: Equipment operations expenses and Maintenance allocated on the basis 15% 70%, and
15% as per the information given in the question.
The next step is to identify cost drivers for each activity and established cost driver rates by
dividing the activity costs by a measure of cost drive usage for the period. The calculations are
as follows.
Receiving supplies (Rs 61,330/980) =Rs 62.58 per component
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Despatching goods (Rs 66,320/420) =Rs1 5 7.93 per goods order despatched.
Particulars (Rs)
(Rs)
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Cost per unit 16.34
For components the overhead costs have been assigned as follows (for components R)
Receiving supplies (45 receipts at Rs 62.58)
Performing setups (16 production runs at Rs 153.77)
Quality Inspections (10 at Rs 39.84)
Despatching goods (22 at Rs 157.90)
Q-4 Flyway Ltd. has hired an aircraft to specially operate between cities A and B. All the seats
are economy class.
passenger):
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through agents) : 10% of the fare
There is an offer from another airlines operator, Haltgo Ltd. for a stop-over at destination D,
which is on the way from A to B. Due to this, the flight will operate from A to D, then from D to
B. The following terms are considered for the stop-over:
50 seats from D to B will be booked by Haltgo at Rs 2,700 per ticket, whether or not Haltgo is
able to sell them to its customers. No agents' commission is payable on these tickets. However,
Snacks must be provided to these passengers also by Flyway Ltd. at no further charge to Haltgo
or the passengers.
A maximum of 60 tickets can be sold by Flyway's travel agents for the A to D sector at a fare of
Rs 3,000 per passenger.
Since the stop-over wastes more time, 25 of Flyway's original passengers in the A to B sector
will voluntarily drop out in favour of other airlines offering direct flights between A and B.
Due to the stop-over, fuel costs will increase from Rs 90,000 to Rs 1,35,000. Additional airport
landing/baggage handling charges of Rs19,000 per stopover will have to be incurred by Flyway
Ltd. Flyway Ltd. will have to serve snacks to all the passengers in the D to B sector at no charge
to passengers. Each snack will cost Flyway Rs 200. This will be in addition to the original food at
Rs 300 served in the A to D sector. You may assume that fuel costs are not affected by the
actual number of passengers in the flight, ignore nonfinancial considerations, additional wear
and tear to aircraft due to extra landing/take-off.
(i) What is the profit earned by Flyway Ltd. per flight from A to B?
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(ii) What is the Break-even number of passengers for each flight from A to B?
Considering the effects of Haltgo's offer,
A-4
Statement Showing Allocation of Seats in the Aircraft
Existing Situation
For Destination A to B
Proposed Situation
For Destination D to E
For Destination A to B
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Seats Available {260 (capacity) – 50' (booked by Haltgo Ltd. for 210 Seats
destination D to B)}
For Destination A to D
agents)
Existing Situation
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Profit per Flight
Rs Rs
Passengers)
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Ground Service, Baggage Handling / 40000
Checking in
(a) Break – even Number of Passengers = Total Fixed Cost per Right / Contribution per
Passenger Proposed Situation
Contribution per Passenger (A to D)
Rs Rs
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10% Commission on Fare 300
Additional
Cost Revenue
(Rs) (Rs)
Rs 4,200)
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Fuel Cost 45000
(#) All the passengers booked for destination A to D are also served food tree of cost.
Flyway Ltd. will gain Rs 13,000 (Rs 2,55,000 – Rs 2,42,000) per flight if it accepts Haltgo's offer.
skilled
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Number of workers in actual gang 9
A-5
SR SH SR RSH SR AH AR AH
960
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Semi-Skill 3x 90 270 3x 120 3x 160 480 2x 160 320
360
Unskilled 1x 60 60 1x 80 80 1x 80 80 2x 80 160
Workings Note:
Standard hours produced = 270
Ratio 4: 3: 2:
Hrs. 120 90 60
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Actual hrs = 40 × 9 = 360 hrs
4: 3: 2:
Semi-skilled = 160
160 = 2 (Unskilled)
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= 360-240 = 120
120 160 80
40 hr week
No. of Workers
(i) 3 4 2
= 1400-1280 = 120(F)
= 1280-1320 = 40 (A)
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Q-6 X Ltd. produces and sells a single product. Standard cost card per unit of the product is as
follows :
50.00
B 5 kg @ Rs 6 per kg 30.00
A fixed production overhead has been absorbed on the expected annual output of 25,200 units
produced evenly throughout the year. During the month of December, 2009, the following
were the actual results for an actual production of 2,000 units :
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(Rs)
B 10,750 kg 61,275
Total 3.82.500
The material price variance is extracted at the time of receipt of materials. Material purchase
were A 20,000 kg. @ Rs 5.25 per kg; B 11,500 kg @ Rs 5.70 per kg.
Required:
(i) Calculate all variances.
(ii) Prepare an operating statement showing Standard gross profit, Variances and Actual gross
profit.
(iii) Explain the reason for the difference in actual gross profit given in the question and
calculated in (ii) above.
A-6
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(i) Material Price variance = (SP – AP) AQ
= 1.000(F)
A = 2,000 × 10 = 20.000 kg
B = 2,000 × 5 = 10,000 kg
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A = (19,766.67 18,900) × 5 = 4,333.33 (F)
= 866.67 (A)
= 1,866.67 (F)
= 2.100(F)
= 1,500 (A)
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Labour idle time variance = Idle hours × SR = 200 × 5 = 1,000 (A)
overhead
variable overhead
overhead
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Fixed overhead exp. Variance = Budgeted overhead Actual overhead
Mix 866.67
Yield 1,866.67
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Efficiency 1,500
Efficiency 3,600
Volume 2,500
(iii) Actual gross profit given in the question is Rs 67,500 while calculated operating profit in
statement is Rs 6,7450. The difference amount is due to material price variance that is
calculated at the time of receipt of material instead of consumption of material price variance
that is calculated at time of receipt of material instead of consumption of material.
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1.500(A)
Q-7 RST Ltd. has provided the following summarized results for two years:
Year ended
(Rs in lacs)
31 -03-2013 31-3-2014
During the year ended 31 -3-2014 sale price has increased by 15% whereas material and
overhead prices have increased by 15% and 5% respectively. You are required to analyse the
variances of revenue and each element of cost over the year in order to bring out the reasons
for the change in profit. Present a profit reconciliation statement starting from profits in 2012-
13 showing the factors responsible for the change in profits in 2013-14.
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A-7 Statement Showing Reconciliation Between Budgeted Profit [F Y. 2012 -13] & Actual
Profit [F. Y. 2013-14]
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Fixed Overheads Variances:
Sales Variances:
= Rs 3,277.50-Rs 2,850.00
= Rs 427.50 (F)
Material Variances
Material Price Variance = Standard Cost of Actual Quantity – Actual Cost
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= Rs 2,050.00 -Rs 2,357.50
= Rs 307.50 (A)
Material Usage Variance = Standard Cost of Standard Quantity for Actual
Output – Standard Cost of Actual Quantity
= Rs 1,900 – Rs 2,050
= Rs150 (A)
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= Rs 300.00 -Rs 367.50
= Rs 67.50 (A)
Volume Variance = Absorbed Fixed Overheads – Budgeted Fixed
Overheads
= Rs 285-Rs 300 = Rs 15 (A)
[Standard Sales]
lacs]
Percentage fall 5%
2.
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Material Cost In F. Y. 2012-2013 2,000.00
Actual Quantity)
3.
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Amount Spent in F. Y. 2013-14 at F. Y. 2012-13 Prices (Budgeted 500.00
4.
Overheads)
Q-8 Apex Limited manufactures two products, P and Q, using the same production facility. The
following information is available for a production period:
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P and Q can be produced only in batches of 100 units, and whatever is produced has to be sold
or discarded.
Inventory build-up is not possible from one production period to another. The total fixed costs
for each level of production and directly attributable to P and Q are given below:
Product P Product Q
(i) Calculate the quantities of P and Q in the best product mix to achieve the maximum profit
and compute the maximum profit.
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(ii) What will be the opportunity cost of meeting P's demand fully?
'P' 'Q'
units) units0
(Rs12 × 100
(Rs 10 × 100 units) units)
Rank I II
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Hours Required = 33,000 hrs (2,200 batches × 15 hrs.)
25hrs.
(Rs) (Rs)
'P' 'Q'
(Rs) (Rs)
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Next 1,000 batches 750000 670000
For producing additional batches above 2,000 batches of Product 'P' Apex Limited have to incur
additional fixed cost of Rs 5,20,000 to earn additional contribution of Rs 2,00,000 (200 batches
× Rs 1,000) which is not beneficial. However, hours saved on 200 batches i.e. 3,000 hrs (200
batches × 15 hrs.) can be utilized for production of 'Q' to the extent of 70 batches (1,750
batches i.e. maximum demand of 'Q'- 1,680 batches). The contribution from producing
additional 70 batches of Product 'Q' will be Rs 84,000 (70 batches × Rs1,200). Accordingly best
product mix will be 2,000 batches of 'P' and 1,750 batches of 'Q'.
Contribution 4100000
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(ii) Statement Showing "Opportunity Cost"
[Benefit Denied in the Next Best Alternative i.e. (I)]
Particulars Total
Additional Fixed Cost Not Covered by Producing 'P' in the Maximum 320000
A B C
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Material cost 230 260 290
of production 8 11 7 (hours)
Material cost and variable production overheads are the same for the peak-season and off-
season. Variable selling overheads are not incurred in the off-season. Fixed costs amount to Rs
26,780 for each season, of which Rs 2,000 is towards salary for special technician, incurred only
for product B, and Rs 4,780 is the amount that will be incurred on after-sales warranty and free
maintenance of only product C, to match competition. Labour force can be interchangeably
used for all the products. During peak-season, there is labour shortage and the maximum
labour hours available are 1,617 hours. During off-season, labour is freely available, but
demand is limited to 100 units of A, 115 units of B and 135 units of C, with production facility
being limited to 215 units for A, B and C put together.
You are required to:
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(i) Advise the company about the best product mix during peak-season for maximum profit.
(ii) What will be the maximum profit for the off-season ? (12 marks)
Product A B C Total
Production
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Variable Overhead-Selling 10 20 15
F. Ranking 2 3 1
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H BEP (units) (for only 1 Product at a time)
Maximum units that can be produced of product C with limited labour hours 1,617
= 1,617 /7 = 231.
Next rank = A
Maximum units of A that can be produced with limited labour hours = 1,617 / 8
= 202 units.
Rs
Profit 200
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Off Season
Bloom Ltd.
Off Season
Product A B C
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Ranking 3 1 2
Cost (loss)
unit 120
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Contribution
(Rs) — 14,375 12,100 26,475 26,780 (305)
Contribution
(Rs) 12,000 14,375 — 26,375 22,000 4,375
Contribution
(Rs) 9,600 — 16,335 25,935 24,780 1,155
Best strategy is to produce 100 units of product A and 115 units of product B during off-season.
Maximum profit =Rs 4,375.
(i) Best strategy for peak-season is to produce 202 units of A.
Q-10 On the basis of the following information determine the product-mix to give the highest
profit if at least two products are produced:
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Product X Y Z
Only 9,200 hours are available for production at a cost of Rs 20 per hour and maximum 50,000
kgs. Of material @ Rs 20 per kg., can be obtained.
(Only product mix quantities are to be shown, calculation of total profit at that product mix not
required to be shown)
A-10
Calculation of Contribution per Key Factor(s) for Various Products
Products
X Y Z
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Variable Cost p.u. (Rs):
Ranking III II I
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Contribution per Kg. ( Rs) 2.00 5.00 4.00
Ranking III 1 II
Ranking II III I
(ii) Contribution per Kg. of Raw Material also maximum in case of product Y&Z.
(iii) Contribution per Machine Hour is maximum in case of product × & Z. Hence, product Z is
common in all cases and priority shall be given for production of 'Z'. Balance resources should
be divided between other two products × & Y.
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Resources Maximum Maximum Consumption Total Balance
Kg.
Hrs. Hrs.
The production of × & Y may be computed with the help of following equations by utilizing the
balance resources:-
20X + 12Y = 27,500 ...(I)
3X + 5Y = 6,200 ... (ii)
Then,
30X + 18Y = 41,250 ... equation (I) multiplied by 1.5
30X + 50Y = 62,000 ... equation (ii) multiplied by 10
-32Y = -20,750
Y = 648.43 i.e. 648 units
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Putting the value of Y in equation (ii)
3X + (5 × 648) = 6,200
Or 3X = 2,960
Or × = 986 units
Q-11 Fruitolay has decided to increase the size of the store. It wants the information about the
probability of the individual product lines: Lemon, grapes and papaya. It provides the following
data for the 2009 for each product line:
Rs
Cost of bottles returned 1,200.00 Rs0 Rs0
Number of purchase
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orders placed 36 84 36
Fruitolay also provides the following information for the year 2009:
(R
No. Activity s) basis
Bottle
1. returns Returning of empty 1,200.00 Direct tracing to
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bottles to the store product line
of purchases orders
merchandise
a dise on store
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restocking
checkout
Required:
(i) Fruitolay currently allocates store support costs (all costs other than the cost of goods sold)
to the product line on the basis of the cost of goods sold of each product line. Calculate the
operating income and operating income as the percentage of revenue of each product line.
(ii) If Fruitolay allocates store support costs (all costs other than the cost of goods sold) to the
product lines on the basis of ABC system calculate the operating income and operating income
as the percentage of revenue of each product line.
(iii) Compare both the systems.
A-11
(i)
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Particulars Lemon Grapes Papaya Total
Rate
Output
Stocking u it 17280 864 self stocking hours Rs20
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Customer Support Output unit 30720 153600 items sold Rs0.20
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Less: Cost of goods sold 60000 150000 90000 300000
Summary
The grapes line drops sizeably when ABC is used. Although it constitutes 50% COGS, it uses a
higher percentage of total resources in each activity area, especially the high cost of customer
support area. In contrast, lemon line draws a much lower percentage of total resources used in
each activity area than its percentage of total COGS. Hence under ABC, Lemon is most
profitable. Fruitolay can explore ways to increase sales of lemons and also explore price
increases on grapes.
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Operating Income Ranking is highest for Grapes under Traditional System because other
products bear its overhead cost, whereas under ABC a more accurate picture shows Grapes as
the lowest ranking product.
Q-12 Gupta Ltd. produces 4 products P, Q, R and S by using three different machines X, Y and Z.
Each machine capacity is limited to 6000 hours per month. The details given below are for July,
2013:
P Q R S
Machine X 20 12 4 2
Machine Y 20 18 6 3
Machine Z 20 6 2 1
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Required:
A-12
(i) Computation of Machine Utilisation:
ne
P Q R S
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(200 units x (200 units x (200 units (200 units ×
Because of Machine Y has the highest machine utilization it represents the bottleneck activity.
Therefore Product Ranking & Resource Allocation should be based on Contribution / Machine
Hour of Machine Y.
(ii) Allocation of Resources:
Particulars P Q R S Machine Spare
Utilizatio capacity
(Rs)
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Variable Cost per unit 7,000 5,600 4,000 2,800
(Rs)
(Rs)
Time Required in 20 18 6 3
Machine V (firs.)
Machine
Hour (Rs)
Rank III IV II I
x x x
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20 hrs) 6 hrs.) 3 hrs )
(200 hrs./18
hrs.)
'X' time (hrs.) (200 units (11.11 units (200 units (200 units
× 12 hrs.)
× 20 hrs.) x x
4 hrs.) 2 hrs.)
× 20 hrs.) x x x
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Particulars Amount (Rs)
Q (11.11 units × Rs
2,400) 26,664
Machine 'X'
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Less: Machine Hours Utilized 5,333.32 hrs.
Machine 'Z'
Note: At the time of computation of Production (units) of Product 'Q' on the basis of allocated
hours, round figure (complete units) can also be considered then remaining solution will be
changed accordingly.
Q-13 KG Ltd. is engaged in the production of two products K and G. One unit of product K
requires two units of material A and four units, of material B. Each unit of product G needs four
units of material A, two units of material B and four units of material C. Material C is locally
produced in the factory of the company by using two units of material B for each unit of C.
Materials A and B are purchased in the open market. Production of products K, G and C is
carried out evenly throughout the year. At present the company has purchased its 3 months
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requirements of A and B in one purchase. That is four purchases per annum. The other
particulars provided by the company are:
Product S
K Units G Units
Products
A B
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(i) Prepare a production budget and a material requirement budget for the next year.
(ii) Calculate the number of material purchases to be made, if the company wants to purchase
materials in optimal quantity.
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For Product 'K': Production 30,000 units
'A' B'
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2 X 3, 00, 000 X 1, 2 X 7, 20, 000 X 1,
Optimum order 000 000
EOO = EOQ =
15X10 25X10
= 15 Purchases = 30 Purchases
Q-14 Division Z is a profit centre which produces four products A, B, C and D. Each product is
sold in the external market also. Data for the period is :
A B C D
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Variable cost of pdn. per unit (Rs) 130 100 90 85
Product D can be transferred to division Y, but the maximum quantity that may be required for
transfer is 2,500 units of D. The maximum sales in the external market are :
A 2,800 units
B 2,500 units
C 2,300 units
D 1,600 units
Division Y can purchase the same product at a price of Rs 125 per unit from outside instead of
receiving transfer of product D from Division Z.
What should be the transfer price for each unit for 2,500 units of D, if the total labour hours
available in division Z are 20,000 hrs?
Products A B C D
Rs Rs Rs Rs
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Less: Variable cost 130 100 90 85
Ranking IV III I II
Balancing figure
Note : Time required meeting the demand of 2,500 units of product D for division Y is 7,500
hours. This requirement of time viz, 7,500 hours for providing 2,500 units of product D for
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division Y can be met by sacrificing 600 hours of Product A (200 units) and 6,900 hours of
Product B (1725 units)
Transfer Price = Variable cost + Opportunity cost
Q-15 B Ltd. makes three products X, Y and Z in Divisions × , Y and Z respectively. The following
information is given:
X Y Z
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Maximum external Market demand (no. of units) 5,000 5,500 5,000
Y and Z need material × as their input. Material × is available in the market at Rs 23 per unit.
