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FINANCIAL
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Q1) ABC Ltd. Produces room
coolers. The company is considering whether it should continue to
manufacture air
circulating fans itself or purchase them from outside. Its annual requirement
is
25000 units. An outsider
vendor is prepared to supply fans for Rs 285 each. In addition, ABC Ltd will have
to incur costs of Rs 1.50 per unit for freight and Rs 10,000 per year for
quality inspection, storing etc of the product.
In the most recent year
ABC Ltd. Produced 25000 fans at the following total cost :
Material Rs. 50,00,000
Labour Rs. 20,00,000
Supervision & other
indirect labour Rs. 2,00,000
Power and Light Rs. 50,000
Depreciation Rs. 20,000
Factory Rent Rs. 5,000
Supplies Rs. 75,000
Power and light includes
Rs 20,000 for general heating and lighting, which is an allocation based on the
light points. Indirect labour is attributed mainly to the manufacturing of
fans. About 75% of it can be dispensed with along with direct labour if
manufacturing is discontinued. However, the supervisor who receives annual
salary of Rs 75,000 will have to be retained. The machines used for manufacturing
fans which have a book value of Rs 3,00,000 can be sold for Rs 1,25,000 and the
amount realized can be invested at 15% return. Factory rent is allocated on the
basis of area, and the company is not able to see an alternative use for the
space which would be released. Should ABC Ltd. Manufacture the fans or buy
them?
Q2) Usha Company produces
three consumer products : P, Q and R. The management of the
company wants to determine
the most profitable mix. The cost accountant has supplied the following data.
Usha Company : Sales and
Cost Data
Description Product Total
P Q R
Material Cost per unit
Quantity (Kg) 1.0 1.2 1.4
Rate per Kg (Rs) 50 50 50
Cost per unit (Rs) 50 60
70
Labour Cost per unit 30 90
90
Variable Overheads per
unit 15 10 25
Fixed Overheads (Rs .000)
9,175
Current Sales (Units ,000)
100 50 60 210
Projected Sales (Units
,000) 109 55 125 289
Selling Price per unit
(Rs) 150 200 270
Raw material used by the
firm is in short supply and the firm can expect a maximum supply of 350 lakh kg
for next year. Is the company’s projected sales mix most profitable or can it
be changed for the better?
Q3) DSQ Company Ltd, a
diversified company, has three divisions, cement, fertilizers and
textiles. The summary of
the company’s profit is given below :
(Rs/Crore)
Cement Fertilizer Textiles
Total
Sales 20.0 12.0 18.0 50.0
Less : Variable Cost 8.0
9.6 5.4 23.0
Contribution 12.0 2.4
12.6 27.0
Less : Fixed Cost
(allocated to
divisions in proportion to
volumes of Sales)
8.0 4.8 7.2 20.0
Profit (Loss) 4.0 (2.4)
5.4 7.0
After allocating the
company’s fixed overheads to products the Fertilizers, division incurs a loss
of Rs 2.4 crore. Should the company drop this division?
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