| 1. | (a) | X Ltd. is engaged in the production of four products: A, B, C and D. The price charged for the four products are Rs.180, Rs.175, Rs.130 and Rs.180 respectively, Market research has indicated that if X Ltd can reduce the selling prices of its products by Rs.5, it will be successful in getting bulk orders and gain a significant share of market of those products. The company’s profit markup is 25 per cent on cost of the product. The relevant information of products are as follows: | Products | A | B | C | D | Output in units
Cost per unit:
Direct material (in Rs.)
Direct labour (in Rs.)
Machine hours (per unit) | 600
40
28
4 | 500
50
21
3 | 400
30
14
2 | 600
60
21
3 |
The four products are usually produced in production runs of 20 units and sold in batches of 10 units. The production overhead is currently absorbed by using a machine hour rate, and the total of the production overheads for the period has been analysed as follows: | Rs. | Machine department costs
Setup costs
Stores receiving
Inspection/Quality Control
Material handling and dispatch | 52,130
26,250
18,000
10,500
23,100 |
The cost drivers to be used for the overhead costs are as follows: Cost
Setup costs
Store receiving
Inspection/Quality control
Materials handling and dispatch | Cost drivers
Number of production runs
Requisitions raised
Number of production runs
Order executed |
The number of requisitions raised in the stores was 100 for each product and the number of orders executed was 210, each order being for a batch of 10 units of a product. You are required: | (i) | To compute the target cost for each product. | | (ii) | To compute total cost of each product using activity based costing. | | (iii) | Compare target cost and activity based cost of each product and comment whether the price reduction is profitable or not. |
| 12 | (0) |
| | (b) | A company is launching a new product and has made estimates of the time for the various activities associated with the launch as follows: | Activity | Predecessor | Times (Days) | | Optimistic | Most likely | Pessimistic | A
B
C
D
E
F
G
H
I | None
None
A, B
B
A
C
E, F
D, F
G, H | 1
3
1
3
1
2
2
2
10 | 3
4
3
3
2
5
3
2
10 | 5
5
11
9
3
14
4
2
10 |
Required: | (i) | Draw the network diagram. | | (ii) | Calculate the expected time and variance of each activity. | | (iii) | Find out the expected length of critical path and its standard deviation. | | (iv) | Find the probability that the launching will be completed in 27 days. | | (v) | Find the duration, which has 95% probability of completion. |
| 8 | (0) |
| | (c) | He following information is provided by a firm. The factory manager wants to use appropriate average learning rate on activities, so that he may forecast costs and prices for certain levels of activity. | (i) | A set of very experienced people feed data into the computer for processing inventory records in the factory. The manager wishes to apply 80% learning rate on data entry and calculation of inventory. | | (ii) | A new type of machinery is to be installed in the factory. This is patented process and the output may take a year for full fledged production. The factory manager wants to use a learning rate on the workers at the new machine. | | (iii) | An operation uses contract labour. The contractor shifts people among various jobs once in two days. The labour force performs one task in 3 days. The manager wants to apply an average learning rate for these workers. |
You are required to advise to the manager with reasons on the applicability of the learning curve theory on the above information. | 4 | (0) |
| 2. | (a) | The following information relates to a manufacturing concern: | Standard | Rs. | Material A 24,000 kgs @ Rs.3 per kg.
Material B 12,000 kgs @ Rs.4 per kg
Wages 60,000 hours @ Rs.4 per hour
Variable overheads 60,000 hours @ Re.1 per hour
Fixed overheads 60,000 hours @ Rs.2 per hour
Total Cost
Budgeted profit
Budgeted sales
Budgeted production (units) | 72,000
48,000
2,40,000
60,000
1,20,000
5,40,000
60,000
6,00,000
12,000 | | Actual | Rs. | Sales (9,000 units)
Material A consumed 22,275 kgs.
Material B consumed 10,890 kgs.
