Indian Institute of Management Kashipur

PGP 2016-18, Term II

Management Accounting
Quiz 6
Maximum Marks: 20 Time: 30 Minutes.
Name..................... Roll No.....................
Note: Please show your calculations clearly as step marking will be done. Every Question carry
equal marks.
1. Gilmark Company has 10,000 obsolete lamps carried in inventory at a cost of Rs 120 each. They
can be sold as they are for Rs 40 each. They can be reworked, however, at a total cost of Rs 5,50,000 and
sold for Rs 100 each. If the company choose to rework and then sell, what is the total relevant cost per lamp
you will consider for this decision?
Calculation:

Answer:
2. McGee Corporation’s Olympia plant produces a module used in automobile manufacturing. The
company’s practical capacity is 4,000 modules per week. The selling price is $900 per module. Production
this quarter is 3,000 modules per week, and all of the modules produced are sold each week. Demand is
expected to remain steady. Total costs of production this week at the level of 3,000 modules were $300,000
of fixed costs plus $18,00,000 of variable costs. Suppose that a new customer’s supplier has an emergency
need for 1,500 modules to be delivered next week and that the plant cannot schedule overtime production.
Consequently, McGee would have to give up some of its current sales to fill the new order. Total selling
and administrative costs would not change if McGee accepts the order.

What is the minimum (floor) price that McGee should charge for the new order?
Calculation:

Answer:
3. Jason Brady is the managing partner of a business that has just finished building a 60-room motel.
Brady anticipates that he will rent these rooms for 15,000 nights next year (or 15,000 room-nights). All
rooms are similar and will rent for the same price. Brady estimates the following operating costs for next
year:
Variable operating costs $3 per room-night
Fixed costs:
Salaries and wages $177,000
Maintenance of building and pool 38,000
Other operating and administration costs 190,000
Total fixed costs $405,000

The capital invested in the motel is $1,500,000. The partnership’s target return on investment is 20%. Brady
expects demand for rooms to be uniform throughout the year. He plans to price the rooms at full cost plus
a mark-up on full cost to earn the target return on investment. What price should Brady charge for a room-
night?
Calculation:

Answer:
4. Excel Corporation manufactures three products at its plant. The plant capacity is limited to 120,000
machine hours per year on a single-shift basis. Direct material and direct labour costs are variable. The
following data are available for planning purposes:
PRODUCT XL1 XL2 XL3
TOTAL UNIT DEMAND FOR NEXT YEAR 2,00,000 2,00,000 2,00,000
SALES PRICE PER UNIT $10.00 14 12
DIRECT MATERIALS COST PER UNIT $4.00 4.5 5
DIRECT LABOR COST PER UNIT $2.00 3 2.5
VARIABLE OVERHEAD COST PER UNIT $2.00 3 2.5
MACHINE HOURS PER UNIT 0.2 0.35 0.25

Common fixed overheads are $ 2,50,000. What maximum profit the company can earn if it optimise its
production mix:
Calculation:

Answer: