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Suggested Answer of Advanced Management
Accounting 2016(May)
CA Ravi Shanker
[Topper of EIRC & NIRC]
1. (a) UK Ltd. prepared a draft budget for the next year as follows: 5
Quantity 10,000 units
(₹.)=
Selling price per unit=60=
Variable cost per unit=
 Direct materials
 Direct labour (2 hours x Rs. 6)
 Variable overheads (2 hrs* Rs. 1)
16
12
2
contribution per unit 30
Total budgeted contribution 3,00,000
Total budgeted fixed contribution 2,80,000
Total budgeted profit 20,000
The board of directors are not satisfied with this draft budget and suggested the following
changes for the better profit:
(i) The budgeted profit is ₹ 50.000,
(ii) The company should spend ₹ 57,000 on advertisement and the target sales price up to ₹
64 per unit.
(iii) It is expected that the sales volume will also rise, in spite of the price rise, to 12,000 units.
In order to achieve the extra production capacity, however, the work force must be able to reduce
the time taken to make each unit of the product. It is proposed to offer a pay and productivity
deal in which the wages rate per hour is increased to ₹ 8. The hourly rate for variable overheads
will be unaffected.
You are required to calculate the target labour time require to achieve the target profit.
Solution:
Calculation of target labour time required to achieve target profit
Particulars Amount (₹)
Target Sales (12,000 units ×₹ &#667557932;&#667557934;) 7,68,000
Less: Target/Budgeted Profit 50,000
Total Target Cost 7,18,000
Less: Fixed Cost
 Existing ₹ 2,80,000
 Advertisement ₹ 57,000
3,37,000
Total Target Variable Cost 3,81,000
AMA2016(M) Suggested Answer
CA Ravi Shanker
[Topper of EIRC & NIRC]
÷��&#667558768;.&#667558768;&#667558777; &#667558762;&#667558769;&#667558774;&#667558763;&#667558764; 12,000
Target Variable cost per unit 31.75
Less: Direct Material per unit 16.00
Target Labour and variable overheads cost per unit 15.75
÷��&#667558782;&#667558781;&#667558768;&#667558762;&#667558765; &#667558782;&#667558769;&#667558779; &#667558761;&#667558782;&#667558765;&#667558774;&#667558782;&#667558781;&#667558771;&#667558778; &#667558768;&#667558761;&#667558778;&#667558765;&#667558775;&#667558778;&#667558782;&#667558779; &#667558780;&#667558768;&#667558764;&#667558763; &#667558767;&#667558778;&#667558765; &#667558775;&#667558768;&#667558762;&#667558765;
 Labour cost per hour ₹ 8
 Variable Overhead per hour ₹ 1
9.00
Target Labour hours per unit (A) 1.75
Existing Lour hours per unit (B) 2
Reduction in Labour hour required (A  B) 0.25
(b) Supreme Prakashan Ltd. is in the business of publishing a leading newspaper which has a wide
customer base. It measure quality of service in term of
(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 utilize the proceeds of an investment fetching an
annual income @ of 9%.
Details regarding the present and future performance are given as under: 
Present Expected
Ontime delivery 85% 97%
Variable cost per lot of newspaper damaged and unsold ₹=40=₹=40=
Fixed cost=50,000=50,000=
No. of lots of newspaper damaged and=unsold=6,00M=1,00M=
=
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?
AMA2016(M) Suggested Answer
CA Ravi Shanker
[Topper of EIRC & NIRC]
Solution:
Determination of Incremental profit from installation of new system
Particulars ₹
Increase in contribution {₹&#667557935;&#667557932;,&#667557938;&#667557938;&#667557938;
&#667557937;%×(&#667557929;&#667557931;%− &#667557930;&#667557933;%)} ×&#667557934;&#667557938;% 1,72,800
Saving in variable coat of newspaper damaged (6000  1000) ×&#667557934;&#667557938; 2,00,000
Total 3,72,800
Less: Additional Operational Cost of new system
 Additional ₹ 3,00,000
 Opportunity Cost (4,00,000 ×₹ &#667557929;%) ₹ 36,000
3,36,000
Incremental Profit 36,800
(c)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:
(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
kilometer 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 end of the fifth year
Work out the relevant costs of three proposals and rank them.
AMA2016(M) Suggested Answer
CA Ravi Shanker
[Topper of EIRC & NIRC]
Solution
Determination of relevant cost of proposal of different options and its rank
(i)
Own car
(₹)
(ii)
Executive car
(₹)
(iii)
Agency car
(₹)
Fixed Cost
Depreciation on Car (₹ 1,00,000 – ₹ 20,000)/5
Insurance Cost
Taxes
16,000
1,200
800

1,200



800
Total (A) 18,000 1,200 800
Fixed cost per km (A ÷&#667557936;&#667557938;,&#667557938;&#667557938;&#667557938; &#667558772;&#667558770;&#667558764;) 0.90 0.06 0.04
Running and Maintenance Cost
 Petrol
 Repair and Maintenance
 Tyre
0.60
0.20
0.12



0.60

0.12
Reimbursement  1.60 1.00
Total cost per km. (B) 1.82 1.66 1.76
Cost for 20,000 (B ×&#667557936;&#667557938;,&#667557938;&#667557938;&#667557938;) 36,400 33,200 35,200
Ranking of alternative proposals III I II
Decision: Second alternative i.e. use of own car, is the best alternative from company‟s point of view.
(d) The cost per unit of transporting goods from the factories X, Y, and Z to destination A, B, C, and D
and the quantities demanded and supplied are given: 5
Factories Destinations Supply
A B C D
X 25 50 20 25 100
Y 30 40 35 10 250
Z 20 10 25 35 200
Demand 250 100 150 50 550
Answer the following question with reasons taking u3 as zero while calculating ui & vj :
(i) Is this solution is optimum?
(ii) If yes, can there be any alternate optimum solution?
AMA2016(M) Suggested Answer
CA Ravi Shanker
[Topper of EIRC & NIRC]
Solution:
Since, question is silent about method to be used in determination of initial solution we use Vogel‟s
Approximation Method (VAM):
Initial solution by using VAM:
Factories Destination Supply
X ×
25
×
50 20
100 ×
25
100/
Y
30
150 ×
40
35
50
10
50 250/200
Z
20
100
10
100 ×
25
˟=
35=
20M/100=
Demand 250/150/0 100/0 150/50/0 50/0
Penalty
5 30↑=R=25=
R==R=15=
R==5↑=M=
10↑==10==
=
Since, numbers of allocated cells are equal to m+n1/ R+C1 (i.e. Number of Rows + Number of=
Column =1) hence above solution is ready for the optimality test. =
=
Determination of value of ui and vj by using cij = ui + vj, where u3 is assumed 0 as specified in the
question.
Factories Destination ui
X
25
50
20 100
25
u1 = 5
Y 30 150
40
35
50 10 50 u2 = 10
Z 20 100 10 100
25
35
u3 = 0 (assume)
vj v1 = 20 v2 = 10 v3 = 25 v4 = 0
Penalty
5
5
5

20
←=
20=
=
R=
=
R=
=
10=
=
R=
=
R=
=
R=
AMA2016(M) Suggested Answer
CA Ravi Shanker
[Topper of EIRC & NIRC]
Determination of opportunity cost or cell evaluation of each unallocated/empty cell (i, j) by using ∆ij =
cij – (ui + vj):
Factories Destination ui
X
25
50
20
100
25
u1 = 5
Y
30
150
40
35
50
15
50 u2 = 10
Z
20
100
10
100
25
35
u3 = 0
(assume)
vj v1 = 20 v2 = 10 v3 = 25 v4 = 0
Since, value of ∆ij are non negative (either zero or more than zero) hence above solution is optimum. If
∆ij is zero then it represents alternative solution. Number of alternative solution is totally depended upon
number of ∆ij came as zero. In the above solution one alternative solution can be obtained by
reallocating units by using loop.
2. (a) A company produces and sells a single product. The cost date per units for the years 2017 is
predicted as below: 8
₹=Per unit=
Direct material =35=
Direct labour =25=
variable overheads=15=
Selling price=90=
The company has forecast that demand for the product during the year 2017 will be 28,000 units.
However to satisfy this level of demand,==
Production quantity will be increased?=
There are no opening stock and closing of the product.=
The stock level of material remains unchanged throughout the period.=
The following additional information regarding cost and revenue are given:=
 12.5% of the items delivered to customers will be rejected due to specification failure and will
require free replacement. The cost of delivering the replacement item is ₹ 5 per unit.
 20% of the items produced will be discovered faulty at the inspection stage before they are
delivered to customers.
 10% of the direct material will be scrapped due to damage while in storage.
Due to above, total quality costs for the year is expected to be ₹ 10,75,556.
