Question 1 (a) XYZ Company has an option to buy any one of the two machines N or M to manufacture its unique industrial component P. Each of the ma...

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Question 1 (a) XYZ Company has an option to buy any one of the two machines N or M to manufacture its unique industrial component P. Each of the machines have the capacity to produce same quality of component P and are almost identical except for the fact that they are being manufactured by a different manufacturers. The specifications for each Machine are: Machine M: It has the capacity to produce 50,000 components of P per annum, the fixed costs being 1,50,000 and could generate a profit of 2,25,000 on the sale of all the components produced. Machine N: It is also having the equal capacity to produce same number of components as that of Machine M per annum and all the components thus produced could be sold in the open market without any difficulty. Fixed cost of Machine N is 60,000 less than that of Machine M and yield a profit of 1,60,000 by selling all the components that are produced. The selling price of each component of P is 100. Required: (i) Calculate break even sales in value for each machine. (3 Marks) (ii) Calculate sales levels in units where both the machines are equally profitable. (2 Marks) (b) PQR Ltd. manufactures a product in batches of 2,000 units. The following costs are incurred for each batch Particulars Amount (in) Direct Material Cost per Batch 2,40,000 Direct Labour Cost per Batch 1,65,000 Overhead Absorption Rate (variable) 120 per machine hour Expected Rejection Rate 3% Scrap Value per Rejected Unit 75 Other Information: Particulars Details Selling Price per Good Unit 250 Total Available Machine Hours per month 3,000 hours Fixed Overheads per Month 1,25,000 Batches Manufactured per Month 10 batches Required: (i) Calculate contribution per unit of good units after adjusting rejected units. (3 Marks) (ii) Calculate the company's total monthly profit. (2 Marks) (c) The Cost Accountant of a Manufacturing concern has given the following details in respect of a raw material X: Difference between Minimum lead time and Maximum lead time is 4 days. Average Lead time to procure the Raw Material X is 7 days. Reorder Level 1,80,000 units Reorder Quantity 90,000 units Minimum Stock Level 1,00,000 units Maximum Stock Level 1,90,000 units Required to Calculate: (1) Maximum Consumption per day (2 Marks) COST AND MANAGEMENT ACCOUNTING (2) Minimum Consumption per day (2 Marks)

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Answer Solution: (a) (i) Machine M Machine N Quantity Price Amount () Quantity Price Amount () Sales 50,000 100 50,00,000 50,000 100 50,00,000 Variable cost 50,000 92.5 46,25,000 50,000 95 47,50,000 Contribution 7.5 3,75,000 5 2,50,000 Fixed Cost 1,50,000 90,000 Profit 2,25,000 1,60,000 P/V Ratio Contribution x 100 Sales 3,75,000 x100 50,00,000 2,50,000 x100 50,00,000 7.5% 5% Break even Sales FixedCost P / V Ratio 20,00,000 18,00,000 (ii) Let the units be x 7.5x – 1,50,000 = 5x – 90,000 2.5x = 60,000 X = 24,000 Units (b) (i) Calculation of Contribution per unit of good units Total Amount () Per Unit () Selling Price 48,50,000 250.00 Direct Material Cost 24,00,000 Direct Labour Cost 16,50,000 Variable Overhead (120 x 3,000 hours) 3,60,000 Total Variable Cost 44,10,000 220.50 Less: Scrap Value of Rejected Units ( 75 x 20,000 x 3%) 45,000 Net Variable Cost 43,65,000 225.00 Contribution per good units 4,85,000 25.00 Working Note: Number of units manufactured in a month = Number of batches x number of units in a batch = 10 x 2,000 = 20,000 units Number of good units sold = 20,000 units x 97% = 19,400 units (ii) Calculation of Company’s total monthly profit Total Amount () Contribution 4,85,000 Less: Fixed Cost 1,25,000 Total Monthly Profit 3,60,000 (c) Let the Minimum lead time be A and Maximum lead time be B B - A = 4 …1 Average lead time of X = 7 A B 2 + = 7 A + B = 14 …2 From equation 1 and 2, we get A (Minimum lead time) = 5 B (Maximum lead time) = 9 (i) Re-order level = Maximum re-order period/lead time × Maximum consumption 1,80,000 units = 9 × Maximum consumption Maximum consumption = 20,000 units COST AND MANAGEMENT ACCOUNTING (ii) Maximum stock of A = Re-order level + Re-order quantity – (Minimum consumption × Minimum re-order period/lead time) 1,90,000 unit = 1,80,000 units+90,000 units – (Min. Consumption x 5) Min. Consumption = 80,000 units 5 = 16,000 units Part (ii) can also be done in following way: (ii) Minimum Stock Level = Re-order level – (Average Consumption X Average Lead time 1,00,000 = 1,80,000 – (Average Consumption X 7) Average Consumption per day = 11,428.57 Average Consumption per day = (Maximum consumption + Minimum consumption)/ 2 11,428.57 = (20,000 + X) /2 Minimum Consumption per day = 2,858 units

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