ET 2

Shantanu Gaikwad

MBA07131 C 31/1/2022

MA

Prof. VinayGoyal

Declaration:
1. I have submitted faculty feedback 30 minutes prior to appearing in the End-Term Exam.
2. I have not copied the answer/matter in this answer booklet from my classmate, internet and any other
sources.

Signature of the Student

Answer 1

Only variable costs are to be considered for special orders

Total cost per unit for special=$14+$20+3*2/3+$2=$38
The minimum selling price per unit that should be accepted is $38 per printer

Answer 2

Shelby Industries has capacity to produce 45,000 oak shelves per year.
But they are currently selling only 40,000 shelves
That Means They have excess and unutilised capacity of 5000 shelves
Now they receive a special order of 1200 shelves
But for the special order, they do not have to pack each shelf individually instead they can pack it in bulk
Due to packaging in bulk, they will save $1.5 per shelf.
So now the Variable Cost for the special order is $25.5 per shelf i.e., ($27.00 - $1.50) per shelf.
As Shelby Industries has excess capacity for 5,000 shelves, There is no additional fixed cost because of
special order of 1200 units.
So Shelby Industries should charge at least variable cost from the Martin Hardwoods.
Therefore, Minimum Price per shelf that Shelby should accept this order is $25.50 per shelf.

Answer 3

Presently the total cost to make the rolls

= 0.24 + 0.40 + 0.16 + 0.20
=$1
Potential seller is selling Reuben @ $ 0.90,
30% of the fixed overhead could be avoided if the roll is purchased

MAKE ($) BUY($)

Direct Material 0.24
Direct Labor 0.4
Variable Overhead 0.16
Fixed Overhead (0.2*30%) 0.06
Purchase Cost 0.9
Total relevant Cost 0.86 0.9

Therefore, accepting the offer on the potential supplier will increase the cost by 0.04 then for reducing the profit
by 30,000*0.04 = $1200
Answer 4

In this case total variable cost of manufacturing the cereal is to be compared with the selling price quoted by
Acme Cereal.

Total variable cost in producing the cereal is equals to 20,000 ( 13,000 +5000 + 2000)
The proposed selling price of 22,000,
Hence it is advisable to make the cereal and reject the offer proposed by Acme Cereal, accepting the offer will
put a negative effect on the net income

Answer 5

If costumes are dropped

It is given that neither the direct fixed costs and allocated common fixed costs may be eliminated,
Avoidable fixed costs = 0
Contribution margin lost = 76,000
Increase (Decrease) in profit
= Avoidable fixed costs - Contribution margin lost
= 0 - 76,000 = (76,000) decrease
Profit will decrease by $76,000

Answer 6

$8,000

Explanation:

Khaki Shorts Khaki Pants

Machine minutes per unit 15 24
contribution margin per unit $16 $32
CM per machine minute $1.067 $1.33
minimum demand 3000 3000
machine minutes required 45000 72000

total machine minutes available 2,88,000

total machine minutes remaining 1,71,000

production 0 7125
total production 3000 10125
total contribution margin $48000 $324000

if 100 more machines hours are added, then production time increases by 6,000 minutes which can be used to
produce 250 more khaki pants. Contribution margin will increase by 250 x $32 = $8,000
I calculated contribution margin per minute, but you could also calculate contribution margin per hour to
determine which product is more profitable. Contribution margin per hour for shorts = $64, and for pants = $80.
The answer will not change.

Answer 7

As can be seen in the following table, only further processing of Frozen Yogurt leads to increased sales value.

Product Current sales Estimate added Sales value if Value added by

value processing costs processed further further
processing

Frozen yogurt 8000 2000 11000 1000

Ice cream 12000 7000 18000 -1000

Answer 8

Profit per pins can be calculated as below.