45 10 30
20
0 35
AMA2016(M) Suggested Answer
CA Ravi Shanker
[Topper of EIRC & NIRC]
The company is now considering the following proposal:
a. To introduce training programmes for the workers the workers which, the management of the
company believes, will reduce the level of faulty production to 10%. This training programme
will cost ₹ 4,50,000 per annum.
b. To avail the services of quality control consultant at an annual charges of ₹ 50,000 which would
reduce the percentage of faulty items delivered to customers to 9.5%.
You are required to:
(i) Prepare a statement of expected quality cost the company would incur if it accepts the
proposal. Costs are to be calculated using the four recognized quality costs heads.
(ii) Would you recommend the proposal? Give financial and nonfinancial reasons.
Solution
(i) Determination of rejected items, faulty items and scrap items before and after
acceptance of proposal
Particulars Before acceptance
(units)
After acceptance
(units)
Demand 28,000 28,000
Add: Rejected items by customers 4,000
( 28000 × 12.5
87.5)
2,940
( 28000 × 9.5
90.5)
Units delivered to customers 32,000 30,940
Faulty units 8,000
(32,000 × 20
80)
3,438
(30,940 × 10
90)
Gross Production 40,000 34,378
Add: Scrapped due to damage in storage 4,444.44
(40,000 × 10
90)
3,820
(34,378 × 10
90)
Statement of expected quality cost for the 2017 of Company before and after acceptance of
proposal
Particulars Before acceptance (₹) After Acceptance (₹)
Preventive Cost
 Training programme cost

4,50,000
Appraisal Cost
 Annual Quality control consultant charges

50,000
Internal Failure Cost
 Scrap item
1,55,556
1,33,700
AMA2016(M) Suggested Answer
CA Ravi Shanker
[Topper of EIRC & NIRC]
 Faulty units
(4,444.44 ×35)
6,00,000
(8,000 ×35)
(3,820 ×35)
2,57,850
(3,438 ×75)
External Failure cost
 Rejected item cost
Manufacturing cost
Delivery cost
3,00,000
(4,000 ×75)
20,000
(4,000 ×5)
2,20,500
(2,940 ×75)
14,700
(2,940 ×5)
Total cost of quality 10,75,556 11,26,750
(ii) On the pure financial reason based TQM and proposal should not be accepted because it
increases cost by 51,194.
But based on nonfinancial reasons it should be accepted because it reduce external failure
(rejected items) by 3% and faulty units production by 10% which will image of company in
the eyes of customer.
Note: Scrap items valued at material acquisition cost, Faulty units are valued at manufacturing cost
whereas rejected items are valued at total variable cost (Manufacturing cost + Delivery cost).
(b) 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:
Per unit of Product Y Department A Department B
Usage Rate Usage Rate
Direct Material 8 kg ₹=Q=4 kg=₹=S=
Direct Labour=2 hours=₹=14=3 hours=₹=12=
Basis of overhead recovery are given below:=
=Department A per ₹ of
direct material
₹
Department B per direct
labour hour
₹
Variable overheads 0.80 2.00
Fixed overheads 2.20 3.00
Other Details are:
salue of Plant & 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.
AMA2016(M) Suggested Answer
CA Ravi Shanker
[Topper of EIRC & NIRC]
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?
Solution:
Computation of total cost of Product Y
Particulars ₹
Direct Material
 Deptt. A (8 kg ×₹ &#667557934; )
 Deptt. B (4 kg ×₹&#667557932; )
32
24
56.00
Direct Labour
 Deptt. A (2 hour ×₹ &#667557937;&#667557934; )
 Deptt. B (3 hour ×₹ &#667557937;&#667557936; )
28
36
64.00
Variable overheads
 Deptt. A (₹ 32 ×₹ &#667557938;.&#667557930;&#667557938; )
 Deptt. B (3 hour ×₹ &#667557936;.&#667557938;&#667557938; )
25.60
6.00
31.60
Total Variable cost per unit 141.60
Fixed overheads
 Deptt. A (₹ 32 ×₹ &#667557936;.&#667557936;&#667557938; )
 Deptt. B (3 hour ×₹ &#667557935;.&#667557938;&#667557938; )
70.40
9.00
79.40
Total Cost 261
Determination of total investment
Particulars Amount
(₹)
Portion of Plant and Machinery
 Deptt. A (₹ 22,00,000 ×&#667557934;&#667557938;%)
 Deptt. B (₹ 18,00,000 ×&#667557934;&#667557938;%)
8,80,000
7,20,000
Working capital 2,72,800
Total 18,72,800
AMA2016(M) Suggested Answer
CA Ravi Shanker
[Topper of EIRC & NIRC]
(i) Calculation of selling price of product Y
Particulars (₹)
Variable cost per unit 141.60
Add: Contribution per unit
(18,72,800 ×&#667557936;&#667557933;% ×&#667557937;/&#667557937;&#667557936;)/2000
19.51
Selling price per unit 161.11
(ii) If product Y is new product and about to be launched in the market then company should
implement penetration strategy i.e. selling price should be variable cost per unit
(iii) If Product Y is a well established product in the market then minimum selling price should be
total cost per unit i.e. ₹ 261.
