| 1. | In each of the cases given below one out of four answers is correct. Indicate the correct answer (1 mark) and give your workings/reasons in support of your answer (3 marks): | | |
| | (a) | A company operates throughput accounting system. The details of product X per unit are as under: Selling price
Material cost
Conversion cost
Time on bottleneck resources | Rs. 50
Rs. 20
Rs. 15
10 minutes | The return per hour for product X is | (A) | Rs. 210 | (B) | Rs. 180 | | (C) | Rs. 300 | (D) | Rs. 90 |
|
| 4 | (0) |
| | (b) | A firm engaged in the profession of rendering software services provides three different kinds of services to its clients. The following are the data relating to these services: | Types of services | A
Rs./Job | B
Rs./Job | C
Rs./Job | Annual fee
Annual variable costs
Annual fixed costs | 3,000
1,350
600 | 2,400
800
320 | 1,800
810
225 |
The total annual fixed costs are budgeted at Rs. 5,74,200 and none of these costs are specific to any type of service provided by the firm. The firm has estimated the number of service contracts to be sold in the next year in the proportion of 20%, 30% and 50% respectively for the three types of services namely A, B and C.
The annual revenue needed by the firm to break even is | (A) | Rs. 3,16,800 | (B) | Rs. 9,76,800 | | (C) | Rs. 5,74,200 | (D) | Rs. 7,20,000 |
| 4 | (0) |
| | (c) | A company has estimated the selling prices and the variable costs of one of its products as under: | Selling price (per unit) | Variable costs (per unit) | | Probability | Rs. | Probability | Rs. | 0.25
0.45
0.30 | 60
75
90 | 0.25
0.40
0.35 | 30
45
60 |
The company will be able to produce and sell 4000 units in a month irrespective of the selling price. The selling price and variable cost per unit are independent of each other. The specific fixed costs relating to this product is Rs. 20,000. The probability that the monthly net profit of the product will be Rs.1,20,000 is | (A) | 0.2525 | (B) | 0.4512 | | (C) | 0.3825 | (D) | 0.3075 |
| 4 | (0) |
| | (d) | The current price of a product is Rs. 8,000 per unit and it has been estimated that for every Rs. 200 per unit reduction in price, the current level of sale, which is 10 units, can be increased by 1 unit. The existing capacity of the company allows a production of 15 units of the product. The variable cost is Rs. 4,000 per unit for the first 10 units, there after each unit will cost Rs. 400 more than the preceding one. The most profitable level of output for the company for the product will be | (A) | 11 units | (B) | 12 units | | (C) | 13 units | (D) | 14 units |
| 4 | (0) |
| | (e) | In calculating the life cycle costs of a product, which of the following items would be included? In calculating the life cycle costs of a product, which of the following items would be included? | (i) | Planning and concept design costs; | | (ii) | Preliminary and detailed design costs; | | (iii) | Testing costs; | | (iv) | Production costs; | | (v) | Distribution costs. | (A) | All of the above | (B) | (iv) and (v) | | (C) | (ii), (iv) and (v) | (D) | (iv) |
|
| 4 | (0) |
| 2. | Soft Toys Pioneer Ltd. wants to add one more item, Bhulu, to its range of products. According to an outside market research firm, in order to add to retain its speciality value. Bhulus should be marketed for just one year as other competitors will imitate it soon thereafter.
You are required to ascertain the cash flows, based on relevant costing concept, in respect of the following: | (i) | The research firm has submitted its bill of services to the company for Rs. 50,000 which is still to be paid. | | (ii) | Two of the existing machines, P and Q, would be required to make Bhulus. You collect data about the machines as under: | P
Rs. | Q
Rs. | Original cost
Accumulated depreciation
Written down value
Estimated value at end of useful life
Age
Estimated remaining useful life | 49,000
34,000
15,000
7,000
4 years
1 year | 35,000
25,000
10,000
1,000
6 years
2 years |
|
Details are also available of each values relating to the two machines at the start and the end of the year during which Bhulus would be produced: | Start of the year
Rs. | End of the year
Rs. | Machine P:
Machine Q: | Replacement cost
Resale value
Replacement cost
Resale value | 56,000
10,000
42,000
6,000 | 63,000
7,000
46,000
4,000 |
If machine P is not used for the manufacture of Bhulus then it would be used to manufacture existing products the sale of which would result in an estimated Rs. 70,000 net receipts. Machine P is one of a number of identical machine types used regularly on various products by Soft Toys Pioneer Ltd. Each of this type of machine is replaced as soon as it reaches the end of its useful life.
