oll No………

Total No. of Questions — 5] [Total No. of Printed Pages — 3

Time Allowed : 3 Hours Maximum Marks : 100
Answer all the questions.
Working notes should form part of the answer
Marks
1. (a) X Ltd. is engaged in the production of four products: A, B, C and D. The price 12 (0)

charged for the four products are Rs.180, Rs.175, Rs.130 and Rs.180
respectively, Market research has indicated that if X Ltd can reduce the selling
prices of its products by Rs.5, it will be successful in getting bulk orders and
gain a significant share of market of those products. The company’s profit
markup is 25 per cent on cost of the product. The relevant information of
products are as follows:
Products A B C D
Output in units 600 500 400 600
Cost per unit:
Direct material (in Rs.) 40 50 30 60
Direct labour (in Rs.) 28 21 14 21
Machine hours (per unit) 4 3 2 3

The four products are usually produced in production runs of 20 units and sold
in batches of 10 units. The production overhead is currently absorbed by using
a machine hour rate, and the total of the production overheads for the period
has been analysed as follows:

Rs.
Machine department costs 52,130
Setup costs 26,250
Stores receiving 18,000
Inspection/Quality Control 10,500
Material handling and dispatch 23,100

The cost drivers to be used for the overhead costs are as follows:

Cost drivers
Cost
Number of
Setup costs
production runs
Store receiving
Requisitions raised
Inspection/Quality control
Number of
Materials handling and
production runs
dispatch
Order executed

The number of requisitions raised in the stores was 100 for each product and
the number of orders executed was 210, each order being for a batch of 10
units of a product.

You are required:

(i) To compute the target cost for each product.

(ii) To compute total cost of each product using activity based costing.
 Compare target cost and activity based cost of each product and
(iii)
comment whether the price reduction is profitable or not.
(b) A company is launching a new product and has made estimates of the time for 8 (0)

the various activities associated with the launch as follows:

Times (Days)
Activity Predecessor
Optimistic Most likely Pessimistic
A None 1 3 5
B None 3 4 5
C A, B 1 3 11
D B 3 3 9
E A 1 2 3
F C 2 5 14
G E, F 2 3 4
H D, F 2 2 2
I G, H 10 10 10

Required:

(i) Draw the network diagram.

(ii) Calculate the expected time and variance of each activity.
(iii) Find out the expected length of critical path and its standard deviation.
(iv) Find the probability that the launching will be completed in 27 days.
(v) Find the duration, which has 95% probability of completion.
(c) He following information is provided by a firm. The factory manager wants to 4 (0)

use appropriate average learning rate on activities, so that he may forecast

costs and prices for certain levels of activity.
(i) A set of very experienced people feed data into the computer for
processing inventory records in the factory. The manager wishes to apply
80% learning rate on data entry and calculation of inventory.
(ii) A new type of machinery is to be installed in the factory. This is patented
process and the output may take a year for full fledged production. The
factory manager wants to use a learning rate on the workers at the new
machine.
(iii) An operation uses contract labour. The contractor shifts people among
various jobs once in two days. The labour force performs one task in 3
days. The manager wants to apply an average learning rate for these
workers.

You are required to advise to the manager with reasons on the applicability of
the learning curve theory on the above information.
2. (a) The following information relates to a manufacturing concern: 10 (0)

Standard Rs.
Material A 24,000 kgs @ Rs.3 per kg. 72,000
Material B 12,000 kgs @ Rs.4 per kg 48,000
Wages 60,000 hours @ Rs.4 per hour 2,40,000
Variable overheads 60,000 hours @ Re.1 60,000
per hour 1,20,000
 Fixed overheads 60,000 hours @ Rs.2 per 5,40,000
hour 60,000
Total Cost 6,00,000
Budgeted profit 12,000
Budgeted sales
Budgeted production (units)
Actual Rs.
4,57,500
Sales (9,000 units)
62,370
Material A consumed 22,275 kgs.
44,649
Material B consumed 10,890 kgs.
1,91,250
Wages paid (48,000 hours)
1,20,900
Fixed Overhead
45,000
Variable overhead
47,700
Labour hours worked
900
Closing work in progress
units
Degree of completion:
Material A and B
100%
Wage and overheads
50%

You are required to:

(i) Calculate all the material and labour variances.

