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146

UNIVERSITY OF MORATUWA
F ACUL TY OF ENGINEERING

DEPARTMENT OF MANAGEMENT OF TECHNOLOGY

B.Sc.
LEVEL

ENGINEERING

4 - SEMESTER 1- EXAMINATION

MN 3040 - BUSINESS ECONOMICS AND FINANCIAL ACCOUNTING

TIME ALLOWED:

INSTRUCTIONS

3 HOURS

FEBRUARY

2010

TO CANDIDATES:

This paper contains 8 questions with TWO (02) sections on 06 pages.

This examination accounts for 60% of the module assessment.
This is a closed book examination. Mobile phones are not permitted.
The maximum marks attainable are indicated in square brackets.

Answer FIVE [05] questions selecting TWO [02] questions from Section A and
THREE [03] questions from Section B.
Use separate Answer Booklets for Section A and Section B.
Clearly state the assumptions you made on the script.
If you have any doubt as to the interpretation of the wording of a question, make your
own decision, but clearly state it on the answer script.

This page is intentionally left blank

SECTION A:BvSINESS

MN3040

ECONOMICS

Instructions to Candidates: Answer any two [02] questions from Section A.

All questions carry equal marks.

Question 01
a.

Give a definition for business economics and explain the basics in business
[04 marks]

economics.

b.

Explain the basic difference between economic and accounting costs concepts.
[04 marks]

c.

Explain how business economics help practicing engineers in their day to day
decision makings. Provide examples.

[04 marks]

d.

Explain the main features of mixed economic system.

[04 marks]

e.

How do you explain the law of diminishing returns?

[04 marks]

Question 02

a.

With examples explain the behaviour of Sri Lankan rice market by using demand
and supply framework.

b.

[04 marks]

Giving suitable examples explain the three types of price discrimination and
conditions for successful price discrimination.

[08 marks]

c.

Explain importance of elasticity concept for business.

[04 marks]

d.

What do you understand from the Angel's law?

[04 marks]

Question 03

a.

Explain the technical relationships between Total Product [TP], Average Product
[AP] and Marginal Product [MP] curves.

b.

[04 marks]

Giving appropriate examples, discuss the pricing and production behavior of

perfect competition and oligopoly market structures.

[08 marks]

c.

Distinguish between economies of scales and scopes.

[04 marks]

d.

Explain why technical progress and factor productivity are considered as key
determinants of economic growth.

Page 1 of6

[04 marks]

SECTION A:BuSINESS

MN3040

ECONOMICS

Question 04
Write short notes on five of the following:
a.

GNP and NNP.

b.

Porter's five forces model and SCP framework.

c.

Short and long run cost functions.

d.

Demand estimation and forecasting techniques.

e.

Monopoly and monopolistic competition.

f.

Movement along the demand curve and shift in supply curve.

g.

Macro economics and micro economics.

h.

Factors of production and basic economic problems.

**************End

of

Section

Page 2 of6

[04 marks for each]

A**************

SECTION

MN3040

B: FINANCIAL AND COST ACCOUNTING

The economic life of each project is forecasted to be 5 years; and at the end of this time,
only the facilities from plan B with value of LKR 50,000 are expected to be salvage.
During the life of the project, the facility in plan A is expected to produce LKR 34,000
annually, whereas plan B is expected to produce LKR 42,000.
Compute the rate of return for both plans.
If the Urban Council expects 12% rate of return on their investment, which plan would
you recommend?

[06 Marks]

Question 08
a.

Why should engineers worry about product costs?

[02 Marks]

b.

Why is it difficult to determine the exact amount of overhead cost consumed by one type
of product when there exist multiple product lines in a plant?

c.

Differentiate the terms "cost allocation", "cost apportionment" and "cost reapportionment" with an example.

d.

[04 Marks]

Give two reasons why the conventional absorption costing techniques are not suitable in
determining the overhead cost consumed by products.

e.

[03 Marks]

[03 Marks]

Explain how a given investor chooses an optimal portfolio. Will this choice always be a
diversified portfolio, or could it be a single asset? Explain your answer giving appropriate
examples and diagrams.

f.

[04 Marks]

"With the private sector becoming an active partner in environmental protection, an

earlier emphasis on strict governmental regulations has ceded ground to corporate selfregulation and voluntary initiatives. As a result the environmental aspects of CSR covers
the environmental implications of company's operation and productivity of its resources;
and minimize practices that might adversely affect the enjoyment of country's resources
by future generations" -World Bank Report.
As an accountant, propose how you accommodate a company's CSR activities and green
initiatives into Financial Statements.