Machine Q is the only one of its type within the firm and if not used in the manufacture of Bhulus would be sold immediately. Explain your working taking differential approach i.e. showing cash flows if Bhulus are manufactured and if Bhulus are not manufactured. Please restrict your answer to the above two information Research cost and Machine usage for a decision by the management on the Project Bhulu. | 4+12=16 | (0) |
| 3. | When goods are passed between divisions of an organization, a central transfer price policy is needed so that no sub&ndahs;optimal or dysfunctional results ensure ........ one way to attain this objective is to aim at the same contribution margin ratio (P/V ratio) on the goods subject to internal transfer for both the transferor division and the transferee division.’ The Managing Director of Fairdeal Limited has just attended a lecture on Transfer Pricing in a seminar organized by ICWAI. The above is a quote from the said lecture. Fairdeal has two divisions, Wholesale (W) and Retail (R). As per the existing rule, W sells is products @ Rs. 156 per tonne in the external market but supplies identical product @ Rs. 90 per tonne to R.R uses the transferred material as captive consumption and produces finished goods in the ratio of 1 tonne input: 100 prices of output. R sells all its out put in the external market. W insists that R be charged at market price, to which R does not agree. The MD of Fairdeal Ltd. requests you to find the transfer price of the goods that his wholesale division supplies to the Retail division, conforming to the principle laid out in the above quote. For your information the Accountant of Fairdeal Ltd. furnishes you with an estimated Profit Statement of the company as under:
Estimated Profit Statement of Fairdeal Ltd. for the current quarter (July–Sept. 2006) | Wholesale
Rs. ‘000 | Retail
Rs. ‘000 | Company
Rs. ‘000 | External sales 1,200 t. @ Rs. 150
120,000 pcs @ Rs. 2.67
Internal transfer 1,200 t. @ Rs. 90
Variable cost 2,400 t @ Rs. 58.33
120,000 pcs @ Re. 0.50
Fixed costs
Profit | 180
–
108
(140)
–
(100)
48 | –
320
(108)
–
(60)
(40)
112 | 180
320
–
(140)
(60)
(140)
160 |
Note: Your answer should (i) highlight the need for a change in the ruling transfer price and (ii) show that the suggested transfer price meets the MD’s requirement. | 8+8=16 | (0) |
| 4. | (a) | What are the problems associated with apportionment of joint cost? | 4 | (0) |
| | (b) | A company produces three joint products in one common process. Each product can be separately processed further after split–off point. The estimated data for a particular month are as under: | Product | | A | B | C | Selling price at split—off point (Rs./litre)
Selling price further processing(Rs/litre)
Post separation point cost
Output in litres | 100
200
Rs. 3,50,000
3,500 | 120
200
4,50,000
2,500 | 150
250
2,00,000
2,000 |
Preseporation point joint costs are estimated to be Rs. 2,40,000. As per current practice such costs are apportoned to the three products according to production quantity.
You are required to: | (a) | Prepare a statement of estimated profit or loss for each product and in total for the month if all three products are processed further: and |
| (b) | From the profit statement comment how profit could be maximised if one or more products are sold at split–off points. |
| 4+4 | (0) |
| | (c) | A division of a large group company has prepared the following summarised budget for the ensuring year: | Rs. (lac) | Profit
Net current assets (average for the year)
Fixed assets (at cost)
Accumulated depreciation | 660
750
3,000
1,440 |
The group financial controller has proposed the following non–routine transaction:
At the beginning of the year, the division will buy a plant for Rs. 360 lac to achieve a reduction of Rs. 105 lac in revenue expenses. This plant will have a life of 5 years with no salvage value at the end of the 5th year.