Defectives can be returned to suppliers at their cost. Division × supplies the material free from
defects and hence is able to sell at Rs 25 per unit. Each unit of Y and Z require one unit of × as
input with slight modification. If Y purchases from outside at Rs 23 per unit, it has to incur Rs 3
per unit as modification and inspection cost. If Y purchases from Division X, it has to incur, in
addition to the transfer price, Rs 2 per unit to modify it. If Z gets the material from Division X, it
can use it after incurring a modification cost of Rs 1 per unit. If Z buys material × from outside, it
has to either inspect and modify it at its own shop floor at Rs 5 per unit or use idle labour from
Division × at Rs 3 per unit. Division × will lend its idle labour as per Z's requirement even if Z
purchases the material from outside.
The transfer prices are at the discretion of the Divisional Managers and will remain confidential.
Assume no restriction on quantities of inter – division transfers or purchases.
Discuss with relevant figures the best strategy for each division and for the company as a
whole.
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Particulars Division X Division Y Division Z
Outside Y z Outside X X
(Excluding
Material 'X')
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Modification Cost – – 3.00 2.00 1.00
(*) Division 'Y' will not pay Division 'X' anything more than Rs 24, because at 24, it will incur
additional cost of Rs 2 per unit to modify it, Rs 23 + Rs 3 = Rs 26, the outside cost.
(*) To purchase material × from outside is costly for Division 'Z' as after modification at own
shop floor, cost of the same comes to Division 'Z' is Rs 28 (Rs23 +Rs 5).
If Division 'X' goes to utilize its full capacity in that case labour would not be available for
modification to Department 'Z'.
Particulars X Y Z
Maximum Capacity that can be added 6,000 units 2,000 units 2,250 units
(B)
Total Maximum that can be produced 12,000 units 5,000 units 5,250 units
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r
Maximum External Demand (D) 5,000 units 5,000 units 5,000 units
2,000 units to Y
Internal Transfer from Other Divisions N.A. 2,000 units 5,000 units
(material X) (material X)
(*) Division 'X' will supply its production to Division 'Z' first (after meeting its external
requirement) as contribution from product Z is high.
Statement Showing Decision Whether to Expand or Not:
Particulars X Y Z
E
x
p
a
n
s
i
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o
n
C
o
n
t
r
i
b
u
t
i
o
n
t
h
a
t
c
a
n
b
eRs 64,000 Rs 18,000 (2,000 Rs 28,000
e
a
r
n
e
d
b
y
e
x
p units × Rs 9) (2,000* units x
a
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n
s
i
o
n
Rs14)
(*) As maximum demand of product Z is 5,000 units which Division 'Z' first complete with
existing capacity of 3,000 units. Balance 2,000 units from expansion.
Particulars X Y Z Total
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Contribution 75,000 – – 75,000
Rs10 + 5,000
units × Rs 11)
(ii) As show above all the three Divisions are getting net benefit when they are taking decision
to expand and hence, all the three Divisions should expand there activity by incurring additional
fixed cost on expansion.
Q-16 Four product P, Q, R and S are produced by profit centre Division A. Each product is sold in
the external market also. Data for the period are as follows:
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P Q R S
Specific fixed costs (Rs) per 10,000 units of 2500 12600 15000 18000
product
Product S can be transferred to Division B but the maximum quantity that might be required for
transfer is 20,000 units of S. The specific fixed costs given above are avoidable if a product is
not made. They are incurred for every 10,000 units.
The maximum sales (units) in the external market are:
P 30,000
Q 31,000
R 28,000
S 18,000
Division B can purchase the same product at a slightly cheaper price of Rs 45 per unit instead of
receiving transfers of product S from Division A without any extra transport/inspection costs. B
can also take partial supplies from A. The total labour hours available in Division A is 192000
hours.
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(i) What is A's optimal product mix and the corresponding contribution net of specific fixed
costs?
Particulars P Q R S
Contribution p.u. 4 10 20 9
Ranking IV II I III
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Optimal Product Mix – Labour Hours = 1,92,000
Product Units Labour Hour Total Labour Labour Hour
P 7333.33 3 22000 –
(i) Statement Showing "Optimal Product Mix and Contribution Net of Specific Net of Specific
Fixed Costs on the basis of ranking"
Particulars P Q R S
Rank IV II I III
Contribution (Rs/u) 4 10 20 9
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Specific Fixed Cost (Rs) 2,500 37,800 45,000 36,000 1,21,300
P SEXT SDIV.B
Market Price(Rs/u) 70 46 45
Contribution (Rs/u) 4 9 8
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Rank [Contribution (Rs/hr.)] III I Il
Hrs.
Balance 22,000
Less: Allocated for SDivB (Rank II) (22,000hrs / 3hrs. = 7,333,33 units) 22,000
Units
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Add: Loss of Contribution Net of Specific Fixed Cost "P" 26,833.32
Total 3,16,166.53
Units
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Savings {20,000 units × (Rs 45 – Rs 37)} 1,60,000
Conclusion
From the financial perspective net gain from transfer of 20,000 units to Division B is negligible.
To take final call to transfer 20,000 units to Division B Company should consider other factors
also such as its market share, future market demand, market price, and transportation cost etc.
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Direct material Rs
40
Direct labour 20
Direct expenses 20
150
Annually 20,000 units of the product are sold externally at the standard price of Rs 300 per unit.
In addition to the external sales, 10,000 units are transferred annually to division RPQ at an
internal transfer price of Rs 290 per unit. This transfer price is obtained by deducting variable
selling and packing expenses from the external price since those expenses are not incurred for
internal transfers.
Division RPQ incorporates the transferred – in goods into a more advanced product. The unit
costs of this product are as follows:
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Transferred – in – item (from division PQR) Rs
290
Direct labour 30
800
Division RPQ's manager disagrees with the basis used to set the transfer price. He argues that
the transfers should be made at variable cost plus an agreed (minimal) mark up because his
division is taking output that division PQR would be unable to sell at the price of Rs 300.
Partly because of this disagreement, a study of the relationship between selling price and
demand has recently been carried out for each division by the company's sales director. The
study has brought out the following demand schedule:
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Division PQR
Division RPQ
The manager of the division RPQ claims that this study supports his case. He suggests that a
transfer price of Rs 120 would give division PQR a reasonable contribution to its fixed
overheads while allowing division RPQ to earn a reasonable profit. He also believes that it
would lead to an increase of output and an improvement in the overall level of company
profits. Required:
(i) Calculate the effect of the transfer price of Rs 290 per unit on company's operating profit.
Calculate the optimal product mix.
(ii) Advise the company on whether the transfer price should be revised to Rs 120 per unit.
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Selling Price (Rs) 200 300 400
Optimal Level
The above table shows Rs 300 price to be the most profitable and that cutting prices would not
result in increased profits.
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Optimal Level
(ii) Contribution – Division RPQ (at alternative transfer price Rs 120
Optimal Level
(ii) Contribution – Division RPQ (at alternative transfer price Rs 120
Optimal Level
Comment:
• The maximum capacity of the PQR division is given as 30,000 units. Hence there is no
question of internal transfer if the entire 30,000 units are sold by PQR in the external market.
• However, from the above computations it is clear that division PQR would sell 20,000 units in
external market to optimize its profit and therefore the maximum transfer to division RPQ is
10,000 units only.
• The question of transferring 14,400 units would arise as an alternative to analyze the overall
profitability only when PQR sells 10,000 units in the external market. Based on the demand
projection of RPQ, the demand level of 5,600 units is not relevant.
• It can be further noted from the question that Division RPQ will purchase the entire quantity
only from Division PQR and not externally.
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Transfer to RPQ (units) 10,000 14,400 10,000
Rs
Contribution PQR (External) 38,00,000 Rs 29,00,000 Rs 29,00,000
Note 1
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Fixed Costs
Optimal Level
8,00,000
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Contribution RPQ 39,00,000 41,76,000 39,00,000
costs)
Optimal Level
Comment: The revision of transfer price has no impact on the overall profitability of the
company.
However, it will alter the profitability of the divisions.
Note –1 The optimal level is 30,000 of PQR of which 20 ,000 units are for external sale and
10,000 units are transferred to RPQ under both the transfer prices.
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Note – 2 On internal transfers, PQR's variable cost per unit is Rs 100, since the Rs 10 on selling is
not incurred.
Q-18 AXE Ltd. manufactures four products A, B, C and D. The following details are available for
a production period:
A B C D
Material cost 40 42 46 40
Labour cost:
Total fixed cost is dependent on the output level and is tabulated below at different levels of
output:
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Production units (any combination of one or more of any of Total fixed cost (in Rs)
A, B, C or D)
(i) Advise the management on how many units of each product are to be manufactured or
subcontracted to fulfill maximum market demand. What would be the corresponding profits?
(ii) What is the minimum number of units to be produced to achieve breakeven point?
(iii) What would you advise as the best strategy to maximize profits if assembly labour is not a
limiting factor and if there is no compulsion to fulfill market demand?
