Decision Making – CA Final SCMPE Question Bank

Decision Making – CA Final SCMPE Question Bank is designed strictly as per the latest syllabus and exam pattern.

Decision Making – CA Final SCMPE Question Bank

Question 1.
Explain briefly the concepts of Opportunity costs and .Relevant costs. (May 2009, 4 marks)
Answer:
Opportunity cost has been defined as “prospective change in cost following the adoption of an alternative machine, process, raw materials, specification or operation”. In other words, it is the cost of opportunity lost by diversion of an input factor from one use to another. It is the measure of the benefit or opportunity foregone. The opportunity cost or the value of opportunity foregone is taken into consideration when alternatives are compared.

The introduction of opportunity cost concept in making profitability calculations is helpful to the management when one or more of the inputs required by one or more of the alternative courses of action is already available. These inputs may nevertheless have a cost and this is measured by the sacrifice made by the alternative action chosen or the cost that is given up in order to make them available for the current proposal.

Relevant Cost: Business decisions involving planning for the future require consideration of several alternative choices of plans. In making these plans, estimates of future costs and revenues in respect of each alternative are worked out. It should be recognised that the only costs that matter for business decisions are future costs.

Actual costs or current or historical costs are used only for estimating the future costs of each alternative choice. Thus we give consideration to what is known as relevant costs. The contribution approach coupled with the ability to distinguish relevant cost from irrelevant costs will prove to be a boon to the manager in arriving at correct conclusions in the challenging area of decision making.

Relevance means pertinent to the decision at hand. The data given is said to be relevant if it helps the manager in taking a right decision in furtherance of the company’s objectives.

Decision Making – CA Final SCMPE Question Bank

Question 2.
What are the applications of incremental/differential costs? (May 2010, 5 marks)
Answer:
Application of incremental/differential costs:

  1. Whether to process a product further or not.
  2. Dropping or adding a product line.
  3. Optimizing investment plan.
  4. Accepting an additional order from a special customer at lower than existing price.
  5. Make or buy decision.
  6. Opening a new sales territory or branch.
  7. Optimizing investment plan out of multiple alternatives.
  8. Submitting tenders.
  9. Lease or buy decisions.
  10. Equipment replacement decisions.

Decision Making – CA Final SCMPE Question Bank

Question 3.
Two companies, H and L, have the same values for turnover and net profit and make a similar product. H has a higher PN ratio than L. Which company will perform better when:

  1. the market demand is high?
  2. the market demand is low? (Nov 2011, 2 marks)

Answer:

  1. In case Market Demand is High – Product H (Lower Variable Cost and Higher Fixed Cost)
  2. In case Market Demand is Low – Product L.

Question 4.
Answer the following questions:
“Sunk cost is irrelevant in decision making, but all irrelevant costs are not sunk costs.” Explain with examples. (Nov 2012, 4 marks)
Answer:
Sunk Cost:

  • Sunk costs are costs that have been created by a decision made in the past and that cannot be changed by any decision that will be made in the future.
    Example, the written down value of assets previously purchased are sunk cost.
  • Sunk costs are not relevant for decision making because they are past cost.
  • But not all irrelevant costs are sunk cost. For example, a comparison of two alternative production methods may result in identical material costs for both the alternatives. In this case, the direct material cost will remain the same whichever alternative in chosen.
  • In this situation, though direct material cost is the future cost to be incurred in accordance with the production, it is irrelevant, but it is not a sunk cost.
  • Irrelevant is only with respect to alternatives being considered and not for fund flows whereas for sunk cost there is no further cash flow. Cash flows have already been incurred.

Decision Making – CA Final SCMPE Question Bank

Question 5.
Answer the following question: (Nov 2013, 4 marks)
State the type of cost in the following cases:
(i) Cost associated with the acquisition and conversion of material into finished product.
(ii) Cost arising from a prior decision which cannot be changed in the short run.
(iii) Increase in cost resulting from selection of one alternative instead of another.
(iv) Rent paid for a factory building which is temporarily closed.
Answer:
(i) Product Cost
(ii) Committed Cost
(iii) Differential/Incremental Cost
(iv) Shut Down Cost

Question 6.
Answer the following; (Nov 2014, 4 marks)
Explain the concept of relevancy of cost by citing three examples each of relevant costs and non-relevant costs.
Answer:
Relevant cost are those costs which are affected by a decision. Relevance means pertinent to the decision in hand the expected future cost which are relevant cost.

  • Example of Relevant Cost:
  • Material Cost
  • Labour Cost
  • Variable Overhead Cost
  • Example of Non – Relevant Cost:
  • Past or historical cost (sunk cost)
  • Purchases price of material cost
  • Fixed Cost
  • Book value of equipment.

Decision Making – CA Final SCMPE Question Bank

Question 7.
Answer the following: (Nov 2015, 4 marks)
Proposal A is being evaluated against Proposal B. Fill up column IV of the following table:
Decision Making – CA Final SCMPE Question Bank 2
Answer:
Analysis of Costs for Evaluation of Proposal A against the proposal B.
Condition under which classification happens

  1. Variable Cost per unit that will not differ between the options Variable Cost has already been incurred in the past.
  2. Fixed Cost that is not committed and differ between the options.
  3. Additional future cost) Differs between alternatives.
  4. Costs already have been incurred and it will not affect any current or future action.

Decision Making – CA Final SCMPE Question Bank

Question 8.
Answer the following question: (May 2017, 4 marks)
Classify the following costs into one or more the following categories Relevant cost, Opportunity cost, Sunk cost, Notional cost and Historical cost.

A company wishes to manufacture ‘Smart’ watches that can be interactive with mobile phones, computers and CCTV systems. It is planning to do research on the compatibility. It has done market survey and is satisfied about the demand being sufficient for making the product profitable. Some facilities can be made available by discontinuing, its existing line of telephone instruments division.
(i) R & D costs indicated above
(ii) Cost -if Market Survey
(iii) The profit of the Telephone Instruments Division
Answer:
A company wishes to manufacture ‘smart’ watches that can be interactive with mobile phone computers and CCTV. It is planning to do research on the compatibility. It has done market survey and is satisfied about the demand being sufficient for making the product profitable. Some facility can be made available by discontinuing its existing line of telephone instruments division. So the classification of R&D costs, cost of Market Survey and the profit of the Telephone Instruments Division are as follows:
Decision Making – CA Final SCMPE Question Bank 3

Decision Making – CA Final SCMPE Question Bank

Question 9.
Bloom Ltd. makes 3 products A, B and C. The following information is available: (Nov 2008, 12 marks)
Decision Making – CA Final SCMPE Question Bank 4
Material cost and variable production overheads are the same for the peak-season and off-season. Variable selling overheads are not incurred in the ott-season. Fixed costs amount to ₹ 26,780 for each season, of which ₹ 2,000 is towards salary for special technician, incurred only for product B, and ₹ 4,780 is the amount that will be incurred on after-sales warranty and free maintenance of only product C, to match competition.

Labour force can be interchangeably used for all the products. During peak-season, there is labour shortage and the maximum labour hours available are 1,617 hours. During off-season, labour is freely available, Jut demand is limited to 100 units of A, 115 units of B and 135 units of C, with production facility being limited to 215 units for A, B and C put together.

You are required to:
(i) Advise the company about the best product mix during peak-season for maximum profit.
(ii) What will be the maximum profit for the off-season?
Answer:
Bloom Ltd. Peak Season.
Statement of Contribution and BEP (in units)
Decision Making – CA Final SCMPE Question Bank 5

Maximum units that can be produced of product C with limited labour hours 1,617
= \(\frac{1,617}{7}\) = 231.
Since
231 < Break Even units.
Hence, Bloom Ltd. cannot produce C.
Next rank is of product A
Maximum units of A that can be produced with limited labour hours
= \(\frac{1,617}{8}\)
= 202 units.
Break Even units of A = 200
∴ Profit if only of A 200
Decision Making – CA Final SCMPE Question Bank 6
Best strategy is to produce 100 units of product A and 115 units of product B during off-season.
Maximum profit = ₹ 4,375.

  1. Best strategy for peak-season is to produce 202 units of A.
  2. Maximum profit for off-season ₹ 4,375.

Decision Making – CA Final SCMPE Question Bank

Question 10.
Paints Ltd. manufactures 2,00,000 tins of paint at normal capacity. It incurs the following manufacturing costs per unit: (Nov 2008, 6 marks)
Decision Making – CA Final SCMPE Question Bank 7
Each unit is sold for ₹ 21, with an additional variable selling overhead incurred at ₹ 0.60 per unit.

During the next quarter, only 10,000 units can be produced and sold. Management plans to shut down the plant estimating that the fixed manufacturing cost can be reduced to ₹ 74,000 for the quarter.

When the plant is operating, the fixed overheads are incurred at a uniform rate throughout the year. Additional costs of plant shut down for the quarter are estimated at ₹ 14,000.

You are required:
(i) To advise whether it is more economical to shut down the plant during , the quarter rather than operate the plant.
(ii) Calculate the shut down point for the quarter in terms of numbering units.
Answer:
Contribution per tin = Selling Price – Variable cost
= 21 – (7.8 + 2.1 + 2.5 + 0.6)
= ₹ 8 per tin.
Loss on operation:
Fixed cost per annum = 2,00,000 units × 4 per unit = 8 lakhs.
∴ Fixed cost for 1 quarter = \(\frac{8}{4}\) = 2 lakhs
Decision Making – CA Final SCMPE Question Bank 8
Shut-down point (number of units) = \(\frac{\text { Avoidable Fixed Cost }}{\text { Contribution perunit }}\)
= \(\frac{2,00,000-88,000}{8}\)
= \(\frac{1,12,000}{8}\) = 14,000 units.

Decision Making – CA Final SCMPE Question Bank

Question 11.
XYZ Ltd, has two divisions, A and B. Division A makes and sells product A, which can be sold outside as well as be used by B. A has a limitation on production capacity, that only 1,200 units can pass through its machining operations in one month. On an average about 10% of the units that A produces are defective. It may be assumed that out of each lot that A supplies, 10% are defectives. (May 2009)

When A sell? in the outside market, the defectives are not returned, since the transportation costs make it uneconomical for the customer. Instead, A’s customers sell the defectives in the outside market at a discount.

But when B buys product A, it has to fix it into its product, which is reputed for its quality. Therefore, B returns all the defective units to A. A can manually rework the defectives, incurring only variable labour cost and sell them outside at ₹ 150 and not having to incur any selling costs on reworked units. If A chooses not to rework, it can only scrap the material at ₹ 30 per unit. B can buy product A from outside at ₹ 200 per unit, but has to incur ₹ 10 per unit as variable transport cost. B can insist to its outside suppliers also that it will accept only good units.

A incurs a variable selling overhead only on units (other than,reworked units) sold outside. The following figures are given for the month:
Variable cost of production – Dept. A (₹/unit) – 120
Variable selling overhead (₹/u) – 20
Selling price per unit in the outside market (₹/u) – 200
Current selling price to B (₹/u) – 190
Additional variable labour cost of reworking defectives (₹/u) – 100
Selling price of reworked detectives (₹/u) – 150
Fixed costs for the month (₹) – 36,000
Maximum demand from B at present (no. of units) – 630
The outside demand can be freely had upto 900 units.

Decision Making – CA Final SCMPE Question Bank

Given the demand and supply conditions, you are required to present appropriate calculations for the following:
(i) Evaluation of the best strategy for A in the present condition.
(ii) If B can buy only upto 540 units and the outside demand is only 600 units, how much should A charge B to maintain the same level of profit as in (i) above? (12 marks)
Answer:
(i) Contribution per unit against sale to outside = ₹ (200 – 120 – 20) = ₹ 60
In case of transfer, good units and rejected units are in proportion of 9 : 1
In case of transfer, contribution per good unit = ₹ (190 – 120) = ₹ 70
In case of transfer, contribution per rejected unit = ₹ (150 – 120 – 100) = – ₹ 70
Thus, effective contribution per unit of transfer = ₹(70 × 0.9 – 70 × 0.1) = ₹ 56
As contribution per unit against outside sale is higher, the best strategy should be to sell maximum number of unit to outside market. ‘
Contribution from outside market from sale of 900 units ₹ (900 × 60) = ₹ 54,000
Contribution from transfer of 300 units to B ₹ (300 × 56) = ₹ 16,800
Total Contribution from best strategy = ₹ 70,800

(ii) If B’s demand is 540 unit, total production required (540/0.9) = 600 units.
Taking outside market demand of 600, it is within production capacity of 1,200 units.
Now contribution from 600 units of outside sale ₹ (600 × 60) = ₹ 36,000
Contribution from rejected 60 units ₹ (60 × – 70) = ₹ (4,200)
= ₹ 31.800
To keep same level of contribution as in (i), the contribution required from transfer of 540 unit to B (₹ 70,800 – 31,800) = ₹ 39,000
Thus, contribution required per unit ₹ 39,000/540 = ₹ 72.22
Hence price to be charged per unit against transfer to B ₹ (120 + 72.22)
= ₹ 192.2

Decision Making – CA Final SCMPE Question Bank

Question 12.
Ret Ltd., a retail store buys computers from Comp Ltd. and sells them in retail. Comp Ltd. pays Ret Ltd. a commission of 10% on the selling price at which Ret sells to the outside market. This commission is paid at the end of the month in which Ret. Ltd. submits a bill for the commission. Ret Ltd. sells the computers to its customers at its store at ? 30,000 per piece. Comp Ltd. has a policy of not taking back computers once despatched from its factory. Comp. Ltd. sells a minimum of 100 computers to its customers. (May 2009, 13 marks)

Comp Ltd. charges prices to Ret Ltd. as follows:
₹ 29,000 per unit, for order quantity 100 units to 140 units.
₹ 26,000 per unit, for the entire order, if the quantity is 141 to 200 units. Ret Ltd. cannot order less than 100 or more than 200 units from Comp Ltd.

Due to the economic recession, Ret Ltd. will be forced to offer as a free gift, a digital camera costing it ₹ 4,500 per piece, which is compatible with the computer. These cameras are sold by another Co., Photo Ltd. only in boxes, where each box contains 50 units. Ret Ltd. can order the cameras only in boxes and these cameras cannot be sold without the computer.

In its own store, Ret Ltd. can sell 110 units of the computer. At another far- off location, Ret Ltd. can sell upto 80 units of the computer (along with its free camera), provided it is willing to spend ₹ 5,000 per unit on shipping costs. In this market also, the selling price that each unit will fetch is ₹ 30,000 per unit.

You are required to:
(i) State what is Ret’s best strategy along with supporting calculations.
(ii) Compute the break-even point in units, considering only the above costs.
Answer:
Decision Making – CA Final SCMPE Question Bank 9
(i) Upto 110 units, Ret Ltd. will earn a contribution of ₹ 4,000/- per unit
(ii) Between 110 and 140 units, contribution of 4,000 will be wiped out by 5,000 on shipping costs, Hence we should not consider 110-140 range.
(iii) 101 – 110 not to be considered since additional fixed costs 2,25,000 will not be covered by 10 units.
(iv) Valid consideration, 100 units or 141 to 190 units.
Fixed cost of box of 50 cameras is ₹ 2,25,000.
Decision Making – CA Final SCMPE Question Bank 10
Best strategy buy 150 units from Comp. sell 110 at store and 40 outside.
BEP should be between 151 – 191 units
Extra Camera box cost beyond 150 units = 2,25,000
Less: Profit for 150 units = 1.75.000
Extra profit acquired = 50.000
No. of units to cover this addition costs at contribution 2,000 ₹/u
= \(\frac{50,000}{2,000}\) = 25

Decision Making – CA Final SCMPE Question Bank

Question 12.
Lee Electronics manufactures four types of electronic products, A, B, C and D. All these products have a good demand in the market. The following fiqures are given to you: (Nov 2009, 18 marks)
Decision Making – CA Final SCMPE Question Bank 11
At present, the available production capacity in the company is 4,98,000 machine hours. This capacity is not enough to meet the entire market demand and hence the production manager wants to increase the capacity.

