Professional Documents
Culture Documents
Step 1:-Understand all the concepts deeply with the help of examples
as taught in classes.
Step 2:-Understand practical questions and solve them thoroughly in
the classes.
Step 3:- After step-2, Now is the time to solve all the questions yourself
at home by hiding its solution.
Step 4:-Write down typical points you came across while solving
question under Step-3.
Step 5:-Now verify solutions to questionspoint-by-point with the help of
pencil and revise all typical points as noted down under step 4.
Step 6:-Repeat step 5 continuously after a certain time to become
master of all practical concepts and questions.
About Purushottam Aggarwal Sir..
Purushottam Aggarwal is a throughout first class graduate from Delhi
University in the year 2005. He is a Fellow member of The Institute of
Chartered Accountants of India.
https://www.purushottamaggarwal.com/
Nov 17 - Result
VOLUME - 1
SL. NO. CHAPTERS PAGE NO.
6 DECISION MAKING 6.1 – 6.88
Khan
CA Final - SCM & PE
September 2019 Vol 1 Issue 21
https://www.purushottamaggarwal.com/
Nov 17 - Result
ABC Ltd produces a product which has a Variable Cost of Materials - Rs. 40, Labour
- Rs. 10 and OH - Rs. 4. The Selling Price is Rs. 90 per unit. Sales for the current
year is expected to be 15,000 units and Fixed OH are Rs. 1,40,000.
Under a wage agreement, an increase of 10% is payable to all direct workers from
the beginning of the forthcoming year, while Material Cost is expected to increase by
7.5%, Variable OH by 5% and Fixed OH by 3%. You are required to calculate the
following -
2. Sales required to earn a Profit of Rs. 7,50,000, if the current cost structure
continues.
3. Revised PV Ratio and Profits of forthcoming year if the current sales quantity and
price were maintained.
5. Sales Quantity in the forthcoming year, to yield the same as present profits, if the
Sale Price remains Rs. 90.
Question 2
ABC Ltd, which manufactures the component EXCEL, has achieved a turnover of
Rs. 6,00,000 for the calendar Year 1. The Manager of the Company has informed
that the Company has worked at a PV Ratio of 25% and Margin of Safety of 20%.
But he feels due to severe competition, the Selling Price is to be reduced to maintain
the same volume of sales for Year 2. He does not expect any change in variable
costs. He expects that due to cost reduction programme, the PV Ratio and Margin of
Safety will be 20% and 30% respectively and considerable saving in Fixed Cost for
Year 2.
Even if the Company prefers to shut down its operations for Year 2, it expects to
incur a minimum Fixed Cost of Rs. 60,000.
1. Present the comparative statement for the Years 1 and 2 showing under Marginal
Costing.
2. What will be minimum sales required, if it decides to shut down its unit in Year 2?
Question 3
A Shoe Manufacturer has a Net Profit of Rs. 25 per pair on a Selling Price of Rs.
143. He is producing 6,000 pairs per annum which is 60% of the potential capacity.
The cost per unit is as under:
During the current year, the Manufacturer also estimates demand of 6,000 pairs but
anticipates that the Fixed Charges to go up by 10% while the rate of Direct Labour
and Direct Materials will increase by 8% and 6% respectively. But he has no option
of increasing the Selling Price. Under this situation he obtains an offer to utilize
further 20% of capacity. What Minimum Price will you recommend to ensure an
overall profit of Rs. 1,67,300?
Question 4
B Ltd makes Industrial Power Drills which are made by the use of 2 components A
(Electrical & Mechanical Components) and B (Plastic Housing). The following table
shows the cost of Plastic Housing separately from the cost of Electrical &
Mechanical Components -
Particulars A B A&B
Electrical & Plastic Industrial
Mechanical Components Housing Drills
Sales 1,00,000 units at Rs. 100 1,00,00,000
Variable Costs:
Direct Material 44,00,000 5,00,000 49,00,000
Direct Labour 4,00,000 3,00,000 7,00,000
Variable Factory Overhead 1,00,000 2,00,000 3,00,000
Other Variable Costs 1,00,000 - 1,00,000
Sales Commission at 10% of Sales 10,00,000 - 10,00,000
Total Variable Costs 60,00,000 10,00,000 70,00,000
Contribution - - 30,00,000
Total Fixed Costs 22,20,000 4,80,000 27,00,000
Operating Income 3,00,000
1. During the year, a prospective customer offered Rs. 82,000 for 1,000 Drills. The
Drills would be manufactured in addition to the 1,00,000 units sold. B Ltd would pay
the regular Sales Commission rate on the 1,000 Drills. The Chairman rejected the
order because "it was below our Costs". Calculate Operating Income of B Ltd, if it
accepts the offer.
Supplier.
Question 5
ABC Limited manufactures and sells a range of products. For one of its products, it
makes 2,000 units of a Component which has the following Budgeted Manufacturing
Cost:
Direct Labour (specially skilled) (40 hours @ Rs. 150 per hour) Rs. 6,000
Softech Limited has offered to supply the component at a Guaranteed Price of Rs.
25,000 per unit.
If the component is not manufactured by ABC Limited, all the Direct Labour thus
Question 6
The Ace Ventures Company (AVC) assembles bicycles. This year's expected
production is 10,000 units. AVC makes the Chains for its bicycles. Its Accountant
reports the following costs for making 10,000 Bicycle Chains -
AVC received an offer from an outside vendor for the supply of any number of
chains at Rs. 8.20 per Chain. The following additional information is available on
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CA Final – SCM & PE By CA Purushottam Aggarwal
AVC's operations -
• Inspection, Set-up and Materials Handling Costs vary with the number of batches
in which the Chains are produced. AVC currently produces the Chains in batches of
1000 units. It estimates that 10 batches are required for meeting the expected
production requirements.
• AVC rents the machine used to make the Chains. If it chooses to outsource the
Chains, machine rent can be avoided.
Required:
1. Should AVC accept the Vendor's offer for 10,000 units? What is the net gain f
(loss)? What is the maximum price payable to the Vendor?
2. Suppose the Chains were purchased outside, the facilities where the Chains are
currently made will be used to upgrade the bicycles by adding Mud Flaps and
Reflectors. As a result, the Selling Price of the Bicycles can be increased marginally
by Rs. 20. The Variable Costs of the upgrade would be Rs. 18 and additional
Tooling Costs of Rs. 16,000 would be incurred. Should AVC make or buy the
Chains, at the anticipated production level of 10,000 units? What is the maximum
price payable to the Vendor in this situation?
3. AVC's Sales Manager is concerned that the estimate of 10,000 units may be high
and believes that only 6,200 units can be sold. Production will be cut back, freeing
up work facilities and space. This space can be used to add the Mud Flaps and
Reflectors whether AVC outsources the Chains or makes them in-house. At this
lower output, AVC will produce the chains in 8 batches of 775 units each. Should
AVC purchase the Chains from the Outside Vendor? Show calculations.
Question 7
Study Material - Aditya Ltd manufactures four products A-1, B-2, C-3 and D-4 in
Gurgaon and one product F-1 in Faridabad. Aditya Ltd operates under Just-in-Time
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CA Final – SCM & PE By CA Purushottam Aggarwal
(JIT) Principle and does not hold any Inventory of either Finished Goods or Raw
Materials.
The Company has entered into an agreement with M Ltd to supply 10,000 units per
month of each product produced from Gurgaon unit at a contracted price. Aditya Ltd
is bound to supply these contracted units to M Ltd without any fail. Following are the
details related with non-contracted units of Gurgaon unit.
The products manufactured in Gurgaon unit use Direct Material M-1 and M-2 but
Product F-1 produced in Faridabad is made by a distinct Raw Material Z. Material Z
is purchased from the market at Rs. 200 p.u. One of F-1 requires one unit of
Material Z.
Material Z can also be manufactured at Gurgaon unit but for this 2 hours of Direct
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CA Final – SCM & PE By CA Purushottam Aggarwal
Labour, 3 hours of Machine Time and 2.5 Litres of Material M-2 will be required.
