ABC Ltd. Produces room coolers. The company is considering whether it should continue to manufacture air circulating fans itself or purchase them from outside. Its annual requirement is 25000 units. An outsider vendor is prepared to supply fans for Rs 285 each. In addition, ABC Ltd will have to incur costs of Rs 1.50 per unit for freight and Rs 10,000 per year for quality inspection, storing etc of the product.

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AEREN FOUNDATION’S Maharashtra Govt. Reg. No.: F-11724

SUBJECT: FINANCIAL & COST ACCOUNTING

Total Marks: 80

N.B. : 1) All questions are compulsory

2) All questions carry equal marks.

Q1) ABC Ltd. Produces room coolers. The company is considering whether it should continue to

manufacture air circulating fans itself or purchase them from outside. Its annual requirement is

25000 units. An outsider vendor is prepared to supply fans for Rs 285 each. In addition, ABC Ltd

will have to incur costs of Rs 1.50 per unit for freight and Rs 10,000 per year for quality inspection,

storing etc of the product.

In the most recent year ABC Ltd. Produced 25000 fans at the following total cost :

Material Rs. 50,00,000

Labour Rs. 20,00,000

Supervision & other indirect labour Rs. 2,00,000

Power and Light Rs. 50,000

Depreciation Rs. 20,000

Factory Rent Rs. 5,000

Supplies Rs. 75,000

Power and light includes Rs 20,000 for general heating and lighting, which is an allocation based on

the light points. Indirect labour is attributed mainly to the manufacturing of fans. About 75% of it

can be dispensed with along with direct labour if manufacturing is discontinued. However, the

supervisor who receives annual salary of Rs 75,000 will have to be retained. The machines used for

manufacturing fans which have a book value of Rs 3,00,000 can be sold for Rs 1,25,000 and the

amount realized can be invested at 15% return. Factory rent is allocated on the basis of area, and the

company is not able to see an alternative use for the space which would be released. Should ABC

Ltd. Manufacture the fans or buy them?

AN ISO 9001 : 2008 CERTIFIED INTERNATIONAL B-SCHOOL

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Q2) Usha Company produces three consumer products : P, Q and R. The management of the

company wants to determine the most profitable mix. The cost accountant has supplied the following

data.

Usha Company : Sales and Cost Data

Description Product Total

P Q R

Material Cost per unit

Quantity (Kg) 1.0 1.2 1.4

Rate per Kg (Rs) 50 50 50

Cost per unit (Rs) 50 60 70

Labour Cost per unit 30 90 90

Variable Overheads per unit 15 10 25

Fixed Overheads (Rs .000) 9,175

Current Sales (Units ,000) 100 50 60 210

Projected Sales (Units ,000) 109 55 125 289

Selling Price per unit (Rs) 150 200 270

Raw material used by the firm is in short supply and the firm can expect a maximum supply of 350

lakh kg for next year. Is the company’s projected sales mix most profitable or can it be changed for

the better?

Q3) DSQ Company Ltd, a diversified company, has three divisions, cement, fertilizers and

textiles. The summary of the company’s profit is given below :

(Rs/Crore)

Cement Fertilizer Textiles Total

Sales 20.0 12.0 18.0 50.0

Less : Variable Cost 8.0 9.6 5.4 23.0

Contribution 12.0 2.4 12.6 27.0

Less : Fixed Cost (allocated to

divisions in proportion to

volumes of Sales)

8.0 4.8 7.2 20.0

Profit (Loss) 4.0 (2.4) 5.4 7.0

After allocating the company’s fixed overheads to products the Fertilizers, division incurs a loss of

Rs 2.4 crore. Should the company drop this division?