Q- Ridge well Cogcle Ltd. purchases 20,000 bells per annum from an outside supplier at Rs. 5 per unit.

The management feels that these be manufactured and not purchased. A machine costing Rs. 50,000
will be required to manufacture the item within the factory. The machine as an annual capacity of
30,000 units and life of 5 years. The following information is available:

Material Cost per bell will be Rs. 2

Labor Cost per bell will be Rs. 1

Variable Overheads 100% of Labor Cost

You are required to advise whether:

(i) The company should continue to purchase the bells from the outside supplier or should
make them in the factory, and

(ii) The company should accept an order to supply 5,000 bells to the market at a selling price of
Rs. 4.50 per unit?

Q- A firm can purchase a separate part from an outside source @ Rs. 11 per unit. There is a proposal
that the spare part be produced in the factory itself. For this purpose, a machine costing Rs. 1,00,000
with annual capacity of 20,000 units and a life of 10 years will be required. A foreman with a monthly
salary of Rs. 500 will have to be engaged. Materials required will be Rs. 4 per unit and wages Rs. 2 per
unit. Variable overheads are 150% of direct labor. The firm can easily raise funds to finance this
machinery @ 10% p.a interest. Advise the firm whether the proposal should be accepted.

Q- A company annually manufactures 10,000 units of product at a cost of Rs. 4 per unit and there is a
home market for consuming the entire volume of production at a sale price of Rs. 4.25 per unit. In year
2007, there is a fall in the demand for home market which can consume 10,000 units only at a sale price
of Rs. 3.72 per unit. The analysis of cost per 10,000 units is:

Material Rs. 15,000

Wages Rs. 11,000

Fixed Overheads Rs. 8,000

Variable Overheads Rs. 6,000

The foreign market is explored and it is found that this market can consume 20,000 units of the
product if offered at a sale price of Rs. 3.55 per unit. It is also discovered that for additional 10,000 units
of product (over initial 10,000 units), the fixed overheads will increase by 10%. Is it worthwhile to try
and capture the foreign market?

Q- A company manufacturing electric motors at a price of Rs. 6,900 each, made up as under:
 Rs.

Direct materials 3,200

Direct Labor 400

Variable overheads 1,000

Fixed overheads 200

Depreciation 200

Variable Selling Overheads 100

Royalty on Production 200

Profit 1,000

6,300

Central Excise Duty 600

6,900

(i) A foreign buyer has offered to buy 200 such motors at Rs. 5,000 each. As a cost accountant of
the company, would you advice acceptance of the offer?

(ii) What should the company quote for a motor to be purchased by a company under the same
management if it should be at cost?

Q- Chair Manufacturers Ltd. presents the following information for the past year:

Material Cost Rs. 1,20,000

Labor Cost Rs. 2,40,000

Fixed Overheads Rs. 1,20,000

Variable Overheads Rs. 60,000

Units Produced 12,000

Selling Price Rs. 50 per unit

The available capacity is a production of 20,000 units per year. The firm has an offer for the purchase of
5,000 chairs at a price of Rs. 40 per unit. It is expected that by accepting this offer, there will be a saving
of Re. 1 per unit in materials cost on all units manufactured, the fixed overheads will increase by Rs.
35,000 and the overall efficiency will drop by 2% on all production. Draft a report to the management
giving your recommendations as to whether or not the offer should be accepted.
Q- K Ltd. produces a variety of products, each having a number of component parts. B takes 5 hours to
process on a machine working to full capacity. B has a selling price of Rs. 50 and a marginal cost of Rs. 30
per unit. ‘A-10’ component part used for product A, could be made on the same machine in 2 hours for a
marginal cost of Rs. 5 per unit. The supplier’s price is Rs. 12.50. should K Ltd. make or buy ‘A-10’?
Assume that machine hour is the limiting factor.