(ii) Calculate variable overhead expenditure and efficiency variances, fixed
overhead expenditure and volume variances and sales price and sales
volume variances.
(b) Mr. X has taken a shop on lease and made a down payment of Rs.2,50,000. 5 (0)

Additionally, the rent under lease amount is Rs.96,000 per annum. If lease
agreement is cancelled by Mr. X, then the initial payment is forfeited. Mr. X
plans to use the shop for the shop for the general stores business, and has
estimated operations for the next year as follows:
Sales Rs.25,00,000
Less: value added tax (VAT) Rs.2,80,000
Sales after VAT 22,20,000
Cost of goods sold
Wages and wages related cost 12,50,000
Rent including down payment 2,76,000
Rent including down payment 3,46,000
Rates, lighting and insurance 2,80,000
Audit, legal and general 50,000 22,02,000
expenses 18,000
Net profit before tax

In the business, Mr. X will be devoting of half time, however no provision has
been made for his remuneration/salary. Mr. X also has an option to sublet the
shop to his friend for a monthly rent of Rs.18,000, if he does not use the shop
himself.
You are required to:

(i) Identify the sunk and opportunity cost in the above problem.
 State most profitable decision, which should be taken by Mr. X, supporting
(ii)
with appropriate calculation.
(c) Explain four P’s of quality improvement principles. 4 (0)

3. (a) At a small store of readymade garments, there is one clerk at the counter who 9 (0)

is to check bills, receive payments and place the packed garments into fancy
bags. The arrival of customer at the store is random and service time varies
from one minute to six minutes, the frequency distribution for which is given
below:
Time between Service Time (in
Frequency Frequency
arrivals (minutes) minutes)
1 5 1 1
2 20 2 2
3 35 3 4
4 25 4 2
5 10 5 1
6 5 6 0

The store starts work at 11 a.m. and closes at 12 noon for lunch and the
customers are served on the "first came first served basis".

Using Monte Carlo simulation technique, find average length of waiting line,
average waiting time, average service time and total time spent by a customer
in system.

You are given the following set of random numbers, first twenty for arrivals
and last twenty for service:

64 04 02 70 03 60 16 18 36 38
07 08 59 53 01 62 36 27 97 86
30 75 38 24 57 09 12 18 65 25
11 79 61 77 10 16 55 52 59 63
(b) What is Margin of safety? How, margin of safety can be improved? 5 (0)

(c) Explain briefly stages involved in the process of Bench marking. 5 (0)

4. (a) An agro–products producer company is planning its production for next year. 11 (0)

The following information is relating to the current year:

Products/Corps A1 A2 B1 B2
Area occupied (acres) 250 200 300 250
Yield per acre (ton) 50 40 45 60
Selling price per ton (Rs.) 200 250 300 270
Variable cost per acre (Rs.)
Seeds 300 250 450 400
Pesticides 150 200 300 250
Fertilizers 125 75 100 125
Cultivations 125 75 100 125
Direct wages 4,000 4,500 5,000 5,700

Fixed overhead per annum (Rs.) 53,76,000.

The land that is being used for the production of B1 and B2 can be used for
either crop, but not for A1 and A2. The land that is being used for A1 and A2
 can be used for either crop, but not for B1 and B2. In order to provide
adequate market service, the company must produce each year t least 2,000
tons each of A1 and A2 and 1,800 tons each of B1 and B2.

You are required to:

(i) Prepare a statement of the profit for the current year.

(ii) Profit for the production mix by fulfilling market commitment.
(iii) Assuming that the land could be cultivated to produce any of the four
products and there was no market commitment, calculate: Profit amount
of most profitable crop and breakeven point of most profitable crop in
terms of acres and sales value.
(b) An oil refinery can blend three grades of crude oil to produce quality A and 4 (0)

quality B petrol. Two possible blending processes are available. For each
production run, the older process uses 5 units of crude Q, 7 units of crude P
and 2 units of crude R and produces 9 units of A and 7 units of B. The newer
process uses 3 units of crude Q, 9 unit of crude P and 4 units of crude R to
produce 5 units of A and 9 units of B.