The Purchase Manager has reported to the Production Manager that Material M-1
and M-2 are in short supply in the market and only 6,50,000 kg of M-1 and 6,00,000
Litres of M-2 can be purchased in a month.
Required:
2. Calculate the optimum monthly usage of Gurgaon unit's available resources and
make decision accordingly.
3. Calculate the Purchase Price of Material Z at which your decision in Part (1)
above can be sustained.
Question 8
A company manufactures two models of a pocket calculator. The basic model sells
for Rs.5, has a direct material cost of Rs. 1.25 and require 0.25 hours of labour time
to produce. The other model, the scientist model, sells for Rs. 7.50, has a direct
material cost of Rs. 1.63 and takes 0.375 labour hour to produce. Labour, which is
paid at the rate of Rs.6 per hour, is currently very scarce, while demand for the
company‘s calculator is heavy. The company is currently producing 8000 pf basic
model and 4000 of scientist calculator per month while fixed cost are Rs. 24000 per
month.
An overseas customer has offered the company a contract, worth Rs.35,000 for a
number of calculators made to its requirements. The estimating department has
ascertained the following facts in respect of the work:
The labour time for the contract would be Rs 1,200 hours
The material cost would be Rs. 9,000 plus cost of a particular
component normally used in the company‘s models.
Question 9
The Bharti Televenture manufactures cellular modems. It manufactures its own
cellular modern circuit boards (CMCB), an important part of the cellular modem. It
reports the following cost information about the costs of making CMBCs in 2006 and
the expected costs in 2007.
Current costs Expected Costs
in 2006 in 2007
Variable manufacturing costs
Direct material cost per CMBC 1800 1700
Direct manufacturing labour cost per CMBC 500 450
Variable manufacturing cost per batch for 16000 15000
setups, material handling & quality control
Fixed manufacturing costs
Fixed manufacturing overhead costs that can be 32,00,000 32,00,000
avoided if CMBC are not made
Fixed manufacturing overhead costs of the plant 80,00,000 80,00,000
depreciation, insurance and administration that
cannot be avoided even if CMBCs are not made
Required – calculate the total expected manufacturing cost per unit of making
CMCBs in 2007
Suppose the capacity currently used to make CMCBs will become idle if Bharti
purchases CMCBs from Reliance. On the basis of financial considerations alone,
should Bharti make CMCBs or buy them from Reliance? Show Your calculations
Now suppose that if Bharti purchases CMCBs from Reliance, its best alternative use
of the capacity currently used for CMCBs is to make and sell special circuit boards
(CB3s) to the Airtel Corporation. Bharti Estimates the following incremental
revenues and costs from CB3s:
Total Expected Incremental Future Revenues 2,00,00,000
Total Expected Incremental Future costs 2,15,00,000
On the basis of financial considerations alone, Should Bharti make CMCBs or buy
them from Reliance ? Show Your Calculations.
Question 10
A company is able to obtain 2.00,000 kgs of A and 4,00,000 kgs of B from the input
of 6,00,000 kgs of raw material F, The Selling prices of these outputs are A is Rs. 6
per kg B - Rs. 4.50 per kg. The processing costs are:
Rs.
Raw materials (6,00,000 kg x Rs. 2) 12,00,000
Variable processing costs 6,00,000
Fixed processing costs 2,00,000
Total 20,00,000
Question 11
HTM Ltd by using 12,00,000 units of a Material M produces jointly 2,00,000 units of
H and 4,00,000 units of T. The Costs and Sales details are -
Particulars Amount
The Company receives an additional order for 40,000 units of T at the rate of Rs. 15
per unit. If this order has been accepted, the existing Price of T will not be affected.
However, the present Price of H should be reduced evenly on the entire Sale of H to
market the additional units to be produced. Find the Minimum Average Unit Price to
be charged on H to sustain the increased Sales.
Question 12
A Company processes different products form a certain Raw Material. The Raw
Material is processed in Process I (where Normal Loss is 10% of Input) to give
products A and B in the ratio 3:2. B is sold directly. A is processed further in Process
II (where Normal Loss is 12.5% of Output) to give Products C and D in the ratio 5:3.
At this point, C and D have sale values Rs. 55 and Rs. 40 per kg respectively. C can
be processed further in Process III with Processing Cost Rs. 3,95,600 and Normal
Wastage 5% of Input and then be sold at Rs. 66 per kg. D can be processed further
in Process IV with Processing Cost Rs. 3,82,500 and Normal Wastage 12.5% of
Output and then be sold at Rs. 55 per kg. The Normal Wastage of each process has
no realizable value. During the production period, 2,00,000 kgs of Raw Material is to
be introduced into Process I.
Question 13
CRAZY Ltd. manufacturers products-P,Q,R and S. The direct cost of production is
estimated at:
Particulars Product
P Q R S
Rs. Rs. Rs. Rs.
Material 36 38 42 24
Labour
Up to 50,000 4,00,000
The Sales Director estimates that demand for their products in the next year
will be as follow:
Particulars P Q R S
The Production Manager states that the capacity of existing machines is 2,10,000
hours per annum, though this will be increased to 3,00,000 hours in two years time
when new plant which is currently on order will be delivered. Meanwhile a local firm
has offered to manufactures any of the products on a sub-contract basis at the
following prices:
P 63
Q 80
R 72
S 82
Required:
a) Advise the management to what extent the services of the sub-contractor
should be utilized in order to meet the expected demand of P. Q, R and S.
b) Prepare a statement showing the profit.
Question 14
Selling Prices and Variable Production Costs are budgeted as follows: Products (Rs.
per unit)
Other Data:
• Products X and Y could be bought in at Rs. 10.00 per unit and Rs. 15.00 per unit
respectively.
Required:
Question 15
through two of the Company's departments P and Q. The machine hour capacity of
each department is limited to 6,000 hours in a month. The monthly demand for
components and cost data are as under -
Components A B C
Components A and C can be purchased from market at Rs. 129 each and Rs. 70
each respectively. Prepare a statement to show which of the components in what
quantities should be purchased to minimise the cost.
Question 16
Motor components Ltd. have secured an order for 3,000 components per week from
a car manufacturer but there is a shortage of available skilled labour capacity, which
is restraining the Company from producing the entire quantity within the Company.
Production, cost and sales information of Motor Components Ltd, are as under:
Sales price of complete component = Rs.1,500
Skilled labour capacity per week = 7,500 hours
Each component is finally assembled from three section, made up of one or more
parts as under:
Particulars Section
I II III
The subcontract price for component of Rs. Rs. 700 Rs.500 Rs. 200
1,400 made up as indicated
Required: Advise which of the above two production strategies would be more
profitable for the Company.
Question 17
ABC Limited has stated that its standard selling prices and standard prime costs for
each product for the forthcoming year is:
Costs: Department-1:
Direct materials 45 75
Costs-Department 2:
Direct materials 15 20
Production overheads are to be absorbed on a direct labour hour basis and the
budgeted overheads for the forthcoming year are:
Department- I Department- II
You are required (a) to state, with supporting calculations and estimated profit
figures, whether ABC Limited should concentrate its resources on Robroy or
Trigger if:
(1) It does not use sub-contractor.
(2) It does use sub-contractors and restricts its salesto either 22,000 units of
Robroy or 18,000 units of Trigger.
If Subcontract price is as under –
Question 18
Particulars A B C D
A B C D
The Company seeks your advice in terms of products & quantities to be produced
and / or sub-contracted, so as to achieve the maximum possible profit. You are
required to also compute the profit expected from your suggestion.
Question 19
ABC Ltd manufactures and sells three products X, Y & Z for which budgeted sales
demand, unit selling prices and unit variable costs are as follows:-
Budgeted Nature X Y Z
of Exp.
Unit sales 16 18 14
price
Variable Material 8 6 2
Costs:
Labour 4 6 9
12 12 11
Unit 4 6 3
contribution
The company has existing stocks of 250 units of X and 200 units of Z, which it is
quite willing to use up to meet sales demand.
All three products use the same materials and the same type of direct labour. In the
next year, the available supply of materials will be restricted to Rs. 4800 (at Cost)
and the available supply of labour to Rs. 6600 (at Cost)
Required - Determine what product mix and sales mix would maximize the
company‘s profit in the next year.
