Management and Financial Accounting: (Assignment-2)
Management and Financial Accounting: (Assignment-2)
FINANCIAL ACCOUNTING
[ASSIGNMENT- 2]
SOLUTION:
Given:
Variable cost = Number of rooms rented*50 (cost per room per night)
Therefore, we can see that when the number of room occupancy is 0 total cost is 2000
When total occupancy is 60 then total cost is 5000
When total occupancy is 85 then total cost is 6250
When total occupancy is 100 then total cost is 7000
Question 2:
Sethi Manufacturing sold 25,000 units of its products for Rs.150/- per unit in 2020, where
the variable cost is Rs. 60/- per unit and fixed costs are Rs. 250,000.
Required: Based on the above information calculate the following. State your assumptions
(if any) clearly before attempting the question (s):
a) Calculate – (i) Contribution Margin; (ii) Operating Income (Contribution Margin -
Fixed Cost)
b) Sethi’s current manufacturing process is labor-intensive. Ms. Simran, Sethi
Manufacturing’s production manager has proposed an up-gradation of the existing
machinery & other equipment, which will increase the annual fixed cost to Rs. 775,000,
while the variable cost on other hand, is expected to decrease by Rs. 30/- per unit. The
company expects to maintain the same sales volume and selling price for 2021. How would
acceptance of Ms. Simran’s proposal affect your answers to (i)Contribution Margin and (ii)
Operating Income
c) Should Sethi Manufacturing accept Ms. Simran’s proposal? Explain.
SOLUTION:
Part a.)
GIVEN
:
Fixed Cost: 250000
Variable
Cost/unit: 60
Total variable 150000
cost: 0
No. of units
sold: 25000
Selling Price/
unit: 150
Total Selling 375000
Price 0
Part c.) Yes, Sethi Manufacturing should accept Ms. Simran’s proposal as the operating income
would increase by 2,25,000/-
[Operating Income (Part 2.) – Operating Income (Part 1.)] -> 22,25,000 – 20,00,000 = 2,25,000/-
Question 3:
Suppose Mitra & Sons’ breakeven point is revenue of Rs. 1,500,000 and fixed costs are Rs.
720,000. Compute the following:
a) Contribution Margin Percentage
b) Calculate the selling price if variable cost is Rs. 13 per unit
c) Suppose 90,000 units are sold, calculate the margin of safety in units and rupees
d) What does this tell you about the risk of firm making a loss? What are the most likely
reasons for this risk to increase?
SOLUTION:
GIVEN
:
Break Even Point: 1500000
Fixed Cost: 720000
Variable cost: 13/Unit
Part a.) Contribution Margin Percentage = (Fixed cost/ Break Even Point Revenue) *100
= (720000/ 1500000) *100
Therefore, contribution Margin Percentage is = 48%
Part b.) Selling Price?
Contribution Margin Percentage = (Selling Price – Variable cost)/ Selling Price
0.48 = (selling price – 13)/ selling price
0.48 * Selling Price = Selling – 13
0.52 (Selling Price) = 13
Selling Price = 25
Part c.)
Revenue/
Break-even point Sales unit= Selling Price
60000
Units given = 90000
Margin of safety (units)= 30000
Margin of safety (Units) = Number of units give in question – Break-even point sales unit
= 90000 – 60000
Therefore, Margin of safety in units is = 30000/-
Margin of safety in Rupees:
Question 4
Soneva Enterprise manufactures two models of boats- Regular & Deluxe, using a
combination of hand finishing and machining. Machine setup costs are driven by the
number of setups. Indirect labor cost increase with direct labor costs. Equipment and
maintenance costs increase with the number of machine hours, and facility rent is paid per
square foot. The capacity of the facility is 6250 square foot and Soneva is using only 80% of
this capacity. Soneva records the cost of unused capacity as a separate line item and not as
a product cost. For 2021, Soneva has budgeted the following:
Soneva Adventures- Budgeted Costs & Activities (Year Ending 31st March 2021)
Total 13,525,000
GIVEN:
Direct Material- Regular Boats 3250000
Direct Material- Premium
Boats 2400000
Direct Labour - Regular Boats 1100000
Direct Labour - Premium
Boats 1300000
Indirect Labour costs 720000
Machine Setup costs 405000
Equipment and Maintenance
costs 2350000
Facility Rent 2000000
1352500
Total 0
Total space rented/sq. feet 6250
Part a.)
Regula Premiu
Cost drivers r m Total
Number of Boats 5000 3000 8000
Machine Hours 11000 12500 23500
Number of setups 300 200 500
Square footage of production
space 2860 2140 5000
330,00 72000
Indirect Manufacturing cost 0 390000 0
*Assumption: There is need for the allocation of total indirect manufacturing cost
product wise with per unit cost calculation as in this case indirect manufacturing labor
cost is the part of budgeted activity.
Part b.)
Budgeted cost of unused capacity = Facility rent cost *(total space rented – total used
space)
= 320* (6250- 5000) = 4,00,000
Part c.)
Regula Premiu
r m
325000
Direct Material 0 2400000
110000
Direct Labour 0 1300000
Indirect Manufacturing cost 330,000 390000
Machine setup 243000 162000
Equipment and Maintenance 110000
cost 0 1250000
Facility rent 915200 684800
693820
Total cost 0 6186800
2062.26
Per unit cost 1387.64 7
*Formulas for derivation of values:
Machine setup cost = Machine setup cost * Number of setups
Equipment and Maintenance cost = Equipment and Maintenance cost * Machine hours
Facility rent = Facility rent cost * Square footage of production space.
Total cost for Regular Boats = Sum of direct material, direct labor, indirect
manufacturing cost, machine setup, equipment and maintenance cost and facility rent
(Regular Boats)
= 6938200
Total cost for Premium Boats = Sum of direct material, direct labor, indirect
manufacturing cost, machine setup, equipment and maintenance cost and facility rent
(Premium Boats)
= 61,86,800
Per unit cost of regular = Total cost of regular/ number of Boats (Regular)
= 6938200/ 5000
= 1,387.64
Per unit cost of Premium = Total cost of Premium/ number of Boats (Premium)
= 61,86,800/ 3000
= 2,062.27
Part d.) As we know that the budgeted cost of unused capacity for Soneva is 4,00,000/- it is a
big cost for the company to pay annually. However, on the other hand if we see the company can
use this extra capacity for its expansion, or to entertain new special orders when received, it can
also use the extra capacity to rent it out to a compatible user outside. Some of the issues which
Soneva needs to consider before expanding its production should be that there should be
availability of labor and machine hours to meet out the increased production demands.