1.

–The Sunshine Company Limited has 8,000 obsolete units of a product that are carried in
inventory at a manufacturing cost of Rs. 1,60,000. If the units are re-machined for Rs. 40,000,
they could be sold for Rs. 72,000. Alternatively, the units could be sold for scrap for Rs. 28,000.
If company decides to re-machine it, what is the total relevant cost for that alternative?

2. A company is producing 3,000 units per month of a product and operating at 50% of its
installed capacity due to demand conditions prevailing in the market. It is selling the product at
Rs 2,100 per unit. Total cost of the product is Rs. 2,000 per unit of which Rs. 800 per unit is
allocated as the fixed cost. The Company gets an oversea order for 3,000 units. If company
produces 6,000 units, the variable cost per unit will come down by 10% while total fixed cost
will go up by Rs 6.00 Lakh per month.
What is the minimum price (the floor price) for this special order?

3. Okara a budget hotel in Kolkata is having 100 rooms and established near a busy amusement
park. During November, 2023 the Hotel experienced a 70% occupancy at week nights (Mon. to
Thu.) and 90% on weekend nights (Fri. to Sun.). The month of December, 2023 is having 19
week nights and 12 weekend nights. The Hotel charges Rs. 2,500 per night for suite. The
company recently hired Ms. Reema Solanki to manage the Hotel’s profitability. The following
information relates to the cost:
Fixed Cost (Per Month) Variable Cost
Depreciation Rs.2,50,000 -
Administrative Cost Rs.8,00,000 -
Housekeeping and Supplies Rs.5,60,000 Rs. 300 per night
Breakfast Rs.2,20,000 Rs. 100 per serving
Hotel offers free breakfast to guests. In November, 2023, there were on an average two
Breakfasts served per week-night and 4 Breakfasts served per weekend nights.
You are required:
(i) Calculate the Average Cost per room night for the month of November, 2023 and also
calculate operating income for the month.
(ii) Ms. Reema Solanki estimates that during December 2023, if the Hotel decreases the night
rates to Rs. 1,750, weeknight occupancy will increase to 80%. She also estimated that if
hotel increase weekend night rate upto 3,000 that will not affect weekend night occupancy.
Would it be a good move for the Hotel. Why and why not?
(iii) Assume that OYO rooms has approached the Hotel with a proposal to offer last minute
deals on empty rooms on both weeknight and weekend nights. Assuming that there will be
an average of three Breakfasts/Lunch/Dinner served per night per room. What is the
minimum price that hotel could accept on the last minute rooms?
4. “In my opinion, we ought to stop making our own blue tooth speakers and accept outs––ide
supplier’s offer” said Ayush Jain, Managing Director of Sound Electronics Limited, Greater
Noida, UP, India. “At a price of Rs. 1,800 per blue tooth speaker, we would be paying Rs. 500
less than it costs us to manufacture the blue tooth speaker in our own plant. Since we produce
60,000 blue tooth speakers a year that would be an annual cost saving of Rs. 3,00,00,000.”
Mr. S. K. Goyal, Head of the Finance, presents cost to manufacture on blue tooth speaker to Mr.
Ayush Jain which is given below (based on 60,000 blue tooth speakers per year):
Cost per drum
Particulars
(Rs.)
Direct Material 1,035
Direct Labour 600
Variable Overheads 150
Fixed Overheads 515
Total 2,300

The break-up of fixed overheads per blue tooth speaker is as follows:

Depreciation of equipment Rs. 160
Supervision Rs. 75
General company overheads
Rs. 280
(allocated)
Total Rs. 515

The decision about whether to make or buy the blue tooth speakers is especially important at
this time since the equipment being used to make the blue tooth speakers is completely worn out
and must be replaced. The choices the Company facing are:
Alternative 1: Rent new equipment and continue to make the blue tooth speaker. The equipment
would be rented at for Rs. 13,50,000.
Alternative 2: Purchase the blue tooth speakers from an outside supplier at Rs. 1,800 per blue
tooth speaker.
The new rented equipment will be more efficient than the equipment the Company has been
using to manufacture blue tooth speakers, and according to manufacturer of the equipment, it
would reduce the direct labour and variable overhead costs by 30%. The capacity of the new
equipment is 90,000 blue tooth speakers per year. Moreover, if the Company acquires this
equipment on rent, it is not required providing for depreciation. The old equipment has no resale
value. Supervision cost will remain unchanged if company decides to manufacture the blue
tooth speakers on its own.
The general company overheads would be unaffected by the decision; whatever alternative it
choose.
Required:
a. To assist the Managing Director in making the decision, prepare an analysis showing the
total cost and cost per blue tooth speaker for each of the two alternatives given above.
Which course of action would you recommend to the managing director?
b. Would your recommendation in above be the same if company expects that it will need
90,000 blue tooth speakers from next year? Show computations to support your answer
with cost presented on both a total and a per unit basis.
What other factors would you recommend that the company consider before making the
decision?
5. Mr. Sen is the Managing Director of a Hotel Company that has just finished building 60 rooms
motel. Mr. Sen anticipates that he will rent theses room for Rs. 6,000 per room night next year
and the capacity utilization will be 75%. All rooms are similar and will rent for the same price.
Mr. Sen estimates that following operating costs for the next year:
Variable Operating Cost : Rs. 3,500 per room night
Fixed Cost:
Salaries and Wages: Rs. 27,50,000
Maintenance: Rs. 13,70,000
Other Admin Exp. : Rs. 14,00,000

The capital invested in the motel is Rs. 8,96,00,000. He has a target return of 25% on
Investment. Mr. Sen expects demand for rooms to be uniform throughout the year. He plans to
price the room at full cost plus a markup.
(i) What price should Mr. Sen charge for a room night?
(ii) What is the markup?
(iii) Mr. Sen market research indicates that if the price of a room night as determined in (i)
above is reduced by 5%, then the demand for room nights could be increased and
thereby capacity utilization will increase to 85%. What he should do?

6. A Company can produce two products A and B in its plant. The plant can be run for 48 hours
in a week. In one hour, the plant can produce either 20 units of product A or 30 units of
product B. The maximum weekly demand for product A is 500 units and for product B it is
900 units. The selling price is: product A – Rs 250; Product B Rs 200. Variable Cost per unit
is: Product A- 200 product B- 160. The Joint fixed cost is Rs. 20,000 per week. How many
units of product A and Product B ought to be produced to maximize profit?

7. A company is currently producing a product X, which is marketed through dealers. The unit
cost of the product is Rs 50 of which 50% cost is fixed. Product is sold in the market at Rs 75
per unit. Product X requires skilled labour and company has availability of only 200 man-hours
in a week, which is fully utilized. Company can produce 500 units of product X in one skilled
labour hour. The company has received an enquiry for this product from a firm which wants to
add some customized features. The firm will buy 20,000 units per week. The customized
product can be produced at a variable cost of Rs 40 and additional fixed cost of Rs 2 lakhs per
week. In one killed man-hour only 200 units of the customized product can be produced. What
is the minimum price the company may quote for this product?
8. Blue Star Limited plans a new industrial powered vacuum sweeper for household use that runs
exclusively on rechargeable batteries. The product will take 6 months to design and test. The
company expects the vacuum sweeper to sell 10,000 units during the first 6 month of the sales,
20,000 units per year over the following 2 years and 5000 units over the final 6 months of the
product’s life cycle. The company expects the following costs:

Period Cost Total Fixed Cost Variable Cost (per unit)

0-6 months Design Rs.50,00,000

7-12 months Production Rs.1,30,00,000 Rs.900

Marketing Rs.1,00,00,000

Distribution Rs.20,00,000 Rs.100

13-36 months Production Rs.4,90,00,000 Rs.700

Marketing Rs.2,32,50,000

Distribution Rs.70,00,000 Rs.80

36-42 Months Production Rs.80,00,000 Rs.600

Marketing Rs.47,50,000

Distribution Rs.10,00,000 Rs.70

 Ignore time value of money
Required:
(i) If Blue Star Limited prices the sweepers at Rs. 3,750, how much operating income will the
company make over the product life cycle? What is the operating income per unit?
(ii) Excluding the initial product design costs, what is the operating income in each of the three
sales phases of the product life cycle, assuming the prices stays at Rs. 3750.
(iii) Blue Star Limited is concerned about the operating income it will report in the first sales
phase. It is considering pricing the vacuum sweepers at Rs. 4,250 for the first 6 month and
decreasing price to Rs. 3,750 thereafter. With this pricing strategy, Blue Star Limited
expects to sell 9,500 units instead of 10,000 units in first 6 month. 19,000 each year for the
next two years and 5,000 over the last 6 months. Assuming the same costs structure, which
pricing strategy would you recommend and why? (Consider the Designing Cost)