Question 20
A company produces three products. The General Manager has prepared the
following draft budget for the next year.
Particulars Products
A B C
The company uses the same raw material in all the three products and the price per
kg of the raw material is Rs. 2. The company envisages a profit of 10% on the
budget turnover before interest and depreciation, which are fixed. Interest and
depreciation are estimated at Rs. 3,00,000 and Rs. 1,00,000 respectively. The draft
budget makes full utilization of the available raw material, which is in short supply.
The Managing Director is not satisfied with the budgeted profitability and hence he
has passed on the aforesaid draft budget to you for review.
Required:
(i) Set an optimal product mix for the next year and find its profit.
(ii) The company has been able to locate a source for the purchase of an
additional 20,000 kg of raw materials at an enhanced price. The transport cost
of this additional quantity of raw material is Rs. 10,000. What is the maximum
price per kg that the he company for the additional quantity of raw material can
offer.
Question 21
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CA Final – SCM & PE By CA Purushottam Aggarwal
Particulars Products
A B C
Direct materials 15 19 25
Direct labour 7 5 11
Variable overhead 3 6 4
Selling price 30 38 50
If sale of Product A exceeds 50 units a day, the selling price is expected to fall to Rs.
29 a unit for each additional unit; if sale of C exceeds 20 units a day, the selling
price is expected to fall to Rs. 49 a unit; and if sales of B exceeds 15 units a day, the
price is expected to fall to Rs. 37 a unit.
The company works as per eight-hours a day and on an average 40 minutes daily
are taken up by machine setting up time. The constraint is the machine capacity.
Workout the optimum level of production that would yield maximum profits for the
company.
Question 22
ABC Company manufactures two products. Each product passes through two
departments A and B before it becomes a finished product. The data for a year are
as under -
Required:
1. State How Much should be produced and sold in the year under review to
maximize the profit? State the number of units of that product and the resultant
contribution.
Question 23
Based on the following information determine the product-mix to give the highest
profit, if atleast two products are produced:
Product X Y Z
Only 9,200 hours are available for production at a cost of Rs. 20 per hour and
maximum 50,000 kgs of material @ Rs. 20 per kg, can be obtained. (Only product
mix quantities are to be shown, calculation of Total Profit at that product mix not
required to be shown.)
Question 24
Particulars A B C
season)
Material Cost and Variable Production Overheads are the same for the peak-season
and off-season. Variable Selling Overheads are not incurred in the off-season. Fixed
Costs amount to Rs. 26,780 for each season, of which Rs. 2,000 is towards Salary
for Special Technician, incurred only for Product B, and Rs. 4,780 is the amount that
will be incurred on after-sales warranty and free maintenance of only Product C, to
match competition.
Labour force can be inter-changeably used for all the products. During peak-season,
there is labour shortage and the maximum labour hours available are 1,617 hours.
During off-season, labour is freely available, but demand is limited to 100 units of A,
115 units of B and 135 units of C, with production facility being limited to 215 units
for A, B and C put together.
1. Advise the Company about the best product mix during the peak-season for
maximum profit.
Question 25
A company manufactures two products A and B. using imported raw materials. The
selling prices of these products are A Rs. 144. B Rs. 216. The standard cost data
are as under:
Raw material P 15 20
Q 5 20
Department 1 24 36
2 12 24
3 36 —
4 — 48
The company operates a 8 hour shift for 300 days in a year and the number of
workers engaged in each department is given below: The number of employees
cannot be increased or transferred from one department to another.
1 45
2 24
3 27
4 36
Required:
(i) How many units of each product should be manufactured and what is the
resultant maximum profit ?
(ii) If only one product is to be manufactured by the company.
(a) Which of the products would give the maximum profit and what is the
Question 26
ABC Limited provides two cleaning services for staff uniform to hotels and local
public. One service is of laundry services and other is of dry cleaning service. Both
services required same raw material but in different quantities. Details of expected
resources requirement, revenues and costs for each service are as follows –
Particulars Laundry Service (Rs. Per Dry Cleaning (Rs. Per
service) service)
** Fixed cost per service is based upon budgeted demand for December 2017. ABC
limited has already prepared its budget for December based on 8000 laundry
services & 10500 dry cleaning services.
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CA Final – SCM & PE By CA Purushottam Aggarwal
ABC limited has entered into a contract approx. 1 year before with a local hotel.
Under this contract ABC limited has guaranteed 1,200 laundry services and 2,000
dry cleaning services every month. In case company does not fulfill terms
guaranteed under contract then company will be under severe financial penalties.
Required –
Question 28
A paint manufactures 2,00,000 per annum medium-sized tins of ―Spray Lac Paints‖
when working at normal capacity It incurs the following costs of manufacturing per
unit:
Particulars Rs.
Each unit (tin) of the product is sold for Rs. 20 with variable selling and
administration expenses of Rs. 2 per tin.
During the next quarter only 10,000 units can be produced and sold. Management
plans to shut down the plant estimating that the fixed manufacturing cost can be
reduced to Rs. 60,000 for the quarter.
When the plant is operating, the fixed overheads are incurred at a uniform rate
throughout the year. Additional costs of plant shut-down for the quarter are
estimated at Rs. 12,000.
Required –
a) To express your opinion, along with the calculations as to whether the plant
should be shut down during the quarter, and
b) To calculate the shut-down point for quarter in units of products (i.e., in terms
of number of tins).
Question 29
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CA Final – SCM & PE By CA Purushottam Aggarwal
ABC Limited has prepared a flexible budget for the coming quarter. The following
information is provided at different level of production –
However due to recession the company will have to operate at 50% capacity, in the
coming quarter, selling prices has to be lowered to an uneconomic level and
expected sales revenue for the coming quarter shall be Rs. 49,500. But it is
projected that in the next quarter following the coming quarter, the concern will
operate at 75% capacity and generate a sales revenue of Rs. 90,000.
a) The present fixed cost for the quarter would be reduced to Rs. 11,000.
b) There will be cost of Rs. 7,500 for closing down operations.
c) There would be additional maintenance cost of Rs. 1,000 for quarter.
d) There would be an one time cost of Rs.4,000 in re-opening the plant.
You are required to advise whether the factory should be kept operational during the
coming quarter and also what will be the profit at 75% capacity utilization level.
Question 30
If Moonlite Limited operates its Plant at normal capacity it produces 2,00,000 units
from the Plant 'Meghdoot'.
Total 135.00
Direct Labour Cost represents the compensation to highly-skilled workers, who are
permanent employees of the Company. The Company cannot afford to lose them.
One labour hour is required to complete one unit of the product.
The Company sells its product for Rs. 200 per unit with Variable Selling Expenses of
Rs. 16 per unit. The Company estimates that due to economic down turn, it will not
be able to operate the Plant at the normal capacity, at least during the next year. It is
evaluating the feasibility of shutting down the Plant temporarily for one year.
If it shuts down the Plant, the Fixed Manufacturing Overhead will be reduced to Rs.
1,25,000. The Overhead Costs are incurred at a uniform rate throughout the year. It
is also estimated that the additional cost of shutting down will be Rs. 50,000 and the
cost re-opening will be Rs. 1,00,000.
The rates of Variable Costs are 90% of the Normal Rates due to the current volume
of operation. There is adequate market demand. For any lower volume of operation,
the rates would go back to the Normal Rates.
Facilities released by discounting Division C cannot be used for any other purpose.
Evaluate the decision to discontinue Division C using Relevant Cost Approach.
Question 32
The management of ABC Limited is considering the closure of one of its operations,
Department 3 and financial accountant has submitted the following information –
Department 1 2 3 Total
Cost of Sales
(Rs.)
Additional Information:
Required:
Question 33
ABC Ltd has been approached by a customer who would like a special job to be
done for him, and who is willing to pay Rs. 40,000 for it. The job would require the
following materials.