The company wants to retain the customers by meeting their demands through alternative ways. One alternative is to sub-contract a part of its production. The sub-contract offer received is as under.
Decision Making – CA Final SCMPE Question Bank 12
The company seeks your advice in terms of products and quantities to be produced and/or sub-contracted, so as to achieve the maximum possible profit. You are required to also compute the profit expected from your suggestion.
Answer:
Decision Making – CA Final SCMPE Question Bank 13
I Decision: It is more profitable to sub-contract B, since contribution is higher subcontract.
1st Level of Operations: 1,50,000 hours, Produce D as much as possible.
Hours required = 30,000 units × 3 = 90,000 hours
Balance hours available: 60,000 hours.
Produce the next best (i.e. A, Since B is better outsourced)
\(\frac{60,000 \text { hrs }}{6 \text { hrs/u }}\) = 10,000 units of A
1st Level of Operation:
Decision Making – CA Final SCMPE Question Bank 14

Decision Making – CA Final SCMPE Question Bank

2nd Level of Operation:
Both A and C increase contribution by own manufacture only by ₹ 2/- per unit.
1,50,000 hrs can produce 25,000 units of A.
∴ Contribution increases by 25,000 × 2 = 50,000
(Difference in Contribution sub-contract and own manufacturing) = 2
But increase in fixed Cost = 50,000

At the 2nd level of operation, the increase in contribution by own manufacturing is exactly set off by increase in fixed costs by ₹ 50,000/-. It is a point of financial indifference, but other conditions like reliability or possibility of the sub-contractor increasing his price may be considered and decision may them but towards own manufacture.

3rd Level of Operation:
1,50,000 hrs available
Unit of A that are needed = [52,000 – 25,000 (2nd Level) – 10,000 (1st Level)]
= 17,000 units × 6 hrs/u = 1,02,000 hrs.
Balance 48,000 hrs are available for C to produce 6,000 units.
Increase in Contribution over Level 1st or 2nd:
A : 17,000 × 2 = ₹ 34,000
C : 6,000 × 2 = ₹ 12,00
= ₹ 46,000
Increase in fixed costs = ₹ 50.000
Additional fixed costs = ₹ 4,000

4th Level of Operation: 1,50,000 hrs can give \(\frac{1,50,000}{8}\) = 18,750 unit 0f C.
Increase in Contribution 18,750 × 2 = ₹ 37,500
Increase in Cost = (₹ 50,000)
Level 3rd loss c/fd = (₹ 4,000)
Level 1st profit will order by = (₹ 16,500)
Advice: Do not expand capacities; sell maximum

Decision Making – CA Final SCMPE Question Bank

No. of units by operating at 1,50,000 hrs. capacity (level 1st) and gain ₹ 23,24,000.
Summary.
Decision Making – CA Final SCMPE Question Bank 15

Question 13.
E Ltd. is engaged in the manufacturing of three products in its factory. The Following budget estimates are prepared for 2009 – 10: (May 2010)
Decision Making – CA Final SCMPE Question Bank 16
After the finalisation of the above manufacturing schedule, it is observed that presently only 80% capacity being utilised by these three products. The production activities are made at the same platform and it may be interchangeable among products according to requirement. In order to improve the profitability of the company the following three proposals are put for consideration:

(a) Discontinue product A and capacity released may be used for either product B or C or equally shared. The fixed cost of product A is avoidable. Expected changes in material cost and selling price subject to the utilisation of product A’s capacity are as under:
Product B: Material cost increased by 10% and selling price reduced by 2%.
Product C: Material cost increased by 5% and selling price reduced by 5%.

Decision Making – CA Final SCMPE Question Bank

(b) Discontinue product A arid divert the capacity so released and the idle capacity to produce a new product D for meeting export demand whose per unit cost data are as follows:
Decision Making – CA Final SCMPE Question Bank 17

(c) Product A, B and C are continuously run and hire out the idle capacity fixing a price in such a way that the same rate of profit per direct labour hour is obtained in the original budget estimates.

Required:
(i) Prepare a statement of profitability of products A. B and C in existing situation.
(ii) Evaluate the above proposals independently and calculate the overall profitability of the company under each proposal.
(iii) What proposal should be accepted. if the company wants to maximise its Profit? (10 marks)
Answer:
(i) Budgeted profitability statement under existing situation
Decision Making – CA Final SCMPE Question Bank 18

(ii) Proposal (a) Alternative use of As Capacity for Product b or C or B C
Equally Hours released for discontinuance of A = 10,000 × 4 = 40,000 hours.
Decision Making – CA Final SCMPE Question Bank 19
Decision: It is better to produce C
Taking both changes in the selling price and material cost are for the entire
production or the incremental production. Profitability is calculated below:

Decision Making – CA Final SCMPE Question Bank

Proposal (a): Profitability statement if A’s capacity utilized by C
Decision Making – CA Final SCMPE Question Bank 20
Proposal (b): .
Existing capacity = (4 × 10,000 +6 × 25,000 + 5 × 20000) = 2,90,000 hrs
Then, Idle capacity of 20% = 290000/4 = 72,500 hours
Capacity for product ‘D’ = (idle + A’s spare) capacity = 72,500 + 40,000 = 1,12,500 hours,
No. of units ‘D’ produced = 1,12,500/4 = 28,125 units.
Profitability Statement – proposal (b) –
Decision Making – CA Final SCMPE Question Bank 21

Proposal (c) HIring Out Idle capacity
Decision Making – CA Final SCMPE Question Bank 22
Decision on option on the basis of profitability:
(i) If price anc st under proposal (a) is for entire production of C: Proposal (b) of Export
(ii) If price and cost under proposal (a) is for incremental prod C: Proposal (a) – Option 2

Decision Making – CA Final SCMPE Question Bank

Question 14.
X Ltd. supplies spare parts to an air craft company Y Ltd. The production capacity of X Ltd. facilitates production of any one spare part for a particular period of time. The following are the cost and other information for the production of the two different spare parts A and B: (May 2010, 8 marks)
Decision Making – CA Final SCMPE Question Bank 23
Total hours available: Machine A 4,000 hours
Machine B 4,500 hours
Alloy available is 13,000 kgs. @ ₹ 12.50 per kg.
Variable overheads per machine hours:
Machine A: ₹ 80
Machine B: ₹ 100
You are required to identify the spare part which will optimise contribution at the offered price.

If Y Ltd. reduces target price by 10% and offers ₹ 60 per hour of unutilised machine hour, what will be the total contribution from the spare part identified above?
Answer:
(i) Number of parts to be manufactured:
Decision Making – CA Final SCMPE Question Bank 24

Decision Making – CA Final SCMPE Question Bank

Question 15.
G Ltd. produces and sells 95,000 units of ‘X’ in a year at its 80% production capacity. The selling price of product is ₹ 8 per unit. The variable cost is 75% of sales price per unit. The fixed cost is ₹ 3,50,000. The company is continuously incurring losses and management plans to shut-down the plant. The fixed cost is expected to be reduced to ₹ 1,30,000. Additional costs of plant shut-down are expected at ₹ 15,000. (Nov 2010, 5 marks)

Should the plant be shut-down ? What is the capacity level of production of shut-down point?
Answer:
Decision Making – CA Final SCMPE Question Bank 25
A comparison of loss figures indicated as above points out that loss is reduced by (1,60000 – 1,45,000) ₹ 15,000 if plant is shut down.
Shut down point = \(\frac{3,50,000-1,45,000}{8-6}\) = \(\frac{2,05,000}{2}\) = 1,02,500 units
Capacity level of shut down point:
At 100% level production is \(\frac{95,000}{0.80}\) = 1,18,750
Capacity level at shut down = \(\frac{1,02,500}{1,18,750}\) =86.31%

Decision Making – CA Final SCMPE Question Bank

Question 16.
E Ltd. manufactures and sells four types of products under the brand names A, B, C and D. On a turnover of ₹ 30 crores in 2009, company earned a profit of 10% before interest and depreciation which are fixed. The details of product mix and other information are as follows: (Nov 2010, 12 marks)
Decision Making – CA Final SCMPE Question Bank 26
Interest and depreciation amounted to ₹ 225 lakhs and ₹ 115.50 lakhs respectively.

Due to increase in prices in the international market, the company anticipates that the cost of raw materials which are imported will increase by 10% during 2010. The company has been able to secure a license for the import of raw materials of a value of ₹ 1,535 lakhs at 2010 prices. In order to counteract the increase in costs of raw materials, the company is contemplating to revise its product mix. The market survey report indicates that the sales potential of each of the products: ‘A’ ‘B’ and ‘C’ can be increased upto 30% of total sales value of 2009. There was no inventory of finished goods or work in progress in both the year.

You are required to:
Set an optimal product mix for 2010 and find the profitability.
Answer:
(a) Revised P/V ratio and ranking of products:
Decision Making – CA Final SCMPE Question Bank 27
Maximum Sales Potential
A 30% of ₹ 3,000 = 900
B 30% of ₹ 3,000 = 900
C 30% of ₹ 3,000 = 900
D 40% of ₹ 3,000 =1200
Allocation of raw material whose supply is restricted to ₹ 1,535 lacs in order of raw material profitability.
Decision Making – CA Final SCMPE Question Bank 28

Decision Making – CA Final SCMPE Question Bank

Balancing figure, hence sales will be restricted to 451** lakhs (297.5/66%)
Decision Making – CA Final SCMPE Question Bank 29
Balancing figure(Contribution – Profit before Depreciation & Interest)
The increase of contribution of ₹ 85.54 in 2010 will set off loss of ₹ 40.50 lakhs and result in profit of ₹ 45.04 lakhs.

Decision Making – CA Final SCMPE Question Bank

Question 17.
Attempt: (Nov 2010, 4 marks)
(a) The following information is given by Z Ltd:
Margin of safety – ₹ 1,87,500
Total cost – ₹ 1,93, 750
Margin of safety – 7,500 units
Break-even sales – 2,500 units
Required:
Calculate Profit, P/V Ratio, BEP Sales (in ₹) and Fixed Cost.
Answer:
Margin of Safety(%) = MoS Units/Actual Sales Units
= 7,500/(7,500 + 2,500) = 75%
Total Sales = 1,87,500/0.75 = ₹ 2,50,000/-
Profit = Total sales – Total Cost
= 2,50,000 – 1,93,750 = ₹ 56,250
P/V Ratio = Profit/MoS (₹) × 100
= 56,250/1,87,500 × 100 = 30%
BEP Sales = Total Sales/(100- MS)
= 2,50,000 × 0.25 = ₹ 62,500
Fixed Cost = Sales × P/V Ratio- Profit
= 2,50,000 × 0.30 – 56,250 = 18,750

Decision Making – CA Final SCMPE Question Bank

Alternate Answer:
Margin of Safety = Selling Price per unit × (7500 units)
₹ 1,87,500 = Selling Price per unit × (7500 units)
Therefore,
Selling Price per unit = 1,87,500/7,500 = ₹ 25
Decision Making – CA Final SCMPE Question Bank 30

Question 18.
A company has two divisions: Division A and Division B. Both divisions ot the company manufacture the same product but located at two different places. The annual output of division A is 6,000 tons (at 80% capacity) and that of division B is 7,500 tons (at 60% capacity). The basic raw material required for production is available locally at both the places, but at division A, it is limited to 4,000 tons per annum at the rate of ₹ 100 per ton, at division B, it is limited to 8,000 tons per annum at the rate of ₹110 per ton. Any additional requirement of material will have to be purchased at a rate of ₹ 125 per ton from other markets at either of division. Variable costs per ton at each division remain constant. For every 1,000 tons of output, 800 tons raw material is required. The details of other costs of the divisions are as follows: (Nov 2010, 12 marks)
Decision Making – CA Final SCMPE Question Bank 31

Required:
(i) Calculate variable cost per ton for each division’s product and decide ranking in order of preference.
(ii) The company desires to fully utilize the available local supplies of raw material to save the overall variable cost of production; keeping the total production of both the divisions putting together is the same as at present level. Calculate the quantity of production (output) that could be transferred between the two divisions and overall saving in variable cost.
(iii) After considering the option (ii), how the balance capacity should be
utilized if company is working at 100% capacity, and also calculate selling price per ton if company mark up 10% on full cost of each division’s product.
Answer:
Variable cost per ton in different alternatives
Decision Making – CA Final SCMPE Question Bank 32

Maximum production at both division 6,000 + 7,500 = 13,500 tons
Decision Making – CA Final SCMPE Question Bank 33

Decision Making – CA Final SCMPE Question Bank

Transfer from Division A to Division B 1000 tons output wiN save in variable cost ₹ 27,92,000 – 27,78,000 = 14,000.

At 100% capacity the production is
Decision Making – CA Final SCMPE Question Bank 34
Decision Making – CA Final SCMPE Question Bank 35
Decision Making – CA Final SCMPE Question Bank 36

Decision Making – CA Final SCMPE Question Bank

Question 19.
Pick out from each of the following items, costs that can be classified under ‘committed fixed costs’ or ‘discretionary fixed costs’. (May 2011, 5 marks)
(i) Annual increase of salary and wags of administrative staff by 5% as per agreement.
(ii) New advertisement for existing products is recommended by the Marketing Department for achieving sales quantities that were budgeted for at the beginning of the year.
(iii) Rents paid for the factory premises for the past 6 months and the rents payable for the next six months. Production is going on in the factory.
(iv) Research costs on a product that has reached ‘maturity’ phase in its life cycle and the research costs which may be needed on introducing a cheaper substitute into the market for facing competition.
(v) Legal consultancy fees payable for patent rights on a new product. Patenting rights have been applied for.
Answer:
Committed Fixed Cost
(i) Salary and wage increase
(iii) Rents payable for the next 6 months
(v) Legal fees for filing for patent rights.

Discretionary Fixed Cost
(ii) New Advertisement Cost
(iv) Research cost for substitutes

Decision Making – CA Final SCMPE Question Bank

Question 20.
A company can make any one of the 3 products X, Y or Z in a year. It can exercise its option only at the beginning of each year. Relevant information about the products for the next year is given below: (May 2011, 3 marks)
Decision Making – CA Final SCMPE Question Bank 37
You are required to compute the opportunity costs for each of the products.
Answer:
Decision Making – CA Final SCMPE Question Bank 38

Question 21.
Maruthi Agencies has received an order from a valuable client for supplying 3,00,000 pieces of a component at ₹ 550 per unit at a uniform rate of 25000 units a month. (May 2011, 6 marks)

Variable manufacturing costs amount to ₹ 404.70 per unit, of which direct materials is ₹ 355 per unit. Fixed production overheads amount to ₹ 30 lacs per annum, excluding depreciation. There is a penalty/reward clause of ₹ 30 per unit for supplying less/more than 25000 units per month. To adhere to the schedule of supply, the company procured a machine worth ₹ 14.20 lacs which will wear out by the end of the year and will fetch ₹ 3.55 lakhs at the year end.

