Cost Management
Cost Management
Cost Management
2. Suppose company can increase the annual capacity of its regular machines
by 15000 machine-hours at a cost of Rs. 3,00,000. Should company
increase the capacity of the regular machines by 15000 machine-hours By
how much will companys operating income increases or decreases?
3. Suppose that the capacity of the regular machines has been increased to
65,000 hours. Company has been approached to supply 20,000 units of
another cutting tool, V2 for Rs.240 per unit. Company must either accept
the order for all 20,000 units or reject it totally. V1 is exactly like A6 except
that its variable manufacturing cost is Rs. 140 per unit. (it takes 1 hour to
produce one unit of V2 on the regular machine, and variable marketing cost
equals to Rs. 30 per unit). What product mix should the company choose
to maximize operating income?
11-30: Closing down divisions: Vivek industries has four following operating
divisions. The budgeted revenues & expenses for each division for 2016 are as
follows:
Closing down any division would result in savings of 40% of the fixed costs of
that division. Top management is very concerned about the unprofitable divisions
(A & B) and is considering closing them for the year.
1. Calculate the increase or decrease in operating income if Vivek closes
division A.
2. Calculate the increase or decrease in operating income if Vivek closes
down division B.
3. What other factors should the top MANAGEMENT of Vivek consider
before making a decision?
11-32: Multiple choice. (CPA) Choose the best answer
1. The Beta Company manufactures slippers and sells them at Rs. 100 a pair.
Variable manufacturing cost is Rs.45 a pair, and allocated fixed
manufacturing cost is Rs.15 a pair. It has enough idle capacity available to
accept a one-time-only special order of 20,000 pairs of slippers at a cost of
Rs.60 a pair. Bata will not incur any, marketing costs as a result of the
special order. What would be the effect on the operating income be if the
special order could be accepted without affecting normal sales? (a) Rs.0,
(b) Rs.3,00,000 increase, (c) Rs.9,00,000 increase, or (d) Rs.12,00,000
increase.
2. The Sona Steering Manufactures Part No. 498 for use in kits production
line. The manufacturing cost per unit for 20,000 units of Part No. 498 is as
follows:
Rupees (Rs.)
Direct Materials 6.00
Direct manufacturing labour 30.00
Variable manufacturing overhead 12.00
Fixed manufacturing overhead allocated 16
TOTAL MANUFACTURING COST PER UNIT 64
The Sundaram Fastners Company has offered to sell 20,000 units of Part No. 498
to Sona Steering for Rs.60 per unit. Sona steering will make a decision to buy the
part from Sundaram Fastners if there is overall savings of at least Rs.25,000 for
Sona Steering. If Sona Steering accepts Sundaram fastners offer, Rs.9 per unit
of the fixed overhead allocated would be eliminated. Furthermore, Sona Steering
has determined that the released facilities could be used to save relevant costs in
the manufacture of Part No. 575. For Sona Steering to achieve an overall savings
of Rs. 25,000, the amount of relevant cost that would have to be saved by using
the released facilities in the manufacture of Part No.575 would be (a) Rs. 80,000
(b) Rs. 85,000 (c)Rs. 1,25,000 or (d)Rs. 1,40,000.
Manufacturing overhead cost per unit is based on variable cost per unit of Rs. 20
and fixed cost of Rs. 30,000 (at full capacity of 10,000 units). Marketing cost, all
variable, is Rs. 40 per unit, and the selling price is Rs. 200.
A customer, Royal Company, has asked Bajaj to produce 2,000 units of
Orangebo, a modification of Rosebo. Orangebo would require the same
manufacturing processes as Rosebo. Royal has offered to pay Bajaj Rs. 150 for a
unit of Orangebo and half the marketing cost per unit.
Required: -
1. What is the opportunity Cost to Bajaj of producing the 2,000 units of
Orangebo? (Assume that no overtime is worked.)
2. The Reliable Corporation has offered to produce 2,000 of Rosebo for Bajaj
so that Bajaj may accept the Royal offer. That is, if Bajaj accepts the
Reliable offer, Bajaj would manufacture 8,000 units of Rosebo from
Reliable. Reliable would charge Bajaj Rs.140 per unit to manufacture
Rosebo. On the basis of financial considerations alone, should Bajaj accept
the Reliable offer? Show calculations.
3. Suppose that Bajaj had been working at less than full capacity, producing
8,000 units of Rosebo at the time the Royal offer was made. Calculate the
minimum price Bajaj should accept Rosebo at the time the Royal offer was
made. Calculate the minimum price Bajaj should accept for Orangebo
under these circumstances. (Ignore the previous Rs.150 selling price.)
The following data refer only to the preceding data: there is no connection
between the situations. Unless stated otherwise, assume a regular selling price of
Rs.60 per unit. Choose the best answer to each question. Show the calculations.
1. In an inventory of 10,000 units of the high-style pen presented in the
balance sheet, the appropriate unit cost to use is (a) Rs.30 (b) Rs.35 (c)
Rs.50 (d) Rs.22 or (e) Rs.59.
2. The pen is usually produced and sale at the rate of 2,40,000 units per year
(an average of 20,000 per month). The selling price is Rs.60 per unit, which
yields total annual revenues of Rs.1,4400,000. Total costs are
Rs.1,41,60,000, and operating income is Rs.2,40,000, or Rs.1 per unit.
market Research estimates that unit sales could be increased by 10% if
prices were cut to Rs.58. Assuming the implied cost-behaviour patterns
continue, this action, if taken, would
3. A contract with the government for 5,000 units of the pens calls for the
reinvestment of all manufacturing costs plus a fixed fee of Rs. 10,000. No
variable marketing costs are incurred on the government contract. You are
asked to compare the following into alternatives:
SALE EACH MONTH TO ALTERNATIVE A ALTERNATIVE B
Regular customers 15000 units 15,000 units
Government 0 units 5,000 units
6. The company has an inventory of 1,000 units of pens that must be sold
immediately at reduced prices. Otherwise, the inventory will be worthless.
The unit cost that is relevant for establishing the minimum selling price is
(a) Rs.45 (b) Rs.40 (c) Rs.30 (d) Rs.59 or (e) Rs.15.