Published On:Sunday 27 November 2011
Posted by Muhammad Atif Saeed
PRACTICE QUESTIONS Manageril Accounitng
PRACTICE QUESTIONS
Question 1:
Classify the following cost.
- wood used in table 2. labor cost to assemble the table
- cost of electricity to manufacture table 4. salary of Company’s president
- Rental income forgone on factory space. 6.commission paid to sale person for sale of table
- Leather used in manufacturing of football 8. factory equipment maintenance cost
- depreciation of machinery 10.nail used in wood
Question No 2:
The annual cost of a business operations over the past five years have been as follows
Year Activity level(Unit) Total cost Avg. cost index for the year
2001 1,275 11,060 258
2002 1,200 11,400 271
2003 1,438 12,426 280
2004 1,400 13,510 305
2005 1,350 13,660 314
Required
- Use the high- low method to establish a variable cost per unit and annual fixed cost.
- Use the high- low method to establish a variable cost per unit and annual fixed cost for the operations at 2005 level.
Question No 3:
The following table shows the number of units of goods produced and the total cost incurred.
Unit produced Total cost
1000 40,000
2000 45,000
3000 50,000
4000 65,000
5000 70,000
6000 70,000
7000 80,000
Required: Draw regression line for y on x.
Question No 4
ABC Company manufactures and sells telephone answering machines. The Company’s contribution format income statement is given below
Total Per unit
Sale (20,000 units) 1,200,000 60
Less variable expenses 900,000 45
------------- ---
Contribution margin 300,000 15
==
Less fixed cost 240,000
-------------
Net operating income 60,000
=======
Management asked you for an analysis of a number of items
- Compute the Company’s breakeven point in both units and sale dollars.
- Compute the Company’s CM ratio and variable expense ratio.
- Assume that sale increase by 400,000 next year. If cost behavior pattern remain the same. Calculate net operating income.
- Calculate Margin of safety and operating leverage of the company.
- Calculate Company’s operating leverage at the present level of sale
- Assume that through a more intense effort by the sale staff the company’s sale increase by 8% next year. By what percentage would you expect net operating income to increase? Use the operating leverage concept to obtain your answer.
Question No 5
Bill Smith & Partners purchased computer equipment two weeks ago for $35,500. Estimated useful life is 5 years with a residual value of $500.Depreciation method is straight-line at $7,000 per year. Cost of operating equipment is two operators at $18,000 per year each. There is a cancelable Maintenance contract which costs $1,000/year.Equipment can be sold now for $10,000.
A new model can be purchased for $76,000. Estimated useful life is 5 years with a residual value of $1,000.
Depreciation method is straight-line at $15,000 per year. Cost of operating equipment is one operator at 18,000 per year. There is a cancelable maintenance contract which costs $1,000/year.
Required: Analyze the situation
Question No 6
A machine manufactures 10,000 units of a part at a total cost of Rs. 21 of which 18 is variable cost. This part is readily available in the market at Rs. 19 per unit. If the part is purchased from the market then the machine can either be utilized to manufacture a component in same quantity contributing Rs. 2 per component or it can be hired out at Rs. 21,000.
Required : Which of the alternative is profitable?
Question No 7
ABC Company presently operates its plant at 80% of the normal capacity to meet the demand under a rate contract. Currently total sale is Rs. 400,000 and profit margin is 20% on sale realisation. Direct cost per unit is constant. The indirect cost as per budget projection are:
Indirect cost 20,000 22,500 25,000
Capacity 80% 90% 100%
Variable cost 80,000 90,000 100,000
Semi variable 40,000 42,500 45,000
Fixed 80,000 80,000 80,000
ABC Company has received an export order for the product equal to 20% of its present operations. Additional packing charges on this order will be Rs. 1,000. Answer (50,000)
Required
Arrive at the price to be quoted for the export of order to give him a profit margin of 10% on the export price.
Question No 8
JP limited produces three products A, B and C which are then further processes. It is normal practice for the company to apportion all pre-separation costs on the basis of weight of output of each joint product. Data for the last period is as follows
Cost incurred up to separation point Rs. 9,600
A B C
Output 100 60 80
Cost after sepration 2,000 1,200 800
S.P after procession 50 80 60
At pre sepration point 25 70 45
Required
Advise the management of JP Ltd whether or not, on purely financial grounds, it should further process any of three product.
Question No 9
LMN Ltd manufactures three products, L,M and N. The company that supplies the two raw materials that are used in all three products has informed LMN that their employees are refusing to work overtime. This means supply of material is limited to the following quantities
Material A 1,030 kg B 1,220 Kg.
