You are on page 1of 16

# 1 Convert Coal in Coke.

## 20% of coke is sold at \$ 7.50

The total capacity is 80,000 tons.

## Variable cost per ton = \$4.50

Fixed cost = \$40,000 per year

## Expenses \$60,000 per ton then the

coke will sold at \$6 per ton

## Increased in fixed decrease variable cost

reduce by \$ 1.50 per ton

## 2 Convert coke in Iron

Outside purchase.then purchase price will be \$5
per ton. Manager believe that it is not a profitable
option

Requried no1:
The transfer price become the cost of blast furnace and the
company is interested to charge the cost at minium.

## The total capacity is 80,000 tons and company sold 80%

of it which is (80,000 ton x 80%) = 64,000 tons and
the variable cost is \$ 4.50 which is less than \$5 per unit

Profit of Coke:
Present Sale to Dept 2 (64,000 x \$6) 384,000
Sale to Outsider(16,000 x\$7.50) 120,000
Total Sale 504,000
Less:Cost (80,000 x \$4.50) (360,000)
Less: Fixed cost (40,000)
Profit 104,000

## Proposed: Sale to Dept 2 (64,000 x \$5) 320,000

Sale to Outsider (16,000 x\$7.50) 120,000
Total Sale 440,000
Less:Cost (80,000 x \$4.50) (360,000)
Less: Fixed cost (40,000)
Profit 40,000

Required 2: Decision whether to invest money and sell entire coke to outside:

Proposal:
Sales (80,000 units x \$6)
Less: Cost of Sales:
1 Variable Cost (80,000 x \$3)
2 Variable marketing exp (80,000 x 0.50)
Total Variable cost

## 3 Fixed cost 40,000

4 Fixed Productive and Equip 60,000
Profit
5 Cost of purchasing by Furnace dept
(64,000 tons x \$5)
Net Loss

Present:
Sales (16,000 tons x \$ 7.50) 120,000
(64,000 tons x \$6) 384,000

## Less: Cost of Sales:

1 Variable Cost (80,000 x \$4.50)
2 Fixed cost
Profit
3 Cost of Coke to Furnance dept
(64,000 tons x \$6)
\$6 per ton

variable cost

will be \$5
a profitable
oke to outside:

480,000

240,000
40,000
280,000

100,000 (380,000)
100,000

(320,000)
(220,000)

504,000

360,000
40,000 (400,000)
104,000

(384,000)
(280,000)
Required no. 1: For each of Product:

## Product Capital Employed Percentage of Rate of return

Turnover rate Profit to Sales on Capital employed

## Sales Net Income Capital employed ratio x % of prof

Investment / Capital Employed Sales

## A 2,000,000 4 60,000 3 % 60,000 / 500,000 x 100 = 12%

500,000 times 2,000,000 = 4 times x 3% = 12%

## B 5,000,000 16.67 45,000 0.9 % = 16.67 times x 0.9% = 15%

300,000 times 5,000,000

## C 3,000,000 5 175,000 5.83 % = 5 times x 5.83% = 29.15%

600,000 times 3,000,000

## D 1,800,000 9 36,000 2.0 % = 9 times x 2% = 18%

200,000 times 1,800,000

## Product Pay Back

Period

Investment
Annual Cash Inflow

75,000

60,000

## C 600,000 3.00 years

200,000
D 200,000 3.33 years
60,000

## Cash inflow PV = Cash outflow

100,000 - 100,000 = 0 = IRR = DCF

## 26% 3.465 26% 3.465

28% 3.269 Payback 3.333
0.196 0.132

## Discounted Cash flow rate of return

for Product D
(0.132/0.196 x 2%) + 26%

27.35%
Rate of return
on Capital employed

## 0,000 x 100 = 12%

3% = 12%

es x 0.9% = 15%

5.83% = 29.15%

2% = 18%
Solution of Pb 27-1

## Required no.1: Inventory turnover rate (19 A)

Inventory turnover rate = Cost of Goods Sold 451,000
Average Inventory 90,200

Required no. 2: Return Of Capital Employed (ROCE) ratio (after Income Tax) 19 A
Return of Capital Employed ratio = Net Income 75,115
Capital Employed 517,125

0.145

14.5%
W-1 Calculation of capital employed:
Capital Employed = Equities = Total Asset = Current Assets + Non- current assets

## Current Assets 167,125

Non- current assets 350,000
CAPITAL EMPLOYED 517,125

Required no. 3: Rate of return (after income tax) on book value of total assets
19 B
Rate of return (after income tax) = Net Income
Book Value of total assets

57,125
521,450

0.11

11%
W-1: Calculation of net Income (after Income tax) for the year 19 B
Sales (100,000 units x 8.40) 840,000
Less:
Total variable cost (100,000 units x 6) 600,000
Total Fixed cost 125,750 (725,750)

## Net income before Income tax 114,250

Less: Income tax (50%) (57,125)
Net income after income tax 57,125

## W- 2: Calculation of Book value of total assets (19 B):

Value of current asset (840,000 x 22.25%) 186,900

## Value of non current asset

Balance of non currnet asset (at start) of 19 B 350,000
Less: Current year depreciation (19 B) (15,450) 334,550
BOOK VALUE OF TOTAL ASSETS (19 B) 521,450

Sales 751,150

## Note: Same ratio will be applied to 19 B

times

urrent assets
CA

FA
TA
Required no. 1: Profit for 6,000,000 Cases
a) Bottle b) Cologne c) The
Division Division Company

## Less: Cost of Sales (7,200,000) (58,400,000) (55,600,000)

PROFIT 2,800,000 5,500,000 8,300,000

## The Company 48,400,000 + 7,200,000 55,600,000

Required no. 2:
a) Bottle Division:
Volume
Cases 2,000,000 4,000,000 6,000,000

## Less: Cost of Sales (3,200,000) (5,200,000) (7,200,000)

PROFIT 800,000 1,800,000 2,800,000
b) Cologn Division:
Volume
Cases 2,000,000 4,000,000 6,000,000
Revenue 25,000,000 45,600,000 63,900,000

## Less: Cost of Sales (20,400,000) (39,400,000) (58,400,000)

PROFIT 4,600,000 6,200,000 5,500,000
c) The Company
Volume
Cases 2,000,000 4,000,000 6,000,000

## Less: Cost of Sales (19,600,000) (37,600,000) (55,600,000)

PROFIT 5,400,000 8,000,000 8,300,000

## Total Cost 3,200,000 5,200,000 7,200,000

Less: FC 1,200,000 1,200,000 1,200,000