| 1. | (a) | ABC Ltd. initiated a quality improvement program at the beginning of the year. Efforts were made to reduce the number of defective units produced. By the end of the year, reports from the production manager revealed that scrap and rework had both decreased. Though pleased with the success, the President of the company wanted some assessment of the financial impact of the improvements. To make this assessment, the following financial data were collected for the current and preceding year:- | Preceding year
(2001-2002)
Rs. | Current year
(2002-2003)
Rs. | Sales
Scrap
Rework
Product inspection
Product warranty
Quality training
Materials inspection | 1,00,00,000
4,00,000
6,00,000
1,00,000
8,00,000
40,000
60,000 | 1,00,00,000
3,00,000
4,00,000
1,25,000
6,00,000
80,000
40,000 |
You are required to:- | (i) | Classify the costs as prevention, appraisal, internal failure, or external | | (ii) | Compute the profit that has increased because of quality improvements? |
| 4 | (0) |
| | (b) | A company has forecast sales and cost of sales for the coming year as Rs.25 lakhs and Rs.18 lakhs respectively.
The inventory turnover has been taken as 9 ties per year. In case the inventory turnover increases to 12 times and the short term interest rate on working capital is taken as 10%. What will be saving in cost? | 4 | (0) |
| | (c) | Given the projects: | t0 | t1 | t2 | NPV | A
B
C | –100
–150
–200 | –200
+70
–120 | +50
+70
–30 | +40
+20
+50 |
External capital is limited to 190 at t0, 110 at t1 and zero at t2.
Formulate the problem into an LP, assuming projects are divisible.
Cash generated from these investments can be reinvested in other projects in the same year. | 4 | (0) |
| | (d) | A company has the capacity of production of 80,000 units and presently sells 20,000 units at Rs.100 each. The demand is sensitive to selling price and it has been observed that with every reduction of Rs.10 in selling price the demand is doubled. What should be the target cost at full capacity if margin on sale is taken as 25%? | 4 | (0) |
| | (e) | If the direct labour cost is reduced by 20% with every doubling of output, what will be the cost of labour for the sixteenth unit produced as an approximate percentage of the cost of the first unit produced? | 4 | (0) |
| 2. | XYZ Ltd. having idle capacity received an offer to sell 2,000 units of one of its product to a new customer in a geographic region not normally serviced by the company. The offering price is Rs.10 per unit. The product normally sells for Rs.14. The activity based accounting system provides the following information:– | Cost Driver | Unused | Quantity | Activity Rate (Rs.) | | | Capacity | Demanded | Fixed | Variable | Direct Materials
Direct Labor
Set – ups
Machining | Units
Direct labour hours
Setup hours
Machine hours | 0
0
0
6,000 | 2,000
400
25
4,000 | —
—
50.00
4.00 | 3.00
7.00
8.00
1.00 |
This represents the amount of resources demanded by the special order being considered. Fixed activity rate is the price that must be paid per unit of activity capacity. The variable activity rate is the price per unit if resource for resources acquired as needed. Although the fixed activity rate for set–ups is Rs.25 per hour, any expansion of this resource must be acquired in blocks. The unit of purchase for set–ups I s100 hours of set–up servicing. Thus, any expansion of set–up activity must be done 100 hours at a time. The price per hour is the fixed activity rate.
Required: | (a) | Compute the change in income for XYZ Ltd, if the order accepted. Comment on whether the order should be accepted or not (in particular, discuss the strategic issues). |
| (b) | Suppose that the set–up activity had 50 hours unused capacity. How does this affect the analysis? |
| 12+4 | (0) |
| 3. | Samir Health Centre specializes in the provision of sports/exercise and medical advice to clients. The service is provided on a residential basis and clients stay for whatever number of days suits their needs.
Budgeted estimates for the year ending 31st March,2004 are as follows: | (i) | The maximum capacity of the center is 50 clients per day for 350 days in this year. | | (ii) | Clients will be invoiced at a fee per day. The budgeted occupancy level will vary with the client fee level per day and is estimated at different percentages of maximum capacity as follows: Client fee
Per day | Occupancy
level | Occupancy as % of
maximum capacity | Rs. 180
Rs. 200
Rs. 220 | High
Most likely
Low | 90%
75%
60% |
| | (iii) | Variable costs are also estimated at one of the three levels per client day. The high, most likely and low levels per client day are Rs.95 , Rs.85 and Rs.70 respectively. |
The range of cost levels reflect only the possible effect of the purchase prices of goods and services.
Required:- | (a) | Prepare a summary which shows the budgeted contribution earned by Samir Health Center for the year ended 31.3.2004 for each of nine possible outcomes. |
| (b) | State the client fee strategy for the year which will result for the use of each of the following decision rules- | (i) | maximax | (ii) | maximin | (iii) | minimax regret | | Your answer should explain the basis of operation of each rule. |
|
| 6+10 | (0) |
| 4. | (a) | X Ltd is considering the purchase of a new computer controlled packing machine to replace the two machines which are currently used to pack product y. the new machine would result in reduced labor costs because of more automated nature of the process and, in addition, would permit production levels to be increased by creating greater capacity at the packing stage. With an anticipated rise in demand for product y, it has been estimated that the new machine will lead to increased profits in each of the next three years. Due to uncertainty in demand, however, the annual cash flows (including savings) resulting from purchase of the new machine cannot be fixed with certainty and have therefore been estimated probabilistically as follows: | Annual Cash Flows (Rs. ‘000) | | Year 1 | Prob. | Year 2 | Prob. | Year 3 | Prob. | 10
15
20 | 0.3
0.4
0.3 | 10
20
30
40 | 0.1
0.2
0.4
0.3 | 10
20
30 | 0.3
0.5
0.2 |
Because of the overall uncertainity in the sales of product y, it has been decided that only 3 years cash flows will be considered in deciding whether to purchase the new machine. After allowing for the scrap value of the existing machines, the net cost of the new machine will be Rs.42,000. ignore tax.