3. (a) Division X and Y are two division of XY Ltd., which operates as profit centres. Division X
makes and sells product X. The budgeted income statement of Division X, based on a sales volume
of 30,000 units, is given below:
Budgeted Income Statement of Division X
Particulars ₹=in „000=
Sales Revenue=6,00M=
Component purchase costs=1,05M=
Other variable costs=1,68M=
Fixed costs=48M=
Variable marketing costs=27M=
Fixed marketing overheads=85R=
Operating profit=1,66R=
=
The manager of= Division= X suggests= that= sales can be= increased by= 9,600 units,= if= the selling price is=
reduced by ₹ 20 per unit from the present price of ₹ 200 per unit and that for this additional volume, no
additional fixed costs will be incurred.
Division Y makes a company Y which is sold outside at a price of ₹ 50 per unit.
Division X presently uses a component which is purchased from outside at ₹ 35 per unit. This
component is similar to component made by Division Y. Division Y can make this component for
Division X with a minor modification in specification which would cause reduction in direct material
cost for the Division Y by ₹ 1.5 per unit and would require extra labour hour of 1 per unit at the rate of ₹
1.5 per hour.
AMA2016(M) Suggested Answer
CA Ravi Shanker
[Topper of EIRC & NIRC]
Further the Division Y will not incur variable selling marketing cost on units transferred to the Division
X‟s manager has offered to buy the component from Division Y at ₹ 25.00 per unit. Division Y has the
capacity to produce 85,000 units.
The current budgeted information of Division Y are as follows:
Number of units sold outside 60,000 units @ ₹ 50 per unit, variable cost including material and labour ₹
15 per unit, variable marketing cost ₹ 3 per unit, operating profit ₹ 12,00,000 and fixed overheads ₹
7,20,000.
Advise
(i) Should the division X reduce the selling price by ₹ 20 per unit even if it is not able to procure the
component from Division Y at ₹ 25 per unit?
(ii) Should the Division Y be willing to supply 39,600 units to Division X at ₹ 25 per unit?
Support each of your conclusions with appropriate calculations.
Solution:
(i)
Division X
Statement of profit if selling price reduced by ₹ 20 and units are not procured from Division Y
Particulars (₹)
Sales Revenue (39,600 ×₹ &#667557937;&#667557930;&#667557938;) 71,28,000
Less: Variable cost
 Component cost (39,600 ×₹ &#667557935;&#667557933;)
 Other variable costs (39,600 ×₹ &#667557933;&#667557932;)
 Marketing cost (39,600 ×₹ &#667557929;)
13,86,000
22,17,600
3,56,400
Contribution 31,68,000
Less: Fixed Cost
 Manufacturing cost
 Marking cost
4,80,000
8,55,000
Revised Operating profit (A) 18,33,000
Existing operating profit (B) 16,65,000
Incremental operating profit (A  B) 1,68,000
Division X should reduce its selling price by ₹ 20 even if it is not able to procure the component from
Division Y at ₹ 25 per unit.
AMA2016(M) Suggested Answer
CA Ravi Shanker
[Topper of EIRC & NIRC]
(ii)
Division Y
Statement of revised profit if 39,600 units transferred to Division X at ₹ 25
Particulars (₹)
Sales Revenue
 Division X (39,600 ×₹ &#667557936;&#667557933;)
 Market (45,400 ×₹ &#667557933;&#667557938;)
9,90,000
22,70,000
Total Revenue 32,60,000
Less: Variable cost
 Material and labour cost (85,000 ×₹ &#667557937;&#667557933;)
 Marketing cost (45,400 ×₹ &#667557935;)
12,75,000
1,36,200
Contribution 18,48,800
Less: Fixed Cost 7,20,000
Revised Operating profit (A) 11,28,800
Existing operating profit (B) 12,00,000
Incremental operating profit (A  B) (71,200)
Division Y should not transfer units to Division X at ₹ 25.