(Only relevant figures need to be discussed. A detailed profitability statement is not required).
A-18
(i) Assembly Labour is a Limiting Factor & to fulfill Maximum Market Demand:
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Computation of Contribution per unit and Contribution per assembly hour
Demand (Units)
A B C D
Assembly Dept. 15 20 15 20
Machine Dept. 18 24 36 30
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Rank [Contribution (Rs/hr'.)j I IV III II
[Sub-Contract]
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Product Particulars Contribution/unit Contribution
(Rs) (Rs)
Total 31,60,000
Contribution
Cost
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Net Profit 19,10,000
Decision:
AXE Ltd. can save fixed cost of Rs 4,07,000 (Rs 12,50,000 – Rs 8,43,000) if it keeps its
production limited to 1,00,000 units. Whereas in this case AXE Ltd. has to subcontract 20,000
units of B to fulfill maximum market demand. Contribution Lost from subcontracting of 20,000
units is amounting to Rs 20,000 [20,000 units × (Rs 15 – Rs 14)]. Therefore optimum profit
would be Rs 22,97,000 [Rs 19,10,000. + Rs 4,07,000 – Rs 20,000].
Statement Showing Comparison between Production and Sub Contract (units) and Profit
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Less: Fixed Cost 8,43,000
Balance 63,000
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Product D = 30,000 units
(iii) Assembly Labour is Not a Limiting Factor therefore Requirement to Fulfill Maximum
Market Demand:
AB C D
Contribution (Rs/u) 15 14 20 24
[Sub-Contract]
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Decision:
From the aforesaid analysis table it can be seen manufacturing of product A, B and D gives
higher contribution per unit as compared to sub-contracting. So, AXE Ltd. should manufacture
the entire quantity of product A, B and D and Subcontract the production of product C.
However AXE Ltd. can save fixed cost of Rs 4,07,000 (Rs 12,50,000 – Rs 8,43,000) by limiting its
production level to 1,00,000 units only. In this case AXE Ltd. will make 30,000 units, 40,000
units and 30,000 units of product D, A and B respectively. Whereas in this case AXE Ltd. has to
subcontract 25,000 units of B to earn maximum profit.
Comparison between Production and Sub Contribution (units) and Profit – Best Strategy
Prod. Produced Sub-Contract Contribution Contribution Total
Total 31,40,000
Contrib
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ution
Less: 8,43,000
Fixed
Cost
Net 22,97,000
Profit
Q-19 At the budgeted activity of 75% of total capacity, a company earns a P/V ratio of 25% and
a profit of 10% on sales. During the course of the year the company had to reduce its price of
the product by 10% due to recession and poor offtake. The company was able to achieve
actually a production and sales volume for the year equivalent to 50% of its total capacity. The
sales value at this level was Rs. 13,50,000 at the reduced price of Rs. 9.00 per unit. Due to
reduction in production the actual variable costs went up by 2% of the budget.
Required:
(i) Comparative Statement of Profitability at the budgeted and actual activity.
(ii) Find the P/V ratio, bread–even point in value and units of production at the actual sales
activity.
A-19 Statement of Budgeted and Actual Profit
Budgeted Activity Actual Activity
Sales (in units) 2,25,000 1,50,000
Selling price per unit 10 9
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Sales 22,50,000 13,50,000
Marginal Cost 16,87,500 11,47,000
Contribution 5,62,500 2,02,000
Fixed Cost 3,37,500 3,37,500
Profit/ Loss 2,25,000 (1,35,000)
P V Ratio
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Break - even point (in units) Fixed cost / Contribution Per Unit 1 = 3,37,500 / 1.35 (9-7.65) =
2,50,000 units
forthcoming year:
Rslacs
Sales 20.00
Factory overheads:
Variable 2.20
Fixed 2.60
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Fixed selling overheads 0.40
Profit 2.00
The policy of the company in fixing selling prices is to charge all overheads other than the prime
costs on the basis of percentage of direct wages and to add a mark up of one-ninth of total
costs for profit.
While the company is confident of achieving the budget drawn up as above, a new customer
approached the company directly for execution of a special order. The direct materials and
direct labour costs of the special order are estimated respectively at Rs 36,000 and Rs 64,000.
This special order is in excess of the budgeted sales as envisaged above. The company
submitted a quotation of Rs 2,00,000 for the special order based on its policy. The new
customer is willing to pay a price of Rs 1,50,000 for the special order. The company is hesitant
to accept the order below total cost as, according to the company management, it will lead to a
loss. You are required to state your arguments and advise the management on the acceptance
of the special order.
A-20
Analysis of Cost and profit:
Rs (lakhs) Rs (lakhs)
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Direct labour 6.40
Over head:
Profit 2.00
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Break up of new order : Rs
(i) Factory overheads only are to be recovered on the basis of direct wages.
(ii) The special order is a direct order. Hence commission is not payable.
(iii) The budgeted sales are achieved. Hence all fixed overheads are recovered. Hence, no fixed
overheads will be chargeable to the special order.
Based on the above, the factory variable overheads recovery rate may be calculated as under:
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Total variable factory overheads Rs 2.20 lakhs
Direct wages Rs 6.40 lakhs
Factory overhead rate = (2.20 / 6.40) × 100 = 34.375% Applying this rate the cost of the special
order will be as under:
Q-21 Attempt: . Calculate the selling price per unit to earn a return of 12% net on capital
employed (net of tax @ 40%). The cost of production and sales of 80,000 units are:
Variable cost including material cost Rs 9,60,000
Fixed overheads Rs 5,00,000
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The fixed portion of capital employed is Rs 12 lakhs and the varying portion is 50% of sales
turnover.
A-21
Let 'X' be the selling price per unit, Therefore, Turnover = 80,000 x
Capital Employed = 12,00,000 + 40,000 x
Return on capital employed after tax = 12%
Therefore,
Return on capital employed before tax = 12/0.6 = 20%
Therefore,
Return on capital employed before tax = 20% of (12,00,000 + 40,000x)
= 2,40,000 + 8,000 x
Sales 80,000x
Therefore
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Alternative Answer:
Selling price per unit should cover Variable cost unit, Fixed Cost per unit and ROCE per unit.
Fixed Capital Employed =Rs. 12 lacs
Required Selling price =Rs 23.61 If a student has arrived at Rs 23.61, full 4 marks may be given
even if the intermediary steps are not adequately shown.
Q-22 The Board of Directors of XY Company Limited are considering a new type of handy
sewing macnine which their R&D Department has developed. The expenditure so far on
research has been Rs 95,000 and a consultant's report has been prepared at a cost of Rs 22,500.
The report provides the following information:
Cost of production per unit:
R
Material s
45.00
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Labour 75.00
A new machine will be built with the available facilities with a cost of Rs 1,10,000 (material Rs
90,000 and labourRs 20,000). The materials are readily available in stores which are regularly
used. However, these are to be replenished immediately. The price of these materials have
since been increased by 50%. Scrap value of the machine at the end of the 10th year is
estimated at Rs 20,000. The product scraps generated can be disposed off at the end of year 10
for a price of Rs 1,43,000.
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It is estimated that the commercial life of the machine will be no longer than 10 years and the
after tax cost of capital is 10%. The full cost of the machine will be depreciated on straight line
basis, which is allowed for computing the taxable income, over a period of 10 years. Tax rate is
30%.
Required :
Compute minimum selling price for the handy sewing machine.
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Overheads (Not Relevant) -
1.55.000
Materials 45
Labour 75
Total 120
(iv) Profitability :
1-5 6-10
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Sales Value (Rs) [A] 21,000X 16,000X
@ Rs120
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Rs
Total 1,63,000
Year
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Discount Factor 1 3.79 2.355 0.386
Presen
t Value f -1,55,000 55,713X- 26,376X- 44,042.6
= 82.089X – 1,07,71,855.60
Note:
(a) R&D expenses of Rs 95,000 is not relevant.
(b) Fee for consultant's report of Rs 22.500 is not relevant.
(c) Tax element on irrelevant costs not considered, since the benefit will arise even without this
product.
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It is proposed to adopt cost plus pricing approach with a mark up of 25% on full budgeted cost
basis.
However, research by the marketing department indicates that demand of the product in the
market is price sensitive. The likely market responses are as follows:
Analyse the above situation and determine the best course of action.
The company has a plan to produce 2,00,000 units and it proposed to adopt Cost plus Pricing
approach with a markup of 25% on full budgeted cost. To achieve this pricing policy, the
company has to sell its product at the price calculated below:
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Add: Profit (25% of Rs 80,00,000) 20,00,000
However, at selling price Rs 50 per unit, the company can sell 1,40,000 units only, which is
60,000 units less than the budgeted production units. After analyzing the price-demand pattern
in the market (which is price sensitive), to sell all the budgeted units market price needs to be
further lowered, which might be lower than the total cost of production.
Rs Rs Rs Rs Rs
Variable
Cost
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Contribution
Cost
total cost)
(i) Taking the above calculation and analysis into account, the company should produce and sell
1,28,000 units at Rs 56. At this price company will not only be able to achieve its desired mark
up of 25% on the total cost but can earn maximum contribution as compared to other even
higher selling price.
