Problems on Management

Accounting
a) Repairs & maintenance cost is Rs. 10/per unit at 10000 units of production, it
is Rs. 7.00 per unit at
25000. What will
be per unit cost of repairs & maintenance
at 20000 units of production?

b) Advertisement is 20% variable at

100% level of activity. Budgeted
advertisement cost is Rs. 10,000/-. What
is the advertisement at 50%, 70% and
80% levels of output?

Problems on Management Accounting

Sunlight Company Ltd has

been buying a given item in
lots of 1,200 units in a 6
months interval. The cost
per unit is Rs. 1200, ordering
cost is Rs. 1600 per order,
and inventory carrying cost
is 25%. You are required to
calculate the savings (or
otherwise)
per
year
by
buying in economical lot
quantities.

Problems on Management Accounting

EOQ
The Purchase Manager of an organisation has collected the
following data for the input material A.
Interest of the locked up capital 20%
Order processing cost (Rs.) for each order Rs. 10000
Inspection cost per lot
Rs. 5000
Follow up cost for each order
Rs. 8000
Pilferage while holding inventory
5%
Other holding cost 15%
Other procurement cost for each order
Rs. 17000
Annual Demand
1000 units
Cost per item Rs. 1000
Discount for a minimum order quantity of 500 items is 10%
What should be the ordering policy of the Purchase Manager.

Problems on Management Accounting (BEP)

Sales (4000 units @ Rs. 25 each) Rs. 1,00,000
Variable Cost:
Materials Consumed Rs. 40,000
Labour Charges
20,000
Variable Overheads
10,000
Fixed Overheads
18,000
88,000
Net Profit
12,000
Calculate:
1. Number of units by selling which the company will breakeven
2. Sales needed to earn a profit of 20% on sales
3. Extra units, which should be sold to obtain the present
profit if it is proposed to reduce the selling price by 20%
and 25%
4. Selling price to be fixed to bring down its break-even point
to 600 units under present condition.

Problems on Management Accounting (BEP)

A company wants to buy a new machine to replace one which
is having frequent break down. It receives offer for two
models M1 and M2. Further details regarding these models are
given below:
M1

Installed capacity (units)

M2

10,000

10,000

Fixed Overhead p.a.

2,40,000

1,00,000

Estimated profit at the above

capacity

1,60,000

1,00,000

The product manufactured using this type of machine (M 1 and

M2 ) is sold at Rs. 100 per unit.
You are required to determine:
a) BEP level of Sales for each machine
b) The level of Sales at which both the models will earn the
same profit.
c) The model suitable for different levels of demand for the
product.

Problems on Management Accounting (BEP)

2) A Ltd. operating at 80% level of activity furnishes the following
information:

Particulars

Products
A

Selling Price/units (Rs.)

10

12

20

Profit as percentage of selling

price

25

33.33

20

10,000

15,000

5,000

Units produced and sold

Fixedthe
Cost
40,000 to increase
45,000by 10%.
25,000
During
year, the variable costs are expected
There
will, however, be no change in fixed costs, the selling prices and the unit to be
produced and sold. The sales potential for each of the products is unlimited.
i) You are required to prepare a statement showing the P/V ratio, break-even
point and margin of safety for each product and for the company as a
whole.
ii) The company intends to increase the production of only one of the three
products to reach the full capacity available. Assuming that all the three
products take the same machine time, advice with reasons, which of the
three products should be produced so that the overall profitability is the
maximum.