(b) A company is engaged in manufacturing two products M and N. Product M uses one unit of component
P and two units of component Q. Product N uses two units of components p, one unit of component Q
and two units of component R. Component R which is assembled in the factory uses one unit of
component Q. Components P and Q are purchased from the market. The company has prepared the
following forecast of sales and inventory for next year:
Product M Product N
Sales (in units) 80,000 1,50,000
At the end of the year 10,000 20,000
At the beginning of the year 30,000 50,000
The production of both the products and the assembling of the component R will be out uniformly
throughout the year. The company at present orders its inventory of P and Q in quantities equivalent to 3
months production. The company has compiled the following data related to two components:
P Q
Price per unit (₹)=20=8=
Order placing cost per order (₹)=1,50M=N,500=
Carrying cost per annum=20B=20B=
Required:
(i) Prepare a Budget of production and requirements of components for next year.
(ii) Suggest the optimal order quantity of components P and Q.
AMA2016(M) Suggested Answer
CA Ravi Shanker
[Topper of EIRC & NIRC]
Solution:
(i)
Statement of Production Budget for Product M & N
Particulars M N
Inventory at the end of year 10,000 20,000
Add: Sales 80,000 1,50,000
Total Requirements 90,000 1,70,000
Less: Inventory at the beginning of the year 30,000 50,000
Required Production 60,000 1,20,000
Budgeted Requirements of Components P, Q and R
Particulars P Q R
For product M:
 P (60,000 ×&#667557937;)
 Q (60,000 ×&#667557936;)
60,000


1,20,000


For Product N:
 P (1,20,000 ×&#667557936;)
 Q (1,20,000 ×&#667557937;)
 R (1,20,000 ×&#667557936;)
2,40,000



1,20,000



2,40,000
For Component R:
 Q (3,60,000 ×&#667557937;)

2,40,000

Total 3,00,000 4,80,000 2,40,000
(ii) Optimum Order Quantity/ Economic Order Quantity = 2����
��
Where,
A = Annual Consumption (in case of M = 3,00,000 and N = 4,80,000)
O = Ordering Cost per order (i.e. ₹ 1,500 per order)
C = Carrying Cost per unit per annum (Purchasing cost per unit ×����&#667558817;&#667558817;������&#667558821;�� ��&#667558820;&#667558816;&#667558815; %)
Component M = 2 ×3,00,000 ×1,500
20 ×20% = 15,000
Component N = 2 ×4,80,000 ×1,500
8 ×20% = 30,000
AMA2016(M) Suggested Answer
CA Ravi Shanker
[Topper of EIRC & NIRC]
4 (a) A company operates a standard cost system to control the variable works cost of its only product.
The following are the details of actual production, costs and variances for November, 2015.
Production and cost (actual)
Production 10,000 units
Direct Materials (1,05,000 kg.) ₹=5,20,000=
Direct Labour (19,500 hrs.F=₹=3,08,000=
Variable Overheads=₹=4,10,000=
Cost variances
Direct materials –=Price =₹=5,000 (FF=
Direct materials=–=Usages==₹=25,000 (A)=
Direct labour –=Rate==₹=15,500 (A)=
Direct labour –=Efficiency==₹=7,500 (FF=
Variable overheads=₹=10,000 (A)=
The Cost Accountant finds that the original standard cost data for the product is missing from the cost=
department files. The variance analysis for December, 2015 is held up for want of this data.=
You are required to calculate :=
(iF Standard price per kg of direct material.
(ii) Standard quantity for each unit of output.
(iii)Standard rate of direct labour hour.
(iv) Standard time for actual production.
(v) Standard variable overhead rate.
Solution:
i) Material Price Variance = (Actual Quantity × Standard Price) – (Actual Quantity × Actual
price)
500(F) = (1,05,000 × Standard Price) – (5,20,000)
Standard Price = ₹ 5,25,000
1,05,000 ����
Standard Price = ₹ 4 per kg
ii) Material Usages Variance = (Standard Quantity × Standard Price) – (Actual Quantity ×
Standard price)
25,000(A) = (Standard Quantity × ₹ 5)  (1,05,000 × ₹ 5)
Standard Quantity × ₹ 5 = ₹ 5,25,000 ₹ 25,000
Standard Quantity = ₹ 5,00,000
₹ 5
Standard Quantity = 1,00,000 kg
AMA2016(M) Suggested Answer
CA Ravi Shanker
[Topper of EIRC & NIRC]
iii) Labour Rate Variance = (Actual Hours × Standard Hours) – (Actual Hours × Actual Rate)
15,500(A) = (19,500 × Standard Rate)  ₹ 3,08,000
Standard Rate = ₹ 2,92,500
19,500
Standard Rate = ₹ 15
iv) Labour Efficiency Variance = (Standard Hours × Standard Rate) – (Actual Hours × Standard
Hours)
7500(F) = (Standard Hours × ₹ 15) – (19,500 × ₹ 15)
Standard Hours = ₹ 3,00,000
₹ 15
Standard Hours = 20,000 hours
v) Variable overhead Variance = Standard Overheads – Actual Overheads
10,000(A) = Standard Overheads  ₹ 4,10,000
Standard Overheads = ₹ 4,00,000
Standard Variable Overheads = Standard Hours × Standard Rate
₹ 4,00,000 = 20,000 × Standard Rate
Standard Rate = ₹ 4,00,000
20,000 = ₹ 20
(b) After 15 days of working the following progress is noted for the network of an erection job:
(i) Activity 12, 13, and 14 competed as per original schedule.
(ii) Activity 24 is in progress and will be complete in 3 more days.
(iii)Activity 36 is in progress and will need 18 days more for completion.
(iv) Activity 67 appears to present some problem and its new estimated time of completion is 12 days.
(v) Activity 68 can be completed in 5 days instead of originally planned for 7 days.
You are required to:
(i) Update the above diagram after 15 days of the start of work based on the assumption given above.
(ii) Write down the critical path with total project duration.
Solution:
i) Statement of Revised Duration of Activities
Activity Calculation Revised Duration
12  9
13  10
1.4  6
24 (15 + 3 –=9)=V=
25  18
AMA2016(M) Suggested Answer
CA Ravi Shanker
[Topper of EIRC & NIRC]
34  5
36 ( 15 + 18  10) 23
47  20
57  8
67  12
68  5
78  6
9
9 8
6 20 6
10
12
23 5
ii) Possible Paths and its duration:
Possible Paths Calculation Duration (Days)
12578 9+18+8+6 41
12478 9+9+20+6 44
1478 6+20+6 32
13478 10+5+20+6 41
13678 10+23+12+6 51
1368 10+23+5 38
Critical Path is 13678 and its duration is 51 days.
2
8 7 4 1
3 6
5
AMA2016(M) Suggested Answer
CA Ravi Shanker
[Topper of EIRC & NIRC]
5. (a) MP Ltd. has developed a special product. Details are as follows:
The product will have a life cycle of 5,000 units. It is estimated that market can absorb first
4,500 units at ₹ 64 per unit and then the product will enter the “decline” stage of its life
cycle.
The company estimates the following cost structure:
Direct Labour ₹=6 per hour=
Other variable costs==₹=19 per unit=
=Fixed costs will be ₹ 40,000 over the life cycle of the product. The labour rate and both of
these cost will not change throughout the product‟s life cycle.
The first batch 0f 100 units will take 1,000 labour hours to produce. There will be 80%
learning curve that will continue until 2,500 units have been produced. Batches after this
level will each take the same amount of time as the 25th batch. The batch size will always be
100 units.
Calculate: 
(i) The cumulative average time per batch for the first 25 batches.
(ii) The time taken for the 25th batch if average time for 24 batches is 359.40 hours.
(iii)The average selling price of the final 500 units that will allow the company to earn a total
profit of ₹ 80,000 from the product.
(Note: Learning coefficient is 0.322 for learning rate of 80%)
The values of Logs have been given for calculation purpose:
log2 = 0.30103, log3 = 0.47712, log5 = 0.69897
antilog of 2.534678 = 342.51
antilog of 2.549863 = 354.70
antilog of 2.555572 = 359.40
antilog of 2.567698 = 369.57
Solution:
(i) Determination of average time required per batch for the first 25 batches.