Required: | (i) | Ignoring time value of money, identify which combinations of annual cash flows will lead to an overall negative net cash flow and determine the total probability of this occurring. | | (ii) | On the basis of the average cash flow for each year, calculate the net present value of the new machine, given company’s cost of capital is 15% and the present value of Rs.1 at 15% discount rate are as follows: | Year | 1 | 2 | 3 | 4 | 5 | | P.V. | 0.8696 | 0.7561 | 0.6575 | 0.5718 | 0.4972 |
|
| 8 | (0) |
| | (b) | consider an all equity financed firm which has 10,00,000 shares of Rs.10 each. The corporate tax rate applicable is 50%. Company plans to raise another Rs.50lakhs to fund a project that will give EBIT – Rs.100 lakhs with a probability 0.4 and Rs.20 lakhs with probability 0.6. The money can be raised in either of the following ways – (a) issue additional equity share – 5 lakhs at Rs.10 each. Or (b) issue debt at 12% interest. If the bankruptcy cost is Rs.10 lakhs, what should the company do? | 8 | (0) |
|
| 5. | (a) | Briefly explain the concept behind ‘Theory of Constraints’ and bring out clearly the meaning of ‘Througnput’. | 6 | (0) |
| | (b) | The sales, cost , selling price and processing time of three different herbal drinks produced by a company for the year just concluded are given below : | Product | | Strong | Normal | Mild | Annual sales (no.of packs 250gm)
Selling price (Rs./pack)
Unit Cost (Rs./pack)
Processing time/per pack (hrs.) | 6,000
50
42
1.5 | 5,000
40
36
2 | 1,000
30
21
2 |
The total processing hours available to the company is 16,000 hours which is fully utilized.
Fixed manufacturing overheads are fully absorbed in unit cost at a rate of 200% of variable cost.
For the coming year the demand for the three products has been estimated as under : Strong – 6,000 packs
Normal – 6,000 packs
Mild – 2,000 packs |
Considering that the selling prices are fixed and the processing time can be switched from one product to another, calculate the best production programme for next operating year indicating the increase in net profit that will result. | 10 | (0) |
| 6. | Tithi (P) Ltd has the following activities and associated cost behaviors: | Activities | Cost Behavior | | Labour | Rs.10 per direct labor hour | | Set–up | Variable: Rs.100 per set–up
Step–fixed – Rs.30,000 per step, step = 10 set–ups | | Receiving | Step–fixed:Rs.40,000 per step, step = 2,000 hours |
Activities with step cost behaviour are being fully utilized by existing products. Thus, any new product demands will increase resource spending on these activities. Two designs are being considered for a new product – Design I and II. The following information is provided about each design (1,000 units of the product will be produced): | Cost Driver | Design I | Design II | | Direct labor hours | 3,000 | 2,000 | | Number of set-up | 10 | 20 | | Receiving hours | 2,000 | 4,000 |
The company has recently developed a cost equation for manufacturing costs using direct labor hours as the driver.
The equation has R2 = 0.60 and is given below: Required:- | (a) | Compute the cost of each design (based on the direct labor cost equation) if the design engineering is told that only direct labor hours drive manufacturing costs. Which design would be chosen based on this unit-based cost assumption? |
| (b) | Now compute the cost of each design using all driver and activity information. Which design will now be chosen? Are these any other implications associated with the use of the more complete activity information set? |
| (c) | Consider the following statement: "Strategic cost analysis should exploit internal linkages." what does this mean? Explain, using the results of requirements (a) and (b). |
| (d) | What other information would be useful to have concerning the two designs? Explain. |
| 3+6+4+3 | (0) |
| 7. | A company has one main plant, which produces intermediate product for three downstream plants, which produces three different varieties of end product from the same intermediate. The three downstream plants are entirely dependent on the main plant for the intermediate product used as input in those plants. The following particulars are available regarding the three downstream units: | Downstrem units | | | 1 | 2 | 3 | Total | Capacity (Kgs.)
Intermediate products required (kg) | 60,000
66,000 | 40,000
20,000 | 20,000
14,000 | 1,20,000
1,00,000 | Variable cost
Fixed cost
Profit
Total price | Rs./kg
Rs./kg
Rs./kg
Rs./kg | 14
4
2
20 | 8
6
1
15 | 9
3
4
16 | |
It has been observed that the downstream unit must operate at a minimum level of 70% capacity utilization for economic reason. The main plant can produce only 75,000 kgs. of output of the intermediate product during the coming year. There is an opening stock of 6,000 kgs of the intermediate product of which 1,000kgs must be always retained. The main plant incurs variable cost of Rs.8 per kg. in producing the intermediate product and recovers @Rs.10 per kg. from the downstream units.
You are required to | (a) | work out the most profitable mix of level of production for the downstream units, | | (b) | compute the loss suffered for shortage of availability of intermediate from main plant, and | | (c) | work out the revised price of the production of downstream units to offset the loss suffered as above. |
| 16 | (0) |
| 8. | Write short note on any four: | 4x4=16 | |
| | (a) | Queing theory | | (0) |
| | (b) | Target costing | | (0) |
| | (c) | Pareto analysis | | (0) |
| | (d) | Life cycle costing (LCC) | | (0) |
| | (e) | Cost Management information System. | | (0) |
| | (f) | Back flush accounting | | (0) |