After this supply of machine, the supplier offers another advanced machine which will cost ₹ 10.65 lakhs, will wear out by the year end and not have any resale value. If the advanced machine is purchased immediately, the purchaser will exchange the earlier machine supplied at the price of the new machine. Fixed costs of maintaining the advanced machine will increase by ₹ 14,200/-per month for the whole year. While the old machine had the capacity to complete the production in 1 year, the new machine can complete the entire job in 10 months. The new machine will have material wastage of 0.5%. Assume uniform production throughout the year for both the machines.

Using incremental cost/revenue approach, decide whether the company should opt for the advanced version.
Answer:
Decision Making – CA Final SCMPE Question Bank 39
Decision: Buy the advanced version.
Working Note:
1st machine 25,000 per month, no penalty, no reward
New machine: \(\frac{3,00,000}{10}\) = 30,000 per months
advance supply per month = 5,000
= 5,000 × 10 months = 50,000 units reward.

Decision Making – CA Final SCMPE Question Bank

Question 22.
Entertain U Ltd. hires an air-conditioned theatre to stage plays on weekend evenings. One play is staged per evening. The following are the seating arrangements: (May 2011, 11 marks)

VIP rows – the first 3 rows of 30 seats per row, priced at ₹ 320 per seat.
Middle level – the next 18 rows of 20 seats per row, priced at ₹ 220 per seat.
Last level – 6 rows of 30 seats per row, priced at ₹ 120 per seat.

For each evening, a drama troupe has to be hired at ₹ 71,000, rent has to be paid for the theater at ₹ 14,000 per evening and air conditioning and other stage arrangement charges work out to ₹ 7,400 per evening. Every time a play is staged, the drama troupe’s friends and guests occupy the first row of the VIP class, free of charge, by virtue of passes granted to these guests. The troupe ensures that 50% of the remaining seats of the VIP class and 50% of the seats of the other two classes are sold to outsiders in advance and the money is passed on to Entertain U.

The troupe also finds for every evening, a sponsor who puts up his advertisement banner near the stage and pays Entertain U a sum of ₹ 9,000 per evening. Entertain U supplies snacks during the interval, free of charge to all the guests in the hall, including the VIP free guests. The snacks cost Entertain U ₹ 20 per person. Entertain U sells the remaining tickets and observes that for every one seat dertianded from the last level, there are 3 seats demanded from the middle level and 1 seat demanded from the VIP level. You may assume that in case any level is filled, the visitor buys the next higher or lower level, subject to availability.

(i) You are required to calculate the number of seats that Entertain U has to sell in order to break-even and give the category wise total seat occupancy at BEP.
(ii) Instead of the given pattern of demand, if Entertain U finds that the demand for VIP, Middle and Last level is in the ratio 2:2:5, how many seats in each category will Entertain U have to sell in order to break-even?
Answer:
(i) When demand in ratio 1 : 3 : 1
Decision Making – CA Final SCMPE Question Bank 40
Weighted average contribution per seat as per std.
demand pattern = \(\frac{1,000}{5}\) = ₹ 200

Decision Making – CA Final SCMPE Question Bank

(ii) When demand in ratio 2 : 2 : 5
Decision Making – CA Final SCMPE Question Bank 41
Weighted average contribution per seat as per demand pattern \(\frac{1,500}{9}\) = ₹ 166.66
Number of Seats of BEP = \(\frac{₹ 30,000}{166.67}\) = 180 seats

Decision Making – CA Final SCMPE Question Bank

Question 23.
New Ltd. plans to completely manufacture a single product Z, whose selling price and variable manufacturing costs will be ₹ 100 per unit and ₹ 80 per unit respectively. If the complete production is done at its own factory, fixed machining costs will be ₹ 3,62,000 and fixed administration and selling overheads will be ₹ 30,000 for the production period. (Nov 2011, 5 marks)

Alternatively, the product can be finished outside by sub contracting the machining operations at ₹ 10 per unit, but this will entail an increase in the fixed administration overheads by ₹ 1,20,000, while fully avoiding the machining cost of ₹ 3,62,000.

Based on the above figures and assuming a production capacity of 30,000 units for the production period, advise with relevant supporting figures, from a financial perspective, for what volumes of market demand will:
(i) a manufacture be recommended at all?
(ii) a fully in-house production be recommended?
(iii) the sub contracting option be recommended?
Answer:
Decision Making – CA Final SCMPE Question Bank 42
Point of Indifference = level of production where both options will have same outcome.
It can be calculated as:
Difference in Fixed cost = ₹ (3,92,000 – 1,50,000) = ₹ 2,42,000
Difference in contribution per unit = ₹ (20 – 10) = ₹ 10
Point of indifference = Diff. in FC/Diff in Contribution = 2,42,000/10 = 24,200 units
(i) If Market demand is above 15,000: manufacture is recommended
(ii) For Demand 24201 to 30000 units: Manufacture fully in-house.
(iii) For Demand 15000 to 24200 units: Sub-contract

Decision Making – CA Final SCMPE Question Bank

Question 24.
Pigments Ltd. is a chemical factory producing joint products J, K and L at a joint cost of production of ₹ 9,60,000. The sales are: (Nov 2011, 5 marks)
J ₹ 60,000 units at ₹ 5 per unit,
K ₹ 20,000 units at ₹ 20 per unit and
L ₹ 40,000 units at ₹ 10 per unit.
The company seeks your advice regarding the following options available:- Option I: After the joint process, all of L can be further.processed to make 36,000 units of M, at an additional processing cost of ₹ 1,80,000 and M can be sold at ₹ 18 per unit.

Option II: The facilities used to convert L to M may be used to make 7,000 units of an additional product A, with a different raw material input. A can be made at an additional variable manufacturing cost of ₹ 12 per unit and will fetch ₹ 30 as the selling price, but the company will have to offer one unit of J as a free gift for each unit of A sold.
Evaluate the proposals using the ncremental cost approach.
Answer:
Decision Making – CA Final SCMPE Question Bank 43

Decision Making – CA Final SCMPE Question Bank

Question 25.
Quickcomp is a successful version of a software package that is widely used. Fastercomp is the next version, for which the development is complete and it is ready to be sold immediately in the market as budgeted. However, for Fastercomp, user manuals training modules and diskettes have not yet been made, whereas, for the Quickcomp version, these are overstocked by 5,000 units. Release of Fastercomp will render the Quickcomp version not saleable. The following information is provided: (Nov 2011, 6 marks)
Decision Making – CA Final SCMPE Question Bank 44
From a purely financial perspective, the company wants your advice whether to delay the release of the new version by 2 months by when the inventory of the existing version would have sold out or to release the new version immediately. Support your advice with relevant figures.
Answer:
Decision Making – CA Final SCMPE Question Bank 45

Question 26.
A company has decided to launch a new product X which is expected to have a demand of 10,000 units during the year at ₹ 160 per unit. The following information is furnished by the company: (May 2012, 5 marks)
(i) Material — The manufacture of one unit of X requires one unit of each of materials A, B and C.
Decision Making – CA Final SCMPE Question Bank 46
(ii) Direct labour
Skilled labour is paid at ₹ 80 per hour. It takes 0.25 hours/unit. Skilled labour has to be drawn from another production line which has a contribution of ₹ 240 per unit, with each unit requiring 2 hours of skilled labour.
Unskilled labour — 2 hours/unit @ ₹ 56 per hour. There is abundant unskilled labour in the factory, but according to an agreement with the labour union, no unskilled worker can be retrenched.

(iii) Variable overhead – ₹ 10 per unit.
(iv) Fixed Costs – no increase.
Using relevant cost approach, you are required to find out the average variable cost per unit of X.
Answer:
Average Variable Cost per unit of X
Decision Making – CA Final SCMPE Question Bank 47

Decision Making – CA Final SCMPE Question Bank

Question 27.
XY Ltd. makes two products X and Y, whose respective fixed costs are F1 and F2. You are given that the unit contribution of Y is one fifth less than the unit contribution of X, that the total of F1 and F2 is ₹ 1,50,000, that the BEP of X is 1,800 units (for BEP of X, F2 is not considered) and that 3,000 units is the indifference point between X and Y. (i.e. X and Y make equal profits at 3,000 unit volume, considering their respective fixed costs). There is no inventory build up as whatever is produced is sold.
You are required to find out the values of F1 and F2 and unit contributions of X and Y. (May 2012, 5 marks)
Answer:
Let Cx be the Contribution per unit of Product X.
So, Contribution per unit of Product Y = Cy = 4/5Cx = 0.8Cx
Given F1 + F2 = 1,50,000,
F1= 1,800Cx (Break even volume x contribution per unit)
∴ F2 = 1,50,000 – 1,800Cx.
3,000Cx – F1 = 3,000 x 0.8Cx – F2 or 3,000Cx – F1 = 2,400 Cx – F2 (Indifference point) .
i.e., 3,000Cx – 1,800Cx = 2,400Cx – 1,50,000 + 1,800 Cx
i.e., 3,000Cx = 1,50,000, Therefore Cx = ₹ 50/- (1,50,000 / 3,000)
∴ Contribution per unit of X = ₹ 50
Fixed Cost of X = F, = ₹ 90,000 (1,800 × 50)
∴ Contribution per unit of Y is ₹ 50 × 0.8 = ₹ 40 and Fixed cost of Y = F2 = ₹ 60,000 (1,50,000 – 90,000)
The value of F1 = ₹ 90,000, F2 = ₹ 60,000 and X = ₹ 50 and Y = ₹ 40

Decision Making – CA Final SCMPE Question Bank

Question 28.
A company is operating at 60% of its capacity with a turnover of ? 43.20 lacs. If the company works at 100% capacity, the sales-cost relation is: (May 2012, 8 marks)
Factory cost is two thirds of sales value. Prime cost is 75% of factory cost Administration and selling expenses (75% variable) are 20% of the sales value. Factory overhead will vary according to operating capacity as given below:
Decision Making – CA Final SCMPE Question Bank 48
The company has planned to operate at 80% of its capacity. Moreover, it has received an export order and its execution will involve 40% of the capacity. The prime cost of the order is estimated at ₹ 6.0 lacs and the shipping involved will be around ₹ 1.0 lac. Administration and selling expenses will be avoided on the export order. Taking the same percentage of profits as on the domestic sales, determine the minimum price to be quoted for the export order.
Answer:
Decision Making – CA Final SCMPE Question Bank 49

Decision Making – CA Final SCMPE Question Bank

Question 29.
Ezee Ltd makes two products, E and Z. All units produced are sold. There is no inventory build up. Production facilities may be used interchangeably for both the products. Sales units are the limiting factor. The following information is given: (May 2012, 8 marks)
Decision Making – CA Final SCMPE Question Bank 50
For increase in quantities above 4,000 units for each product, there will be an increase in variable selling costs, (for the increased portion only), thereby reducing the contribution per unit to the following figures:
Decision Making – CA Final SCMPE Question Bank 51
(i) For the present level, find the break-even point with the present product mix.
(ii) What is the minimum number of incremental units to be sold to recover the additional fixed cost of ₹ 47,500 to be incurred? (Present product mix need not be maintained):
(iii) If you are allowed to choose the best product mix for the incremental level, (while taking the present mix given in the first table above for the present level), what would be the individual product quantities and the corresponding total contributions, the total average contribution per unit and the total profits for the complete production?
Answer:
(i) Present Level:
Weighted average contribution per unit
(3,000 × 25 + 2,000 × 20)1(3,000 + 2,000) Or, (3 × 25 + 2 × 20)/(2 + 3)
= 23 ₹ /unit.
BEP = Present level Fixed cost/ weighted average Contribution per unit
= 46,000/23 = 2000 units,
or (E 1200 units and Z 800 units)

Decision Making – CA Final SCMPE Question Bank

(ii) Minimum units for incremental level:
next 1,000 units of E get contribution of 25 × 1000 = 25,000
next 1,000 units of E or Z get 20/unit as Contribution = 20,000
next 125 units of E or Z get 20/unit as Contribution = 2,500
Total 2,125 units are the minimum requirement for 47,500
Incremental fixed cost
Minimum units required:
E = 2,000
Z = 125
Total = 2,125
Or
E = 1,000
Z = 1,125
Total = 2,125

(iii) Optimal profit – best mix :
Decision Making – CA Final SCMPE Question Bank 52

Decision Making – CA Final SCMPE Question Bank

Question 30.
A machine manufacturing company needs four components A, B, C and D. The components may be procured from outside. The cost, market price for the components and other information are given below: (May 2012, 8 marks)
Decision Making – CA Final SCMPE Question Bank 53
There are constraints on the machine time in manufacturing all the components. Total machine hours available is only 12,000 hours.
It is possible to use the machine time in a second shift which will attract 20% extra wages and other fixed overheads at ₹ 6,000 for every 1,000 hours or part thereof.
With relevant supporting figures, advise the best course of action to maximize the profits.
(Note / Students need not work out the complete profitability statement).
Answer:
Decision Making – CA Final SCMPE Question Bank 54

Decision Making – CA Final SCMPE Question Bank

Hours required in 2nd Shift is 3250 hours / 1625 units of A
Contribution per unit for Product A in second shift
₹ 40 – ₹ 12 = ₹ 28 (Direct wages will go up by ₹ 12)
For every 1000 hours in second shift the Contribution from A would be ₹ 14,000 i.e., 1,000/2 × 28
The increase in Fixed Cost is ₹ 6,000. After 3,000 hours the Contribution will be only ₹ 250/2 × 28 i.e. ₹ 3,500, whereas the increase in fixed cost will be ₹ 6,000.
Hence, it is not advantageous to go beyond 3,000 hours in the second shift.

Best Course of action is:
(i) Purchase D from outside: 3,000 units.
(ii) Make B and C fully in-house in the normal shift, B:3,500 units, C:2,000 units.
(iii) Make and buy A as follows:
Normal shift: – 1,375 units
2nd shift: – 1,500 units
Purchase: – 125 units

Decision Making – CA Final SCMPE Question Bank

Question 31.
PQR Ltd is considering introducing a new product at a price of ₹ 105 per unit. PQR Ltd’s controller has compiled the following incremental cost information based on an estimate of 1,20,000 units of sales annually for the new product: (May 2012, 8 marks)
Direct material cost – ₹ 36,00,000
Direct Labour cost – ₹ 24,00,000
Flexible manufacturing support – ₹ 12,00,000
Sales commission – 10% of sales
Capacity-related cost – ₹ 20,00,000
The average inventory levels for the new product are estimated as follows:
Raw materials : 2 months’ production
Work-in-progress (100% complete for Materials and 50% complete for labour and Flexible manufacturing support) : 1 month production Finished goods : 2 months’ production

Annual inventory carrying costs not included in the flexible manufacturing support listed earlier are estimated to be 12% of inventory value. In addition, the sales manager expects the introduction of new product to result in a reduction in sales of existing produpt from 3,00,000 to 2,40,000 units. The contribution margin for the existing product is ₹ 20 per unit.

Prepare a statement showing the budgeted impact on PQR’s profits on the introduction of the new product. Should the new product be introduced?
Answer:
Decision Making – CA Final SCMPE Question Bank 55

Decision Making – CA Final SCMPE Question Bank

Question 32.
If Moonlite Limited operates its plant at normal capacity it produces 2,00,000 units from the plant ‘Meghdoot’. The unit cost of manufacturing at normal capacity is as under: (Nov 2012, 5 marks)
Decision Making – CA Final SCMPE Question Bank 56
Direct labour cost represents the compensation to highly-skilled workers, who are permanent employees of the company. The company cannot afford to lose them. One labour hour is required to complete one unit of the product.

The company sells its product for ₹ 200 per unit with variable selling expenses of ₹ 16 per unit. The company estimates that due to economic down turn, it will not be able to operate the plant at the normal capacity, at least during the next year. It is evaluating the feasibility of shutting down the plant temporarily for one year.

