Management Accounting –II

Assignment –V

Short run decision analysis

(Acceptance of a special order)

Q.1. Jamshed crockery ltd. manufactures cookware. Expected annual volume of 1,00,000 sets per
year is well below its full capacity of 1,50,000. Normal selling price is Rs. 40 per set.
Manufacturing cost is Rs. 30 per set (Rs 20 variable and Rs. 10 fixed). Total fixed manufacturing
cost is Rs. 10,00,000. Selling and administrative expenses are expected to be Rs. 5,00,000 (Rs.
3,00,000 fixed and Rs. 2,00,000 variable). A departmental store offers to buy 25,000 sets of Rs.
27 per set. No extra selling and administrative costs would be caused by the order. Further, the
acceptance of this order will not affect regular sales. Should the offer be accepted?

(Make or buy)

Q.2. The ABC company Ltd. produces most of its own parts and components. The standard wage
rate in the parts department is Rs.30 per hour. Variable manufacturing overheads is applied at a
standard rate of Rs.20 per labour-hour and fixed manufacturing overheads are charged at a
standard rate of Rs.25 per hour. For its current year output, the company will require a new part.
This part can be made in the parts department without any extension of existing facilities.
Nevertheless, it would be necessary to increase the cost of product testing and inspection by
Rs.50,000 per month. Estimated labour time for the new part is half an hour per unit. Raw
materials cost has been estimated at Rs.60 per unit. The alternative choice before the company is
to purchase part from an outside supplier at Rs.90 per unit. The company has estimated that it
will need 2,00,000 new parts during the current years. Advise the company whether it would be
more economical to buy or make the new parts. Would your answer be different if the
requirement of new parts was only 1,00,000 parts?

(Key factor)

Q.3. The following particulars are obtained from costing records of a factory.

Product A Product B
(per unit) (per unit)

Rs. Rs.

Selling Price 200 500

Material (Rs. 20 per litre) 40 160

Labour (Rs. 10 per hour) 50 100

Variable Overhead 20 40

Total Fixed Overheads –Rs. 15,000

Comment on the profitability of each product when:

(a) Raw material is in short supply;

(b) Production capacity (Labour hours ) is limited;
(c) Sales quantity is limited;
(d) Sales value is limited;
(e) Only 1,000 litres of raw material is available for both the products in total and maximum
sales quantity of each product is 300 units.
Also find the amount of contribution and profit that the firm would generate under this
condition.

Q.4 A manufacturer produces three products whose cost data are as follows:
X Y Z
Direct materials (Rs./unit) 32.00 76.00 58.50
Direct Labour:
Department. Rate / hour (Rs.) Hours Hours Hours
1 2.50 18 10 20
2 3.00 5 4 7
3 2.00 10 5 20
Variable overheads (Rs.) 8 4.50 10.50
Fixed overheads: Rs. 4,00,000 per annum.
The budget was prepared at a time, when market was sluggish. The budgeted quantities and
selling prices are as under:
Product Budgeted quantity Selling Price/unit

(Units) (Rs.)

X 19,500 135

Y 15,600 140

Z 15,600 200

Later, the market improved and the sales quantities could be increased by 20 per cent for product
X and 25 per cent each for product Y and Z. The sales manager confirmed that the increased
sales could be achieved at the prices originally budgeted. The production manager stated that the
output could not be increased beyond the budgeted level due to the limitation of direct labour
hours in department 2.
Required: (i) Prepare a statement of budgeted profitability.
(ii) Set optimal product mix and calculate the optimal profit.

(Shut down or continue)

Q.5. Baluja shoes ltd. Which has a chain of shoe shops throughout the country has two shops in
Madras of which shop I makes a profit and shop II makes a loss. The following is the
summarized profit and loss account of shop II for the current month ended March 31:

Particulars Amount (Rs)

Sales 6,00,000
Cost of sales 4,92,000
Gross profit 1,08,000
Expenses:
Commission to salesman
6000
Manager’s salary
12,000
Head office expenses
10,500
Motor van expenses: 1,47,750
Fixed (allocated) (39,750)
6900
Variable (allocated)
2400
Other items ( like rent , insurance, salesman’s salaries)
1,09,950

The commission to salesman is a fixed percentage on turnover. There is a common manager for
the two shops and his salary is equally shared by the two shops. The motor van is also common
to the two shops. Its fixed expenses are shared equally by the two shops but the running expenses
are apportioned on the basis of the turnover.

Required:
Prepare a report explaining the financial implication of closing down shop II, assuming that 20
percent of its turnover will be gained by shop I without the shop needing any additional staff.

(Dropping a product line)

Q.6.A company manufactures three products. The respective details are:

Particulars A B C
 Capacity engaged (percent) 20 40 40
Units produced 2,000 5,000 6,000

Cost per unit:

Material cost 20 32 36
Wages 10 12 16
Variable overheads 7 9 11
Fixed overheads 6 9 10
Total 43 62 73
Selling price per unit 40 75 85
Profit (loss) per unit (3) 13 12

The management proposes to discontinue line A as for the last few years it has ben showing
losses. Future prospects of the other two lines being good, it is intended to utilize the disengaged
capacity in line A, in line B and C equally. Expected percent rise in prices and cost are:

B C
Material 10
10
Wages 5
5
Selling price 2
5

Fixed overheads shall remain the same. You are required to prepare a statement of projected
profitability and advise the management as to whether the scheme may be adopted.