PART — B |
2. |
(a) |
What do you understand by Budget Manual? |
3 |
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(b) |
What are the role of Budget Committee? |
4 |
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(c) |
Based on the data given below show the calculation of
(i) | Efficiency ratio; |
(ii) | Production volume ratio; |
(iii) | Idle capacity volume ratio.
Data | Standard hour of output | Hours of actual operations |
Theoretical capacity Theoretical capacity less unavoidable loss time Planned activity for period Actual activity for period |
100 95 81 68 |
100 95 90 85 |
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9 |
3. |
(a) |
Briefly describe the merits and demerits of cost based and market based transfer price. |
6 |
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(b) |
NOVELTY LTD. has two divisions-divisions DB. Division DA is currently operating at full capacity. It has been asked to supply its product to division DB. Division DA sells its product to its regular customers for Rs. 60 each. Division DB, currently operating at 50 per cent capacity, is willing to pay Rs. 40 each for the component produced by division DA (this represents the full absorption cost per component at division DA). The components will be used by division DB in supplementing its main product to conform to the need of special order. As per the contract terms of sale, the buyer calls for re-imbursement of full cost to division DB, plus 10 per cent. |
2+5+3 |
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Division DA has a variable cost of Rs. 34 per component. The cost per unit of division DB subsequent to the buying part from division DA is estimated as follows:
Purchased parts-outside vendors Purchased component from division DA Other variable costs Fixed overheads including administration |
Rs. 180 40 100 80 |
| 400 |
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The company uses return on investment (ROI) in the measurement of divisional and Division Manager's performance.
Required:
(i) | As Manager of division DA would you recommend sales of your product to division DB at the stipulated price of Rs. 40? |
(ii) | Would it be in the overall interest of the company for division DA to sell its product to division DB? |
(iii) | Suggest an alternative transfer price and show how could it lead to goal congruence. |
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4. |
(a) |
Define Residual Income and state its advantages and disadvantages in appraisal of divisional performance. |
6 |
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(b) |
Apparel division of ALERT LTD. has employed Rs. 20 lakhs and earned an annual profit (after depreciation) of Rs. 3,50,000. The Divisional Manager is considering an investment of Rs. 80,000 in an asset which will have a eight-year life with no residual value and will earn a constant annual profit after depreciation of Rs. 12,800. The cost of capital is 15 per cent. Ignore taxation.
You are required to work out:
(i) | the return on divisional investment and the divisional residual income before and after the new investment. |
(ii) | the Net Present Value (NPV) of the new investment. (PV factor of an annuity of Re. 1 for 8 years at 15% = 4.4873.)
Also comment on the results. |
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3+3+4 |