L M N
Material A 2 1 4
Material B 5 3 7
Maximum sale 120 160 110
Contribution per unit sold 15 12 17.50
Requirement
1. Product mix to maximize profit
2. LMN has a valued customer to whom they wish to guarantee the supply of 50 units of each product next year. Would this alter your recommendations?
Question No 10
A firm selling product X, whose variable cost per unit is Rs. 10 and fixed cost is Rs. 6,000. It has sold 1,000 articles during one month at Rs. 20 per unit. Market research shows that there is a great demand for the product if the price can be reduced. If the price can be reduced Rs. 12.50 per unit, it is expected that 5,000 articles can be sold. The firm has to take a decision whether to produce and sell 1000 units at the rate of Rs. 20 or to produce and sell for the growing demand of 5,000 units at the rate of Rs. 12.50.
Required: Give advice to Management.
Question No 11
Sale ( 100,000 units @ 20) 2,000,000
Variable cost 1,000,000
-------------
Contribution 1,000,000
Fixed cost 400,000
-------------
Net profit 600,000
=======
Which plan is better?
A B
Increase in price 20% Decrease in price 20%
Decrease in volume 25% Increase in volume 25%
Increase in V cost 10% Decrease in variable cost 10%
Increase in fixed cost 5% Decrease in fixed cost 5 %
The Red tap company has three major products, whose contribution margins are shown below
A B C
Sale 15 10 8
Variable 10 6 5
---- ---- ----
Contribution 5 4 3
Total fixed costs are Rs. 100,000.
Compute the break even point in units and in total for each product if three products are sold in the proportion of 30:50:20
Question No 12
Assume the following data concerning operation of the Ames Manufacturing company for the month of September
Number of units sold 100 units
Selling price per unit Rs. 20
Variable manufacturing cost Rs. 5
Fixed manufacturing cost Rs. 300
Variable selling & Admin cost Rs. 4
Fixed selling & Admin cost Rs. 110
Prepare income statement for the month of September using absorption and direct costing.
Question No 13
ABC Limited operates at three factory sites producing a closely related product range. The 2006 budget for ABC Limited is as follows
Lahore Karachi Multan (Amount in Rs”000”)
Sale 1,000 4,000 2,000
Variable cost 475 2,200 1,000
Fixed cost (site) 375 1,300 650
Fixed cost (Central) 50 200 100
Profit 100 300 250
The lease of Lahore site expires at the end of year 2006. Four alternative options have been identified for the year 2007.
1. Renew the Lahore site lease at an additional rental of Rs. 50,000.
2. Shut the Lahore site and franchise Lahore production to another manufacturer at a 1.5% commission on sale.
3. Shut the Lahore site and switch production to Karachi, this would involve an additional Rs. 250,000 per year fixed cost at Karachi and additional transport cost on production transferred amounting to 7.5% of sales.
4. Shutdown the Lahore and switch production to Multan; this would involve additional fixed cost of Rs. 200,000 per year at Multan and additional transport cost on production transferred amounting to 10% of sale.
Question No 14- FIFO Break even
A company has an opening stock of 6,000 units of output. The production planned for the current period is 24,000 units and expected sale for the current period amount to 28,000 units. The selling price per unit of output is Rs. 10. Variable cost per units is expected to Rs. 6 per unit while it was only Rs. 5 per unit during the previous period.
What is break even volume for the current period if the total fixed cost is Rs.86,000? Assume that FIFO system is followed.
Question No 15 Short term decisions making
Classify the following as relevant or irrelevant for decision making.
• The salary to be paid to a market researcher who will oversee the development of a new product. This is new post created specially for the new product but the Rs. 12,000 salary will be fixed cost.
• Office cleaning expenses of Rs. 5,000 for next month. The office is cleaned by a contractors and the contract can be cancelled by giving one month’s notice. Is this cost relevant to a decision to close the office.
• Expenses of Rs. 10,000 paid to marketing manager. This was to reimburse the manager for the cost of traveling to meet a client with whom the company is currently negotiating a major contract. Is this cost relevant to the decision to continue negotiation?
Question No 15 – LP
A firm produces two products , X and Y with a contribution of Rs. 8 and Rs. 10 per unit respectively. Production data (per unit)
Labor Hrs Mat. A Mat. B
X 3 4 6
Y 5 2 8
Total available 500 350 800
Formulate the LP model in the standardized manner and solve the problem.