Wages paid (48,000 hours)
Fixed Overhead
Variable overhead
Labour hours worked
Closing work in progress
Degree of completion:
Material A and B
Wage and overheads | 4,57,500
62,370
44,649
1,91,250
1,20,900
45,000
47,700
900 units
100%
50% |
You are required to: | (i) | Calculate all the material and labour variances. | | (ii) | Calculate variable overhead expenditure and efficiency variances, fixed overhead expenditure and volume variances and sales price and sales volume variances. |
| 10 | (0) |
| | (b) | Mr. X has taken a shop on lease and made a down payment of Rs.2,50,000. Additionally, the rent under lease amount is Rs.96,000 per annum. If lease agreement is cancelled by Mr. X, then the initial payment is forfeited. Mr. X plans to use the shop for the shop for the general stores business, and has estimated operations for the next year as follows: Sales
Less: value added tax (VAT)
Sales after VAT
Cost of goods sold
Wages and wages related cost
Rent including down payment
Rent including down payment
Rates, lighting and insurance
Audit, legal and general expenses
Net profit before tax | Rs.25,00,000
Rs.2,80,000
12,50,000
2,76,000
3,46,000
2,80,000
50,000 |
22,20,000
22,02,000
18,000 |
In the business, Mr. X will be devoting of half time, however no provision has been made for his remuneration/salary. Mr. X also has an option to sublet the shop to his friend for a monthly rent of Rs.18,000, if he does not use the shop himself.
You are required to: | (i) | Identify the sunk and opportunity cost in the above problem. | | (ii) | State most profitable decision, which should be taken by Mr. X, supporting with appropriate calculation. |
| 5 | (0) |
| | (c) | Explain four P’s of quality improvement principles. | 4 | (0) |
| 3. | (a) | At a small store of readymade garments, there is one clerk at the counter who is to check bills, receive payments and place the packed garments into fancy bags. The arrival of customer at the store is random and service time varies from one minute to six minutes, the frequency distribution for which is given below: Time between
arrivals (minutes) | Frequency | Service Time (in
minutes) | Frequency | 1
2
3
4
5
6 | 5
20
35
25
10
5 | 1
2
3
4
5
6 | 1
2
4
2
1
0 |
The store starts work at 11 a.m. and closes at 12 noon for lunch and the customers are served on the "first came first served basis". Using Monte Carlo simulation technique, find average length of waiting line, average waiting time, average service time and total time spent by a customer in system. You are given the following set of random numbers, first twenty for arrivals and last twenty for service: 64
07
30
11 | 04
08
75
79 | 02
59
38
61 | 70
53
24
77 | 03
01
57
10 | 60
62
09
16 | 16
36
12
55 | 18
27
18
52 | 36
97
65
59 | 38
86
25
63 |
| 9 | (0) |
| | (b) | What is Margin of safety? How, margin of safety can be improved? | 5 | (0) |
| | (c) | Explain briefly stages involved in the process of Bench marking. | 5 | (0) |
| 4. | (a) | An agro–products producer company is planning its production for next year. The following information is relating to the current year: | Products/Corps | A1 | A2 | B1 | B2 | Area occupied (acres)
Yield per acre (ton)
Selling price per ton (Rs.)
Variable cost per acre (Rs.)