(ii) If the company wants to uphold its proposed pricing approach with the budgeted quantity,
it should try to reduce its variable cost per unit for example by asking its supplier to provide a
quantity discount on the materials purchased.
Q-23 The CEO of your company has been given the following statement showing the results for
a recent month :
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Particulars Master Budget Actual
Rs Rs
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Variable overhead (1 hour @ Rs 10/hour) Rs 10.00 per unit
Actual results for the month revealed that 9,800 kg. of material was used and 8,800 labour
hours were recorded.
(i) Prepare a flexible budget for the month and compare with the actual results (6 marks)
(ii) Calculate material volume and variable overhead efficiency variances
A-23
(i)
Particular Master Budget Flexible Actual Variance
Budget
Total Variable
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Cost 6,00,000 60 5,40,000 5,40,000 -
Q-24 The following figures are available. Find out the missing figures, giving appropriate
formulae:
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2,800
There is no inventory
Other information :
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Budgeted sales 10,000 units
A-24
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(1) Budgeted contribution = Budgeted Profit Rs
= 15,000 + 15,000 =
30,000
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Standard labour cost for Standard hours(63,000 + 600) 63,600
(7) Actual fixed overheads: Budgeted Overhead + Fixed Overhead variance = 15,000 + 600 = Rs
15,600.
(8) Operating profit variancIf budgeted profit is considered (15,000 7,000) =Rs 8,000 adverse
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It standard profit is considered (16,800 7,000) =Rs 9,800 adverse
Q-25 The following profit reconciliation statement has been prepared by the Cost Accountant
of RSQ Ltd. for March, 2008 :
Budget profit 2,40,000
2,49,000
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Q-26 A company is engaged in manufacturing of several products. The following data have been
obtained from the record of a machine shop for an average month : Budgeted
The actual data for the month of August 2010 are as follows : Overheads Fixed Rs 78,800
Variable Rs 70,870
Net operator hours worked 20,500
Standard hours produced 22,550
There was a special holiday in August 2010.
Required:
(i) Calculate efficiency, activity, calendar and standard capacity usages ratio.
(ii) Calculate all the relevant fixed overhead variances.
(iii) Calculate variable overheads expenditure and efficiency variance.
A-26
Efficiency Ratio = Output expressed in Standard Hours / Actual Hours Worked
= (22550/20500)* 100
= 110%
Activity Ratio
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Workings
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Variable Overhead Efficiency Variance (1) – (2) Rs 7.175(F)
(3)
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Fixed Overhead Efficiency Variance (1)-(2) Rs 5,966 (F)
Q-27.A company actually sold 8000 units of A and 10,000 units of B at Rs 12 and Rs 16 per unit
respectively against a budgeted sale of 6000 units of A at Rs 14 per unit and 9000 units of B at
Rs 13 per unit. The standard costs of A and B are Rs 8 and Rs 10 per unit respectively and the
corresponding actual costs are Rs 5.5 and Rs 14.5 per unit.
Compute the product wise sales margin mix and sales margin price variances, indicating clearly,
whether the variances are favourable or adverse. (5 marks)
A-27
BQ RBQ AQ AP BP BC BM AM
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A 6,000 7,200 8,000 12 14 8 6 4
15.000 18.000
Sales Margin Price Variance = Actual Qty (Actual Margin – Budgeted Margin)
A 8,000(4-6) = -16,000(A)
B 10,000(6-3) = 30,000 (F)
14,000(F)
Q-28 Sunglow Limited manufacturers and sells a single product. From the records of the
company the following information is available for November 2012:
The standard cost comprises the following :
X 8 320
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Y 24 1,680
Z 16 400
2,400
5,000
The budgeted selling price is Rs 700 each and the budgeted sales for the month were 14,000
units.
The following were the transactions for the month:
Direct material Units Purchased Issued unit
priced per unit
X 44,000 42 82,400
Y 1,40,000 71 2,46,400
z 60,000 24 1,64,000
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Direct Wages Rs 90,00,000 (3,98,000 hours)
Overheads:
Variable Rs 2,00,000
Fixed Rs 3,00,000
Production : 11,000 Units
Sales: 9,000 units at Rs 700 each and 3,500 units at Rs 750 each
Required:
Calculate
(i) Material price variance;
(ii) Material mix variance;
(iii) Labour rate variance
(iv) Labour efficiency variance
(v) Variable overhead efficiency variance; and
(vi) Fixed overhead efficiency variance.
A-28 Statement showing 'Standard Cost of Material' and 'Actual Cost of Material'-Production
11,000 units
Materi
al
Amount
Type Quantity Rate Amount Quantity Rat Rs Quantity*
Consumed e Rs
Rs
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X 88,000 40 35,20,000 44,000 42 33,84,000 82,133 Units
[4.92.800/5.28.00
(11,000 × 8) 38,400
Units x 88.000]
(11,000 × ) 1,06,400 0
24) Units
x 2,64,000]
Units Units 25
16) Units
x 1,76,000]
Units 0 Units 0
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Statement showing 'Standard Cost of Wages' and 'Actual Cost of
Wages'-
Rs Rs Rs Rs
(i) Material Price Variance = Actual Quantity × Std. Price – Actual Cost
= Rs 88,000 (A)
= Rs 1,40,000 (A)
1,64,000 Units × Rs 25 – Rs
Material 'Z' = 40,40,000
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= Rs 60,000 (F)
= Rs 1,68,000 (A)
(ii) Material Mix Variance = Std. Price × (Revised Actual Quantity -Actual Quantity)
Material 'X' =Rs 40 × (82,133 units – 82,400 units)
= Rs 10,680 (A)
(iii) Labour Rate Variance = Actual hours × (Std. Rate – Actual Rate)
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Actual Production – Actual Hours)
= (Rs 400/40 hrs.) × [(11,000 units × 40 hrs.) -
(3,98,000 hrs.)]
= Rs 4,20,000 (F)
Q-29 A Multinational company runs a Public Medical Health Centre. For this purpose, it has
hired a building at a rent of Rs 10,000 per month with 5% of total taking. Health centre has
three types of wards for its patients namely. General ward, Cottage ward and Deluxe ward.
State the rent to be charged to each bed – day for different type of ward on the basis of the
following informations :
(i) The number of beds of each type are General ward 100, Cottage ward 50, Deluxe ward 30.
(ii) The rent of Cottage ward bed is to be fixed at 2.5 times of the General ward bed and that of
Deluxe ward bed as twice of the Cottage ward bed.
(iii) The occupancy of each type of ward is as follows : General ward 100%, Cottage ward 80%
and Deluxe ward 60%. But, in general ward there were occasions when beds are full, extra beds
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were hired at a charges of Rs 20 per bed. The total hire charges for the extra beds incurred for
the whole year amount to Rs 12,000.
(iv) The Health Centre engaged a heart specialist from outside and on an average fees paid to
him was Rs 15,000 per trip. He makes three trips in the whole year.
4,25,000
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(vi) Provide profit @ 20% on total taking.
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General administration charges 63.000 Rs 21,72,000
Total Rs 23,49,000 + 5%
on Total Taking
Total Taking
Rent to be charged
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General ward 100 × 360 × 100% 36,000 × 1 36,000
Total 1,05,000
Rent to be charged
Total
Note : You may assume Total Taking to include Service Tax also.
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Rent = 23,49,000 + 25% × (1,05,000X × 1.08) + 0.08 × (1,05,000X)
= 1,05,000 × x 1.08
– 23,49,000 + 28.350X + 8.400X = 1.13.400X
Rent to be charged
Total
Q-30 Kangan Resorts operates a lodging house with attached facilities of a shopping arcade and
restaurant on a National highway. The following details are available :
(i) The lodging house has 40 twin – bedded rooms, which are to be rented for Rs 200. per night
on double occupancy basis. The occupancy ratio is expected at 85% and always both the beds in
the room will be occupied. The lodging facilities are operated, for 200 days in the year during
foreign tourists season time only.
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(ii) As per past record the spending pattern of each tourist staying in the lodge will be as under:
Rs 50 per day in the shopping arcade and Rs 80 per day in the restaurant.
(iv) For the lodging house the variable cost on house – keeping and electricity will amount Rs 30
per day per occupied room.
(v) Annual fixed overhead for the entire complex in estimated at Rs 10,00,000.
Required:
(i) Prepare an income statement for the next year:
(ii) The Lodging House Manager suggests a proposal of reducing room rent to Rs 150 per day on
double occupancy basis, which will increase occupancy level to 95%. Should the proposal be
accepted or not?
A-30
Sales Revenue Rs
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Restaurant (40 Rooms × 2 persons × 200 days)xRs 80 × 85%) 10,88,000
Variable Cost ,
Sales Revenue Rs
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Lodging house room receipts (40 Rooms × 200days × Rs 150x95%) 11,40,000
Contribution 17,78,400
Profit 7,78,400
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The profitability decreases by 9,31,200 – 7,78,400 = Rs 1,52,800
Q-31 XY Hotel has 40 bed rooms with a maximum occupancy of 490 sleeper nights per week.