Resale Value
B 2,000 600 Rs. 2 p.u Rs. 1.00 p.u Rs. 3.00 p.u
C 1,000 700 Rs. 3 p.u Rs. 2.00 p.u Rs. 4.00 p.u
D 200 200 Rs. 4 p.u Rs. 3.00 p.u Rs. 9.00 p.u
Material B is used regularly by ABC Ltd and if units of B are required for this job,
they would need to be replaced to meet other production demand.
Material C and D are in stock as the result of previous over - buying and they have a
restricted use. No other use could be found from material C, but the units of material
D could be used in another job as substitute for 300 units of material E, which
currently costs Rs. 5 per unit (of which the Company has no units in stock at the
moment).
Compute the relevant costs of materials for deciding whether or not to accept the
offer.
Question 34
Buildico, a Company that builds houses presents the following facts relating to a
certain Housing Contract that it wishes to undertake- M14
(1) The CEO's and Marketing Director's food and hotel expenses of Rs. 3,750 were
incurred for a meeting with a prospective client.
(2) 1,200 kgs of Raw Materials Z will be required for the house. Inventory of Z
available is 550 kg. It was purchased at Rs. 580 per kg. It is used by Buildico in
other projects. Its Current Market Price is Rs. 650 per kg. Its Resale Value is Rs.
350 per kg.
(3) The House will require 90 hours of Engineer's time. The Engineers are paid a
fixed monthly salary of Rs. 47,500 per Engineer who can work 150 hours a month.
Spare time is not available now and an Engineer has to be hired for this house for
one month. He cannot be used in any other project once he does this contract.
(4) Buildico will use a special Earthquake-proof Foundation Material. This was
developed by Buildico at a cost of Rs. 30,000 for some other project that had to be
abandoned. If it does not use it in this project, it can use it in some other project and
charge the Client Rs. 50,000 for it.
A list of items is given below. You are required to name the type of cost and state
whether it is relevant or not in calculating the cost of the given Housing Project:
Question 35
A company manufactures a wide range of fashion fabric. The company is
considering whether to add a further product ―BEST ‖ to the range. A market
researcher survey recently undertaken at a cost of Rs. 1,00,000 suggest that
demand for ―BEST‖ will last for only year during which 50,000 unit could be sold
atRs.1,000 per unit.
The following information is available regarding the cost of manufacture ―BEST‖.
Raw material: Each product requires four types of raw material Ml, M2, M3, M4 .
Ml: For every unit of best, one kg of Ml is required. At present material Ml is not
available in stock. Current resale value of Ml, isRs.2 per kg and Current replacement
cost of Ml isRs.2 kg.
M2: Each unit of best requires two units of M2. The current stock of M2 are 1,50,000
units lying in godown, which has no other use. The current resale value is Rs. 2 per
unit or it can be used in place of another material R2, current replacement cost of R
2 isRs.3 per unit.
M3: Material M3 is also in stock but it is unlikely that any additional supply can be
obtained for some considerable time because of an industrial dispute. At present
time material M3 can be used normally in producing a product Z which has selling
price = 450 per unit and total variable cost (excluding cost of material M3) is 100 per
unit and one unit of Z requires five units of M3. Each unit of best requires one unit of
M3. Current stock available = 2,00,000 units of M3.
Labour: Each product requires 2 hour of skilled (grade I), 3 hours unskilled and 4
hours of Semi-skilled labour, Skilled labour (Grade I) rate Re 1 per hour and skilled
labour (Grade I) is employed on a casual basis.
Semi-skilled labour is presently engaged in meeting the demand for product ―L‖
which required 4 hour of semi-skilled labour. The contribution from sale of 1 unit of
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CA Final – SCM & PE By CA Purushottam Aggarwal
―L‖ = 24 current wage rate of semi skilled = 2 per hour semi-skilled labours are in
short supply.
Supervisory labour cost =Rs.2,00,000
Supervisory staff will remain whether or not the contract is accepted. Only two of
them can replace the other position where salary isRs.90,000 if contract not to be
accepted.
Straight-line depreciation has been charged on each machine for each year of its
life. The company owns a number of MT 4 machines, which are used regularly on
various products. Each MT 4 is replaced as soon as it reaches the end of its usual
life.
MT 7 machines are no longer used and the one which would be used for ‗Best‘ is
the only one the company now has. If it was not used to produce ‗Best‘, it would be
sold immediately.
Per Unit
All activities undertaken by Co. is job costed using full, absorption, costing in order
to derive a profit figure for each contract. If the contract for Best is accepted it will be
treated as a separate job for routine costing purposes. The decision to accept or
reject the contract will be taken in sufficient time to enable its estimated, effects to
be incorporated in the next year‘s budgets and also in the calculations carried out to
derive the overhead recovery rate to be used in the forthcoming year.
Question 36
A newspaper presently sells 1,00,000 copies of its morning daily. It wants to publish
evening daily. Particular are:
Sale of morning daily will fall @ 1 copy for every 10 copies sold of evening daily.
Calculate Break-even sales for evening daily per week.
Question 37
The budgeted results of A Ltd. are as under:
X 2,50,000 50 20
Y 4,00,000 40 32
Z 6,00,000 30 48
12,50,000 100
Question 38
ABC Ltd manufactures a semi-conductor for which the cost and price structure is
given below:
Variable Overhead 50
The product is manufactured by a machine, whose Spare Part costing Rs. 2,000
needs replacement after every 100 pieces of output. This is in addition to the above
costs. Assume that no defectives are produced and that the spare part is readily in
the market at all times at Rs. 2,000.
1. Prepare profitability statement for production levels of 2,000 units & 3,000 units,
when Fixed Cost = Rs. 1 Lakh.
2. What is the Break Even Point (BEP) for the above data?
3. Comment on the BEP, if the Fixed Cost can be reduced to Rs. 1,80,000 from the
existing level of Rs. 2 Lakhs.
Question 39
Satish Enterprises are leading exporters of Kid's Toys. J Ltd of USA has approached
Satish Enterprises for exporting a special toy named "Jumping Monkey". The order
will be valid for next three years at 3,000 toys per month. The Export Price of the
Toy will be $4. Cost data per Toy is as follows -
Materials Rs. 60
Labour Rs. 25
The Toys will be packed in lots of 50 each. For this purpose a Special Box, which
will contain the 50 Toys will have to be purchased, cost being Rs. 400 per box.
Satish Enterprises will also have to import a Special Machine for making the Toys.
The Cost of the Machine is Rs. 24,00,000 and Duty thereon will be at 12%. The
Machine will have an effective life of 3 years and Depreciation is to be charged on
straight- line method. Apart from Depreciation, annual Fixed OH is estimated at Rs.
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CA Final – SCM & PE By CA Purushottam Aggarwal
4,00,000 for the 1st year with 6% increase in the 2nd year. Fixed OH are incurred
uniformly over the year.
Assuming the average Conversion Rate to be Rs. 50 per $, you are required to:
1. Prepare monthly and yearly profitability statements for 1st year and 2nd year
assuming production at 3,000 toys per month.
2. Compute a monthly and yearly break-even units in respect of the 1st year.
3. In what contingency can there be second Break-Even Point for the month and for
the year as a whole?
Question 40
Electro Life Ltd is a leading Home Appliances manufacturer. The Company uses JIT
manufacturing process, thereby having no inventory. Manufacturing is done in batch
size of 100 units which cannot be altered without significant cost implications.
Although the products are manufactured in batches of 100 units, they are sold as
single units at the market price. Due to fierce competition in the market, the
Company is forced to follow Market Price of each product. The following table
provides the financial results of its four unique products -
Product A B C D Total
Since the Company is concerned about loss in manufacturing and selling of two
products,it has approached you to clear picture on its products and costs. You have
conducted adetailed investigation whose findings are below -
The Overhead Absorption Rate of Rs. 2 per Machine Hour has been used to
allocate Overheads into the above product costs. Further analysis of the OH Cost
shows that some of it is caused by the number of machine hours used, some is
caused by the number of batches produced and some are product-specific Fixed
OH that would be avoided if the product were discontinued. Other General Fixed OH
Costs would be avoided only by the closure of the factory. Numeric details are
summarized below -
Product Specific Fixed OH: (A Rs. 10,00,000 B Rs. 1,00,000 C Rs. Rs.14,00,000
2,00,000 and D Rs. 1,00,000)
Product A B C D Total
Hours
1. Prepare a Profitability Statement that is more useful for decision-making than the
Profit Statement given above.