The divisional manager asks you to evaluate the Financial Controller’s proposal from the point of view of performance of the division. Ignore taxation. | 4 | (0) |
|
| 5. | A company is engaged in the purchase of a raw material and selling the same after treatment in its plant. The plant has a capacity to treat 60,000 tons of raw materials per annum. The variable cost of treatment is Rs. 4 per ton and the fixed cost is Rs. 6,00,000 per annum. There is no loss in process. The company owns a fleet of vehicle having a capacity of 26 lac ton’km of raw materials per annum. The fixed costs of the transport department is Rs. 10,50,000 per annum. The variable cost of the company’s own transport is Rs. 0.80 per ton’km. The facility of hiring of transport for incoming raw materials is available at Rs. 1.80 per ton’km. The company has three sources of purchase of raw materials. The data relating to quantity, cost and distance of the supplier’s sources are as under: | Source | P | Q | R | Capacity of raw materials (tons)
Distance from Plant (km)
Variable price/ton (Rs.)
Fixed price per annum (Rs.) | 9,000
25
90
24,000 | 27,000
25
120
– | 45,000
50
68
96,000 |
Source Q has a commitment to supply 19,000 tons of its raw materials to another company at a higher price and hence this source is prepared to supply only 8,000 tons of raw materials to the plant at the quoted price. The other two sources can supply the entire quantity of their capacity.
The company sells its treated raw materials to the following stockists for whom demand and selling prices are given against each: | Customer | Demand
(Tons) | Price/Ton
(Rs.) | A
B
C | 30,000
24,000
9,000 | 188
200
150 |
All the selling prices are net ex–plant.
Required to: | (a) | Evaluate the alternative proposals. |
| (i) | For the purchase of raw materials, and |
| (ii) | For transportation arrangement for the incoming goods with a view to maximizing the profit. |
| (b) | Compute the distribution of sales to the three customers and the profit for the company. |
| 6+6+4 | (0) |
| 6. | A project consisting of eight activities has the following characteristics: | Activity | Preceding
Activity | Time estimates (in weeks) | | Optimistic | Most likely | Pessimistic | A
B
C
D
E
F
G
H | none
none
A
A
A
B, C
D
E, F, G | 2
10
8
10
7
9
3
5 | 4
12
9
15
7.5
9
3.5
5 | 12
26
10
20
11
9
7
5 |
| (a) | Draw the PERT network for the project. | | (b) | Determine the critical path. | | (c) | If a 30 week deadline is imposed, what is the probability that the project would be finished within the time limit? | | (d) | If the Project Manager wants to be 99% sure that the project is completed on the scheduled date, how many weeks before that date should he start the project work?
(Area of normal curve between z = 0 and z = 0.41 is 0.1591 and the value of z which covers 49% of area is 2.33) |
| 16 | (0) |
| 7. | A company has four factories producing an identical product. The output of the four factories are sold through three markets. The cost of production of the product in each factory and the selling price obtained each market are given below: | Factory | Cost/Unit
(Rs.) | Production unit | Market | Selling price per unit
Rs. | Demand units | A
B
C
D | 12
15
11
13 | 100
20
60
80 | P
Q
R | 15
14
16
| 120
140
60
|
| (a) | Using transportation method, solve the problem to obtain a minimum cost allocation of the products of the four factories to the three markets. |
| (b) | Determine the profit obtained by your solution. |
| 12+4 | (0) |
| 8. | (a) | What is Flexible Manufacturing System (FMS)? | 2 | (0) |
| | (b) | State briefly the benefits of FMS. | 2 | (0) |
| | (c) | In the context of JIT purchasing techniques, reporting of traditional material price variance may be inappropriate. Discuss the statement. | 4 | (0) |
| | (d) | What is Competitive Pricing? | 2 | (0) |
| | (e) | In what circumstances is the strategy of Incremental Pricing used? | 2 | (0) |
| | (f) | How is Pareto analysis used in pricing of a product? | 4 | (0) |