**************End

[04 Marks]

of Section
Page 6 of6

B**************

-'

SECTION

e.

B: FINANCIAL AND COST ACCOUNTING

MN3040

A biscuit manufacturing company offers four types of biscuits in their product range.

Budgeted data for the next year would be as follows.

Table Qn.6
Product

Sales (packets)

Selling price per packet (Rs.)

Cracker

250,000

35

Cream

400,000

30

Chocolate

300,000

40

Vege

150,000

45

Variable cost of an individual product is 30% of the selling price of the respective product.
Budgeted fixed cost would be Rs. 1,400,000.
1.

11.
111.

Calculate the level of sales required to break- even.

[2 marks]

Determine the break - even sales value of each product.

[3 marks]

Determine the number of packets to be sold to achieve break-even under each product
category.

[2 marks]

Question 07
a.

Capital has the power to earn and satisfy our needs. Discuss the capital the view points of
the Lender and Borrower.

b.

[04 Marks]

Explain the advantages and disadvantages of IRR and NPV as project appraisal
techniques?

c.

[05 Marks]

When comparing two projects, the use of the NPV and the IRR methods may give
different results. A project selected according to the NPV may be rejected if the IRR
method is used. Why?

d.

[05 Marks]

Two alternative investment proposals are under consideration for a vacant lot owned by
Urban Development Council. Plan A would require an immediate investment of LKR
120,000 and the first year expenditure for property taxes, maintenance, and insurance of
LKR 4,000, with this amount expected to increase at a rate of LKR 1,000 per year. Plan B
would have a first cost LKR 170,000 and a total first expense of LKR 9,000, with an
increase ofLKR 1,000 per year. (Continue to page 06)
Page 5 of6

SECTION

B: FINANCIAL AND COST ACCOUNTING

MN3040

Table Qn.5.2
Profit and Loss Account for the years 2007 and 2008
2008

2007

Sales turnover

274.91

228.61

Cost of Goods sold

237.60

191.60

37.31

37.01

9.58

10.71

27.73

26.30

6.49

6.37

21.24

19.93

Taxation

5.30

5.00

Net Profit

15.94

14.93

Operating profit

..

Interests
Profit before Depreciation and Taxation
Depreciation
Profit before Taxation

'.
11.

Transform above statements into common size statements.

Conduct ratio analysis covering Liquidity, Profitability or efficiency, Ownership

[Earnings and Leverage] aspects.

111.

[04 Marks]

[06 Marks]

Focusing working capital structure and results generated from ratio analysis provide
your recommendations to Rainbow Chemicals management.

[04 Marks]

Question 06

a.

Derive a formula for classical EOQ [Economic Order Quantity] model?

[04 Marks]

b.

State three 3 assumptions that you have considered deriving above.

[03 Marks]

c.

Using the answer obtained in part (a) show that minimum average cost per unit time is
given by

d.

CO(q)

= -J2DSH

where D S and H are standard notations.

Compute the EOQ for the following.

[03 Marks]
[03 Marks]

Annual demand

25 units

Unit price

Rs 2.50

Order cost

Rs 4.00

Storage cost

8% of unit cost per year

Capital cost

12% of unit cost per year

Page 4 of6

SECTION

MN3040

B: FINANCIAL AND COST ACCOUNTING

Instructions to Candidates: Answer any three [03] questions from Section B. All questions
carry equal marks.

Question 05
a.

b.

Explain the following giving suitable examples:

Materiality concept

Consistency concept

Going concern concept

[06 Marks]

Refer the financial statements of Rainbow-chemicals Private Ltd for year 2007 and 2008.
Table Qn.5.1
Balance Sheet of Rainbow Chemicals Private Ltd for year 2007 and 2008
Sources of Funds

2008

2007

Share capital

11.65

11.65

Reserves

71.36

59.50

Total Shareholders Funds

83.01

71.15

Total Debts

74.32

60.59

157.33

131.74

72.83

62.41

Total Liabilities

Applications of Funds
Fixed Assets
121.10

Currents Assets

94.28

Inventories

46.30

40.48

Debtors

49.85

37.30

Cash at Bank

1.85

1.62

Loans and Advances

23.10

14.88

Current Liabilities

24.95

36.60

Net Current Assets

Total Assets

84.50

69.33

157.33

131.74

Page 3 of6