2. Calculate the Break Even Volume in Batches and also in approximate units for
Product 'A'.
Question 41
Material Rs.70
Installed capacity 20,000 units. Normal capacity 10,000 units. Selling overhead
(fixed) Rs. 1.00,000. Under an agreement with the union, labour has to be paid for
minimum 1,00,000 hours For labour hours in excess of 1,50,000 hours, labour has
to be paid at the rate of Rs. 12 per hour.
(i) Find BEP.
(ii) Find BEP if fixed selling overhead to Rs. 3,95,000
(iii) Find BEP if fixed selling overhead increases to Rs. 6,00,000.
Question 42
The Columbus Hospital operates a general hospital but rents space and beds to
separate entities for specialized areas such a skin, pediatrics, maternity, psychiatric,
and so on. Columbus charges each separate entity for common services to its
patients such as meals and laundry and for administrative services such as billing,
collections and so. Space and bed rentals are fixed for the year.
For the entire year ended 30th June, the Skin Department at Columbus Hospital
charged each patient an average of Rs. 65 per day, had a capacity of 60 beds,
operated 24 hours per day for 365 days and revenue of Rs.11,38,800.
Expenses charged by the hospital to the Skin Department for the year ended 30th
June are given in given Table A.
The only personnel directly employed by the Skin Department are supervising
nurses, nurses and assistant. The hospital has minimum personnel requirements
based on total annual patient days. Hospital requirements of personnel are given in
Table B.
Table A: Expenses (Skin Department)
Basis of Allocation
Dietary 42,952
Janitorial 12,800
Laundry 28,000
Laboratory 47,800
Pharmacy 33,800
Repairs 5,200
General 1,31,760
services
Rent 2,75,320
2,62,800 5,00,000
10,000-14,000 21 11 4
14,001-17,000 22 12 4
17,001-23,725 30 16 10
23,726- 25,550 35 18 15
25,551-27,375 40 18 15
27,376-29,200 40 20 15
Question 43
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CA Final – SCM & PE By CA Purushottam Aggarwal
Navbharat Commerce College, Bombay, has six sections of B.Com and two
sections of M. Com. with 40 and 30 students per section, respectively. The college
plans one day pleasure trip around the city for the students once in an academic
session during the winter break to visit park, zoo, planetarium and aquarium.
A transporter provides the required number of buses at a flat rate of Rs. 700 per bus
for the aforesaid purpose. In addition, a special permit fee ofRs. 50 per bus is
required to be deposited with city Municipal Corporation. Each bus is 52 seater. Two
seats are reserved for teachers who accompany in each bus. Each teacher is paid a
daily allowance ofRs. 100 for the day. No other costs in respect of teachers are
relevant to the trip.
The approved caterers of the college supply breakfast, lunch and afternoon tea,
respectively at Rs. 7, Rs. 30 and Rs. 3 per student.
No entrance fee is charged at the park. Entrance fees come to Rs. 5 per student
both for the zoo and the aquarium. As regards planetarium, the authorities charge
block entrance fee as follows for group of students of educational institutions
depending upon the number of students in the group:
Up to 100 200
101-200 300
Cost of prizes to be awarded to the winners in different games being arranged in the
park depending upon the strength of students in a trip. Cost of prizes to be
distributed are:
Up to 50 900
51-125 1,050
126-150 1,200
151-200 1,300
201-250 1,400
To meet the above costs, the college collects Rs. 65 from each student who wish to
join the trip. The college releases subsidy of Rs. 10 per student towards the trip.
Required
a) Prepare tabulated statement of total costs at the levels of 60, 120. 180, 240
and 300 students indicating each item of cost.
b) Compute average cost per student at each of the above levels.
c) Calculate the number of students to break even for the trip as the college
suffered loss during the previous year despite 72 percent of the students
having joined the trip.
Question 44
The Company has begun Activity Based Costing of Fixed Costs and has presently
identified two Cost Drivers, viz. Production Runs and Engineering Hours. Of the total
Fixed Costs presently at Rs. 96,000, after the above, Rs. 72,100 remains to be
analysed. There are changes as proposed above for the next production period for
the same volume of output.
(i) How many units and in how many Production Runs should X Ltd produce in the
changed scenario in order to break-even?
(ii) Should X Ltd continue to break up the remaining Fixed Cost into Activity Based
Costs? Why?
Question 45
A manufacturing company produces ball pens that are printed with the logos of
various companies. Each pen is sold for Rs. 5 per unit. Costs are as follows –
Set-ups 225 40
Other Data –
Required –
Question 46
The management of ABC Limited is alarmed at the high under utilization of installed
capacity. The workers of ABC Ltd have a very strong union. Any attempt by
management to increase production is opposed by the union on the ground that the
workers are working as per nonnal standards and that extra unit produced does not
fetch any rewards to workers. The management, having realized that there is
capacity, puts forth incentive scheme, which rewards the workers, staff as well as
management.
As per the proposed scheme, the after tax incremental profit will be shared by all as
follows:
30% to be ploughed back, 40% to be shared by workers and 30% to be shared by
staff
In case there is a loss, no reward will be given to anyone. The changes in capacity
Selling overheads 99
The above figures include fixed cost to the extent of 20% works overheads. 30%
administration overheads and 100% selling expenses. The company pays 50% tax.
However, the reward under the scheme given to workers (not staff) is tax deductible.
You are required to calculate the annual share in absolute amount for each of the
beneficiary at various levels at an interval of 1% from 1% to 8% increase in
production over present target.
Question 47
X Ltd wants to replace an old Machine. Three alternatives M1, M2 and M3 are under
consideration, with associated data as -
Particulars M1 M2 M3
You are required to compute the Cost Indifference Points for these alternatives.
Based on these points suggest a most economical alternative Machine to replace
the old one when the expected level of Annual Production is 1,200 units.
Question 48
PV ratio of a business is 30%. BER is 40% of the capacity. Capital turnover is 2.5
and profit is 15% on capital employed. At what level (% of the capacity) the business
is operating ? (Turnover = sales/C.E.)
Question 49
The organization pays its guest performer Rs. 18,000 per concept and anticipates
ticket sale price to be Rs. 45,000 per concert. The music society also incurs costs of
approximately Rs.10,000 per concert for marketing and advertising. The
organization pays it‘s part time artistic director Rs. 3,30,000 per year and expects to
receive Rs. 3,00,000 in donations in addition to selling of tickets.
Required –
1. Calculate number of concerts The Sound Well Music Society needs to hold for
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CA Final – SCM & PE By CA Purushottam Aggarwal
break-even?
2. In addition to the organization‘s part-time artistic director, The music society
would like to hire part time marketing director Rs. 2,55,000 per year. What is
Break-Even-Point? The Music Society anticipates that the addition of
marketing director would allow the organization to increase the number of
concerts to 41 per year. What is the music society‘s operating income/(Loss) if
it hires the new marketing director?
3. The music society expects to receive a grant that would provide the
organization with an additional Rs. 1,70,000 toward the payment of the
marketing director‘s salary. What is the Break-even point if the music society
hires the marketing director and receives the grant?
Question 50
Expert Roadways Services Pvt. Ltd. Is planning to run a fleet of 15 buses in Birpur
City on a fixed route. Company has estimated a total of 2,51,85,000 passenger
kilometers per annum. It is estimated that buses will have 100% load factor. Buses
are purchased at a price of Rs. 44,00,000 per unit whose scrap value at the end of
5th year shall be Rs. 5,50,000. Seating capacity of a bus excluding seat of driver is
42. Each bus can give a mileage of 5 kmpl. Average cost of fuel is Rs. 66 per litre.
Cost of Lubricants & Sundries per 1,000 km would be Rs. 3,300. Company will pay
Rs. 27,500 per month to Driver and two attendants for each bus.
Other Annual Charges per Bus: Insurance – Rs. 55,000, Garage Charges Rs.