If it shuts down the plant, the fixed manufacturing overhead will be reduced to ₹ 1,25,000. The overhead costs are incurred at a uniform rate throughout the year. It is also estimated that the additional cost of shutting down will be ₹ 50,000 and the cost of re-opening will be ₹ 1,00,000.

Required:
Calculate the minimum level of production at which it will be economically beneficial to continue to operate the plant next year if 50% of the labour hours can be utilized in another activity, which is expected to contribute at the rate of ₹ 40 per labour hour. The additional activity will relate to a job which will be off¬loaded by a sister company only if the company decides to shut down the plant.
(Assume that the cost structure will remain unchanged next year. Ignore income tax and time value of money.)
Answer:
Contribution per unit
Decision Making – CA Final SCMPE Question Bank 57
*[2,00,000 units × ₹ 7]
Indifference Point: ₹ 51,25,000/₹ 86 = 59,593 units
Minimum level of production to justify continuation = 59,594 units

Decision Making – CA Final SCMPE Question Bank

Question 33.
A process industry unit manufactures three joint products: A, B and C. C has no realisable value unless it undergoes further processing after the point of separation. The cost details of C are as follows: (May 2013, 5 marks)
Decision Making – CA Final SCMPE Question Bank 58
C can be sold at ? 37 per unit and no more.
(i) Would you recommend production of C?
(ii) Would your recommendation be different if A, B and C are not joint products?
Answer:
(i)

  • Cost incurred on Product ‘C’ upto point of separation is irrelevant for decision making as Product ‘C’ is a Joint Product. Joint Products are the result of same raw material and same process Operations.
  • Cost incurred after point of separation will be considered for decision making as specifically incurred for Product ‘C’.
  • Calculation of further processing cost:
    Decision Making – CA Final SCMPE Question Bank 59

Conclusion: Therefore, further processing of Product ‘C’ is recommended.

So further processing Product ‘C’ will contribute ₹ 17 per unit toward’ Joint Production Cost’.

(ii) If Product ‘C is not a joint product with same cost structure. In this case there will be negative contribution on production of Product ‘C’. The calculation is as follows:
Decision Making – CA Final SCMPE Question Bank 60
Therefore, production of Product ‘C’ will not be recommended.

Decision Making – CA Final SCMPE Question Bank

Question 34.
X Ltd. wants to replace one of its old machines. Three alternative machines namely M1, M2 and M3 are under its consideration. The costs associated with these machines are as under: (May 2013, 5 marks)
Decision Making – CA Final SCMPE Question Bank 61
You are required to compute the cost indifference points for these alternatives. Based on these points suggest a most economical alternative machine to replace the old one when the expected level of annual production is 1200 units.
Answer:
CalculatIon of Cost Indifference Points for three alternatives
Decision Making – CA Final SCMPE Question Bank 62

  • From the above calculation, it is clear that at activity level below the indifference point the alternative (machine) with lower fixed cost and higher variable costs should be used.
  • If the activity level exceeds the indifference point, a machine with lower variable cost per unit (or higher contribution per unit) and higher fixed cost, is more profitable to operate.
  • At the activity level equal to the indifference point both machines are on equal footing. Hence from the above we conclude as follows:

Decision Making – CA Final SCMPE Question Bank 63
. When the expected level of activity is 1.200 units i.e. more than 1,000 units, Machine M1 should be used.

Decision Making – CA Final SCMPE Question Bank

Question 35.
Better and Best Ltd. manufacture only one product. Production is regular throughout the year and the capacity of the factory is 150,000 units per annum. The summarized Profit and Loss Account for the year ended 31st December is being reviewed by the Board of Directors. (May 2013, 12 marks)
Decision Making – CA Final SCMPE Question Bank 64
(i) The Production Director proposed to reduce selling price to ₹ 9 in order to utilize full capacity.
(ii) The Sales Director proposed to increase selling price by 20 per-cent. By spending ₹ 2,25,000 on advertisement, sales will be increased to
1,20,000 units per annum.

(iii) The Personnel Director pleaded for a change in the method of wage payment. For the present piece rate of ₹ 1.50 per unit, a bonus scheme (for each 2% increase in production over the target, there would be an increase of 1% in the basic wage of each employee) will be implemented. A target of 2,000 units per week for the company will be set for 50 week year. Selling price increase by 10%. With an additional advertisement cost of ₹ 1,60,000, 20% increase in present sales will be achieved.

(iv) The Chairman felt that the packaging of the product required improvement. He wanted to know the sales required to earn a target profit of 10% on turnover with the introduction of an improved packing at an additional cost of 20 paise per unit (no change in selling price).
You are required to evaluate individually the proposals of each of the board member and give your recommendation.
Answer:
(i) Workings Note:
Full Capacity: ₹ 1,50,000 units p.a.
Current Capacity: ₹ 1,00,000 units p.a. which is equals to 66.67% of full capacity.
Existing Situation
Decision Making – CA Final SCMPE Question Bank 65

Proposal (i) When selling Price is reduced to ₹ 9, Capacity Utilization 100%
Decision Making – CA Final SCMPE Question Bank 66

Decision Making – CA Final SCMPE Question Bank

Proposal (ii): When Selling Price is lo be increased by 20%, Additional Advertising Cost ₹ 2,25,000, Sales Volume 1,20,000 units per annum.

Decision Making – CA Final SCMPE Question Bank 67
Proposal (iii): When Selling Price is to be increased by 10%, Additional Advertising Cost ₹ 1.60,000, 20% Increase in Present Sales and Bonus Scheme (for each 2% increase in production over the target, there would be an increase of 1% in the basic wages of each employee)
Decision Making – CA Final SCMPE Question Bank 68

Working Note:
Present Labour Rate = ₹ 1.50 per unit
Target Production Volume = 2,000 units × 50 weeks = 1,00,000 units
Production above the target volume = 1,20,000 units – 1,00,000 units = 20,000 units or 20% of Target Production Volume Bonus (for each 2% increase in production over the target, there would be
an increase of 1% in the basic wages of each employee) = \(\frac{1 \%}{2 \%}\) × 20%
= 10% increase in basic wages.
It means wages would be ₹ 1.65 (₹ 1.50 × 1.10) per unit.

Decision Making – CA Final SCMPE Question Bank

Proposal (iv): When -Target Profit 10% on Turnover, Additional Packing Cost 0.20 paise per unit. No-Change in Selling Price, Sales Volume.
Let the sales volumes be K units
Decision Making – CA Final SCMPE Question Bank 69
Profit equals to 10% of Turnover, It means:
→ 5K – 4,80000 = 10% of 10K
→ 4K = 4,80000
→ K = 1,20,000 units
Turnover = 1,20,000 units × ₹ 10
= 12,00,000
Profit = 10% of ₹ 12,00,000
= ₹ 1,20,000
Decision Making – CA Final SCMPE Question Bank 70
Company should accept Proposai (ii).

Decision Making – CA Final SCMPE Question Bank

Question 36.
A company has to decide whether to accept a special order or not for a certain product M in respect of which the following information is given: (Nov 2013, 5 marks)
Decision Making – CA Final SCMPE Question Bank 71
Considering relevant costs, find out the minimum value above which the company may accept the order.
Answer:
Decision Making – CA Final SCMPE Question Bank 72

Decision Making – CA Final SCMPE Question Bank

Question 37.
A company can produce any of its 4 products, A, B, C and D. Only one product can be produced in a production period and this has to be determined at the beginning of the production run. The production capacity is 1000 hours. Whatever is produced has to be sold and there is no inventory buildup to be considered beyond the production period. Th following information is given: (Nov 2013, 5 marks)
Decision Making – CA Final SCMPE Question Bank 73
What are the opportunity costs of A, B, C and D?
Answer:
Statement Showing Calculation of Opportunity Cost:
Decision Making – CA Final SCMPE Question Bank 74
(*) Opportunity cost is the maximum possible contribution foregone by not producing alternative products i.e. if product A is produced then opportunity cost will be maximum of possible contribution from product B, C and D i.e. ₹ 32,000. Same is for Product B and D. In case of product C opportunity cost will be the maximum of possible contribution from product A, B and D i.e. ₹ 20,000.

Decision Making – CA Final SCMPE Question Bank

Question 38.
Flyway Ltd. has hired an aircraft to specially operate between cities A and B. All the seats are economy class. (Nov 2013, 12 marks)
The following information is available:
Seating capacity of the aircraft : 260 passengers
Average number of passengers per flight : 240 passengers
Average one-way fare from A to B : ₹ 5,000 per passenger
Fuel costs per flight from A to B : ₹ 90,000
Food cost (A to B sector)(no charge to passenger) : ₹ 300 per passenger
Commission to travel agents (All tickets are through agents) : 10% of the fare
Annual lease costs allocated to each flight : ₹ 2,00,000
Ground services, baggage handling/checking in service costs per flight A to B : ₹ 40,000
Flight crew salaries per flight A to B : ₹ 48,000

There is an offer from another airlines operator, Haltgo Ltd. for a stop-over at destination D, which is on the way from A to B. Due to this, the flight will operate from A to D, then from D to B.

The following terms are considered for the stop-over:
50 seats from D to B will be booked by Haltgo at ₹ 2,700 per ticket, whether or not Haltgo is able to sell them to its customers. No agents’ commission is payable on these tickets. However, Snacks must be provided to these passengers also by Flyway Ltd. at no further charge to Haltgo or the passengers.

A maximum of 60 tickets can be sold by Flyway’s travel agents for the A to D sector at a fare of ₹ 3,000 per passenger.

Decision Making – CA Final SCMPE Question Bank

Since the stop-over wastes more time, 25 of Flyway’s original passengers in the A to B sector will voluntarily drop out in favour of other airlines offering direct flights between A and B.

Due to the stop-over, fuel costs will increase from ₹ 90,000 to ₹ 1,35,000. Additional airport landing/baggage handling charges of ₹ 19,000 per stop-over will have to be incurred by Flyway Ltd.

Flyway Ltd. will have to serve snacks to all the passengers in the D to B sector at no charge to passengers. Each snack will cost Flyway ₹ 200. This will be in addition to the original food at ₹ 300 served in the A to D sector.

You may assume that fuel costs are not affected by the actual number of passengers in the flight, ignore non- financial considerations, additional wear and tear to aircraft due to extra landing/take-off.
Without considering Haltgo’s offer,
(i) What is the profit earned by Flyway Ltd. per flight from A to B?
(ii) What is the Break-even number of passengers for each flight from A to B? Considering the effects of Haltgo’s offer,
(iii) Evaluate whether Flyway should accept the offer.
(A detailed profitability statement is not essential. Only figures relevant for the cost-revenue analysis are required.)
Answer:
Statement Showing Allocation of Seats in the Aircraft .
Decision Making – CA Final SCMPE Question Bank 75
Existing Situation Profit per Flight
Decision Making – CA Final SCMPE Question Bank 76
(a) Break – even Number of Passengers = \(\frac{\text { Total FixedCostperFlight }}{\text { Contribution perPassenger }}\)

Decision Making – CA Final SCMPE Question Bank

Proposed Situation
Contribution per Passenger (A to D)
Decision Making – CA Final SCMPE Question Bank 77
Statement Showing Additional Revenue I Expenditure from Haltgo Ltd.’s Offer
Decision Making – CA Final SCMPE Question Bank 78
(*) 240 Seats (existing) Less 210 Seats (proposed)
(#) All the passengers booked for destination A to D are also served food free of cost.
Flyway Ltd. will gain ₹ 13,000 (₹ 2,55,000 – ₹ 2,42,000) per flight if it accepts Haltgo’s offer.
Decision: Accept Haltgo’s offer.

Decision Making – CA Final SCMPE Question Bank

Question 39.
PQR Ltd., a manufacturer of tool kits has just completed XY’s domestic order of 100 kits at a price of ₹ 1650 per kit. The details of cost for XY’s order are: (May 2014, 5 marks)
Decision Making – CA Final SCMPE Question Bank 79
The company wishes to evaluate a special export order from Expo Ltd. of similar 300 kits at ₹ 1,600 per kit. For the export order, special packing has to be done at ₹ 20 per kit. An additional fixed inspection cost specific to this export order has to be incurred. The allocation of fixed overheads will be revised to increase by ₹ 25,000. Tools and Consumables above include special purpose tools costing ₹ 10,000 incurred for XY’s order and these can be reused for the export order and the remaining portion is variable. PQR Ltd. wishes to accept the export order at 10% profit on the selling price.

Decision Making – CA Final SCMPE Question Bank

What should be the maximum amount that can be incurred as inspection cost for making such an acceptance possible?

If Expo Ltd. offers to take the products without inspection, what is the maximum discount (as a percentage of the existing export price) that PQR Ltd. can offer to retain its 10% profit on the revised selling price?
(Round off calculations to two decimal places.)
Answer:
Evaluation of Export Order:
Decision Making – CA Final SCMPE Question Bank 80
Revised Selling Price = \(\frac{1,400}{0.90}\) = 1,555.56
Discount = 1,600 – 1,555.55 = 44.45
Percentage of Discount is = \(\frac{44.45}{₹ 1,600}\) × 100
= 2.78%
Hence, Maximum Discount of 2.78% can be offered to retain 10% of profit.

Decision Making – CA Final SCMPE Question Bank

Question 40.
A company processes different products from a certain raw material. The raw material is processed in process I (where normal loss is 10% of input) to give products A and B in the ratio 3 : 2. B is sold directly. A is processed further in process II (where normal loss is 12.5% of output) to give products C and D in the ratio 5 : 3. At this point C and D have sale values ₹ 55 and ₹ 40 per kg respectively. C can be processed further in process IIIl with processing cost ₹ 3,95,600 and normal wastage 5% of input and then be sold at 66 per kg. D can be processed further in process IV with processing cost ₹ 3,82,500 and normal wastage 12.5% of output and then be sold at ₹ 55 per kg. The normal wastage of each process. has no realizable value. During the production period, 2,00,000 kgs of raw material is to be introduced into Process I.

Using incremental cost-revenue approach, advise whether sale at split-oft or further processing is better for each of the products C and D. (May 2014, 5 marks)
Answer:
Statement Showing Decision on Sale at – Split-off Point or After Further Processing
Decision Making – CA Final SCMPE Question Bank 81
Decision Making – CA Final SCMPE Question Bank 82
Decision:
C: It is advisable to go for further process and then sell product a because it gives more profitable result and the product revenue can be increased by 66,400.
D: It is advisable to sell directly rather than go for further process for more beneficial results of the product.

