Assignment 2-Management and Business Finance

Question1:

The total expenses of the Fuzzy Breeze

Expenses Cost
Fixed occupancy tax per month Rs.2,000
Fixed occupancy tax per night (31 days a month) Rs.64.52

Variable occupancy tax per room per night Rs.50

Assumptions:

1. 31 days considered per month

2. Single occupancy per room per night considered as worst-case scenario.
3. Double occupancy per room per night considered as normal scenario.

Formula: Total cost = Fixed tax per night + (Variable tax per night x no of rooms)

Total cost at worst case scenario:

Total cost at Occupancy levels

0 60 85 100
Total cost incurred by the resort per night Rs.64.52 Rs.3065 Rs.4315 Rs.5065
Room assumption with single occupancy per
0 room 60 rooms 85 rooms 100 rooms
night

Total cost at normal scenario:

Total cost at Occupancy levels
0 60 85 100
Total cost incurred by the resort per night Rs.64.52 Rs.1565 Rs.2215 Rs.2565
Room assumption with double occupancy per
0 room 30 rooms 43 rooms 50 rooms
night
Question2:
Sethi Manufacturing
2a): Contribution margin = Selling cost – Variable cost.
Operating income = Contribution margin – Fixed cost.

Units sold 25000

cost in 2020 per unit Rs.150
Variable cost per unit Rs.60
Fixed cost Rs.2,50,000
Fixed cost per unit Rs.10
Contribution margin per unit Rs.90
Operating income per unit Rs.80
Total Contribution margin Rs.22,50,000
Total Operating income Rs.20,00,000

2b) Simrans Proposal

Fixed cost increase by Rs.7,75,000

Revised fixed cost Rs.10,25,000
Variable cost per unit (decrease by
30) Rs.30
Revised Variable cost Rs.30
Total units 25000
selling cost per unit Rs.150
Fixed cost per unit Rs.41
Contribution margin per unit Rs.120
Operating income per unit Rs.79
Total Contribution margin Rs.30,00,000
Total Operating income Rs.19,75,000

3c) Yes Sethi Manufacturing should accept the Simran’s proposal.

The contribution margin per unit has raised by 25% due to reduction in variable cost.
Profit volume ratio increased from 60% to 80%, we get 0.8 paise margin for every 1 rupees of selling.
Though the net profit or the operating income reduce by 1.25%, this is negligible.
The variable cost reduced by 50%, so the proposal of the Simran should be accepted.
Profit volume ration = contribution margin / selling cost.
Question3:

a) Contribution Margin Percentage

Contribution margin % 48% (Fixed cost/BEP revenue) x 100

b) Calculate the selling price if variable cost is Rs. 13 per unit

Contribution margin=(SP-VC)/SP)
0.48=((SP-13)/SP)
13=SP(1-0.48)
13=SP 0.52
SP=13/0.52

Selling price at variable cost Rs.13 per unit = Rs.25 per unit.

c) Suppose 90,000 units are sold, calculate the margin of safety in units and rupees
Margin of safety = Expected sales- BEP sales.

Margin of safety = Expected sales- BEP sales

Expected sold units 90000
BEP sales units (BEP
60000
cost/SP)
Margin of safety in units 30000
Margin of safety in rupees
Rs.7,50,000
(units X SP)

d) What does this tell you about the risk of firm making a loss? What are the most likely reasons for
this risk to increase?
The margin of safety % is 50%, the firm doesn’t make profit for the 50% of the units produced.
The variable cost % is 52%, the variable cost increases with increase in units, there is high risk that
the margin of safety will increase.
The firm should reduce the variable cost to reduce the risk.
Question4:
a) Identify the various cost drivers rate for each activity cost pool.

Budgeted
Budgeted
Regular Premium volume
Cost Pool Cost driver volume
kayak kayak (Premium
(regular kayak)
kayak)
Direct Raw
Rs.32,50,000 Rs.24,00,000 5000 3000
material No of orders
Direct labour
Rs.11,00,000 Rs.13,00,000 5000 3000
cost No of orders
Indirect labour
Rs.4,50,000 Rs.2,70,000 5000 3000
cost No of orders
Machine setup
Rs.2,43,000 Rs.1,62,000 300 200
cost No of setup
Equipment
and
Rs.11,00,000 Rs.12,50,000 11000 12500
maintenance Maintenance
cost hours
Facility rent Area Sq-ft used Rs.11,44,000 Rs.8,56,000 2860 2140
Total cost of
Rs.72,87,000 Rs.62,38,000
kayaks
Cost per kayak Rs.1,457.4 Rs.2,079.33

Regular Premium
Cost drivers rates kayak kayak
Direct Raw material 650 800
Direct labour cost 220 433.33
Indirect labour cost 90 90
Machine setup cost 810 810
Equipment and maintenance
100 100
cost
Facility rent 400 400

b) What is the budgeted cost for the unused capacity?

Unused facility 1250 sq-ft

Budgeted cost of unused facility Rs.5,00,000
c) Calculate the budgeted total cost and the cost per unit for each model.
Budgeted
Budgeted
Regular Premium volume
Cost Pool Cost driver volume
kayak kayak (Premium
(regular kayak)
kayak)
Direct Raw
Rs.32,50,000 Rs.24,00,000 5000 3000
material No of orders
Direct labour
Rs.11,00,000 Rs.13,00,000 5000 3000
cost No of orders
Indirect labour
Rs.4,50,000 Rs.2,70,000 5000 3000
cost No of orders
Machine setup
Rs.2,43,000 Rs.1,62,000 300 200
cost No of setup
Equipment
and
Rs.11,00,000 Rs.12,50,000 11000 12500
maintenance Maintenance
cost hours
Facility rent Area Sq-ft used Rs.11,44,000 Rs.8,56,000 2860 2140
Total cost of
Rs.72,87,000 Rs.62,38,000
kayaks
Cost per kayak Rs.1,457.4 Rs.2,079.33

Cost of Regular kayak=Rs.1,457.4 / kayak.

Cost of premium kayak=Rs.2,079.33 / Kayak.

d) Why might excess capacity be beneficial for Bluewater? What are some of the issues Bluewater
should consider before increasing production to use the space?
The excess capacity was not added into product cost, that benefits to give better price to the kayaks
for the customers.
The below issues to be considered before increasing the production to use the space,
1. The indirect cost will increase, as the direct labour increases.
2. Equipment and maintenance cost will increase, as the machine hour increases.
Their unused space cost is fixed, the indirect cost and equipment & maintenance cost are variable
cost, which increases with the increase of the production and will result in increase of the cost of the
kayaks.