CA Final :: Cost Management : May 2003

A company manufactures two products EXE and WYE, which pass through two of its departments exclusively used for them. A market research study conducted by the company reveals that the company can sale either 38,500 units of EXE or 31,500 units of WYE in a year. The manufacturing cost and selling price details are as under :

Since the quantity which can be sold exceeded the production capacity, the company has been considering the use of sub-contracting production facilities. Accordingly, when tenders were floated, two contractors responded as under :

Contractor DS offers to produce upto a maximum of 17,500 units of EXE or 14,000 units of WYE in a year for the type of work done by department 1 of the company. The price charged by DS is Rs. 138 per unit EXE and Rs. 212 per unit of WYE. These prices included the cost of direct materials used in department 1 of the company.

Contractor DW can produce upto a maximum of 11,200 units of EXE and 7,000 units of WYE in a year for the type of work done by department 2 of the company. The price charged by DW is Rs. 150 per unit of EXE and Rs. 192 per unit of WYE. These prices included the cost of direct materials used in department 2 of the company.
Required :

(i)	If the company does not wish to use the sub-contracting facility, which of the two products and in what quantity should be produced and sold by the company by using its own manufacturing capacity to earn maximum profit? Calculate the resultant maximum profit.
(ii)	If the company wishes to produce either 38,500 units of EXE or 31,500 units of WYE by using sub-contracting facility. State which of the two products should be produced to maximise the profits. Calculate the resultant maximum profit.

A company, which uses standard marginal costing, furnishes the following details relating to a single product manufactured and sold in a quarter :

The sales budget is based on the expectation of the company's estimate of market share of 12%. The market report reveals that the actual sales of the product in the whole country for the quarter is 60,000 units.
Further data are given as under :

Direct material price per kg. Direct labour rate per hour

Standard Rs. 8 Rs. 6

Actual Rs. 7.50 Rs. 6.40

Required :
(i) Compute the following variances for the quarter :

— Gross margin sales — Market size variance — Market share variance — Volume variance. — Sales price variance — Direct materials usage and price variance — Direct labour efficiency and rate variances — Variable overheads efficiency and expense variances.

State the main types of information which will be required by a manager to implement the balanced score card approach to performance measurement.

SV Ltd. manufactures a single product. The selling price of the product is Rs. 95 per unit. The following are the results obtained by the company during the last two quarters :

The company estimates its sales for the next quarter to range between 5,500 units and 6,500 units, the most likely volume being 6,000 units. The manufacturing programme will match with the sales quantity such that no increase in inventory of finished goods is contemplated in the next quarter. The following price and cost changes will, however, apply to the next quarter :

—	The price of direct material B will increase by 10%. 'There will be no change in the price of direct material A.
—	The wage rates will go up by 8%. If the production volume increases beyond 5,500 units, overtime premium of 50% is payable on the increased volume due to overtime working to be done by the variable labour complement.
—	The fixed factory and selling expenses will increase by 20% and 25% respectively.
—	A discount in the selling price of 2% is allowed on all sales made at 6,500 units level of output. The selling price, however, will remain unaltered if the volume of output is below 6,500 units.

While operating at a volume of output of 6,500 units in the next quarter, the company intends to quote for an additional volume of 2,000 units to be supplied to a Government department for its captive consumption. The working capital requirement of this order is estimated at 80% of the sales value of the Government order. The company desires a return of 20% on the capital employed in respect of this order.
Required :

(i)	Prepare a flexible budget for the next quarter at 5,500, 6,000 and 6,500 unit levels and determine the profit at the respective volumes.
(ii)	Calculate the lowest price per unit to be quoted in respect of the Government order for 2,000 units.

A company manufactures several products of varying levels of designs and models. It uses a single overhead recovery rate based on direct labour hours. The overheads incurred by the company in the first half of the year are as under :

During this period, the company introduced activity based costing system and the following significant activities were identified :
— receiving materials and components
— set up of machines for production runs
— quality inspection.

A potential customer has approached the company for the supply of 24,000 units of a component K to be delivered in lots of 3,000 units per quarter. The job will involve an initial design cost of Rs. 60,000 and the manufacture will involve the following per quarter :

Direct materials costs Direct labour hours Production runs Inspections Number of consignments of direct materials to be received

Rs. 12,000 300 6 24 20

A company using a continuous manufacturing operation achieves an output of 3 kg. per hour. The selling price is Rs. 450 per kg. The raw material cost is Rs. 125 per kg. of output and the direct labour and variable overheads amount to Rs. 316 per kg. of output. The company has provided an expenditure of Rs. 640 on maintenance and Rs. 6,400 on breakdown repairs per month in its budget. Breakdowns averaging 300 hours per month occur due to mechanical faults. These could be reduced or eliminated, if additional maintenance on the following scale were undertaken :

You are required to solve the transportation problem to maximise the profit and determine the resultant of optimal profit.

With a view to improving the quality of customer services, a Bank is interested in making an assessment of the waiting time of its customers coming to one of its branches located in a residential area. This branch has only teller's counter. The arrival rate of the customers and the service rate of the teller are given below :

You are required to simulate 10 arrivals of customers in the system starting from 11 AM and show the waiting time of the customers and idle time of the teller.

Use the following random numbers taking the first two random numbers in two digits each for first trial and so on :