Decision Making – CA Final SCMPE Question Bank

Question 41.
AXE Ltd. manufactures four products A, B, C and D. The following details are available for a production period: (May 2014, 10 marks)
Decision Making – CA Final SCMPE Question Bank 83
Production facilities can be interchangeably used among the products. Labour availability in the assembly department Is limited to 2,20,000 hours for the production period. A local firm has offered to make any quantity of any of the products on a sub-contract basis at the following rates:
Decision Making – CA Final SCMPE Question Bank 84
(i) Advise the management on how many units of each product are to be manufactured or subcontracted to fulfill maximum market demand. What would be the corresponding profits?
(ii) What is the minimum number of units to be produced to achieve break- even point?
(iii) What would you advise as the best strategy to maximize profits if assembly labour is not a limiting factor and if there is no compulsion to fulfill market demand?
(Only relevant figures need to be discussed. A detailed profitability statement is not required).
Answer:
(i) Assembly Labour is a Limiting Factor and to fulfill Maximum Market
Demand:
Computation of Contribution per unit and Contribution per assembly hour
Decision Making – CA Final SCMPE Question Bank 85
It Is more profitable to sub-contract C, Since contribution is higher in sub -contracting, So it is profitable to sub – contract it.
Allocation of Assembly Hours on the basis of ranking
Produce A as much as possible = 40,000 units
Hours Required = 60,000 tirs (40,000 units × 1.5 hrs.)
Balance Hours Available = 160,000 hrs (2.20,000 hrs. – 60,000 hrs.)
Produce the Next Best = 30,000 units of D
Hours Required = 60,000 hrs (30,000 units × 2 hrs.)
Balance Hours Available = 1,00,000 hrs (1.60,000 hrs. e 60,000 hrs.)
Produce the Next Best = 50.000 UnIts of B \(\left(\frac{1,00,000 \mathrm{hrs}}{2 \mathrm{hrs} / \mathrm{u}}\right)\)

Decision Making – CA Final SCMPE Question Bank

Computation of Profit on the basis of ranking
Decision Making – CA Final SCMPE Question Bank 86
Decision:
AXE Ltd. can save fixed cost of ₹ 4,07,000 (₹ 12,50,000 – ₹ 8,43,000) if it keeps its production limited to 1,00,000 units. Whereas in this case AXE Ltd. has to subcontract 20,000 units of B to fulfill maximum market demand. Contribution Lost from subcontracting of 20,000 units, is amounting to ₹ 20,000 [20,000 units × (₹ 15 – ₹ 14)). Therefore optimum profit would be ₹ 22,97,000 [₹ 19,10,000 + ₹ 4,07,000 – ₹ 20,000].

Statement Showing Comparison between Production and Sub Contract units) and Profit
Decision Making – CA Final SCMPE Question Bank 87

(ii) Break Even Point:
Statement Showing Recovery of Fixed Cost
Decision Making – CA Final SCMPE Question Bank 88
Minimum number of units to be produced to achieve break-even point:
Product D = 30,000 units
Product A = 3,000 units
Accordingly, earliest BEP at 33,000 units

Decision Making – CA Final SCMPE Question Bank

(iii) Assembly Labour is Not a Limiting Factor therefore Requirement to
Fulfill Maximum Market Demand:
Statement Showing Comparison of Contribution per unit
(Make Vs Sub-Contracting) .
Decision Making – CA Final SCMPE Question Bank 89
Decision:
From the aforesaid analysis table it can be seen manufacturing of product A, B and D gives higher contribution per unit as compared to sub-contracting. So, AXE Ltd. should manufacture the entire quantity of product A, B and D and Subcontract the production of product C. However AXE Ltd. can save fixed cost of ₹ 4,07,000 (₹ 12,50,000 – ₹ 8,43,000) by limiting its production level to 1,00,000 units only. lñ this case AXE Ltd. will make 30,000 units, 40,000 units and 30,000. units of product D, A and B respectively. Whereas in this case AXE Ltd. has to subcontract 25,000 units of B to earn maximum profit.

Comparison between Production and Sub Contribution (units) and Profit – Best Strategy
Decision Making – CA Final SCMPE Question Bank 90

Decision Making – CA Final SCMPE Question Bank

Question 42.
RST Ltd. has provided the following summarized results for two years: (May 2014, 10 marks)
Decision Making – CA Final SCMPE Question Bank 91
During the year ended 31 -3-2014 sale price has increased by 15% whereas material and overhead prices have increased by 15% and 5% respectively. You are required to analyse the variances of revenue and each element of cost over the year in order to bring out the reasons for time change in profit. Present a profit reconciliation statement starting from profits in 2012-13 showing the factors responsible for the change in profits in 2013-14.
Answer:
Statement Showing Reconciliation Between Budgeted Profit (F. Y. 2012 – 13] and Actual Profit [F. Y. 2013 – 14]
Decision Making – CA Final SCMPE Question Bank 92
Computation of Variances ( In Lacs):
Sales Variances:
Price Variance = Actual Sales – Standard Sales
= ₹ 3,277.50 – ₹ 2,850.00
= ₹ 427.50 (F)
Volume Variance = Standard Sales – Budgeted Sales
= ₹ 2,850.00 – ₹ 3,000.00
= 150(A)
Sales Margin Variances
Sales Margin Price Variance = Sales Price Variance
= ₹ 427.50(F)
Sales Margin Volume Variance = Sales Volume Variance × Budgeted Net Profit Ratio
= ₹ 150(A) × \(\left(\frac{₹ 200}{₹ 3,000}\right)\)
= ₹ 10(A)
Material Variances
Material Price Variance = Standard Cost of Actual Quantity – Actual Cost
= ₹ 2,050.00 – ₹ 2,357.50
= ₹ 307.50 (A)
Material Usage Variance = Standard Cost of Standard Quantity for Actual Output – Standard Cost of Actual Quantity
= ₹ 1,900 – ₹ 2,050
= ₹ 150(A)

Decision Making – CA Final SCMPE Question Bank

Variable Overhead Variances
Expenditure Variance = Budgeted Variable Overheads for Actual Hours – Actual Variable Overheads
Or
= Std. Rate per unit × Expected Output for Actual Hours Worked – Actual Variable Overheads
= ₹ 500 – ₹ 525
= ₹ 25(A)
Efficiency Variances = Standard Variable Overheads for Production – Budgeted Variable Overheads for Actual Hours
Or
= Std. Rate per unit × Actual Output – Std. Rate per unit × Expected Output for Actual Hours Worked
= ₹ 475 – ₹ 500
= ₹ 25(A)
Fixed Overhead Variances
Expenditure Variance = Budgeted Fixed Overheads – Actual Fixed Overheads.
= ₹ 300.00 – ₹ 367.50
= ₹ 67.50 (A)
Volume Variance = Absorbed Fixed Overheads – Budgeted Fixed Overheads
= ₹ 285 – ₹ 300
= ₹ 15(A)

Working Notes ( in lacs)
1.
Decision Making – CA Final SCMPE Question Bank 93

Decision Making – CA Final SCMPE Question Bank

2.
Decision Making – CA Final SCMPE Question Bank 94

Decision Making – CA Final SCMPE Question Bank

Question 43.
Buildico, a company that builds houses presents the following facts relating to a certain housinf contract that it wishes to undertake: The CEO’s and Marketing Director’s food and hotel expenses of ₹ 3,750 were incurred for a meeting with a prospective client. (May 2014, 8 marks)

1200 kgs of raw material Z will be required for the house. Inventory of Z available us 550 kg. It was purchased at ₹ 580 per kg. It is used by Buildico in other projects. Its current market price is ₹ 650 per kg. Its resale value is ₹ 350 per kg.

The house will require 90 hours of engineer’s time. The engineers are paid a fixed monthly salary of ₹ 47,500 per engineer who can work 150 hours a month. Spare time is not available now and an engineer has to be hired for this house for one month. He cannot be used in any other project once he does this contract.

Buildico will use a special earthquake proof foundation material. This was developed by Buildico at a cost of ₹ 30,000 for some other project that had to be abandoned. If it does not use it in this project, it can use it in some other project and charge the client ₹ 50,000 for it.

A list of items is given below. You are required to name the type of cost and state whether it is relevant or riot in calculating the cost of the given housing project:
Decision Making – CA Final SCMPE Question Bank 95
Answer:
Decision Making – CA Final SCMPE Question Bank 96

Decision Making – CA Final SCMPE Question Bank

Question 44.
Y Limited is a manufacturer of Cardboard boxes. An analysis of its operating income between 2012 and 2013 shows the following: (May 2014, 5 marks)
Decision Making – CA Final SCMPE Question Bank 97
Y limited sold 4,00000 boxes and 4,20,000 boxes in 2012 and 2013 respectively. During 2013 the market for cardboard boxes grew 3% in terms of number of units and all other changes are due to company’s differentiation strategy and productivity. Compute how much of the change in operating income from 2012 to 2013 is due to the industry market size factor, productivity and product differentiation and also reconcile the profit of both years due to these factors.
Answer:
Decision Making – CA Final SCMPE Question Bank 98
(W.N.1)
Market Size Factor Effect
[4,00,000 Units – (4,00,000 × 103%) units] × ₹ 10 = ₹ 1,20,000
₹ 10 = \(\frac{40,00,000}{4,00,000}\)
[(4,00,000 × 103%) units – 4,20,000 units] × ₹ 10 = ₹ 80,000

Alternative Answer
Reconciliation of Operating Income
Decision Making – CA Final SCMPE Question Bank 99
Workings:
Increase in Sale of Cardboard Boxes 20,000 Boxes (4,20,000 Boxes – 4,00,000 Boxes). Out of which increase in Sales of 20.000 Boxes. 12,000 Boxes (3% of 4,00,000) is due to growth in market size, and the remaning 8,000 Boxes (20,000 Boxes – 12,000 Boxes) are due to an increase in market share.

Decision Making – CA Final SCMPE Question Bank

W.N.1
Decision Making – CA Final SCMPE Question Bank 100

W.N.2 .
Impact of Productivity on operating income:
= Cost Effect of Productivity Component in 2013
= ₹ 58,000 (F)

W. N. 3
Impact of Product Differentiation on operating Income:
Decision Making – CA Final SCMPE Question Bank 101

Question 45.
On the basis of the following information determine the product-mix to give the highest profit if atleast two products are produced: (Nov 2014, 8 marks)
Decision Making – CA Final SCMPE Question Bank 102
Only 9,200 Itouis are available for production at a cost of ₹ 20 per hour and maximum 50,000 kgs. of material @ ₹ 20 per kg., can be obtained. (Only product mix quantities are to be shown, calculation of total profit at that product mix not required to be shown)
Answer:
Calculatior of Contribution per Key Factor(s) for Various Products
Decision Making – CA Final SCMPE Question Bank 103
From the above ranking(s) it is clear that:

  1. Contribution per Unit is maximum in case of product Y & Z.
  2. Contribution per Kg. of Raw Material also maximum in case of product Y & z.
  3. Contribution per Machine Hour is maximum in case of product X & Z. Hence, product Z is common in all cases and priority shall be given for production of ‘Z’.

Balance resources should be divided between other two products X & Y.
Statement Showing Balance Resources for Product X & Y
Decision Making – CA Final SCMPE Question Bank 104
The production of X & Y may be computed with the help of following equations by utilizing the balance resources:
20X + 12Y = 27,500 …………… (i)
3X + 5Y = 6,200 ………… (ii)
Then,
Decision Making – CA Final SCMPE Question Bank 105
Y = 648.43 i.e. 648 units
Putting the value of Y in equation (ii)
3X + (5 × 648) = 6200
Or 3X = 2960
Or X = 986 units
Therefore the Product Mix s
X = 986 units
Y = 648 units
Z = 750 units

Decision Making – CA Final SCMPE Question Bank

Question 46.
PO Limited manufactures and sells a range of products. For one of its products, it makes 2000 units of a component which has the following budgeted manufacturing cost: (May 2015, 5 marks)
Decision Making – CA Final SCMPE Question Bank 106
Softech Limited has offered to supply the component at a guaranteed price of 25,000 per unit.

If the component is not manufactured by PQ Limited, a11 the direct labour thus released can be employed in increasing the production by 1600 units of an existing product K, which uses 50 of this type of direct labour hours per unit. K is sold for ₹ 45,000 per unit and has a marginal cost of production of ₹ 30,000 per unit and has sufficient market demand. The direct labour force cannot be retrenched or recruited for the next two production periods. From a financial perspective, using incremental cost analysis, would you advise PO Ltd. to make or buy the component for the forthcoming production period?
Answer:
Statement Showing “Incremental Analysis -Make or Buy (2,000 units)”
Decision Making – CA Final SCMPE Question Bank 107
This analysis indicates that PO Limited will incur 4,000 per unit of additional cost by making the component. Therefore, PO Limited should buy the component from the Softech Limited.

Decision Making – CA Final SCMPE Question Bank

Question 47.
Apex Limited manufactures two products, P and Q, using the same production facility. The following information is available for a production period: (May 2015, 12 marks)
Decision Making – CA Final SCMPE Question Bank 108
P and Q can be produced only in batches of 100 units, and whatever is produced has to be sold or discarded. Inventory build-up is not possible from one production period to another. The total fixed costs for each level of production and directly attributable to P and Q are given below:
Decision Making – CA Final SCMPE Question Bank 109
75,000 machine hours are available in the production period.
(i) Calculate the quantities of P and Q in the best product mix to achieve the maximum profit and compute the maximum profit.
(ii) What will be the opportunity cost of meeting P’s demand fully?
Answer:
(i) Statement Showing “Contribution / Machine Hour”
Decision Making – CA Final SCMPE Question Bank 110
Allocation of Machine Hours on the basis of ranking
Produce ‘P’ as much as possible = 2,200 batches
Hours Required = 33,000 hrs (2,200 batches × 15 hrs.)
Balance Hours Available = 42,000 hrs (75,000 hrs. – 33,000 hrs.)
Produce (the Next Best) = 1,680 batches \(\left(\frac{42,000 \mathrm{hrs} .}{25 \mathrm{hrs} .}\right)\)
Statement Showing “Maximum Possible Contribution”
Decision Making – CA Final SCMPE Question Bank 111

Decision Making – CA Final SCMPE Question Bank

For producing additional batches above 2,000 batches of Product ‘P’ Apex Limited have to incur additional fixed cost of ₹ 5,20,000 to earn additional contribution of ₹ 2,00,000 (200 batches × ₹ 1,000) which is not beneficial. However, hours saved on 200 batches i.e. 3,000 hrs (200 batches × 15 hrs.) can be utilized for production of ‘O’ to the extent of 70 batches (1,750 batches i.e. maximum demand of ‘Q’ – 1.680 batches).

The contribution from producing additional 70 batches of Product ‘Q’ will be ₹ 84,000 (70 batches × ₹ 1,200). Accordingly best product mix will be 2,000 batches of ‘P’ and 1,750 batches of ‘Q’.

Statement Showing “Maximum Profit”
Decision Making – CA Final SCMPE Question Bank 112

Decision Making – CA Final SCMPE Question Bank

Question 48.
Rabi Ltd. is considering the discontinuance of Division C. The following information is given: (May 2015, 4 marks)
Decision Making – CA Final SCMPE Question Bank 113
The rates of variable costs are 90% of the normal rates due to the current volume of operation. There is adequate market demand.

For any lower volume of operation, the rates would go back to the normal rates. Facilities released by discontinuing Division C cannot be used for any other purpose.

Evaluate the decision to discontinue Division C using relevant cost approach.
Answer:
As given in the question Rabi Ltd. is considering to discontinue the Division C perhaps by seeing the Division Cs income as it is a loss of ₹ 1,72.500. Discontinuance of Division C might be saving ₹ 4,14,000 on specific fixed costs to the company but due to this decision company will not only be losing ₹ 2,41,500 contribution from the Division C but also an additional burden of variable cost of ₹ 230,000 to Divisions A & B and Rabi Ltd. as a whole.

Let evaluate the decision of the Rabi Ltd. with the help of the Relevant Cost approach.
Decision Making – CA Final SCMPE Question Bank 114
In a nutshell considering the above analysis we can conclude that the decision of discontinuing Division C will not be beneficial for the Rabi Ltd. and it should review its decision on the basis of relevant cost approach to reach at right decision.