33,000, Repairs & Maintenance Rs. 55,000. Route permit charges upto 20,000 km
is Rs. 5,500 and Rs. 2,200 for every additional 5,000 km or part thereof.
Required –
a) Calculate a suggested fare per passenger per km taking into account markup
Question 51
The Selling Price of a product for the next accounting period is Rs. 110, and the
Variable Cost is estimated to be Rs. 70 per unit. The Budgeted Fixed Costs for the
period are Rs. 1,63,500. Estimated Sales for the period are 5,000 units, and it is
assumed that the probability distribution for the estimated sales quantity is normal
with a Standard Deviation of 125 units. The Selling Price, Variable Cost and Total
Fixed Cost are assumed to be certain. What is the probability of profits being greater
than Rs. 40,000?
Question 52
S limited is engaged in manufacturing activities. It has received a request from one
of its important customer to supply a product which will require conversion of
material ‗M‘ which is a non-moving item.
The labour will be re-deployed from other activities. It is estimated that the
temporary redeployment will not result in loss of contribution. The employees to be
re-deployed are permanent employees of the company.
Required - Estimate the minimum price to be charged from the customer so that the
company is not worse off by executing the order.
Question 53
ABC Co Ltd which produces household electronic gadget HIFY had 90% capacity
utilization (4.5 lakh units) current year of Department A.
i) Cost Sheet for Department A is given below: Rs. Lakhs
Sales 8100
iii) The company proposes to acquire a new technology at a cost of Rs. 100 lakhs
one time royalty to add additional features in the product with introduction of
two components ―CD‘ and ―EF‘ each in place of one component ‗AB‘ in each
product.. Variable costs of production of each component ‗CD‘ and ―EF‖ in
department B are expected to be Rs.200 and Rs.250 respectively. Additional
investment required for facilities to produce components ‗CD‘‘ and :EF‖ will be
Rs.400 lakhs at a capital cost of 15%, annual Maintenance cost of machine
Rs. 20 lakhs, other fixed cost in the department B is expected to remain same.
Market Research department indicates that a rise in the price by Rs.400 per
unit of new product will be safe to ensure sale of its product in domestic
market.
iv) The company is expected to receive an export order for the new product at a
price ofRs.1800 per unit. The export order can be executed by way of going
for 100% capacity utilization. Special shipping cost for the export will be Rs.25
lakhs and fixed cost for both the departments will remain unaltered.
Understanding that the company‘s policy of charging royalty for technology as
deferred Revenue expenses equally over 4 years, advise the management giving
your calculation details on
i) Whether to go for modification of the product?
ii) Whether the export order to be accepted?
Question 54
XYZ Ltd. received an order from a valuable client for supply of 6,00,000 pieces of
components @ Rs.900 unit a year at a rate of 50,000 pieces per month. Cost of
manufacturing of the component is estimated as:
Rs./Unit
Material 600
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Labour 120
Variable overhead 40% of labour cost 48
Fixed Production overheads is Rs.50 lakhs.
There is a penalty/reward clause of Rs.40.00 per unit for supplying less / more than
50,000 units per month. To adhere to the schedule of supply, company procured a
special machine costing Rs.40 lakhs, which is expected to fetch Rs.10 lakh after the
end of the contract of supply of components. After supply of machine, the supplier of
the machine offered another advanced version of machine ( new in the market) with
20% increase in Labour productivity but there will be material wastage 0.5% . The
new machine cost is Rs.60 lakhs but will have no resale value after the end of the
job. If the new machine is purchased, the old machine supplied will be taken back at
Rs.24 lakhs. With the new machine, maintenance cost will increase by Rs.1,00,000
per month and the entire job is expected to be completed within 10 months. Advise
whether the company should go for the improved version machine.
Question 55
A manufacturer of industrial pump buys 30,000 components annually from a
supplier@ Rs.300 per set. Purchase Department has received request from vendor
for an upward revision of price per set of component by 5% from the next financial
year. Production manager is in favour of manufacturing the 40,000 components in
the factory itself so that the same may be used to match its enhanced capacity of
manufacturing pumps. He has submitted the following cost estimates
The Manager has proposed for procurement of required machines the cost estimate
for which Rs.20 lakhs and life of the same is 10 years. Additional Maintenance cost
per annum will be Rs.1.00 lakhs which is not included in variable factory overheads.
Loan arrangement with the bank of Rs.25.00 lakhs against additional working
capital requirement @ 12% per annum has been finalized. On critical analysis, it has
been seen that 30% of the factory overheads included in the cost of component are
fixed in nature.
Question 56
A research project, to date, has cost a company Rs. 2,50,000 and is under review. It
is anticipated that, should the project be allowed to proceed, it will be completed in
about one year and can be sold for Rs. 4,00,000. The following additional
information is available:
(i) Materials have just been received for Rs.60,000. These are extremely toxic,
and if not used in the project, have to be disposed of by special means at Rs.
15,000.
(ii) Labour :Rs.75,000. The men are highly skilled. If they are released from the
Research Project, they may be transferred to the Works Department of the
company and consequently the sales could increase by Rs. 1,50,000. The
accountant estimates that the prime cost of those sales would be Rs. 1,00,000
and the overhead absorbed (All fixed) would amount to Rs.25,000.
(iii) Research staff:Rs. 1,60,000. A decision has already been taken that this will
be the last major piece of research undertaken and consequently, when work
on the project ceases, the staff involved will be made redundant. Redundancy
and severance pay have been estimated at Rs.25,000.
(iv) Share of General Building Expenses : Rs.35,000.
The Managing Director is not sure what is included in this amount, but the accounts
staff charge similar amounts each year to each department.
You are required to advise whether the project should be allowed to proceed and
explain the reasons for the treatment of each of the amounts above in your analysis.
Question 57
Question 58
Sales Commission 60 40
Each unit of the product incurs costs in the Company's two Departments P and Q.
The total capacity available for the month under review is budgeted to be 1,400
hours in Department P and 2,000 hours in Department Q. The capacity costs
amount to Rs. 14,000 and Rs. 20,000 respectively per month for P and Q
irrespective of the level of usage made of it. The number of hours required in each
of these departments to complete one unit of output is -
The maximum output which the Company can sell in the month is restricted to 400
units of either of these products. You are required to formulate the Linear
Programming Model and solve it graphically to determine the optima! product mix
and profit.
Question 59
The Costs and Selling Prices per unit of two products manufacturing by a Company
are as under:
Profit 30 40
Direct Materials - 480 kg, Direct Labour Hours - 400 hours and Painting Hours - 200
hours.
2. State the Optimal Product Mix and the monthly profit derived from your solution in
(1) above.
Question 60
X Y
A 36 06 108
B 03 12 36
C 20 10 100
The cost of product X is Rs. 20 and that of Y is Rs. 40. Formulate the LPP for the
above and minimize the Total Cost. Solve the problem by using Graphic Method.
Question 61
A Firm makes two products X and Y, and has a total production capacity of 16
tonnes per day. X and Y are requiring the same production capacity. The Firm has a
permanent contract to supply at least 3 tonnes of X and 6 tonnes of Y per day to
another company. Each tonne of X require 14 machine hours of production time and
each tonne of Y requires 20 machine hours of production time. The daily maximum
possible number of machine hours is 280. All the Firm's output can be sold, and the
profit made is Rs. 20 per tonne of X and Rs. 25 per tonne of Y.
Question 62
A Company which has developed a new machine has obsen/ed that the time taken
to manufacture the first machine is 600 hours. Calculate the time which the
Company will take to manufacture the second machine if the actual Learning Curve
Rate is - (i) 80 % and (ii) 90%. Explain which of the two learning rates will show
faster learning.
Question 63
Question 64
A Firm has received an order to make and supply 8 units of a standard product,
which involves intricate labour operations. The first unit was made in ten hours. It is
understood that this type of operations is subject to 80% learning effect. The
workers are paid a wage rate of Rs. 12 per hour.
1. What is the Total Time and Labour Cost required to execute the above order?
2. If repeat order of 24 units is also received from the same customer, what is the
Labour Cost necessary for the 2nd order?