X = Profit / No of products

= 600000 – (120000+220000+50000+70000) / 200000

= 140000 / 200000
= $0.7
Thus, the production cost of each pin = 3-0.7 = $2.30
If the company accepts the order, then profit earned on 6000 pins.
6000 (2.75 -2.30) = $2700
Since, A-company will have to put more $5,000 for fixed manufacturing overhead. Thus, it will have to deal with
loss.
Answer 9

No. of cookies used annually in the production of the boxed lunches = 40000
Purchase cost per cookie = $0.85

Item Cost

Material Cost 40000 * 0.3 = $12000

Labor Cost 40000 * 0.3 = $12000

Variable Overhead
40000 * 0.2 = $8000
Cost

Fixed Overhead Cost 40000 * 0.1*0.1 = $400

Total Cost of
12000 + 12000 + 8000 + 400 = $32400
Production

Purchase Cost 40000 * 0.85 = $34000

Effect of Profit = $32400 – $34000 = -$1600

Hence, the Profit decreased by $1600.
Answer 10

As here it is not given in the question that which expense is fixed and which one is variable. Now we will have
to identify fixed costs and variable cost according to their cost behaviors.

We know that fixed costs are costs that do not fluctuate in total with changes in activity level and remain constant
in total. We can readily identify fixed costs in the table above that do not change in total with the change in
activity level from 5000 to 9000 units. Expense B and C are two of the fixed costs. Expense A is the sole remaining
expense, and I'm quite confident it's not a fixed cost, but I'm not sure if it's a variable cost or not. Now I'll only
calculate the cost per unit to see if it's true. It is variable cost if the cost per unit remains the same for varying
levels of activities.
Check:

Budget
Production 5000 Cost/unit 12000 Cost/Unit 9000
Expense A 17500 3.5 42000 3.5 31500
Expense B 19000 3.8 19000 1.583333 19000
Expense C 21000 4.2 21000 1.75 21000

The Expense B and C will remain in total same for this level of activity as well because these are fixed costs.
Whereas the Expense A will change with the level of activity as it is variable cost in nature.

Answer 11
Variable costs are those costs that remain constant per unit regardless of production or sales volume. It is a one-
time cost incurred by the company just when the company conducts business. As a result, variable costs per unit
remain constant throughout all levels of sales or production, while total costs vary in a similar manner. Direct
materials, direct labour, variable overhead, and so on.
Fixed costs are those costs that stay constant in total regardless of production or sales volume. It is an unavoidable
cost that the company must bear whether it operates or not. As a result, overall fixed costs remain constant at all
levels of sales or production, but the cost per unit varies. Fixed overhead costs, for example, factory rent,
supervisor salary, factory rent, and so on.

Number of units actually produced 14,000

Budgeted variable cost per unit $5.50
Estimated total variable cost for actual activity $77,000 [14000 units x $5.50]
Add: Estimated fixed cost for actual activity $19,400 [Remains the same as budgeted]
Total budgeted cost actual units produced $96,400
Actual costs incurred for the units produced $97,000
Unfavorable flexible cost budget variance $600 [Difference between $96400 & $97000]
it is considered as unfavorable cost variance because actual costs incurred is higher than flexible budgeted cost)

Answer 12
The desired profit for this new product line is
$1,000,000 x 25% = $250,000
Each cover must result in profit of $250,000 / 200,000 units = $1.25
Market price Desired profit Target cost per unit
$20 - $1.25 = $18.75 per unit
Answer 13

(a) Computation of Fixed Cost:

`Sales 5,00,000
(-) Profit 4,00,000 x 12.5% 50,000
Total Cost 4,50,000
(-) VC: DM 2,50,000
DL 1,00,000
VOH 40,000 3,90,000
Fixed Cost 60,000
Statement showing computation of profit obtained on adopting the sales manager’s
proposal:
`
(I) Sales5,00,000 x(110/100) x (104/100)= 5,72,000
(II) Variable Cost 3,90,000 ×
110
100 × 98
100
=4,20,420
(III) Contribution 1,51,580
(IV) Fixed Cost 60,000 x 98% 58,800
(V) Profit 92,780
% of profit on capital employed = 92,780
4,00,000 ×100 = 23.195 > 23%
∴ Proposal is adoptable.