Decision Making – CA Final SCMPE Question Bank

Question 49.
The following are cost data for three alternative ways of processing work cases man office system: (Nov 2015, 5 marks)
Decision Making – CA Final SCMPE Question Bank 115
Calculate cost indifference points. Interpret your result. State for what volumes of case will you prefer each of A, B and C.
Answer:
(i) Calculation of Cost Indifference Point
Decision Making – CA Final SCMPE Question Bank 116

Decision Making – CA Final SCMPE Question Bank

Question 50.
A and B are two customers of XYZ Electronics Ltd., a manufacturer of audio players. (Nov 2015, 5 marks)
Selling price per unit is ₹ 5,400. Its cost of production per unit is ₹ 4,420.
Additional costs are:
Order Processing Cost – ₹ 2,000 por order
Delivery Costs – ₹ 3,500 per delivery
Details of customers A and B for the period are given below:
Decision Making – CA Final SCMPE Question Bank 117
The company’s policy is to give a discount of 5% on the selling price on orders for 50 units or more and to further give 8% discount on the undiscounted selling price if a customer uses his own transport to collect the order. Assume that production levels are not altered by these orders.
(i) You are required to analyse the profitability by comparing profit per unit for each customer.
(ii) Comment on the discount policy on delivery.
Answer:
(i) Calculation of Profitability Statement
Decision Making – CA Final SCMPE Question Bank 118

(ii) Comment: Company is achieving lower profit per unit by giving further discount 8% as discount policy.

Decision Making – CA Final SCMPE Question Bank

Question 51.
Answer the following: (Nov 2015, 4 marks)
(a) A company is planning a new product. Market research information suggests that 40000 units of the product can be sold at a maximum of ₹ 25 per unit. The company seeks a minimum mark-up of 25% on product cost. t is estimated that the lifetime costs of the product will be as follows:
(1) Research and development, design costs ₹ 1,50,000
(2) Manufacturing costs 16 per unit
(3) End of life costs ₹ 70,000
(4) Promotion and capacity cast ₹ 20,000.
Should the product be manufactured?
Answer:
Decision to manufacture a product or not Calculation of Product cost per unit
Decision Making – CA Final SCMPE Question Bank 119
A product can be sold at ₹ 25 per unit, which is more than target selling price p.u.

Decision: Product should be manufactured.

Decision Making – CA Final SCMPE Question Bank

Question 52.
Supreme Prakashan Ltd. is in the business of publishing a leading newspaper which has a wide customer base. It measures quality of service in terms of: (May 2016, 5 marks)
(i) Print quality
(ii) On time delivery
(iii) Number of damaged and unsold paper
To improve its business prospects and performance, the company is considering installing a scheduling and tracking system which involve an annual additional cost of ₹ 3,00,000 beside equipments costing ₹ 4,00,000 needed for the installation of system.

To purchase the equipment, company is planning to utilise the proceeds of an investment fetching an annual income @ of 9%.

Details regarding the present and future performance are given as under:
Decision Making – CA Final SCMPE Question Bank 120
It is expected that each percentage increase in on time performance will result in revenue increase of ₹ 36,000 per annum. Required contribution margin is 40%.

Should Supreme Prakashan Ltd. install the new system?
Answer:
Should Supreme Prakashan Ltd. Install the New System?
Decision Making – CA Final SCMPE Question Bank 121
(*) [ 36,000 × 12% / 1%]
By installing the scheduling and tracking system, the company will be able to save ₹ 36,800 per annum. Hence, the company should install the new system.

Decision Making – CA Final SCMPE Question Bank

Question 53.
A company is considering three alternative proposals for conveyance facilities for its sales personnel who have to do considerable travelling, approximately 20,000 kilometres every year. The proposals are as follows: (May 2016, 5 marks)
(i) Purchase and maintain its own fleet of cars. The average cost of a car is ₹ 1,00,000.
(ii) Allow the Executive to use his own car and reimburse expenses at the rate of ₹ 1.60 per kilometre and also bear insurance costs.
(iii) Hire cars from an agency at ₹ 20,000 per year per car. The company will have to bear costs of petrol, taxes and tyres.

The following further details are available:
Petrol ₹ 0.60 per km
Repairs and maintenance ₹ 0.20 per km
Tyres ₹ 0.12 per km
Insurance ₹ 1,200 per car per annum
Taxes ₹ 800 per car per annum
Life of the car. 5 years with annual mileage of 20,000 kms
Resale value: ₹ 20,000 at the end of the fifth year.
Work out the relevant costs of three proposals and rank them.
Answer:
Statement Showing ‘Evaluation of Three Proposals’
Decision Making – CA Final SCMPE Question Bank 122

Decision Making – CA Final SCMPE Question Bank

Question 54.
A company manufactures a product Y in addition to other products by using the same machines in department A and department B. The usage details are: (May 2016, 8 marks)
Decision Making – CA Final SCMPE Question Bank 123
Other Details are:
Value of Plant and Machinery in department A is ₹ 22 Lacs and in department B is ₹ 18 Lacs.
The Working Capital requirement of Product Y based on a target volume of output of 2,000 units per month is estimated at ₹ 2,72,800 per annum which is 40% of the potential capacity.

Required:
(i) Calculate the selling price of Product Y to ensure contribution equivalent to 25% of investment made.
(ii) If Product Y is a new product about to be launched in the market, on what basis should the price be fixed and what would be the minimum price?
(iii) If Product Y is a well established product, what should be the basis for price fixing and what would be the minimum price?
Answer:
(i) Workings
Statement Showing ‘Computation of Variable Cost’
Decision Making – CA Final SCMPE Question Bank 124

Decision Making – CA Final SCMPE Question Bank

Statement Showing ‘Desired Contribution on Working Capital’
Decision Making – CA Final SCMPE Question Bank 125
Price of Product is ₹ 171.11 per unit.
[Variable Cost (₹ 151.60) + Contribution Required (₹ 19.51)]

(ii) If the Product Y is a new product about to be launched in the market, the strategy should be to penetrate the marloet by adopting ‘Penetration Pricing’ which could be as below as to recover ‘Variable Cost’ for the product which is ₹ 151.60.

(iii) If the Product Y is a well-established product, the company may be able to sell the product at price which also recover Fixed Cost apart from Variable Cost. Hence, the minimum price would be Total Cost o the Product i.e. ₹ 231/-
Variable Cost ………………. ₹ 151.60
Fixed Cost …………….. ₹ 79.40
Total Price ………….. ₹ 231.00
(*)
Decision Making – CA Final SCMPE Question Bank 126
Note:
Fixed Charges Recovery is based on usage. Full Capacity is not being used by Product Y and Departments are also producing other Products using same Plant and Machinery.

Decision Making – CA Final SCMPE Question Bank

Question 55.
XY Ltd. is manufacturing a consumer product and doing marketing through 200 depots all over the country. The company is considering closing down the depots and resorting to dealership arrangements. The total turnover of the company is ₹ 160 crores per annum. The following information is given for each depot: (May 2016, 8 marks)
Decision Making – CA Final SCMPE Question Bank 127
The inventory carrying cost is 16% p.a. which is also the interest rate prevailing in the market for working capital finance. The other fixed cost per annum is ₹ 16 crores. Marketing through dealers would involve engaging dealers for each area. The dealers will assure minimum sales for each area. This would result in increasing the capacity utilization from 80% to 100%. At present the companys PN ratio is 20%. Marketing through dealers would involve payment of commission of 8% on sales. Half of the existing depot staff will have to be absorbed in the company. The dealer will deposit ₹ 3.20 crores with company on which interest at 12% p.a. will be paid.

You are required to work out the impact on profitability of the company by accepting the proposal.
Answer:
Comparative Profit Statement ‘Existing Vs Proposed Situation’
Decision Making – CA Final SCMPE Question Bank 128
The above analysis shows that if Proposal is accepted, the Profit will increase from ₹ 1.92 Crores to ₹ 30.72 Crores.

It has been assumed that ‘total number of dealers’ are equal to ‘total number of depots’ i.e. 200.

Decision Making – CA Final SCMPE Question Bank

Question 56.
A manufacturing unit of ABC Co. Ltd. has presented the following details: (May 2016,8 marks)
Average Units produced and sold per month – 2,40000
No. of workers – 80
Sales value – ₹ 60 Lacs
Contribution – ₹ 24 Lacs
Wage rate – ₹ 5 per unit
The production manager proposes to introduce a new automated machine due to which following changes will take place:

  1. No. of units produced and sold are expected to increase by 20%.
  2. No. of workers will be reduced to 60.
  3. With a view to provide incentive for increased production, Production Manager intends to offer 1% increase in wage rate for every 3% increase in average individual output achieved.
  4. Decrease in selling price by 2%.

Required:
Calculate amount of extra contribution after introduction of new automated machine and give your recommendations.
Answer:
Workings
Present Average Output per employees per month
= \(\frac{\text { Total Present Output }}{\text { Total Number of Present Employees }}\)
= \(\frac{2,40,000 \text { units }}{80 \text { Employees }}\)
= 3,000 units
Future Average Output per employees per month
= \(\frac{\text { Total Future Output }}{\text { Total Number of FutureEmployees }}\)
= \(\frac{2,40,000 \text { units } \times 120 \%}{60 \text { Employees }}\)
= \(\frac{2,88,000 \text { units }}{60 \text { Employees }}\)
= 4,800 units
Present Piece Work Rate = ₹ 5.00 per unit
Proposed Piece Work Rate = Present Piece Work Rate + Incentive
= ₹ 5.00 + ₹ 5 × 20%
= ₹ 6 per unit

Decision Making – CA Final SCMPE Question Bank

Incentive*
1% Increase in ‘Wage Rate’ for – Every 3% Increase ¡n ‘Average Individual Output Achieved’
Change in Output (%) = \(\frac{4,800 \text { units }-3,000 \text { units }}{3,000 \text { units }}\)
= 60%
60%
Change in Wage Rate (%) = \(\frac{60 \%}{3 \%}\) × 1%
= 20%
Present Sales Priçe per unit = ₹ 25.00 ( 60,00,000/ 2,40,000 units)
Proposed Sale Price per unit = ₹ 24.50 (₹ 25 – 2% × ₹ 25.00)
Present Variable Cost = ₹ 60,00,000 – ₹ 24,00,000
= ₹ 36,00,000

Present Variable Cost Excluding Wages per unit = \(\frac{\text { Contribution }- \text { Wages }}{\text { Presentoutput(units) }}\)
= \(\frac{₹ 36,00,000-(2,40,000 \text { units } \times ₹ 5)}{2,40,000 \text { units }}\)
= ₹ 10.00 per unit

Statement of ‘Extra Monthly Contribution’
Decision Making – CA Final SCMPE Question Bank 129
Recommendations
The above analysis shows monthly increase in contribution amounting to ₹ 48,000. Hence, the production manager’s proposal should be accepted.

Decision Making – CA Final SCMPE Question Bank

Question 57.
X Limited is a manufacturer of cardboard boxes. An analysis of its operating income between 2014 and 2015 shows the following: (Nov 2016, 5 marks)
Decision Making – CA Final SCMPE Question Bank 130
X Limited sold 4,00,000 boxes and 4,20,000 boxes in 2014 and 2015 respectively. During 2015, the market for cardboard boxes grew 3% in terms of number of units and all other changes are due to company’s differentiation strategy and productivity. :

Required:
Compute how much of the change in operating income from 2014 to 2015 is due to the industry market size factor, productivity and product differentiation and also reconcile the profit of both years due to these factors.
Answer:
Reconciliation of Operating Income:
Decision Making – CA Final SCMPE Question Bank 131
Working Note:
Total Increase in sale of cardboard Boxes, 20,000 Boxes (4,20,000 Boxes (-) 400,000 Boxes).

Out of this increase in sales of 20,000 Boxes, 12,000 Boxes (3% of 4,00,000) is due to growth in market size, and the remaining 8,000 boxes (20,000 boxes (-) 12.000 boxes) are due to an increase in market share.

Working Note – 1: Effect of Industry Market size Factor on operating income:
= Revenue and cost effect of growth component 2015 × \(\frac{\text { Increaseinsales unit duetomarket growth }}{\text { Total growthsale unit }(2014,2015)}\)
= ₹ 1.40,000 × \(\frac{12,000 \text { Boxes }}{20,000 \text { Boxes }}\)
= ₹ 84000 (F)
Working Note 2: Effect of Productivity on Operating Income:
= Cost effect of productivity Component in 2015
= ₹ 58,000 (F)

Decision Making – CA Final SCMPE Question Bank

Working Note 3: Effect of Product Differentiation on Operating Income:
Decision Making – CA Final SCMPE Question Bank Q 132

Question 58.
Some statements are given below. Identify name of the cost with examples and state whether it is relevant/non-relevant in decision making. (Nov 2016, 5 marks)
(i) Costs are historical costs which have already been incurred and cannot change by any decision made in future.
(ii) It is measure of benefits foregone by rejecting the second best alternative of resources in favour of the best.
(iii) It is portioning of cost which involves payments to outsiders i.e., it gives rise to cash expenditure as opposed to such costs as depreciation.
(iv) Total cost is changed (increase or decrease) due to change in the level of activity, technology or production process or method of production.
(v) Cost used in evaluation of a product to reflect the use of resources but that have no observable cost,
Answer:
Decision Making – CA Final SCMPE Question Bank 133

Decision Making – CA Final SCMPE Question Bank

Question 59.
G Ltd., produces and sells 95,000 units of ‘X’ in a year at its 80% production capacity. The selling price of product is ₹ 8 per unit. The variable cost is 75% of sales price per unit. The fixed cost is ₹ 3,50,000. The company is continuously incurring losses and management plans to shut-down the plant. The fixed cost is expected, to be reduced to ₹ 1,30,000. Additional costs of plant shut-down are expected at ₹ 15,000.
Should the plant be shut-down? Find the shut-down point in units and also in percentage of capacity level of production. (Nov 2016, 5 marks)

Decision Making – CA Final SCMPE Question Bank

Question 60.
(a) A company manufactures four products. The annual demand for products, selling prices and variable production costs are as follows:
Decision Making – CA Final SCMPE Question Bank 134
Other data:

(i) The variable overheads are absorbed on a machine hour basis at a rate of ₹ 1.20 per machine hour.
(ii) Fixed overheads total ₹ 46,84,000 per annum.
(iii) Production capacity available 8,15,000 machine hours per annum.
(iv) Products P, Q and R can be bought-in at ₹ 21.36 per unit, ₹ 24 per unit and ₹ 48 per unit respectively.
You are required to calculate the best product mix for the year and the resulting optimal profit.(Nov 2016, 8 marks)
Answer:
1. Computation of Best product mix and optimal profit:
Decision Making – CA Final SCMPE Question Bank 135
Decision Making – CA Final SCMPE Question Bank 136
Note: On comparison of “Make costs” with “Buying cost” of P, Q, R, S is observed that “Make” Costs are lower, and hence, it is preferable to make all 3 items as first preference.

3. Machine Hours Requirement Analysis:
Decision Making – CA Final SCMPE Question Bank 137

Decision Making – CA Final SCMPE Question Bank

Observation: Total requirement is 8,87,400 machine hour but production capacity available is 8,15,000 machine hours, so there is a short fall of 8,87,400 (-) 8,15,000 = 72,400 Hours. This means that either product P or Q or R has to be purchased from outside.