Question 65
M Ltd manufactures a special product purely carried out by manual labour. It has a
capacity of 20,000 units. It estimates the following cost structure:
It is estimated that at the current level of efficiency, each unit requires one hour for
the first 5,000 units. Subsequently, it is possible to achieve 80% learning rate. The
market can absorb the first 5,000 units at Rs. 100 per unit. What would be the
Minimum Selling Price acceptable for an order of 15,000 units for a prospective
client?
Question 66
A Company has just completed the manufacture of 40 units of a new product. The
manufacturing costs are -
Total 5,50,000
The Company received another order for 120 units of this product for which the
Company quoted, based on its policy on absorption cost basis, a price of Rs. 15,625
per unit. The Customer struck the order to Rs. 11,000 per unit. The Company is
short of work and so is keen to take up more orders but it is reluctant to accept this
order price because it is against the policy to accept any price before its cost. The
Company experiences a Learning Curve of 90%
Compute the gain or loss arising from acceptance of the order of Rs. 11,000 p.u.
and advise the Company suitably.
Question 67
The Gifts Company makes mementos for offering Chief Guests & other Dignitaries
at functions. A Customer wants 4 identical pieces of hand-crafted gifts for 4
Dignitaries invited to its function.
For this Product, the Gifts Company estimates the following costs for the 1 st unit of
the product:
Particulars Rs.
90% Learning Curve ratio is applicable & 1 labourer works for one Customer's order.
1. What is the price per piece to be quoted for this customer if the Targeted
Contribution is Rs. 1,500 per unit?
delivery to the customer, can the price at Question 1 above be quoted? Why?
Question 68
A Company has made 6,000 units of a product. The labour to make each thousand
unit is as follows -
1. Estimate the Learning Rate for this product using 1,000 units of the product as the
unit of production.
Question 69
1. Calculate the Selling Price per machine of the first lot of 20 machines.
2. What reduction in Selling Price can the Company allow in respect of the repeat
order?
Question 70
An agro-products producer company is planning its production for next year. The
following information is relating to the current year:
Products/Corps A1 A2 B1 B2
The land that is being used for the production of B1 and B2 can be used for either
crop, but not for A1 and A2. The land that is being used for A1 and A2 can be used
for either crop, but not for B1 and B2. In order to provide adequate market service,
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CA Final – SCM & PE By CA Purushottam Aggarwal
the company must produce each year at least 2,000 tons each of A1 and A2 and
1,800 tons each of B1 and B2.
Required:
Question 71
A Company Produces three products, details of costs & sales Value per unit is given
below:
Products (Rs./Unit)
A B C
(i) 80% of Direct Material is imported @ Rs.500 per kg. Import is restricted to
5,000 kg.
(ii) Capacity available for production of A and C is restricted to 6250 and 6000 hrs
respectively.
(iii) Fixed Cost is Rs.20 lakhs,
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CA Final – SCM & PE By CA Purushottam Aggarwal
Required -
(a) Workout most profitable product mix and profit.
(b) Company identifies a source of alternative material as replacement of
imported material. Availability of material will not be restricted but carrying
cost will be @ Rs.2.75 per kg.
The company plans to modify its process to suit the new material and enhance its
capacity for all products by 20% above the present one with an investment of Rs. 25
lakhs at an interest of cost of 15%. Company expects 30% rise in is profit. Find out
the price the company can pay to alternative source.
Question 72
An agriculturist has 480 hectares of land on which he grows potatoes, tomatoes,
peas and carrots. Out of the Total area of land, 340 hectares are suitable for all the
four vegetables but the remaining 140 hectares of land is suitable only for growing
peas and carrots. Labour for all kinds of farm work is available in plenty.
The market requirement is that all the four types of vegetables must be produced
with a minimum of 5,000 boxes. The farmer has decided that the area devoted to
any crop should be in terms of complete hectares and not in fractions of a hectare.
The other limitation is that not more than 1,13,750 boxes of any one vegetable could
be produced.
The Relevant Data Concerning Production, Market Prices and costs are as
under:
hectare
Costs:
Direct labour:
Fixed
expenses per
annum:
Growing Rs1,24,000
General Rs.1,50,000
Administration
It is possible to make the land presently suitable for peas and carrots, viable for
growing potatoes and tomatoes if certain land development work is undertaken. This
work will involve a capital expenditure of 6000 per hectare, which a bank is prepared
to finance at the rate of interest of 15% p.a. If such improvement is undertaken, the
harvesting cost of the entire crop of tomatoes will decrease on an average by 2.60
per box.
Required:
1. Calculate, within the given constraints, the area to be cultivated in respect of
each crop to achieve the largest total profit and the amount of such total profit
before land development work is undertaken.
2. Assuming that the other constraints, advise the cultivator whether the land
development scheme should be undertaking and if so the maximum total profit
that would be achieved after the said development scheme is undertaken
Question 73
ABC manufactures 3 products, X, Y and Z, which are made up from 3 parts A, B and
C in the following proportion:
Products Proportion
X 1Aand 1B
Y 2A, 2B and 1C
Z 3A, 1B and 2C
Selling price 6 14 24
Direct 2 2 5
materials
Time cost 2 9 12
‗Time cost‘ which covers the cost of Direct Labour and Overheads is valued at Rs. 6
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CA Final – SCM & PE By CA Purushottam Aggarwal
per hour. All parts can be sold individually at the above selling price, but the market
demand, which it is hoped, will be satisfied from the expansion will be for the
products. The further expansion would provide an additional 58,000 hours and the
additional market demand for the products would be 5,000 units each. Additional
fixed expenses related to the expansion are expected to be Rs. 15,000. Prepare a
statement showing how the additional capacity available should be used to generate
maximum additional profit.
Question – 74
ABC Ltd. manufactures and markets two products A and B. the demand in the
market of which fluctuates with the prices quoted. As a result of the deliberations of
its recent Sales Conference the following data was agreed upon as a working basis:
Product A B
Selling price per unit (Rs.) 32 30 28 22 20 18
Expected demand per month Nos. 900 1,000 1,500 1,600 2,000 3,000
8 labour hours are required to produce product A and 4 labour hours to produce
product B and the maximum capacity of the factory is restricted to 20,000 labour
hours per month.
Particulars A B
(Rs.) (Rs.)
Direct material 4 3
Direct Labour 6 5
Variable 10 6
Overheads
20 14
Question 75
P, Q, R and S are the four types of products that appear in the price list of a
company with a note that a particular item or items may not be available on demand.
The demand for the products is more than what the company can supply and non-
supply of any of them will have no effect on the demand for the rest.
For the next year, the company has made the following tentative budget that will use
up all the available supplies of material and labour in that year.
A linear programming was made by the company‘s accountant who stated that the
opportunity costs or the shadow prices came to Rs. 2.50 per labour hour and Rs.
16.25 per kg of material. He also suggested the product- mix, which has since been
forgotten. The accountant has left the company. The company now asks you as
their Management Consultant to give your option about the budgeted program.
Product P Q R S
Required –
(a) Determine the optimal sales mix for the company.
(b) What difference the sales mix in (a) will make that in the tentative budget in
respect of contribution ?
Question 76
On the basis of the following information in respect of an engineering company what
is the product mix. which will give the highest profit attainable ? (Overheads are
ignored for the purpose of this question) ?
Product A B C
Question 77
Product A Product B
Question 78
A company produces three products from an imported material. The cost structure
per unit of the product as under:
Product
Particulars A B C
Direct material 50 80 60
Variable overheads 30 60 54
Question 79
A manufacturer has three products A.B and C. Current sales, cost and selling price
details and processing time requirements are as follows:
Product
A B C
The firm is working at full capacity (13,500 processing hours per year). Fixed
manufacturing overheads are absorbed into unit costs by a charge of 200% of
variable costs. This procedure fully absorbs the fixed manufacturing overhead.
Assuming that:
(i) Processing time can be switched from one product time to another.
(ii) The demand at current selling price is:
(iii) The selling prices are not to be altered; you are required to calculate the best
production programme for the next operating period and to indicate the increase in
net profit that it should yield. In addition identify the shadow price of processing
hour.