Seeds
Pesticides
Fertilizers
Cultivations
Direct wages | 250
50
200
300
150
125
125
4,000 | 200
40
250
250
200
75
75
4,500 | 300
45
300
450
300
100
100
5,000 | 250
60
270
400
250
125
125
5,700 |
Fixed overhead per annum (Rs.) 53,76,000. The land that is being used for the production of B1 and B2 can be used for either crop, but not for A1 and A2. The land that is being used for A1 and A2 can be used for either crop, but not for B1 and B2. In order to provide adequate market service, the company must produce each year t least 2,000 tons each of A1 and A2 and 1,800 tons each of B1 and B2. You are required to: | (i) | Prepare a statement of the profit for the current year. | | (ii) | Profit for the production mix by fulfilling market commitment. | | (iii) | Assuming that the land could be cultivated to produce any of the four products and there was no market commitment, calculate: Profit amount of most profitable crop and breakeven point of most profitable crop in terms of acres and sales value. |
| 11 | (0) |
| | (b) | An oil refinery can blend three grades of crude oil to produce quality A and quality B petrol. Two possible blending processes are available. For each production run, the older process uses 5 units of crude Q, 7 units of crude P and 2 units of crude R and produces 9 units of A and 7 units of B. The newer process uses 3 units of crude Q, 9 unit of crude P and 4 units of crude R to produce 5 units of A and 9 units of B. Because of prior contract commitments, the refinery must produce at least 500 units of A and at lease 300 units of B for the next month. It has ,1,500 units of crude Q, 1,900 units of crude P and 1,000 of crude R. For each unit of A, refinery receives Rs.60 while for each unit of B, it receives Rs.90. Formulate the problem as linear programming model so as to maximize the revenue. | 4 | (0) |
| | (c) | Explain the term degeneracy in a transportation problem. | 4 | (0) |
|
| 5. | (a) | B Ltd. makes industrial power drills, which is made by the use of two components A (electrical and mechanical components and B (plastic housing). The following table shows the cost of plastic housing separately from the cost of the electrical and mechanical components: | | A
Electrical and
Mechanical
Components
Rs. | B
Plastic Housing
Rs. | A & B
Industrial Drills
Rs. | Sales 1,00,000 units @ Rs.100
Variable Costs:
Direct materials
Direct Labour
Variable factory overhead
Other Variable Costs
Sales commission @10% of sales |
44,00,000
4,00,000
1,00,000
1,00,000
10,00,000 |
5,00,000
3,00,000
2,00,000
—
— | 1,00,00,000
49,00,000
7,00,000
3,00,000
1,00,000
10,00,000 | Total variable costs
Contribution
Total fixed costs | 60,00,000
–
22,20,000 | 10,00,000
–
4,80,000 | 70,00,000
30,00,000
27,00,000 | | Operating income | | | 3,00,000 |
Answer the following questions independently: | (i) | During the year, a prospective customer offered Rs.82, 000 for 1,000 drills. The drills would be manufactured in addition to the 1,00,000 units sold. B Ltd. would pay the regular sales commission rate on the 1,000 drills. The Chairman rejected the order because "it was below our costs". Calculate operating income if B Ltd. accepts the offer. | | (ii) | A supplier offers to manufacture the yearly supply of 1,00,000 units plastic housing components for Rs.13.50 each. Assume that B Ltd. would avoid Rs.3,50,000 of the costs assigned to plastic housing if it purchases. Calculate operating income if B Ltd. decides to purchase the plastic housing from the supplier. | | (iii) | Assuming that B Ltd. could purchase 1,20,000 units (plastic housing components) for Rs.13.50 each and use the vacated plant capacity for the manufacture of deluxe version of drill of 20,000 units (and sell them for Rs.130 each in addition to the sales of the 1,00,000 regular units) at a variable cost of Rs.90 each, exclusive of housings and exclusive of the 10% sales commission. All the fixed costs pertaining to the plastic housing would continue, because these costs are related to the manufacturing facilities primarily used. Calculate operating income of B Ltd. purchases the plastic housings and manufacture the deluxe version of drills. |
| 8 | (0) |
| | (b) | LMV Limited manufactures product Z in departments A and B which also manufacture other products using same plant and machinery. The information of product Z is as follows: | Items | Department A (Rs.) | Department B (Rs.) | Direct material per unit
Direct labour per unit (Rs.10 per hour)
Overhead rates:
Fixed
Variable
Value of Plant and Machinery | 30
30
8 per hour
6 per hour
25 lakhs | 25
40
4 per hour
3 per hour
15 lakhs |
Overheads are recovered on the basis of direct labour hours. Variable selling and distribution overheads relating to product Z are amounting to Rs.30, 000 per month. The product requires a working capital of Rs.4, 00,000 at the target volume of 1,500 units per month occupying 30 per cent of practical capacity. You are required: | (i) | To calculate the price of product Z to yield a contribution to cover 21 percent rate of return on investment. | | (ii) | Set the minimum selling price of the product if (1) the product is well established in the market; (2) the product is first time launched in the market. |
| 7 | (0) |
| | (c) | "Sunk costs are irrelevant in decision–making, but irrelevant costs are not sunk cost." Explain with examples. | 4 | (0) |