4. Make or Buy Decision
Decision Making – CA Final SCMPE Question Bank 138

5. Statement Showing “Best Product Mix”
Decision Making – CA Final SCMPE Question Bank 139
Balance quantity of R to be purchased 36,200 units (1,71,000 – 1,34,800)

6. Profitability Statement
Decision Making – CA Final SCMPE Question Bank 140

Decision Making – CA Final SCMPE Question Bank

Question 61.
A company manufactures three conponents, A, B and C. These components pass through machines P and Q. The machine hour capacity of Q is limited to 7800 hours a month. The company is interested in fulfilling the market demand to retain its market share. The following information is given:
Decision Making – CA Final SCMPE Question Bank 141
Component B has to be made by the company. There is a supplier available for components A and C at ₹ 280 and ₹ 161 per unit respectively.
(i) Which component(s) and in what quantities should be purchased to minimize costs?
(ii) From a financial perspective, what do you need to ensure in order to justify your answer in (i) above? (May 2017, 5 marks)
Answer:
(i)
Decision Making – CA Final SCMPE Question Bank 142
300 units of A required to be purchased but as the purchase price of A & C is lower than production cost company should purchase both component instead of manufacturing.

(ii) Total manufacturing cost of A is ₹ 302 and purchase cost ₹ 280, total manufacturing cost of C is ₹ 166 & purchase cost ₹ 161. In this case purchase of both product Is beneficiar to company provided company can avoid fixed cost relating to A & C.

Decision Making – CA Final SCMPE Question Bank

Question 62.
XY Ltd. manufactures two types of mobile phones, X and Y. Due to severe competition, it has to reduce the prices for the next production period. The following information is provided:
Decision Making – CA Final SCMPE Question Bank 143
For the next period the company wants the present PN ratio to be maintained and achieve a break-even for both the products at 400 units. What is the cost reduction programme envisaged? (May 2017, 5 Marks)
Answer:
Statement showing cost reduction programme envisaged (Reduction in fixed expenses product-wise)
Decision Making – CA Final SCMPE Question Bank 144
Decision Making – CA Final SCMPE Question Bank 145
So cost reduction program is envisaged in reduction of fixed cost from previous level by ₹ 2,00,000 in Mobile – X and ₹ 4,20,000 in Mobile – Y.

Notes:

  1. In the absence of information it is assumed that the number of units to be sold for X and Y to break-even as well as the total number of units of X and Y to be sold during the year are same.
  2. The revised P/V ratio are as per the previous year as given in the problem.

Decision Making – CA Final SCMPE Question Bank

Question 63.
ABC Ltd. produces a gadget made up of special steel plates. The company gets an order for supply of 50,000 gadgets at a price of ₹ 680 per unit.
The gadgets are made of two halves (upper part and lower part) and then welded together.
The cost structure is:
Materials 15 kg. per half @ ₹ 10 per kg; Labour ₹ 60 per half.
Welding charges and fitting charges would be ₹ 20 per gadget.
The special steel plates are in short supply and ABC Ltd. has stock of only 750 Tons. A supplier has only the lower part and has offered to supply 50,000 numbers. Transportation and handling will cost ₹ 6 per half. (Consider 1 ton = 1000 kg)
ABC Ltd. could either execute its order to the extent of material available, or could fulfill the entire order by buying the lower part from the supplier. Evaluate both the options and find out the maximum price that ABC would be willing to pay the supplier per lower part if.
(i) it wants to retain the same level of profit per unit as in own manufacture.
(ii) if any additional revenue is preferred.
Present your calculations to the nearest rupee. (May 2017, 6 marks)
Answer:
ABC Ltd.
cost of Sheet of Gadget
Decision Making – CA Final SCMPE Question Bank 146

(i) If ABC wants to retain the same level of profit per unit as in own manufacture, it has to achieve manufacturing cost of ₹ 440.
Decision Making – CA Final SCMPE Question Bank 147
ABC will pay ₹ 204 per lower part to the supplier for retaining the same level of profit per unit.

(ii) Present Capacity Revenue is ₹ 60,00,000/- (25,000 units × ₹ 240)
If Supplier is used, 50,000 units of Gadgets can be sold.
For, Additional Revenue
Let Price for Lower Part per unit- ‘K’
50,000 units × {₹ 680 – (₹ K + ₹ 236*) > ₹ 60,00,000
50,000 units × {₹ 444 – ₹ K) > ₹ 60,00,000
K < 324
(*) Cost of Upper Part plus Transportation Cost plus Welding Charges An amount less than ₹ 324 will be paid for the lower part.

Decision Making – CA Final SCMPE Question Bank

Question 64.
AB company produces three products X, Y and Z by using Indigenous and Imported raw materials. The relevant information available from the records of the Company is as under:
Decision Making – CA Final SCMPE Question Bank 148
The Company also has an agreement to supply 1,000 units of Product X to a vendor which has to be executed. Out of direct materials, 60% is imported raw material and it is purchased at ₹ 24 per kg.
Prepare a statement showing Contribution of these three products assuming availability of importfed raw materials is restricted to 24,000 kgs per year. (Nov 2017, 5 marks)
Answer:
1. Statement showing Ranking Priority
Decision Making – CA Final SCMPE Question Bank 149

2. Production Decision when Imported Material Available = 24000 kg.
Decision Making – CA Final SCMPE Question Bank 150
Decision Making – CA Final SCMPE Question Bank 151

Decision Making – CA Final SCMPE Question Bank

Question 65.
UV Limited manufactures a product ZED. It currently operates at 70% capacity. It has received an export order which will utilize 50% of the capacity of the factory. The order has to be either taken in full or rejected totally. The order has to be executed at a price of ₹ 86 per unit and company has to incur additional cost of packing and forwarding of ₹ 2.50 per unit on the goods exported. Commission @ 3% will be payable to overseas agent.
Other information available is as under:
Decision Making – CA Final SCMPE Question Bank 152

Following three alternatives are available to the management:
(i) Continue with the current domestic sale and reject the export order.
(ii) Accept the export order by reducing the domestic sale.
(iii) increase the capacity by 10% by installing a new machine costing ₹ 2,50,000. Fixed overheads will increase by ₹ 96,000. Opportunity cost of investment is 15%.

Overtime is to be paid at one and a half time the normal rate to meet the balance of the required capacity.
Required:
(i) Prepare Statement of profitability for each of the above three alternatives.
(ii) Which is the best alternative in terms of profitability? (Nov 2017, 8 marks)
Answer:
1. Analysis of Domestic Sale at 70% level (for computing variable and fixed Elements, and Direct Labour Cost):
Decision Making – CA Final SCMPE Question Bank 153
2. Relevant Computations:
Decision Making – CA Final SCMPE Question Bank 154

3. ProfIt Statement under different alternatives (amounts in ₹)
Decision Making – CA Final SCMPE Question Bank 155
Decision Making – CA Final SCMPE Question Bank 156
Observation : Option-3 is preferable is terms of profitability.

Decision Making – CA Final SCMPE Question Bank

Question 66.
JC Company produces electronic product and factory is working in Special Economic Zone (SEZ). The expected capacity utilization is 60% and turnover for the year 2016-17 is ₹ 660 Pakh. If the company works at 100% capacity, the sales cost relationship will be as follows:
Factory cost: . 65 per cent of sales value
Prime cost : 75 per cent of factory cost
Selling and administrative cost : 20% of sales value and being 80% variable
The factory overheads will vary according to operating capacity in the following manner:
Decision Making – CA Final SCMPE Question Bank 157
The Government of India gives 10% subsidy on the export order amount and it is expected that currency fluctuation trends will be positive by 8% in next financial year.

The Company receives an offer from abroad for a value of ₹ 150 lakhs. The prime cost of this order is estimated at ₹ 96 lakhs and selling and administrative expenses applicable to this order is ₹ 7,20,000. The order will occupy 40% of the capacity of the plant. To complete the export order, quality maintenance cost of ₹ 1,20,000 will also be incurred.

The Marketing Director estimates that the company’s own sales will increase to 80% of the capacity by the time of materialization of new order. The factory overheads will increase by ₹ 50.50 lakhs (for increase from 80% to 120% capacity).

The maximum demand in local market can be extended up to 120% with export order. The export order cannot accepted partly.

Required:
(i) Prepared a profitability statement at the capacity level of 60%, 80% and 100%.
(ii) Should the company accept the export order? (Nov 2017, 8 marks)
Answer:
(i)
Profitability Statement
Decision Making – CA Final SCMPE Question Bank 158
Decision Making – CA Final SCMPE Question Bank 159

(ii) The above computations show that JC Company should accept the export order since its acceptance would increase the operating profit of the concern by ₹ 22.1 lakhs (₹ 124.30 lakhs – ₹ 102.20 lakhs).

Decision Making – CA Final SCMPE Question Bank

Question 67.
JM Ltd. is engaged in the manufacture of plastic bottles of a standard size. The factory has 5 machines of identical size, each capable of producing 40 bottles per hour. The variable cost per bottle is ₹ 0.32 and the selling price is ₹ 0.80 each. The company has received an offer from another company for manufacture of 40000 units of a plastic moulded toy.

The price per toy is ₹ 30 and the variable cost is ₹ 24 each. In case of the company takes up the job, it has to meet the expenses of making a special mould required for the manufacture of the toy. The cost of the mould is ₹ 1,00,000. The company’s time study analysis shows that the machines can produce only 16 toys per hour. The company has a total capacity of 10,000 hours during the period in which the toy is required to be manufactured. The fixed costs excluding the cost of construction of the mould during the period will be ₹ 10 Lakh.
The company has an order for the supply of 3,00,000 bottles during the period.

Required:
(i) Do you advise the company to take up the order for manufacturing plastic moulded toys during the time when it has an order in its book for the supply of 3,00,000 bottles. (May 2018, 3 Marks)
(ii) If the order for the supply of bottles increases to 4,00,000 bottles, will you advise the company to accept the order for the supply of plastic moulded toys? State the reasons. (May 2018, 3 Marks)
(iii) An associate company of JM Ltd. has idle capacity and is willing to take up the whole or part of the manufacturing of the plastic moulded toys on sub-contracting basis. The subcontract price inclusive of the cost of construction of mould is ₹ 28 per toy. Determine the minimum expected (May 2018, 4 Marks)
Answer:
Workings
Statement Showing “contribution /Machine Hour”
Decision Making – CA Final SCMPE Question Bank 160

Advice on Supply of 3,00,000/ 4,00,000 Bottles
(i) JM Ltd. can accept plastic molded toy’s order as sufficient number of
hrs. i.e. 2,500 hrs. (10,000 hrs.- 3,00,000 bottles × 0.025 hrs.) are available and would be able to generate additional benefit of ₹ 3.50 per unit on 40,000 units of toys i.e. ₹ 1,40,000.

(ii) If the order for the supply of bottles increases to 4,00,000 bottles, then 2,500 more hrs. will be required to produce the additional bottles. JM Ltd. has to decide whether to utilize 2,500 hrs. for existing bottle order or for toy Order.

Machine time is limiting factor, Therefore, contribution per machine hour from both the activities (i.e. bottles and toys) should be calculated to decide whether the order should be accepted. Contribution per hour is more in case of toys (refer workings). Therefore, JM Ltd. should utilize the remaining 2,500 hours for manufacturing toys rather than to fulfil the order for supply of additional bottles.

Decision Making – CA Final SCMPE Question Bank

Prioritizing production based on contribution per machine hour would maximize profits. However, existing order fulfilment is necessary for building long term and sustainable customer relationship. Developing and maintaining long term and intimate relationships with the profitable customers provides valuable benefits to the company as the relationships between company and customers grow, a customer who is satisfied with the company’s products and services, tends to commit the relationship, and buy more over time. Cost of keeping the existing customers is less expensive than the cost of acquiring new customers.

Hence, JM Ltd. should be taken into consideration long term supplier relation before accepting the toy order based on financial consideration as contribution per hour is more in case of toys. Further, company may also explore outsourcing opportunities for production of toys.

(iii) Minimum number of toys needed to be manufactured to justify the increase in fixed cost of ₹ 100,000 to make the mould is 25000 toys {1 .00,000/ (₹ 28 – ₹ 24). Thus, as long as company has excess capacity
available to manufacture more than 25,000 toys it s cheaper to produce than to buy from subcontractor.
Minimum Expected Excess Capacity hours to justify
= \(\left(\frac{25,000 \text { toys }}{16 \text { toys }}\right)\)
= 1,562.5 or 1,563 hours

Decision Making – CA Final SCMPE Question Bank

Question 68.
Cool Air Ltd., manufactures and sells 25000 table fans annually. One of the components required for fans is purchased from an outside supplier at a price of ₹ 190 per unit. Annually it is purchasing 25000 components for its usage. The Production Manager is of the opinion that if all the components are produced at own plant, it is possible to maintain better quality in the finished product. Further, he proposed that the in-house production of the component with other items will provide more flexibility to increase the annual production by another 5000 units. He estimates the cost of making the component as follows :
Decision Making – CA Final SCMPE Question Bank 161
The proposal of the Production Manager was referred to the Marketing Manager for his remarks. He pointed out that to market the additional units, the overall unit price should be reduced by 5% and additionally ₹ 1,00,000 p.m. should be incurred for advertising. Present selling price and contribution per fan are ₹ 2,500 and ₹ 600 respectively. No other increase or decrease in all other expenses as a result of this proposal will arise.
Since the making cost of the component is more than the buying cost, the Management asks you to :
(i) analyse the make or buy decision on unit basis and total basis.
(8 marks)
(ii) recommend the most profitable alternative. (Nov. 2018, 2 marks)
Answer:
(i) Alternative 1 :
Currently the company is manufacturing 25000 table fans annually. For the manufacturing of the table fans, one component is purchased @ ₹ 190 per unit from outside market.

Alternative 2 :
The company wishes to manufacture the component of table fan internally with a condition to increase the production units to 30000 annually. Additionally company incurs ₹ 1,00,000 per month to market the additional units.

Alternative 3:
The company wishes to manufacture the component of table fan internally but restricts the manufacturing of table fans to only 25000 units annually.

The following is the statement of cost of table fan on unit basis and totality basis for all the alternatives.
Statement showing cost of table fan on unit basis and totality basis for all the alternatives.
Decision Making – CA Final SCMPE Question Bank 162
Decision Making – CA Final SCMPE Question Bank 163

(ii) Conclusion :
Based on the workings, the ideal alternative should be Alternative 3 since, its contribution is highest amongst the other alternatives. However, based on the proposal provided by Institute, the suitable comparison will be between Alternative 1 and Alternative 2 concluding that the company should purchase from outside market to maintain a higher contribution from the selling of table fans.

Decision Making – CA Final SCMPE Question Bank

Question 69.
A Company manufactures a single product, which requires three components. The company purchases one of the components from three supplier. DJ Ltd., PJ Ltd. and ZJ Ltd. The lollowng informations are available:
Decision Making – CA Final SCMPE Question Bank 164
If the defectives are not detected they are utilized in production causing a damage of ₹ 200 per 100 units of the component, Total requirements is 12000 units of the components.

The company intends to introduce a system of inspection for the components on receipt. The inspecvon cost is estimated ot 26 per 100 units of the components. Such as inspection will be able to detect only 90% of the defective components received. No payment will be made for components found to be defective in inspection.

Required:
(i) Advice whether inspection at the point of receipt is justified. (Nov 2018, 8 Marks)
(ii) Which of the three supplier should be asked to supply? (Nov 2018, 2 marks)
Answer:
(i) A. Statement Showing Effective Cost before Inspection
Decision Making – CA Final SCMPE Question Bank 165
B. Statement showing Effective Cost after Inspection
Decision Making – CA Final SCMPE Question Bank 166
Decision Making – CA Final SCMPE Question Bank 167

ADVICE Whether Inspection at the Point of Receipt is Justified:
On comparing the cost under situation. A and B shown above, we find that it will not be economical to install a system of inspection.