Average accumulated hours (y) = axb
When,
a = Time required for first batch
x = cumulated batch
b = learning co efficient
AMA2016(M) Suggested Answer
CA Ravi Shanker
[Topper of EIRC & NIRC]
3.000 0.1573
2.8426
Y = axb
log y = log 1000 + (0.322) × log 25
log y = 3.0000 + (0.322) × 2 × log 5
= 3.0000 + (0.322 × 2 × 0.69897)
= 3.0000 – 0.44501
= 2.5498
Antilog of 2.5498 = 354.70
(ii) Time required for 25th batch
= (Total accumulated hour upto25th batch ) – (cumulated hour upto 24th batch)
= (354.70 × 25) – (359.40 × 24)
= 8867.50 – 8625.60
= 241.90
(iii) Computation of aver5age selling price of final 500 units to earn total profit of 80,000
Particulars (₹)
Labour cost
 First 2500 units (8867.50 × ₹6)
 Last 2500 units (241.90 × 25 × ₹ 6)
53205
36285
Add: other variable cost (5000 × ₹ 19)
95000
1,84,490
Add: Fixed cost 40.000
Total 2,24,490
Add: Desired Profit 80,000
3,04,490
() Sales Revenue of first 45,000 units (4,500 × ₹ 64) 2,88,000
Sale Revenue from 500 units 16,490
÷ No of units 500
32.98
5. (b) 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.
₹ in lakhs
Annual turnover 80.00
Average inventory 16.00
Administrative expenses per annum 1.60
Staff salary per annum 2.88
AMA2016(M) Suggested Answer
CA Ravi Shanker
[Topper of EIRC & NIRC]
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 company‟s P/V 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.
Solution:
Statement of incremental profitability on acceptance of proposal
Particulars (₹ lakh)
Incremental Revenue
Incremental contribution (4000 × 20%) 800
Saving of staff salary (2.88 × 50% × 200) 288
Administration expense (1.60 × 200) 320
Interest Saving on Investor deposits (16 × 200 × 16%) 512
Deposit from dealers (3.20 × 200 × 16%) 102.40
2022.40
Less:
 Commission (20,000 × 8%)
 Interest payments (3.20 × 200 × 12%)
1600
76.80
Incremental Profit 345.60
Working Note:
(1) Total turnover at 80% = 160 crores
Additional turnover 160 ��&#667558817;&#667558820;&#667558817;��&#667558816;×20
80 = 40
Total = 200 crores
(2) It is assumed other fixed cost will not affected with decision.
(3) Administration expenses are treated as specific cost.
(4) Since administration expanses, staff salary & deposit are taken as per depot basis.
AMA2016(M) Suggested Answer
CA Ravi Shanker
[Topper of EIRC & NIRC]
6. (a) A manufacturing unit of ABC co. Ltd. has presented the following details: 
Average units produced and sold per month 2,40,000
No. of workers 80
Sales value ₹=60 Lacs=
Contribution=₹=24 Lacs=
Wage rate =₹=5 per unit=
The production manager purposes 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 reduce 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.
Solution:
Statement of additional contribution
Before After Increment
No. of units (A) 2,40,000 (₹) 2,88,000 (₹) 48,000 (₹)
Sales Required 25.00 24.50 
() Variable cost p.u.
 Wages 5 6
 Others 10 10
Contribution (B) per unit 10 8.50
Total Contribution(A × B) 24,00,000 24,48,000 48,000
Extra contribution after introduction of new automated machine is ₹ 48,000.
Working Note
Increase in average individual output:
Total Budgeted production (2,40,000 × 120%) 2,88,000 units
÷ No. of worker 60
Revised Production 4800
() Existing Production 3000
Increase in Production 1800
% increase in Production = 1800 ×100
3000 = 60%
AMA2016(M) Suggested Answer
CA Ravi Shanker
[Topper of EIRC & NIRC]
Revised Rate = ₹ 5 + ₹ 5 × 60% ×1
3%
= ₹ 5 + ₹ 1
= ₹ 6
6. (b) A manufacturer produces two types of products i.e. X and Y. Each of these products requires
three types of processing. The processing time for processing each unit and the profit per unit are
given in the following table:
Product
X
(hr/unit)
Product
Y
(hr/unit)
Available capacity per day
(hr.)