Average occupancy is 60% throughout the year. Meals provided to guests have been costed and
the average food cost per person per day is as follows :
Rs
Breakfast 72.00
Lunch 220.00
Dinner 268.00
560.00
Housekeeping 39,040.00
General 35,200.00
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Direct expenses per annum are Rs 9,15,200 for house keeping and Rs 10,40,000 for restaurant.
Indirect expenses amount to Rs 68,22,400, which should be apportioned on the basis of floor
area. The floor areas are as follows
: Sq. Mt.
Bed rooms 3,600
Restaurant 1,200
Service area 600
A net profit of 10% must be made on the restaurant taking and also on accommodation takings.
Required:
Calculate what inclusive term per person should be charged per day and also show the split
between meals and accommodation charges.
keeping &
(Rs)
per week
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Other Direct Expe ses per 37,600 17,600 20,000 –
week
[Rs 9,15,200/52;
Rs 10,40,000/52]
(General) [39,040:68,600]
[3,600:1,200]
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Particulars Total House Keeping Restaurant
Total cost per person per day Add: 1,620.00 570.77 63.42 1,049.23
1/9th of Cost
180.00 116.58
Note: May be apportioned to house – keeping and restaurant on any other alternative logical
basis.
Q-32 ABC Ltd. has supermarkets located in most towns and cities. Over the last few years,
profits have fallen. ABC Ltd. has recognized that customer care has been paid insufficient
attention. ABC Ltd. has now realized the importance of the customer experience at its
supermarkets. ABC Ltd. has introduced a loyalty card scheme that rewards customers with
discount vouchers based on their spend and buying patterns at supermarkets in an attempt to
earn the loyalty of its customers. The management of ABC Ltd. is considering the introduction
of a Balanced Scorecard approach to manage the performance of its stores.
Required:
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Recommend an objective and a suitable performance measure for each of three non – financial
perspectives of a Balanced Scorecard that ABC Ltd. could use to support its new strategy of
improving the customer experience. You should state three perspectives, an objective and a
performance measure for each one of the three perspectives. (5 marks)
A-32 The three non – financial perspectives with Objective and Measures are as under:
Objective Measures
2. Internal Perspective: The organisation must excel at certain internal processes, decisions and
actions if it is to meet these customer requirements. The internal perspective must reflect the
organisation's core skills and the critical technology involved in adding value to the customer's
business.
Objective Measures
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Competition
• Manufacturing
excellence – Cycle time & unit cost & yield.
introduction Plan.
3. Innovation & Learning: The Innovation & learning perspective is required in order to
recognize that this is constantly seek to learn, to innovate and to improve every aspect of the
organisation and its business just to maintain their competitive situation, let alone to improve
in the future
Objective Measures
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• Time to market – New product introduction VS Competition.
Alternative Prospective
Perspective
Or ' cards.
customers. No.ofdiscountvouchers
redeemed.
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Internal Either customers have to pay for Either time spent by customers in
Business
Perspectives
delivery made.
Learning & Either Qualified staffs in order to Either Number of staff training
Growth
customer.
Perspectives
segments.
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Q-33 A manufacturing company has three factories namely 'Factory A', 'Factory B' and 'Factory
C'. All three factories produce the same product which are sold at Rs 750 per unit. The factory –
wise estimates of operation results for 2014 are as follows:
(Rsin
lakhs
A B C
Costs:
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Selling overheads – fixed 30 100 60 190
When the above estimates were under finalization, the company's legal department advised
that the lease of 'Factory A' was due to expire on 31st December, 2013 and that it could be
renewed by enhancing the lease rent by Rs 24 lakhs per annum. Since this enhancement will
have impact on the profitability of the company, the management is constrained to examine
following proposals:
(ii) Close down factory 'A', sell off plant, machinery and stock and liquidate all liabilities
including the staff and workers',, pay retrenchment compensation from sale proceeds which
are sufficient for the purpose. In order however to maintain the customer relations, the total
planned output of the factory 'A' will be transferred to EITHER factory 'B' OR factory 'C'. Plant
capacity is available at both the factories to takeover the manufacture. The additional cost
involved in the manufacture of the extra output so transferred in factory 'B' and 'C are
estimated as under:
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Factory B Factory C
annum)
'A'.
You are required to prepare comparative state ents of profitability in the aforesaid alternative courses of
A-33
A B C
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Sales (A) 600 2400 1200 4200
Less: Costs
Fixed cost:
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Admin, overhead 40 180 80 300
Other 24 – – 24
B C Total B C Total
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– V.C. 2065 760 2825 1620 1196 2816
The above statement shows that as a result of renewal of lease of Factory A. The total profit
gets reduced from Rs 320 Lacs to Rs 296 lacs. However Factory A still contributing towards
meeting the head office expenses. Hence it may not be advisable to discontinue the lease.
The above statement shows that transfer of production of factory A to Factory C yields higher
profit i.e. Rs 364 lacs. Hence this source may be adopted. '
Working Notes:
(A) Fixed and variable costs when prod, of Factory A is transferred to Factory B.
A 600 405 –
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Additional costs
(B) Fixed and variable costs when the production of Factory A is transferred to Factory C
(Rslacs)
A 600 380 –
Additional costs
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Note: This question can also be done with the assumption that head office expenses
attributable to factory A will be charged to the factory to which its production has been
transferred.
The investor wants at least 40% of his investment in Government Bonds. Because of the higher
perceived risk of the two shares, he has specified that the combined investment in these two
shares not to exceed Rs 2,60,000. The investor has also specified that at least 25% of the
investment should be in the money market fund and that the amount of money invested in
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shares should not exceed the amount invested in Mutual Funds. His final investment condition
is that the amount invested in mutual fund 'XY should be no more than the amount invested in
mutual fund 'HN'. The problem is to decide the amount of money to invest in each alternative
so as to obtain the highest annual total return.
Required:
Formulate the above as a linear programming problem. (5 marks)
A-34 Let
u = Investment in "Mutual Fund 'XY'"
v = investment in "Mutual Fund' HN'"
w = Investment in "Money Market Fund"
x = Investment in "Government Bonds"
y – Investment in "Share 'P'"
z = Investment in "Share 'Q'"
Maximize
Z = 0.15u + 0.09v + 0.08w + 0.0875x + 0.17y + 0.18z
Rs 15,00,000 to be invested –
u + v + w + × + y + z ≤ 15,00,000
Or
2u +2v + 2w – 3x + 2y + 2z ≤ 0
Combined Investment in two shares not to exceed Rs 2,60,000 –
y + z ≤ 2,60,000
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At least 25% of the investment in the money market fund –
w≥ (u + 'v + w + × + y + z) × 0.25
Or
u + v – 3w + x + y + z≤0
Amount of money invested in shares should not exceed the amount invested in mutual funds
–
y +z ≤u + v
Or
–u–v+y+z≤0
Amount invested in mutual fund 'XY' should not be more than the amount invested in mutual
fund
'HN' – u≤ v
Or
u – v≤ 0
Maximize
z = 0.15 u + 0.09v + 0.08w + 0.0875x + 0.17y + 0.18z
Subject to:
u + v + w + × + y + z ≤ 15,00,000
2u + 2v + 2w – 3x + 2y + 2z ≤ 0
y + z ≤ 2,60,000
u + v – 3w + x + y + z≤0
– u – v + y + z ≤0
u–v≤0
u, v, w, x, y, z, ≥ 0
Alternative Approach:
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This question can be solved with the assumption of 'Investment Exactly' Rs 15,00,000.
Q-35 Given below is aniteration in a simplex table is maximization objective linear programming
product mix problem for products X1, X2 and X3.
cJ 6 4 10 0 0 0
Basic Quantity x1 X2 x3 s1 s2 s3
Variable
zj 2, 400 6 4 12 0 2 0
cJ – zJ 0 0 0 –2 0
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(iv) If customer is prepared to pay higher price for product X3, then by how much should the
price be increased so that the company's profit remains unchanged?
(v) From the given table, derive any one original constraint inequality with the coefficients of
variables in their simplest whole number forms.
A-35
Ci 6 4 10 0 0 0 Min.
Ratio
CB Basic Quantity x1 x2 x3 s1 s2 s3
Variable
x1Rs
Z1= cBx1 6 4 12 0 2 0
Cj– Zj 0 01 –2 0 –2 0
(i) Yes, because the given solution has no artificial variables in the basic column.
(ii) Perform one more iteration with X2:
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cj 6 4 10 0 0 0
0 s1 80 0 0 0 1 1/5 – 4/5
Zj= cBxj 6 4 12 0 2 0
c1 – z 1 0 0 –2 0 –2 0
(iii) Shadow Price is Rs0, Rs2 and Rs0 (or any other given monetary unit) for Constraint 1,
Constraint 2 and Constraint 3 respectively and same has been obtained from row c1 – z1
(iv) c1– z1 for x3 being – 2, production of each unit of X3 would cause a reduction of Rs2 (or any
other given monetary unit). Thus, the price for X3 should be increased by at least two rupee per
unit to ensure no reduction of profits.
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1. Now it is 1/3. Working backwards, we multiply row X, of I2 by 3 to get Row S2 of I1.