Because of prior contract commitments, the refinery must produce at least 500
units of A and at lease 300 units of B for the next month. It has ,1,500 units of
crude Q, 1,900 units of crude P and 1,000 of crude R. For each unit of A,
refinery receives Rs.60 while for each unit of B, it receives Rs.90.

Formulate the problem as linear programming model so as to maximize the

revenue.
(c) Explain the term degeneracy in a transportation problem. 4 (0)

5. (a) B Ltd. makes industrial power drills, which is made by the use of two 8 (0)

components A (electrical and mechanical components and B (plastic housing).

The following table shows the cost of plastic housing separately from the cost
of the electrical and mechanical components:
A B A&B
Electrical Plastic Industrial
and Housing Drills
Mechanical
Components
Rs. Rs. Rs.
Sales 1,00,000 units 1,00,00,000
@ Rs.100
Variable Costs: 44,00,000 5,00,000 49,00,000
Direct materials 4,00,000 3,00,000 7,00,000
Direct Labour 1,00,000 2,00,000 3,00,000
Variable factory 1,00,000 — 1,00,000
overhead 10,00,000 — 10,00,000
Other Variable Costs
Sales commission
@10% of sales
 Total variable costs 60,00,000 10,00,000 70,00,000
Contribution – – 30,00,000
Total fixed costs 22,20,000 4,80,000 27,00,000
Operating income 3,00,000

Answer the following questions independently:

(i) During the year, a prospective customer offered Rs.82, 000 for 1,000
drills. The drills would be manufactured in addition to the 1,00,000 units
sold. B Ltd. would pay the regular sales commission rate on the 1,000
drills. The Chairman rejected the order because "it was below our costs".
Calculate operating income if B Ltd. accepts the offer.
(ii) A supplier offers to manufacture the yearly supply of 1,00,000 units
plastic housing components for Rs.13.50 each. Assume that B Ltd. would
avoid Rs.3,50,000 of the costs assigned to plastic housing if it purchases.
Calculate operating income if B Ltd. decides to purchase the plastic
housing from the supplier.
(iii) Assuming that B Ltd. could purchase 1,20,000 units (plastic housing
components) for Rs.13.50 each and use the vacated plant capacity for
the manufacture of deluxe version of drill of 20,000 units (and sell them
for Rs.130 each in addition to the sales of the 1,00,000 regular units) at
a variable cost of Rs.90 each, exclusive of housings and exclusive of the
10% sales commission. All the fixed costs pertaining to the plastic
housing would continue, because these costs are related to the
manufacturing facilities primarily used. Calculate operating income of B
Ltd. purchases the plastic housings and manufacture the deluxe version
of drills.
(b) LMV Limited manufactures product Z in departments A and B which also 7 (0)

manufacture other products using same plant and machinery. The information
of product Z is as follows:
Items Department A Department B
(Rs.) (Rs.)
Direct material per unit 30 25
Direct labour per unit 30 40
(Rs.10 per hour)
Overhead rates: 8 per hour 4 per hour
Fixed 6 per hour 3 per hour
Variable 25 lakhs 15 lakhs
Value of Plant and
Machinery

Overheads are recovered on the basis of direct labour hours. Variable selling
and distribution overheads relating to product Z are amounting to Rs.30, 000
per month. The product requires a working capital of Rs.4, 00,000 at the
target volume of 1,500 units per month occupying 30 per cent of practical
capacity.

You are required:

To calculate the price of product Z to yield a contribution to cover 21

(i)
percent rate of return on investment.
 Set the minimum selling price of the product if (1) the product is well
(ii) established in the market; (2) the product is first time launched in the
market.
(c) "Sunk costs are irrelevant in decision–making, but irrelevant costs are not 4 (0)

sunk cost." Explain with examples.