Process I 12 12 840
Process II 3 6 300
Process III 8 4 480
profit per unit (₹)=R=T==
=Applying Graphical method, how many units of each product should the company produce=
per day in order to maximize profit?=
=
Solution:
Let
x = No. of units Production of Product x
y = Number of units Produced of Product y
Objective
Maximisation of Profit
Maximize (z) = 5x + 7y
Subject to Constraints
12x + 12y ≤ 840
3x +6y ≤ 300
8x + 4y ≤ 480
x ≥0; , y ≥ 0
AMA2016(M) Suggested Answer
CA Ravi Shanker
[Topper of EIRC & NIRC]
Equation – (i)
12x + 12y = 840
= 12 (x + y) = 840
x + y = 70
x 0 70
y 70 0
Equation – (ii)
3x + 6y = 300
3 (x + 2y) = 300
X + 2y = 100
x 0 100
y 50 0
Equation (iii)
8x + 4y = 480
4(2x + y) = 480
2x + y = 120
x 20 60
y 80 0
The shaded portion in the diagram represents the feasible region.
The shaded portion in the diagram (on previous page) represents the feasible region, and the matrix of
the extreme points
Ei,i = 1, 2, 3, 4, 5 is
Statement of possible profit at all points
Point Number of units Contribution Per Unit Total Contribution
(a × c) + (b × d) x (a) y (b) x (c) y (d)
E1 0 0 5 7 0
E2 0 50 5 7 350
E3 40 30 5 7 410
E4 50 20 5 7 390
E5 60 0 5 7 300
Since 410 is the largest element in EC, the maximum value is achieved at the extreme point E3 whose
coordinates are (40, 30).
Thus to maximize profit, the company should produce 40 units of X and 30 units of Y.
AMA2016(M) Suggested Answer
CA Ravi Shanker
[Topper of EIRC & NIRC]
7. Answer any four out of the following five questions:
a) Answer the following independent situation relating to an assignment problem with a
minimization objective.
i) Just after row and column minimum operations, we find that a particular row has 2
zeroes. Does this imply that the 2 corresponding numbers in the original matrix before
any operation were equal? Why?
ii) Under the usual notation, where A32 means the element at the intersection of the 3rd row
and 2nd column, we have, in a 4*4 assignment problem, A24 and A32 figuring in the
optimal solution. What can you conclude about the remaining assignments? Why?
Answer:
i) Prerequisite of assignment of any job is each row and column must have a zero value in its
corresponding cells. To obtained zero in every row and column row operation and column
operation are carried on. It is not essential two corresponding numbers in original matrix,
before any operation should be equal to make two zeros in the same row. Two may derived
because of only row operation or row and column operation also.
ii) In the given assignment matrix two allocations have been made in a24 (2nd row and 4th
column) and a32 (3rd row and 2nd column). This implies that 2nd and 3rd row and 4th and
2nd column are unavailable for further allocation.
Therefore, the other allocations are at either at a11 and a43 or at a13 and a41.
b) Classify the following under appropriate categories in Balanced Score Card:
Ans:
(i) Research and Development Innovation and Learning Prospective
(ii) New product introduction Internal Business Prospective
(iii) Price Customer Prospective
(iv) Cost Leadership Innovation and Learning Prospective
(v) Sales penetration Internal Business Prospective
(vi) Profitability Financial Prospective
(vii) Sales Financial Prospective
(viii) Quality Customer Prospective
c) How would you use the Monte Carlo simulation method in inventory control?
Ans: In order to provide efficient service to the customers it is necessary to choose to reorder
point with proper consideration of demand during lead time.
If the lead time and demand of inventory per unit time both are random variables then, the
simulation technique can be applied to determine the effect & alternate inventory policy on a
stochastic inventory system.
AMA2016(M) Suggested Answer
CA Ravi Shanker
[Topper of EIRC & NIRC]
The basic approach under this system is to find the probability distribution of the input and
output functions of the past data.
d) Indicate 2 activity drivers respect of each of the following activity cost pools:
Solution:
i) Manufacturing cost Number of hours worked
Number of units produced
ii) Human resource cost Number of employees
Number of employees working hours
iii) Marketing resources cost Number of advertisement
Number of sales personnel
Sales revenue
iv) Accounting costs Number of branches
Number of transaction
Seles revenue
e) What is penetration pricing? What are the circumstances in which this policy can be adopted?
Answer:
Meaning of penetration pricing
 Penetration pricing is a policy of low prices when the product is first launched in order
to obtain sufficient penetration into the market.
 It is opposite to skimming pricing.
Circumstances in which a penetration policy may be appropriate:
(i) The demand is highly elastic and so would respond well to low price.
(ii) If the firm wishes to discourage new entrants into the market.
(iii)If the firm wishes to shorten the initial period of the product‟s life cycle in order to
enter growth and maturity stages as quickly as possible.
(iv) When there is substantial savings on largescale production, here increase in demand is
sustained by the adoption of low pricing policy.