Strategic Cost Management- Mid Trim Examination 02/12/2020

1. Ulfa limited produces a single product in its plant. The product sells for Rs.100 per unit.
The standard production cost per unit is as follows:
Raw material(5 kgs @Rs.8) Rs.40
Direct Labour(2 hours @Rs.5) 10
Variable manufacturing overheads 10
Fixed manufacturing overheads 20
TOTAL 80

The plant is currently operating at full capacity of 100,000 units per year on a single shift.
This output is inadequate to meet projected sales demand, and the sales manager has
estimated that the firm will lose sales of 40,000 units next year if the capacity is not
expanded.
Plant capacity could be doubled by adding a second shift. This would require additional
out of pocket manufacturing overhead costs of Rs.10,00,000/- annually. Also, a night
work wage premium equal to 25% of the standard wage would have to be paid during
the second shift. However, if annual production volume were 130,000 units or more, the
company would take advantage of 2% quantity discount on its raw material purchases.
You are required to advise whether it would be profitable to add the second shift in
order to obtain the sales volume of 40,000 units per year.

2. A cycle tyre manufacturing company has been approached by a large shopkeeper to buy
10,000 tyres @rs.32/- each. Delivery must be made within 30 days. The production
capacity of the company is 64,000 units per month and there is inventory of 2,000 tyres
on hand. Expected sales at regular prices for the coming month are 60,000 tyres. It is
estimated by the sales manager that about 50% of the sales lost during the month would
be made up in later months. Price and cost data per unit are as follows:
Selling price Rs.48
Variable costs-Production 24
Selling 6
Product contribution 18

The variable selling cost on the special order would be Re.1/- per unit.
Required:
a. Determine whether the offer should be accepted or not
b. Determine the lowest price that the company could charge on the special order and
not reduce its income
c. Suppose now that the shopkeeper offers to buy 8,000 tyres per month @Rs.32 per
tyre. The offer would be for an entire year. Expected sales are 60,000 tyres per month
without accepting the special order. Assuming further that there is no beginning
inventory and that sales lost during the year would not be made up in the following
year, determine whether the offer should be accepted, and determine the lowest price
that the company could determine.