Problems on Management Accounting (BEP)

3) The XYZ Ltd operates a chain of shoe stores. The stores
sell 10 different styles of mens shoe with identical purchase
costs and selling prices. The company is trying to determine
the desirability of operating another store, which would have
the following expense and revenue relationships per pair.
Variable data:
Rs.
Selling price
30.00
Cost of shoes
19.50 Salesmens commission
1.50
Total V.C. 21.00
Annual Fixed Expense:
Rent 60,000
Salaries
2,00,000
Advertisement
80,000
Other Fixed Expenses 20,000
3,60,000

Problems on Management Accounting (BEP)

Required (consider each question independently)
1. What is the BEP in sales amount and in unit of sales?
2. If 35,000 pairs of shoes are sold, what would the stores net
income be?
3. If the store manager was paid Rs 0.30 per pair commission
what would the annual BEP in sales and in unit of sales?
4. Refer to the original data. If the store manager were paid
Rs. 0.30 commission on each pair sold in excess of the BEP,
what would be the stores net income if 50,000 pairs were
sold?
5. Refer to the original data. If sales commissions were
discontinued in favour of Rs 81,000 increase in fixed
salaries, what would the annual BEP in amount and in units
of sales?

Problems on Management Accounting (BEP)

Unique Solution Company Ltd. has just been incorporated to
produce a product that will sell for Rs. 10 per unit.
Preliminary market surveys show that demand will be around
10,000 units per year.
The company has the choice of buying one of two machines,
each of which has a capacity of 10,000 units per year.
Machine A would have fixed costs of Rs. 30,000 per year and
would yield a profit of Rs. 30,000 per year on the sale of
10,000 units. Machine B would have fixed cost of Rs. 18,000
per year and yield a profit of Rs. 22,000 per year on the sale
of 10,000 units. Variable costs behave linearly for both
companies.
Required:
a) BEP sales for each machine
b) Sales level where both machines are equally profitable.
c) Range of sales where one machine is more profitable than
the other.

Problems on Management Accounting

(CVP-Decision Making)

4) The following particulars are extracted from the records of a company.

Budgeted Units
Sales
Consumption of Material
Material Cost
Direct Wages Cost
Direct Expenses

Product A
(p.u.)

Product B
(p.u.)

2,500

2,500

Rs. 100

Rs. 120

2 kg

3 kg

Rs 10

Rs. 15

Rs. 15

Rs. 10

Rs. 5

Rs. 6

Rs. 5

Rs. 10

Rs. 15

Rs. 20

Machine hours used

Overhead Expenses:
Fixed
Variable

Direct Wages per hour is Rs. 5. Comment on profitability of each of product (both
use the same raw material) when
i) Total sales potential is limited ii) Raw Material is in short supply
iii) Production capacity (in terms of machine hours) is the limiting factor
b) Assuming raw material as the key factor, availability of which is 10,000 kg.
and maximum sales potential of each product being 3,500 units, find out the
product mix which will yield the maximum profits. (P/V ratio ?)

Problems on Management Accounting

(CVP-Decision Making)

5) Multi Product Company has the following costs and

output for the last year.

Analyse the proposed change and suggest what

decision company should take.

6. The following information given for a

company

Total Sales
Total Cost

2010-11
2,000,000
1,760,000

2011-12
3,000,000
2,160,000

1. P/V Ratio
2. The amount of sales required to
earn a profit of 20% on sales
3. % increase in SP in the year 201112 to earn MOS of 60%

Problems on Management Accounting (CVPDecision Making)

7) Auto Parts Ltd has an annual production of 90,000 units for a motor
component. The component's cost structure is as given below:
Rs.
S.P. 750 per unit
Materials 270 per unit
Labour (25% fixed) 180 per unit
Overheads: Variable 90 per unit
Fixed 135 per unit
675 per unit
a) The purchase manager has an offer from a supplier who is willing to supply
the component at Rs. 540. Should the component be purchased and production
stopped?
b) Assume that the resources now used for this components manufacturing are
to be used to produce another new product for which the selling price is Rs. 485
In the later case material price will be Rs. 200 per unit, 90,000 units of this
product can be produced, at the same cost as above for labour and overheads.
Discuss whether it should be advisable to divert the resources to manufacture
that new product, on the footing that the component presently being produced
would, instead of being produced, be purchased from the market.