Question No 16 – LP
A chemical manufacturer processes two chemicals, Arkon and Zenon, in varying proportions to produce three products, A, B and C. He wishes to produce at-least 150 units of A, 200 units of B and 60 units of C.
Each ton of Arkon yields 3 of A, 5 of B and 3 of C. Each ton of Zenon yields 5 of A, 5 of B and 1 of C .
If Arkon costs Rs. 40 per ton and Zenon Rs. 50 per ton advise the manufacturer how to minimise his cost.
Question No 17 – LP
MNO Limited produces two products W and B. Both are components that a wide range of industrial applications. MNO Ltd’s share of the market for W is insignificant but it is one of a limited number of suppliers of B. W is long-stabilized product and B is a new product
Market price of W is Rs. 128 and that of B is Rs. 95. The resource requirements for producing one unit of each of two product is given below
Process hrs Kg of material Lab. Hrs
W 4 8 21.8
B 3 14.25 7.5
Material cost Rs. 3 per kg and labour cost Rs. 3.20 per hour. Other costs are fixed. During the coming year the company will have the following resources available to it
Process hour 1,200
Material 4,000
Labour hour 6,000
Required: Advise the Management how to maximize profit
Question No 18 – Pricing
ABC Limited produces a single product, Management believe that the Company’s marginal revenue can be represented by the following function
MR= 20-0.12Q (Q is the quantity produced & Sold)
MC= 6+.016 Q
Calculate the level of output at which profit will be maximized.
Solution:
Profit maximizing output level is where MR=MC 20-0.12Q=6+0.016Q i.e. Q= 500 unit
Question No 19 – Pricing
An organization manufactures a product, particulars of which are detailed below. Investment is Rs. 200,000
Annual production 20,000 units
Material cost Rs. 60,000
Other variable cost Rs. 120,000
Fixed cost Rs. 40,000
Total cost Rs. 220,000
Required:
- 30% markup based on total cost
- 20% profit on net sale price
- 40% mark-up based on incremental cost
Answer
1. (220,000X1.30)/20,000 = 14.30
2. (s-220,000)=.20 S= Rs. 13.75
3. [1.40(60,000+120,000)+40,000]/20,000 i.e. Rs. 14.60
Question No 20 – Pricing
The management of RC is considering which of two mutually exclusive projects to select. Detail of each projects are as follows
Project S Project T
Probability Profit 000 Probability Profit 000
0.30 150 0.20 (400)
0.30 200 0.60 300
0.40 250 0.10 400
0.10 800
Required
Which project seems preferable?
Question No 21 – Pricing
The launch of new product is being considered. There is a 0.60 chance that demand for the product will be strong and a 0.40 chance that demand will be weak.
Strategy 1
It involves high promotion costs and will generate a net cash inflow of Rs. 120,000 if demand proves to be strong. However if demand proves to be weak then a net cash outflow of Rs. (30,000) will result.
Strategy 2
It involves low promotion costs. If demand proves to be strong then this will generate a net cash inflow of only Rs. 80,000 but if the demand proves weak then a net cash inflow of Rs. 20,000 is still generated.
Requirement
- Draw a decision tree and advise which course of action to be adopted.
- What should be maximum amount that should be paid for market research to determine with certainty whether demand will be strong or weak?
Question No 22 – Pricing
A company has prepared the design for a new product. It can either sell the design for Rs. 100,000 or attempt to develop the design into marketable product at a cost of Rs. 150,000. If the company decides to develop the product, the chance of success are 0.70. if the attempt fails the design can only be sold for Rs. 20,000. if the attempt succeeds the business has choice of either selling the design and developed product for Rs. 180,000 or marketing the product. If the product is marketed then there is 0.60 probability that the product will generate a cash inflow of Rs. 800,000 and a 0.40 probability that it will generate a cash outflow of Rs. 100,000. Both figures exclude items previously mentioned.
Required: Draw a decision tree and advise management as to their best course of action.
Question No 23 – Pricing
The Management of Ore must choose whether to go ahead with either of two mutually exclusive projects, A and B. Calculate the value of perfect information from the following expected profits
Strong demand Weak demand
Option A Rs. 4,000 Rs. (1,000)
Option B Rs. 1,500 Rs. 500
Probability 0.30 0.70
Question
1. Calculate the compound interest on Rs. 624 at 4% per annum for 10 years.
2. Find the sum of money which, if invested now at 5% pa compound interest will be worth Rs 10,000 in 10 year’s time.
3. An annuity will pay Rs. 100 for five year. What is terminal value if the rate of interest is 10 %.
ANSWER
- A= 624(1+0.04)10 = 923.67
- P= 10,000/ (1.05)10 = 6,139.13
- Annuity at year 5 is = 100 x 6.1051= 610
Question . R Ltd has been investigating the time taken to produce one of its products and found that a 90% learning curve appears to be applicable. If the time taken for the first unit is 4 hours, calculate the total time taken for units 5- 8.