Further we also need to consider that presently many organizations are undergoing .Just in Time (JIT) implementation. JIT aims to find a way of working and managing to eliminate wastes in a process. Achievement of this is ensured through eliminating the need to perform incoming inspection. Inspection does not reduce the number of defects, it does not help in improving quality. In general inspection, does not add value to the product. It simply serves as a means of identifying defects the supplier has tailed to recognize subsequent to the manufacturing of the product.

As a matter of fact, organizations implementing JIT are seeking eventuay to eliminate the need for performing incoming inspecVcn activities through a combination of reducing the supplier base, selection through qualification and vendor development. Vendor development and its proper management seeks to assist the supplier who maintains an interest in striving to provide 100% defect-free materials and parts.

So, to decision whether inspection at the point of receipt is justified or not will also depend on Qualitative factors as well.

(ii) Conclusion:

  • As can be seen from above woddngs, it is Financially Feasible not to get the Inspection done as it results .in a higher cost.
  • Also, it is Better to order from Supplier ZJ as it results in Lowest Cost in totality and per unit. Also li has the lowest defect rate amongst all Suppliers, thereby lowering the defective Cost.

Decision Making – CA Final SCMPE Question Bank

Question 70.
The President of Automation Limited, a 150 persons engineering company, decided it was time to fire the company’s biggest client. Although the client provided close to 60% of the company’s annual revenue, Automation Limited decided that dropping this client was necessary. The client was profitable.

The President of Automation Limited stated “We cannot be a great place to work without employees, and this client was bullying my employees. Its demands for turnaround were impossible to meet even with people working seven days a week. No client is worth losing my valued employees”.

The initial impact on revenues was significant. However, Automation Limited was able to cut costs and obtain new customers to fill the void. Moreover, the dropped client later gave Automation Limited two projects on more equitable terms.

Required:
(i) Discuss the reasons behind dropping of a profitable client by Automation Limited. (Nov 2019, 2 marks)
(ii) State three qualitative factors that management should consider in outsourcing and make or buy decisions. (Nov 2019, 3 marks)
Answer:
(i) In this case Automation Ltd. core about their employees as they feel of fear about losing their employees because of work pressure. Automation Ltd. feels that the employees are the most important asset for the company and this being main reason for dropping the client and care for employees.

(ii) While considering the decision to outsourcing the management should consider qualitative factors like

  1. Quality of goods
  2. Reliability of Suppliers .
  3. Impact on the customers and suppliers etc.
  4. Regularly of Demand
  5. Risk of technological obsolescence.

Decision Making – CA Final SCMPE Question Bank

Question 71.
SEZ Limited produces three products S, Q and L which use the same resources but in varying quantities. Product S uses one unit of component P which is purchased from outside suppliers at ₹ 120 per unit. Details of the three products are as follows:
Decision Making – CA Final SCMPE Question Bank 168
Maximum availability of skilled labour is 16,200 hours. Other resources are sufficient to meet the annual demand/sales.
Engineering division of the company came forward with a proposal to make the component ‘P’ in house with the following costs break up:
Decision Making – CA Final SCMPE Question Bank 169
For in-house making of the component ‘P’ there will not be any change in the annual fixed costs of the company. The company can either buy the component ‘P or make it in house.
Required:
Recommend the optimum productiOn plan and profit for the year. Show calculation in support of your answer. (Nov 2019, 10 marks)
Answer:
Calculation of contribution per unit contribution per hrs.
Option-1
SEZ Ltd. produces 3 products Product S, Product Q and Product L. Each unit of Product S requires one unit of component P, which is currently procured from the external market at ₹ 120 per unit. There is a constraint in terms of skilled hours available for production, the maximum available is 16,200 hours.
Given this constraint, the production plan should be based on the contribution derived per skilled labor hour spent on each product.

Calculation of skilled hour requirement for each of the products and component P
Decision Making – CA Final SCMPE Question Bank 170
Note: When component P is manufactured, in-house Product S would require 1.5 hours of skilled labor hour per unit.
Contribution per unit and contribution per skilled hour (when component P is purchased)
Decision Making – CA Final SCMPE Question Bank 171
Decision Making – CA Final SCMPE Question Bank 172

Decision Making – CA Final SCMPE Question Bank

Based on this, SEZ Ltd. would first produce Product S, then Product L and then Product Q. The constraint of 16,200 hours of skilled labor has to be taken into account while drawing up the production plan. Production plan as per above ranking will be as below:
Decision Making – CA Final SCMPE Question Bank 173
First, 9,000 units Product S is produced, this requires 4.500 hours of skilled labor. After production of Product S, 11,700 hours of skilled labor remain. (16,200 hours – 4,500 hours). Next 7,800 units of Product L cari be produced.
for which the skilled hours used are 7,800 hours. The remaining 3,900 hours would be used to produce Product Q.
Volume of Product Q that can be produced in 3,900 hours = 3,900 / 1.5 hours per unit = 2,600 units.

Therefore, profitability of SEZ Ltd. when component P is purchased:
Decision Making – CA Final SCMPE Question Bank 174

Option-2
Contribution when component P is manufactured in-house.
Note that Product S requires 0.5 hours and component P would require 1 hour of skilled labor per unit. If component P, a part of Product S is manufactured in-house, then Product S would in all require 1.5 hours of skilled labor per unit.
Based on this, contribution per unit and contribution per skilled hour if component P is manufactured is:
Decision Making – CA Final SCMPE Question Bank 175
Decision Making – CA Final SCMPE Question Bank 176

Note 1
Component P has a variable cost, sum of direct material + skilled labor + unskilled labor + variable overhead, given to be ₹ 90 per unit Each unit of Product S requires 1 more hour of skilled labor to manufacture component P. Skilled labor is a limited resource that costs ₹ 40 per hour. The savings SEZ Ltd. earns by manufactunng component P in-house is only ₹ 30 (external purchase Cost is ₹ 120 per unit – cost of manufacturing component P in-house is ₹ 90 per unit). Therefore, it is profitable to purchase component P from the external market.

Decision Making – CA Final SCMPE Question Bank

For further analysis, the impact of producing component P in-house would be:
Based on the revised ranking. SEZ Ltd. would first produce Product L, then Product S and then Product Q. The production plan is component P is made in-house would be
Decision Making – CA Final SCMPE Question Bank 177
First. 7800 units Product L is produced, this requires 7,800 hours of skilled labor. After production of Product L, 8,400 hours of skilled labor remain. (16,200 hours – 7,800 hours). The remaining 8,400 units would be used to
produce Product S. Volume of Product S that can be produced in 8,400 hours = 8,400/ 1.5 hours per unit = 5600 units. In this constraint, Product Q cannot be produced.

The profitability of SEZ Ltd. if component P is manufactured in-house:
Decision Making – CA Final SCMPE Question Bank 178

Recommendation
When component P is purchased, annual profits would be ₹ 6,21,000. When component P is manufactured in-house, annual profits would be ₹ 64,000, a reduction of ₹ 557,000 per year. Therefore, component P has to be bought externally. Optimum production plan would be
Product S – 9,000 units Product Q – 2,600 units Product L – 7,800 units
The decision to outsource make or buy decision might have strategic implications for the SEZ and should be formulated from strategic perspective with senior management’s involvement.

Decision Making – CA Final SCMPE Question Bank

Question 72.
‘Mahesh is a canteen contractor at Jamshedpur. He manages office canteen of 1,200 employees where tea and snacks are served between 9 am to 5 pm. He has employed four supervisors for managing cash. Mahesh pays ? 400 per working day to every supervisor.

The office remains closed on Saturday and Sunday. A sojution provider has approached Mahesh for managing Cash. He has advised Mahesh to install an automated payment mechanism for accepting payments through machines. Every employee of office will swipe smart card for making the payment. The complete system would cost ₹ 3,35,000 with working life of 4 years with annual maintenance of ₹ 60,000. Only one supervisor will be required after the installation of machines.

Required:
Advise Mahesh on his plan of installation of automated payment mechanism. (Ignore the time value of money.) (Nov 2020, 5 Marks)

Question 73.
ZAINA Private Limited is a manufacturing company of electrical equipment. The company is facing the possibility of a strike by its direct production workers engaged on the assembly of one of its machines. The Trade Union is demanding an increase of 8% backdated to the beginning of its financial year (1st April), but the company expects that if a strike takes place, it will last four weeks after which the Union will settle for an increase of 6% similarly backdated.
The Machine whose production (Ceiling Fans) would be affected by the strike is sold to distributors at a discount of 25% from the current recommended selling price of ₹ 2,000.
The estimated costs for the Ceiling Fans are :
Decision Making – CA Final SCMPE Question Bank 179
Direct labour comprises 60% of the variable production cost. The budgeted output is 30,000 Ceiling Fans in 50 working weeks per year. If the strike takes place, the following situations are expected by the company :

(a) Maintenance staff, whose wages are included in the fixed production costs, would be used to carry out an overhaul of the conveyor system using materials worth ₹ 50,000. This work would otherwise be undertaken by an outside contractor at a cost including materials ₹ 1,50,000.

(b) Sales of 500 Ceiling Fans would be lost to completion. The balance that could ordinarily have been produced during the strike period, could however, be sold, but these ceiling fans would have to be produced in overtime working which would be at an efficiency rating of 80% of the normal. This would also entail additional fixed costs of ₹ 40,000 and wage payments at time and one-half.

The Profitability of SEZ Ltd. if component P is manufactured In-house:
Decision Making – CA Final SCMPE Question Bank 180

Recommendation
When component P is purchased. annual profits would be ₹ 6,21,000. When component P is manufactured in-house, annual profits would be ₹ 64,000, a reduction of ₹ 557,000 per year. Therefore, component P has to be bought externally. Optimum production plan would be Product S – 9,000 units Product Q – 2,600 units Product L – 7,800 units.

The decision to outsource make or buy decision might have strategic implications for the SEZ and should be formulated from strategic perspective with senior management’s involvement.

Decision Making – CA Final SCMPE Question Bank

Question 74.
Mahesh is a canteen contractor at Jamshedpur. He manages office canteen of 1 ,200 employees wIere tea and snacks are served between 9 am to 5 pm. He has employed four supervisors for managing cash. Mahesh pays ₹ 400 per working day to every supervisor. The office remains closed on Saturday and Sunday.

A solution provider has approached Mahesh for managing Cash. He has advised Mahesh to Install an automated payment mechanism for accepting payments through machines. Every employee of office will swipe smart card for making the payment. The complete system would cost ₹ 3,35000 with working life of 4 years with annual maintenance of
₹ 60,000. Only one supervisor will be required after the installation of machines.

Required:
Advise Mahesh on his plan of installation of automated payment mechanism. (Ignore the time value of money.) (Nov 2020, 5 Marks)

Decision Making – CA Final SCMPE Question Bank

Question 75.
ZAINA Private Limited is a manufacturing company of electrical equipment. The company is facing the possibility of a stflke by its direct production workers engaged on the assembly of one of its machines. The Trade Union is demanding an increase of 8% backdated to the beginning of its financial year (1 April), but the company expects that if a strike takes place, it will last four weeks after whæh the Union will settle for an increase of 6% similarly backdated.

The Machine whose production (Ceiling Fans) would be affected by the strike is sold to distributors at a discount of 25% from the current recommended selling price of ₹ 2,000.
The estimated costs for the Ceiling Fans are:
Decision Making – CA Final SCMPE Question Bank 181

Direct labour comprises 60% of the variable production cost. The budgeted output is 30,000 Ceiling Fans in 50 working weeks per year. If the strike takes place, the following situations are expected by the company:
(a) Maintenance staff, whose wages are included in the fixed production costs, would be used to carry out an overhaul of the conveyor system using materials worth ₹ 50,000. This work would otherwise be undertaken
by an outside contractor at a cost including materials ₹ 1,50,000.

(b) Sales of 500 Ceiling Fans would be lost to completion. The ba’ance that could ordinarily have been produced during the strike period, could however, be sold, but these ceiling tans would have to be produced in overtime working which would be at an efficiency rating of 80% of the normal. This would also entail additional fixed costs of ₹ 40,000 and wage payments at time and one-half.

Required:
(i) Calculate the profit or loss with and without strike.
(ii) Taking, purely economic point of view, advise the management to allow the strike to go ahead, rather than agree to the Union’s demand.
(iii) list-Any two factors, not considered in yours above evaluation that may have adverse financial effects for the company, if the strike were to take place. (Nov 2020, 10 marks)

Decision Making – CA Final SCMPE Question Bank

Question 76.
ABC Ltd. an Investment company undertakes share market research for its clients. To design a tailor made investment strategy for clients the designated team of staff takes 4 months. The team comprises involvement
of 3 divisions.
Decision Making – CA Final SCMPE Question Bank 183
The variable costs of ABC Ltd are distributed among the 3 categories of staff in the following ratios
Decision Making – CA Final SCMPE Question Bank 184
The contribution from each department would be at the following percentages:
Decision Making – CA Final SCMPE Question Bank 185
For calculation of monthly revenue generated the value of worl executed is divided on the following lines:
Decision Making – CA Final SCMPE Question Bank 186
The work executed by ABC Ltd in the month of April is ₹ 3,00,000, May ₹ 2,00,000, June ₹ 3,00,000 and in July ₹ 2,00,000.

Calculate the additional order to be received if the targeted contribution that the company wants to earn is ₹ 1.50,000 for the period April to July.
(You may assume that no fixed costs are relevant in arriving any calculations and the profit percentage of July is to be considered for calculating the additional order required in July.) (Jan 2021, 12 Marks)

Decision Making – CA Final SCMPE Question Bank

Question 77.
Bharat Heavy Machinery Ltd. produces engines for the cars. Vanable cost per engine is ₹ 4,200. Market research has indicated that at a selling price of ₹ 7,400, no order will be received, but the demand for the engines will be increased by two units for every ₹ 400 reduction in the unit selling price below 7,400.
You are required to determine the unit selling price per engine that will maximize the profit of the company. (Jan 2021, 5 Marks)

Question 78.
Modem Packaging Corporation specialised in the manufacture of one litre plastic bottles. The firm has four moulding machines, each capable of producing 100 bottles per hour. The firm estimates that the
vanable cost of producing a plastic bottle is ₹ 20. The bottles are sold ₹ 50 each.

Management has been approached by a local toy company that would like the firm to produce a moulded plastic toy for them. The toy company is willing to pay ₹ 300 per unit for the toy. The variable cost to manufacture the toy will be ₹ 240. In addition. Modem Packaging Corporation would have to incur a cost of ₹ 20,00,000 to contract the needed mould exclusively for this order.

Because of more intricate shape of the toy, a moulding machine can produce only 40 units per hour. The customer wants 1,00,000 units. Assume that total capacity of all the four machines combined is 10,000 machine hours available during the period in which the toy company wants the delivery of toys. The firm’s fixed cost, excluding the cost to construct the toy mould, during the same period will be ₹ 2,00,00,000.

Decision Making – CA Final SCMPE Question Bank

Required:
(i) It the management predicts thai the demand for its bottles will require the use of 7500 machine hours or less during the period, should the special order be accepted ? Give reasons. (Jan 2021, 3 Marks)

(ii) If the management predicts that the demand for its bottles will be higher than its ability to produce bottles, should the order be accepted? Why? (Jan 2021, 2 Marks)

(iii) If the management has located a firm that has just entered the moulded plastic business. This firm has considerable excess capacity and more efficient moulding machines and is willing to subcontract the toy job, or any portion of it for ₹ 280 per unit. It will contract its own toy mould.

Determine Modern Packaging Corporation minimum expected excess machine hour capacity needed to justify producing any portion of the order itself rather than subcontracting it entirely. (Jan 2021, 5 marks)

Leave a Comment

Your email address will not be published. Required fields are marked *