Strategic Accounting & Finance

BS ACF Limited
BS ACF Limited deals in manufacturing and marketing business. The management of the company is in the
phase of preparation of budget for the year 2018-2019. BS ACF Limited has production capacity of 4 million
Units per annum. Currently the factory is operating at 68% of the capacity. The results for the recently
concluded year are given in Appendix A.

During the year BS ACF Limited received an enquiry from a customer for the supply of 500 units of a new
product, product B22. Negotiations on the final price to charge the customer are in progress and the sales
manager has asked you to supply relevant cost information. Information available is given in Appendix B.

Furthermore, BS ACF Limited is considering launching two new products in Market C33 & D44 from 2020. Cost
details are given in Appendix C. Production Manager just informed the CEO that an external supplier has
offered to supply units of C33 for Rs. 12.50 and units of D44 for Rs. 23.

Required
You being Management Consultant have been asked to prepare report on the following aspects.

a) Using Information given in Appendix A, prepare profit and loss budget for the year 2018–19.
b) Using Information given in Appendix B, calculate the minimum price that the company should be
prepared to accept for the 500 units of product B22. Explain briefly but clearly how each figure in the
minimum price calculation has been obtained.
(Note: The minimum price is the price that equals the total relevant costs of producing the items. Any
price in excess of the minimum price will add to total profit).
c) Using information given in Appendix C, recommend whether BSACF Limited should produce C33 & D44
or purchase from external party for onward sale.
d) Recommend the quantities that BS ACF Limited should make of C33 & D44, and the quantities that it
should buy externally, in order to obtain the required quantities of both components at the minimum
cost. Calculate what the total annual cost will be.
(Note: Consider that labour is a limiting factor.)

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 Appendix A
The results for the recently concluded year are given as under:

Rs. million
Sales 3,400.00
Cost of goods sold
Material (1,493.00)
Labour (367.00)
Manufacturing overheads (635.00)
Gross profit 905.00
Selling expenses (60% variable) (287.00)
Administration expenses (100% fixed) (105.00)
Net profit before tax 513.00

Other relevant information is as under:

 The raw material and labour costs are expected to increase by 5%, while selling and distribution costs
will increase by 4% and 8% respectively. All overheads and fixed expenses except depreciation will
increase by 5%.
 Manufacturing overheads include depreciation of Rs. 285 million and other fixed overheads of Rs. 165
million. During the year 20X3–X4 major overhaul of a machine is planned at a cost of Rs. 35 million
which will increase the remaining life from 5 to 12 years. The current book value of the machine is Rs.
40 million and it has a salvage value of Rs. 5 million. At the end of 12 years, salvage value will increase
on account of general inflation to Rs. 9 million. The company uses straight line method for depreciating
the assets.
 Variable manufacturing overheads are directly proportional to the production volume of production.
 Selling expenses include distribution expenses of Rs. 85 million, which are all variable
 Administration expenses include depreciation of Rs. 18 million. During 20X3–X4, an asset having book
value of Rs. 1.5 million will be sold at Rs. 1.8 million. No replacement will be made during the year.
Depreciation for the year 20X3-X4 would reduce to Rs. 17 million.

The management has planned to take following steps to increase the sale and improve cost efficiency:
 Increase selling price by Rs. 150 per unit.
 The sales are to be increased by 25%. To achieve this, commission on sales will be introduced besides
fixed salaries. The commission will be paid on the entire sale and the rate of commission will be as
follows:
No. of units Commission % on total sales
Less than 35,000 1.00%
35,000 – 40,000 1.25%
40,000 – 50,000 1.50%
Above 50,000 1.75%

 Currently the sales force is categorized into categories A, B and C. Number of persons in each category
is 20, 30 and 40 respectively. Previous data shows that total sales generated by each category are
same. Moreover, sales generated by each person in a particular category are also the same. The trend
is expected to continue in future.
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  The overall efficiency of the workforce can be increased by 15% if management allows a bonus of 20%.
Further increase in production can be achieved by hiring additional labour at Rs. 180 per unit.

Appendix B
The following information is available:
1. Each unit of product B22 requires the following raw materials:
Raw material type
X 4 kg
Y 6 kg
2. The company has 5,000 kg of material X currently in stock. This was purchased last year at a cost of
Rs.7 per kg. If not used to make product B22, this stock of X could either be sold for Rs.7.50 per kg or
converted at a cost of Rs.1.50 per kg, so that it could be used as a substitute for another raw material,
material Z, which the company requires for other production. The current purchase price per kilogram
for materials is Rs.9.50 for material Z and Rs.8.25 per kg for material X.
3. There are 10,000 kilograms of raw material Y in inventory, valued on a FIFO basis at a total cost of
Rs.142,750. Of this current inventory, 3,000 kilograms were purchased six months ago at a cost of
Rs.13.75 per kg. The rest of the inventory was purchased last month. Material Y is used regularly in
normal production work. Since the last purchase of material Y a month ago, the company has been
advised by the supplier that the price per kilogram has been increased by 4%.
4. Each unit of product B22 requires the following number of labour hours in its manufacture:
Type of labour:
Skilled: 5 hours
Unskilled: 3 hours
Skilled labour is paid Rs.8 per hour and unskilled labour Rs.6 per hour.
5. There is a shortage of skilled labour, so that if production of B22 goes ahead it will be necessary to
transfer skilled workers from other work to undertake it. The other work on which skilled workers are
engaged at present is the manufacture of product B16. The selling price and variable cost information
for B16 are as follows:
Rs./unit
Selling price 100
Less: variable costs of production
Skilled labour (3 hours) 24
Other variable costs 31
55
45
6. The company has a surplus of unskilled workers who are paid a fixed wage for a 37-hour week. It is
estimated that there are 900 hours of unused unskilled labour time available during the period of the
contract. The balance of the unskilled labour requirements could be met by working overtime, which is
paid at time and a half.
7. The company absorbs production overheads by a machine hour rate. This absorption rate is Rs.22.50
per hour, of which Rs.8.75 is for variable overheads and the balance is for fixed overheads. If
production of product B22 is undertaken, it is estimated that an extra Rs.4,000 will be spent on fixed
costs. Spare machining capacity is available and each unit of B22 will require two hours of machining
time in its manufacture using the existing equipment. In addition, special finishing machines will be
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 required for two weeks to complete the B22. These machines will be hired at a cost of Rs.2,650 per
week, and there will be no overhead costs associated with their use.
8. Cash spending of Rs.3,250 has been incurred already on development work for the production of B22.
It is estimated that before production of the B22 begins, another Rs.1,750 will have to be spent on
development, making a total development cost of Rs.5,000.

Appendix C
Costs for Products C33 & D44 are expected to be as follows:

Production (units) 30,000 20,000

Variable costs per unit: Rs. Rs.
Direct materials 6 5
Direct labour 3 9
Variable production overheads 1 3
Variable production cost 10 17

Direct labour is paid Rs. 12 per hour. There will be only 19,500 hours of direct labour time available next year,
and any additional components must be purchased from an external supplier.

Total fixed costs per annum are expected to be as follows:

Rs.
Incurred as a direct consequence of making C33 40,000
Incurred as a direct consequence of making D44 50,000
Other fixed costs 30,000
120,000

An external supplier has offered to supply units of C33 for Rs. 12.50 and units of D44 for Rs. 23.

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