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Suggested Answer by CA Ravi Shanker #pdf
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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 AMA-2016(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 On-time 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? AMA-2016(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. AMA-2016(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? AMA-2016(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+n-1/ R+C-1 (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= AMA-2016(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 AMA-2016(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 non-financial 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 AMA-2016(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 non-financial 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. AMA-2016(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 AMA-2016(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. AMA-2016(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. AMA-2016(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. AMA-2016(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 AMA-2016(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 AMA-2016(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 1-2, 1-3, and 1-4 competed as per original schedule. (ii) Activity 2-4 is in progress and will be complete in 3 more days. (iii)Activity 3-6 is in progress and will need 18 days more for completion. (iv) Activity 6-7 appears to present some problem and its new estimated time of completion is 12 days. (v) Activity 6-8 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 1-2 - 9 1-3 - 10 1.4 - 6 2-4 (15 + 3 –=9)=V= 2-5 - 18 AMA-2016(M) Suggested Answer CA Ravi Shanker [Topper of EIRC & NIRC] 3-4 - 5 3-6 ( 15 + 18 - 10) 23 4-7 - 20 5-7 - 8 6-7 - 12 6-8 - 5 7-8 - 6 9 9 8 6 20 6 10 12 23 5 ii) Possible Paths and its duration: Possible Paths Calculation Duration (Days) 1-2-5-7-8 9+18+8+6 41 1-2-4-7-8 9+9+20+6 44 1-4-7-8 6+20+6 32 1-3-4-7-8 10+5+20+6 41 1-3-6-7-8 10+23+12+6 51 1-3-6-8 10+23+5 38 Critical Path is 1-3-6-7-8 and its duration is 51 days. 2 8 7 4 1 3 6 5 AMA-2016(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 AMA-2016(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 AMA-2016(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. AMA-2016(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% AMA-2016(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 AMA-2016(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. AMA-2016(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 re-order 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. AMA-2016(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 large-scale production, here increase in demand is sustained by the adoption of low pricing policy.




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