Question 80
From the following particulars, find the most profitable product mix and prepare a
statement of profitability of that product mix
Direct materials 5 kg 3 kg 4 kg
All the three products are produced from the same direct material using the same
type of machines and labour. Direct labour, which is key factor is limited to 18,600
hours.
Question 81
A company has an opening stock of 6,000 units of output. The production planned
for the current period is 24,000 units and expected sales for the current period
amount to 28,000 units. The selling price per unit of output is Rs. 10. Variable cost
per unit is expected to be Rs. 6 per unit while it was only Rs. 5 per unit during the
previous period. What is the break-even volume for the current period if the total
fixed costs for the current period is Rs. 86,000Rs. Assume that the First In First Out
system is followed, Then Assume that the Last In First Out system is followed.
Question 82
In Previous Year, the turnover of a company, which operated at a margin of safety of
25%, amounted to Rs.9.00,000 and its profit volume ratio was 33 1/3%. During
Current Year, the company estimated that although the same volume of sales as in
Previous Year would be maintained, yet the sales value would go down due to
decrease in selling price. There will be no change in variable costs. The company
proposes to reduce its fixed costs through an intensive cost reduction programme.
These changes will alter the profit volume ratio and margin of safety to 30% and
40%, respectively in Current Year.
Even if the company closed down its operations in Current Year, it would incur a
minimum fixed cost of Rs.50,000.Calculate profit both in Previous and Current
Year?
Question 83
A company manufactures two types of herbal products A and B. Its budget shows
profit figures after apportioning the fixed joint cost of Rs. 15 lakhs in the proportion of
the number of units sold. The budget for Next Year, indicates:
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A B
Profit (Rs.) 1,50,000 30,000
Selling Price/unit (Rs.) 200 120
P/V ratio (%) 40 50
You are required to advise on the option among the following if the company
expects that the number of units to be sold would be equal:
(i) Due to change in a manufacturing process,the joint fixed cost would be
reduced by 15% and the variablewould be increased by 7-1/2%
(ii) Price of A could be increased by 20% as itis expected that the price elasticity
of demand would be unityover the range of price;
(iii) Simultaneous introduction of both the options, viz., (i) and (ii) above. Also
advice on best option to choose from?
Question 84
You have been approached by a friend who is seeking your advice as to whether he
should give up his job as an engineer with a current salary of Rs. 14,800 per month
and go for business on his own assembling and selling a component which he has
invented. He can procure the parts required to manufacture the component from a
supplier.
It is very difficult to forecast the sales potential of the component, but after some
research, your friend has estimated the sales as follows:
Between 600 to 900 components per month at a selling price of Rs. 250 per
component.
Between 901 to 1,250 components per month at a selling price of Rs. 220 per
component for the entire lot.
The cost of the parts required would be Rs. 140 for each complete component.
However, if more than 1,000 components are produced in each month, a discount of
5% would be received from the supplier of parts on all purchases.
Assembly costs would be Rs. 60,000 per month up to 750 components. Beyond this
level of activity, assembly costs would increase to Rs. 70,000 per month.
Your friend has already spent Rs. 30,000 on development, which he would write off
over the first five years of the venture.
Required -
1) Calculate each of the possible sales levels at which your friend could expect to
benefit by going into the venture on his own. Calculate the break-even point of
the venture for each of the selling price. Advise your friend as to the viability of
the venture.
Question 85
A manufacturing company produces a chemical product which passes through two
processes factory and finishing. It has the capacity to process an input of 1,00,000
kgs. of raw material. Normal scrap will be 10% and 5% input in factory and finishing
processes respectively. The Realization value of such scrap is Rs. 4 and 8 per kg,
respectively, for factory and finishing processes to be credited against the cost of
respective process.
Relevant cost data for the coming year is:
In each case, the company is required to collect the raw materials from the Godown
of supplier. Variable transport cost depends upon the weight involved. The same as
under:
Supplier X Y Z
Fixed transport cost would be Rs. 1,00,000 per annum irrespective of the supplier to
be contracted. The output of the finishing process can be sold to three prospective
customers, their offer being as follows:
In case of supplies to customer A and B, the fixed delivery costs will be Rs. 1,500
per month and the variable delivery costs will be 65 paise and 36 paise per kg
Respectively.
Customer C will collect the entire output from the warehouse of the company.
Question 86
ABC Private Limited has been manufacturing track suits for athletes. Currently its
output is around 70 percent of its rated capacity of 19,000 units per annum. One
exporter has approved the sample and has offered to buy 5,000 units at a special
price of Rs. 150 per suit. At present, the Company has been selling the tracksuit @
Rs. 210 the standard cost per unit is as under:
(ii) Labour 25
What would be your advice if the exporter offers to buy 10,000 units instead of 5,000
units?
What is the minimum quotation for accepting the order ?
If order is offer by Local Market Consumer at Rs. 118 for 5,700 units could the order
be accepted.
Question – 87
A company producing a single product in its plant, sells it Rs. 25 per unit. The plant
is currently operating at full capacity of 8 lakh units in single shift and the standard
cost per unit produced is as under:
Rs
Variable overheads 2
Fixed Overheads 5
The Sales Manager has estimated that the company will lose sale of 4 lakh units
next year if something is not done about the capacity constraint. Plant capacity
could be doubled by running a second shift. This would require additional fixed costs
as under:
Rs in Lakhs
Depreciation 10.35
Total 33.5
Also a night shift allowance of 10% on Direct Labour would become payable.
Further, if annual production volume is 12 lakhs units or more, but not less, the
company can enjoy a bulk discount of 5% on purchases of all the raw materials.
Discuss the profitability of working a second shift in order to obtain the additional
Sales volume of 4 lakhs units per year.
What should be the minimum annual increase in production volume over the present
8 lakh units necessary to justify a second shift working?
Question 88
A company operates its plant on single shift basis. It can produce upto 8,000 units of
output per month without- overtime. The fixed costs on single shift basis of operation
amount to Rs. 30,000 per month. The average variable cost per unit is Rs. 10.
The output can be increased up to 15,000 units per month by working overtime. This
entails no increase in fixed costs, but the variable costs per unit during overtime will
be Rs. 12 in excess of 8,000 units up to the capacity of15,000 units. If a second
shift is worked, the maximum capacity of the second shift is 8,000 units per month.
The variable cost on second shift operation is Rs. 10.50 per unit and the incremental
fixed cost involved in the second shift is Rs. 6,000 per month. Required:
1. lf the company‘s demand for the product is 10,000 units, should the company
work overtime or second shift?
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2. At what level of output will the company consider working second shift instead
of working overtime? State the range of output for overtime working and
second shift operation.
3. During a particular month, the company predicted its demand to be 14,000
units and worked second shift. At the end of the month it was discovered that
the company‘s demand was only 11,000 units and the company accordingly
Produced only 11,000 units. Calculate the cost of prediction error.
Question 89
A company proposes to install a machine for themanufacture of a component which
at present is being purchased at Rs.24 each. There are two alternatives, namely(a)
installation of an automatic machine and (b) installation of a semi-automatic
machine. The details of the twomachines are as under:
Automatic Machine Semi-Automatic Machine
Initial cost of machine (Rs.) 9,00,000 6,00,000
Life 10 years 10years
Fixed overhead on machine
(Other than depreciation) 1,62,000 p.a. 84,000 p.a.
Variable Exp. of Component (Rs.) 12 15
The company charges depreciation on straight-line method. Scrap value of the
machine at the end of life is Nil. The demand for the components at present is
20,000 units per annum. This demand is expected to increase to 40,000 units.
Required –
(i) For each of the two volumes of output namely 20,000 and 40,000 units,
state with supporting calculations whether the components should be
purchased or manufactured by installation of machine. If your decision is
an favour of installation of machine, which model will you advice?
(ii) At what volume of output should the company change over from
purchase of components to manufactured by installation of (i) Semi-
automatic machine, and (ii) Automatic machine.
(iii) At what volume of manufacture of the components will the
company switch over from installation of one type of machine to the
other?