Answer
Units Avg time total incremental
1 4 4
2 3.6 7.2
3 3.24 12.96
4 2.916 23.328 10.368
Question A production operation operates on an 85% learning curve. It takes 100 hours to produce the first unit in a batch. How much time it will take to produce 14 unit batch.
Answer
LC (Y) = axb
b = log 0.85/log2= -0.2345
Average time per unit for 14 unit=100 x 14 -0.2345 = 53.856
Question
A company is considering investing in a project which requires an initial investment of Rs. 150,000. The cash flows during the year 1-3 are expected to be Rs. 55,000 per annum. The Company’s monetary cost of capital is 10% and inflation is expected to be 6% during the life of the project
Required
- Calculate the NPV using Real rate of return.
- Calculate NPV using monetary cost of capital as the discount rate.
Question The Grand Company is considering the purchase of a press costing Rs. 100,000. The estimate cash benefit is
Year Cash benefit
1 25,000
2 40,000
3 40,000
4 40,000
5 35,000
6 30,000
7 25,000
8 20,000
9 15,000
10 10,000
The press is to be depreciated on a straight line basis over a period of 10 years. The salvage value is zero. Assume a 50% tax rate and a cost of capita of 10%.
Required:
1. Payback period 2. ARR 3. NPV 4. Discounted cash flow
Question
A company is considering a project involving the outlay of Rs. 300,000 which it estimates will generate cash flow over its two year life at the probabilities shown in the following table. The companys investment criteria is 10% discount factor. Calculate Expected value
| Year 1 | Probabilities | Cash flow year 2 | Probability |
| 100,000 | 0.25 | Nil | 0.25 |
| | | 100,000 | 0.50 |
| | | 200,000 | 0.25 |
| | | | |
| 200,000 | 0.50 | 100,000 | 0.25 |
| | | 200,000 | 0.50 |
| | | 300,000 | 0.25 |
| | | | |
| 300,000 | 0.25 | 200,000 | 0.25 |
| | | 300,000 | 0.50 |
| | | 500,000 | 0.25 |
| | | | |
The precision company contemplates the replacement of certain machinery. The actual cost of operating the machinery is Rs. 138,600, excluding depreciation, while the estimate for the new machinery is Rs. 91,800. Cost of the new equipment is Rs. 160,000, net of trade in allowance with useful life estimate of 8 years and no salvage value. Assume an income tax rate of 50 %, an 8 % cost of capital and straight line depreciation of Rs. 20,000 per year. The book value of old machine is zero.
Calculate : Pay back period, ARR, NPV, PI and Discounted cash flow
Question: Decision Tree:
ABC has a new wonder product , Dell, of which it expect great things. At the moment the company has two courses of action open to it, to test market the product or abandon it. If the company test markets it, the cost will be Rs. 1 Lakhs and the market response could be positive or negative with probabilities of 0.60 and 0.40. if the response is positive the company could either abandon the product or market it full scale.
If the market the Dell full scale, the outcome might be low, medium or high and the respective net gain/(loss) would be (200), 200 or 1000 units of Rs. 1,000( the result could range from a net loss of Rs. 200,000 to a gain of Rs. 1,000,000 million). These outcomes have probabilities of 0.20,0.50 and 0.30 respectively. If the result of the test market is negative and the company goes ahead and market the product, estimated loss would be Rs. 600,000.
If at any point, the company abandon the product, there would be a net gain of Rs. 50,000 from the sale of scrap
If the market the Dell full scale, the outcome might be low, medium or high and the respective net gain/(loss) would be (200), 200 or 1000 units of Rs. 1,000( the result could range from a net loss of Rs. 200,000 to a gain of Rs. 1,000,000 million). These outcomes have probabilities of 0.20,0.50 and 0.30 respectively. If the result of the test market is negative and the company goes ahead and market the product, estimated loss would be Rs. 600,000.
If at any point, the company abandon the product, there would be a net gain of Rs. 50,000 from the sale of scrap
please provide answer for question 16