Original Row S2 [X1 of I2 x 3]:
(1X1 + 2/3X2 + 2X3) x 3 ≤400 x 3
Or
Or
Or
2X1 + 3X2 + 4X3 ≤ 1, 200
Q-36 A company has four zones open and four marketing managers available for assignment.
The zones are not equal in sales potentials,ft is estimated that a typical marketing manager
operating in each zone would bring in the following Annual sales:
Zones ?
East 2,40,000
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West 1,92,000
North 1,44,000
South 1,20,000
The four marketing managers are also different in ability. It is estimated that working under the
same conditions, their yearly sales would be proportionately as under:
Manager M : 8
Manager N : 7
Manager O : 5
Manager P : 4
Required:
If the criterion is maximum expected total sales, find the optimum assignment and the
maximum sales.
A-36
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Sum of the prop rtion = (8 + 7 + 5 + 4) = 24 Assuming ? 1, 000 as one unit, the effective matrix
is as follows :
Effective Matrix
Managers Zones
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Loss Matrix
M 0 16 32 . 40
N 10 24 38 45
O 30 40 50 55
P 40 48 56 60
Row operation
M 0 18 32 40
N 0 14 28 35
O 0 10 20 25
P 0 8 16 20
Column operation
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Managers East West North South
M 0 8 16 20
N 0 6 12 15
O 0 2 4 5
P 0 0 0 0
M 0 6 14 18
N 0 4 10 13
O 0 0 2 3
P 2 0 0 0
M 0 2 10 14
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N 0 0 6 9
O 4 0 2 3
P 6 0 0 0
M 0 2 8 12
N 0 0 4 7
O 4 0 0 i
P 8 2 0 0
Assignment Sales
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M – East . 80, 000
P – South 20.000
1.86.000
Q-37 A city corporation has decided to carry out road repairs on 4 main roads in the city. The
Government has agreed to make a special grant of Rs 50 lacs towards the cost With the
condition that the repairs should be carried out at lowest cost.
Five contractors have sent in their bids. Only one road will be awarded to one contractor. The
bias are given below :
Contrac Road R1 R2 R3 R4
tor
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c1 9 14 19 15
c2 7 17 20 19
c3 9 18 21 18
c4 10 12 18 19
c5 10 15 21 16
You are informed that C2 should get Ft, and C4 should get R2 to minimize costs,
(i) What is the minimum cost allocation ?
(ii) How much is the minimum discount that the eliminated contractor should offer for meriting
a contract ?
(iii) Independent of (ii) above, if the corporation can negotiate to get a uniform discount rate
from each contractor, what is the minimum rate of discount so that the cost is within the grant
amount ?
A-37
There are 5 rows and 4 columns hence insert a dummy column R5
1. C2 has been allocated to R1
2. C4 has been allocated to R2. Hence the assignment is restricted to
R3 R4 R5
C1 19 15 0
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C3 21 18 0
C5 21 16 0
Column Minimum
R3 R4 R5
C1 0 0 0
C3 2 3 0
C5 2 1 0
R3 R4 R5
C1 0 0 1
C3 1 2 0
C5 1 0 0
Q-38 ABC Cooperative Bank receives and disburses different amount of cash in each month.
The bank has an opening cash Balance of Rs 15 crores in the first month. Pattern of receipts and
disbursements from past data is as follows :
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Monthly Cash receipts Monthly Cash disbursements
30 0.20 33 0.15
42 0.40 60 0.20
36 0.25 39 0.40
99 0.15 57 0.25
Required:
(i) Calculate probability that the ABC Cooperative Bank will fall short in payments.
(iii) If ABC Bank can get an overdraft facility of Rs 45 crores from other Nationalized banks.
What is the probability that they will fall short in monthly payments?
A-38
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Monthly Cash receipts (Rscrores) Monthly Cash disbursements (Rscrores)
1 15 17 30 45 78 57 – 12
2 12 43 42 30 16 60 – 30
3 30 74 36 06 35 39 – 33
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4 33 31 42 09 23 60 – 51
5 51 72 36 15 44 39 – 54
6 54 46 42 12 92 57 – 69
7 69 51 42 27 58 39 – 66
8 66 68 36 30 08 33 63
9 63 93 99 36 58 39 –3
10 3 54 42 39 78 57 – 18
11 18 96 99 81 54 39 – 42
12 42 09 30 72 77 57 – 15
(i) In 12 months, the bank falls short of cash in 10 months to meet payment. Thus, probability of
shortfall = 10/12 = 0.83
(ii) Total short fall of Rs 399 crores over 10 months Average monthly shortfall during 10 months
= Rs 39.9 crores
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(iii) With an overdraft facility of Rs 45 crores is available, there will be ashortfall in 5 months
(4,5,6,7,8). Therefore, probability is = 5/12 = 0.42.
Q-39 An international tourist company deals with numerous personal callers each day and
prides itself on its level of service. The time to deal with each caller depends on the client's
requirements which range from, say, a request for a brochure to booking a round – the – world
cruise. If a client has to wait for more than 10 minutes for attention, it is company's policy for
the manager to see him personally and to give him a holiday voucher worth Rs 15. The
company's observations have shown that the time taken to deal with clients and the arrival
pattern of their calls follow the following distribution
Pattern: Minutes 2 4 6 10 14 20 30
Timetodeal
with clients Probability 0.05 0.10 0.15 0.30 0.25 0.10 0.05
Required :
(i) Describe how you would simulate the operation of the travel agency based on the use of
random number tables;
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(ii) Simulate the arrival and serving of 12 clients and show the number of clients who receive a
voucher (use line 1 of the random numbers below to derive the arrival pattern and line 2 for
serving times); and
(iii) Calculate the weekly cost of vouchers, assuming the proportion of clients receiving
vouchers derived from (ii) applies throughout a week of 75 operating hours.
Random Numbers
Line 1 3 47 43 73 86 36 96 47 36 61 46 98
Line 2 63 71 62 33 26 16 80 45 60 11 14 10
A-39
2 0.05 0.05 00 – 04
4 0.10 0.15 05 – 14
6 0.15 0.30 15 – 29
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10 0.30 0.60 30 – 59
14 0.25 0.85 60 – 84
20 0.10 0.95 85 – 94
30 0.05 1.00 95 – 99
1 0.2 0.2 00 – 19
8 0.4 0.6 20 – 59
15 0.3 0.9 60 – 89
25 0.1 1.0 90 – 99
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Client Time Arrival Time in Serving Time Waiting Voucher
Arrivals
1 1 1 1 14 15 –
2 8 9 15 14 29 6
3 8 17 29 14 43 12 Yes
4 15 32 43 10 53 11 Yes
5 15 47 53 6 59 6
6 8 55 59 6 65 4
7 25 80 80 14 94 –
8 8 88 94 10 104 6
9 8 96 104 14 118 8
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11 8 119 122 4 126 3
*Average time between arrivals = 0.2 × 1 + 0.4 × 8 + 0.3 × 15 + 0.1 × 25 = 10. 4 minutes
2 out of the 12 clients receive Rs 15 voucher. So the cost will be Rs 1,082.50 or Rs 1.083 [(2/12 ×
433) x Rs15].
Note: Taking cycle time as 148 minutes, voucher cost can be computed as follows:
Rs 15 per Client × [(75 Hours × 60 minutes/148 minutes) no. of cycles × 2 Clients per Cycle Time]
So, Voucher Cost will be Rs 912.16
Q-40 A bakery sells a popular brand of bread. Cost price per bread is Rs 16 and selling price per
bread is Rs 20. Shelf life of the bread is 2 days and if it is not sold within two days, then it has no
sale value at the end of second day. Daily demand based on past experience is as under:
Daily Demand 0 20 25 35 40 45
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Using the sequence, simulate the demand for the next 10 days and find out the total profit or
loss for 10 days assuming 35 breads are purchased every day in the morning and there is an
opening stock of 5 breads (purchased the previous day) on the 1st day morning. Assume LIFO
basis (Last In First Out basis – where the fresh bread is sold first). (8 marks)
A-40
1. Random Number Table
Probability
20 0.15 0.16 01 – 15
25 0.30 0.46 16 – 45
35 0.40 0.86 46 – 85
40 0.10 0.96 86 – 95
45 0.04 1.00 96 – 99
Let us simulate the supply and demand for the next ten days using the given random
numbers/information in order to find the profit if
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– the cost of the bread is Rs 16,
– unsold bread after the end of the 2nd Day have no saleable value.
y m No. Stock d (In (In No.) (In No.). Stock Waste Sale (InRs) Profit
(InRs)
No.)
×
1 58 5 35 35 5 0 80 (5b Rs 140 (35b 60
16) × Rs 4)
2 80 0 35 35 0 0 0 140 140
(35b× Rs 4)
× Rs 4)
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4 9 0 20 35 0 15 0 80 (20b × 80
Rs 4)
xRs16) × Rs 4)
× Rs 4)
xRs16) × Rs 4)
× Rs 4)
16) × Rs 4)
× Rs 4)
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Cost of Bread in Stock at the end of the 10th Day is Rs 160 (10 Breads × Rs 16).
