PGP Term II, End-term Examination-2012 Management AccountingClose Book, Calculators Allowed Time: 2 Hours Faculty: Prof. K N Badhani Note: Attempt any two questions. All question carry equal marks. Maximum Marks: 50 1. Silven Industries, which manufactures and sells a highly successful line of summer lotions and insect repellents, has decided to diversify in order to stabilize sales throughout the year. A natural area for the company to consider is the production of winter lotions and creams to prevent dry and chapped skin. After considerable research, a winter product line has been developed. However, Sliven’s CEO has decided to introduce only one of the new products for this coming winter. If the product is a success, further expansion in the future years will be initiated. The product selected (call Chap-Off) is a lip balm that will be sold in a lip-stick type tube. The product will be sold to wholesalers in boxes of 24 tubes for $ 8 per box. Because of excess capacity used to manufacture this product during slack season, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $ 90,000 charge for fixed manufacturing overhead will be absorbed by the product under the company’s absorption costing system. Using the estimated sales and production of 100,000 boxes of Chap-Off, the accounting department has developed the following cost per box. Direct Material Direct Labour Manufacturing Overheads $3.60 2.00 1.40 Total Cost $ 7.00 The above costs include costs of producing both the lip balm and the tube that contains it. As an alternative to making tubes, Silven has approached a supplier to discuss the possibility of purchasing the tubes for Chap-Off. The purchase price of empty tubes from the supplier would be $1.35 per box of 24 tubes. If Silven Industries accepts the purchase proposal, direct labour and variable manufacturing overhead costs per box of Chap-Off would be reduced by 10% and direct material cost would be reduced by 25%. Required: 1 00 2.00. min = minute. Presented below is November report: Performance Report for the month of November.000 (F) Revenue Rs Rs 3. prepares monthly reports based on these standard costs.60.80.20 Rs 39.000kg.55.20/oz 5 oz 1.50.50. The standard cost per kg of Chocolate Nut Supreme.00 7. 2010 Actual Budget Variance Unit (kg) 4.40 6.a. At this new volume.00 16.50. hr = hour) Quantity Standard Rate Standard Cost per kg Rs 2. Apart from above cost calculations what other qualitative factors should Silven Industries consider in deciding whether they should make or buy the tubes? 2. The company’s best selling cookie is Chocolate Nut Supreme which is marketed as a gourmet cookie and regularly sells for Rs 80 per kg.000 Direct Labour 34.50. additional equipments must be acquired to manufacture the tubes at an annual rental of $40.50. Assuming that the outside supplier will not accept the order for less than 100.00. Meghraj Cookies bakes cookies for retail stores. Should Silven Industry make or buy the tubes? Give cost calculations to support your answer.20. Meghraj’s accountant.000 boxes.0000 boxes.000(U) 2 .000 33. What would be maximum purchase price of tubes acceptable to Silven Industries? c. Zaheer.000 Rs 35.50/oz 1 oz 5.000 boxes.000 28.000 (U) 3.000 58.00/oz 1 min 2 min 144/hr 180/hr Manufacturing overheads are allocated on the basis of labour hours. b.50 5. d.20.000 1. follows: Cost Item Direct Material: Cookie Mix Milk Chocolate Almonds Direct Manufacturing Labour: Mixing Baking ManufacturingOverheads (@324/hr) Total Standard Cost per kg (oz = ounce. Instead of sale of 100.000 4.000.00.10 10 oz Rs 0.000 (F) Direct Material 86.000 50. revised estimate shows a sale of 120. should Silven Industry make or buy the tubes? Show calculations in support of your answer. based on Maghraj’s normal monthly production of Rs 400. 00 49. Weller Industries is a decentralized organization with six divisions. The Electrical Division (which is operating at full capacity) sells its fittings to its regular customers for Rs7. b.50 5.50.30.000 min Actual Cost RS 9. which is operating at 50% of capacity.000 24. The company’s Electrical Division produces a variety of electrical items.25 and total manufacturing cost of Rs 6. is disappointed with the results. November 2010 Quantity Direct Material Cookie Mix Milk Chocolate Almonds Direct Manufacturing Labour Mixing Baking Required: a. The cost of brake unit being built by the Brake Division follows: Purchased parts (from outside vendors) Electrical fitting X52 Other variable costs Fixed overheads Total Cost per Brake unit 3 Amount (Rs) 22. The company’s Brake Division has asked the Electrical Division to supply it with a large quantity of X52 fittings for only Rs 5.000 24.Abbas. including an X52 electrical fitting.00.60.00 each.000 3. showing possible reasons for the variances you have computed and suggested corrective actions. Analyze sales.80.00.00 14.00. will put the fitting into a brake unit that it will produce and sell to a large commercial airline manufacturer.00. Abbas has asked Zaheer to identify the reasons why the contribution margin has decreased. the fitting has variable manufacturing cost of Rs 4. Zaheer has gathered the following information to help in his analysis: Usage Report. 46. The Brake Division.50 .00 8.80. president of the company. the product’s expected contribution to overall profitability decreased.50 each.000 53. Prepare a report in a tabular form. Despite a sizable quantity of cookies sold. direct material and direct labour variances in detail.000 oz 4.000 min 8.000 oz 4.20.000 10.000 oz 26.50. Although the Rs 5. Weller Industries uses return on Investment (ROI) to measure divisional performance. e. will you still like to sell the Brakes to airplane manufacturer at Rs 50. Assume the Electric Division does not accept the demand of Brake Division to supply X52 at Rs 5.50 price for X52 fitting.00. the Brake Division can get a similar product at this price from outside supplier. Assume you are the manager of the Electrical Division. If Electric Division is not working at full capacity because of demand constraints. will you change your answer to above (d)? If yes. Is it advisable to accept the supply from outside supplier? Analyze from the point view of Brake Division as well the company as a whole.50 only.00 as requested? Why or why not? b. He has heard ‘through the grapevine” that the airplane manufacturer plans to reject his bid if it is more than Rs 50. however. why? What advice will you give to the company in this case? Show your calculations clearly. Required: a. the manager of Brake Division believes that the price concession is necessary if his division is to get the contract for the airplane brake units. Would you recommend your division to supply the X52 fitting to the Brake Division for Rs 5. Would it be profitable for the company as whole if the airplane Brakes are sold for Rs 50. it will either not get the contract or it will suffer a substantial loss at a time when it is already operating at 50% of capacity. Thus if the Brake Division is forced to pay the regular Rs 7.50 price. 4 .00 per brake unit. Assume you are the manager of Brake Division. c.00? Why or why not? d.00 price for the X52 fitting represents a substantial discount from the regular Rs 7. If Electrical Division supplies you X52 at the price of Rs 7. The manager of Brake Division argues that the price concession is imperative to the well-being of both his division and the company as a whole.00? Show your calculations clearly.