Q-41 A cake vendor buys pieces of cake every morning at Rs 4.50 each by placing his order one
day in advance and sale them at Rs 7.00 each. Unsold cake can be sold next day at Rs 2.00 per
piece and there after it should be treated as no value. The pattern for demand of cake is given
below: Fresh Cake:
Daily Sale 100 101 102 103 104 105 106 107 108 109 110
Probability .01 .03 .04 .07 .09 11 .15 .21 .18 .09 .02
Daily Sale 0 1 2 3
Fresh Cake 37 73 14 17 24 35 29 37 33 68
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If there is no stock of cake with him at the end of previous day, he orders for 110 pieces
otherwise he orders 100 or 105 pieces whichever is nearest actual fresh cake sale on the
previous day. Starting with zero stock and a pending order of 105 pieces, simulate for 10 days
and calculate vendor's profit.
101 0 – 03 0.04 01 – 03
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109 0.09 0.98 89 – 97
0 0.7 0.7 00 – 69
1 0.2 0.9 70 – 89
2 0.08 0.98 90 – 97
3 0.02 1 98 – 99
Let us simulate the sale of fresh and one day old cakes for the next ten days using the given
random numbers/information.
Simulation Sheet
Day R. No. Fresh Deman Sales Cl. Order One R. N. Sale Loss
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d Cake Cake
Fresh
Old
Pcs.
Cake
Stoc
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10 68 110 107 107 3 105 0 60 –– ––
1,054 2 11
Amount (Rs)
Less: Cost of Spoilt Cakes [Rs 4.50 × (11 + 3*) Pcs.] 63.00
Profit 2,567.00
Assumption: *It is assumed that 3 Cakes of Closing Stock in not in saleable condition.
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Q-42 M Ltd. manufactures a special product purely carried out by manual labour. It has a
capacity of 20,000 units. It estimates the following
cost structure :
Direct material 30 Rs/unit
Direct labour 20 Rs/unit
(1 hour/unit)
Variable overhead 10Rs/unit
Fixed overheads at maximum capacity is Rs 1,50,000. It is estimated that at the current level of
efficiency, each unit requires one hour for the first 5,000 units. Subsequently it is possible to
achieve 80% learning rate. The market can absorb the first 5,000 units at Rs 100 per unit. What
should be the minimum selling price acceptable for an order of 15,000 units for a prospective
client ?
A-42
(Refer to W Note 1)
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Total Variable Cost 3,00,000 10,56,000
Units Hours
5,000 5,000
Working Note : II
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15,000 x -7,06,000>50,000
15,000x>7,56,000
or x >50.4
Q-43 PQ Ltd. makes and sells a labour-intensive product. Its labour force has a learning rate of
80%, applicable only to direct labour and not to variable overhead.
The cost per unit of the first product is as follows :
PQ Ltd. has received an order from X Ltd. for 4 units of the product. Another customer, Y Ltd. is
also interested in purchasing 4 units of the product. PQ Ltd. has the capacity to fulfil both the
orders. Y Ltd. presently purchases this product in the market for Rs 17,200 and is willing to pay
this price per unit of PQ's product. But X Ltd. lets PQ choose one of the following options :
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(i) A price of Rs 16,500 per unit for the 4 units it proposes to take from PQ.
(Or)
(ii) Supply X Ltd.'s idle labour force to PQ, for only 4 units of production, with PQ having to pay
only Re. 1 per labour hour to X Ltd.'s workers. X Ltd.'s workers will be withdrawn after the first
4 units are produced. In this case, PQ need not use its labour for producing X Ltd.'s
requirement. X Ltd. assures PQ that its labour force also has a learning rate of 80%. In this
option, X Ltd. offers to buy the product from PQ at only Rs 14,000 per unit. X and Y shall not
know of each other's offer. If both orders came before any work started, what is the best
option that PQ may choose? Present suitable calculations in favour of your argument.
A-43
Units Average/hrs/u.
1 2,000
2 1,600
4 1,280
8 1,024
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Option I
If both the orders came together, learning rate 80% applies and 8 units can be made, with
average time of
1,024 hours per unit.
Cost to PQ:
Variable cost excl. labour = Rs 12,000
Labour cost 1,024 hrs x 4 Rs/hr = Rs 4,096
= Rs 16.096
In this case,
Y X
No. of units 4 4
Option II
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If X Ltd. supplies its labour. 80% learning curve will apply to 4 units each of PQ & X.
Hence :hrs/u = 1,280
Y X
1,280 x 4 Rs 5,120
1,280 x 1 Rs 1.280
Units 4 4
Q-44 An electronics firm which has developed a new type of fire-alarm system has been asked
to quote for a prospective contract. The customer requires separate price quotations for each
of the following possible orders:
Order Number of fire-alarm systems
First 100
Second 60
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Third 40
The firm estimates the following cost per unit for the first order:
Direct Materials Rs 500
Direct Labour
Determine a price per unit for each of the three orders, assuming the firm uses a mark up of
25% on total costs and allows for an 80% learning curve. Extract from 80% learning curve table :
X 1.0 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.0 Y (%) 100.0 91.7 89.5 87.6 86.1 84.4 83.0 81.5 80.0 X
represents the cumulative total volume produced to date expressed as a multiple of the initial
order.
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Y is the learning curve factor, for a given X value, expressed as a percentage of the cost of the
initial order.
A-44
(i) Price/Unit for First 100 Units
Rs
Profit 455
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(ii) Price/Unit for Second Order of 60 Units :
Learning will be applicable only in Dept. B
Cumulative output becomes 100 units + 60 units = 160 units
i.e. 1.6 times for which learning is 86.1 % from the table.
total hours for 160 units = 160 x 40 x 0.861 = 5,510.4 hrs.
hours for 60 units = Hrs for 160 units - Hrs for 100 units.
= 5,510.40- 4,000 hrs = 1,510.40 hrs.
Hours per unit =1,510.40/60 = 25.17
500.00
Profit 369.73
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Selling price per unit 1,848.64
Hours for 40 units = Hrs for 200 units - Hrs for 160 units. = 6,400 -5,510.4 = 8,89.6 hrs.
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Total Cost 1,411.52
Profit 352.88
*86.1%
(R
(Rs) s) (Rs)
Direct Labour
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Fixed Overheads
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**Third, Order-40 Alarm, Cumulative Total = 200 Alarm
The cumulative total is now 200 fire alarms, which is denoted by the multiple of 200/100 i.e. 2.
From the 80% learning curve table the relevant percentage factor is 80% of the labour cost.
Fixed costs will be Rs 40,000 over the life cycle of the product. The labour rate and both of
these costs will not change throughout the product's life cycle.
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The first batch of 100 units will take 1,000 labour hours to produce. There will be an 80%
learning curve that will continue until 2,500 units have been produced. Batches after this level
will each take the same amount of time as the 25 th batch. The batch size will always be 100
units.
Calculate:
(I) The cumulative average time per batch for the first 25 batches.
(II) The time, taken for the 25th batch if average time for 24 batches is 359.40 hours.
(III) The average selling price of the final 500 units that will allow the company to earn a total
profit of Rs 80,000 from the product.
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antilog of 2.567698 = 369.57
A labour incentive product is made and sold by XY Ltd. Its labour force has a learning rate of
80%, applicable only to direct labour and not to variable overheads.
Direct Materials Rs
20,000
XY Ltd. has received an order from P Ltd. for 4 units of the product. Another customer, Q Ltd. is
also interested in purchasing 4 units of the product. XY Ltd. has the capacity to fulfill both the
orders. Q Ltd. presently purchases this product in the market for Rs 34,400 and is willing to pay
this price per unit of XY Ltd. product. But P Ltd. lets XY Ltd. choose one of the following
options:
(i) A price of Rs 33,000 per unit for the 4 units it proposes to take from XY Ltd.
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OR
(ii) Supply P Ltd.'s idle labour force to XY Ltd. for only 4 units of production, with XY Ltd. having
to pay only Rs 2 per labour hour to P Ltd.'s workers. P Ltd.'s workers will be withdrawn after
the first 4 units are produced. In this case, XY Ltd. need not use its labour for producing P Ltd.'s
requirements. P Ltd. assures XY Ltd. that its labour force also has a learning rate of 80%. In this
option, P Ltd. offers to buy the product from XY Ltd. at only 28,000 per unit.
If both orders came before any work started, what is the best option that XY Ltd. may choose?
Present suitable calculations in favour of your arguments.
A-45
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Variable Cost per unit excluding Labour Cost:
(Rs)
When both the orders came together, learning rate 80% applies and 8 units can be made, with
average time of 1,024 hours per u it.
Cost to XY (Rs)
= 32.192
Option-I
In this case
Particulars Q P Total
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Contribution p. u. (Rs) 2,208 808
No. of Units 4 4
Option-II If P Ltd. supplies its labour. 80% learning curve will apply to 4 units ea h of XY Ltd. & P
Ltd. Hence: hrs/unit = 1,280 (as calculated in the working note)
Particulars Q P Total
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1,280 hrs. x Rs 2 -- 2,560
Units 4 4
Decision
XY Ltd. should not take labour from P Ltd. It should choose Option-I.
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