PAPER – 5 : COST MANAGEMENT QUESTIONS Basic Cost Concepts for Decision Making

PAPER – 5 : COST MANAGEMENT QUESTIONS Basic Cost Concepts for Decision Making

55 Pages · 2012 · 2.24 MB · English

“I may not be an accountant, but I am smart enough to know that I will lose Rs. 32.50 per unit if I make this sale. Therefore, I must refuse your offer.” Required: i. From the list of costs in the product cost report, which costs would be relevant to the decision to sell at the special price ?

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1 PAPER – 5 : COST MANAGEMENT QUESTIONS Basic Cost Concepts for Decision Making: Application of Differential Cost Techniques in Managerial Decision 1 Salabhi Arora, Sales Manager for Green Industries, has been asked by a potential foreign customer to sell 10,000 units of a certain gear for Rs 100 per unit Green normally sells this item for Rs 150 per unit, but they have had some excess manufacturing capacity in recent months It is anticipated that this would be a one time order from this customer Th e product unit cost report for this type gear is as follows: Rs Direct materials 30 Direct labour 25 Variable manufacturing overhead 1250 Fixed manufacturing overhead 25 Variable selling and administrative expense 1750 Fixed selling and administ rative expense 2250 Total per unit cost 13250 After looking at the product cost report, Salabhi advises the customer as follows: “I may not be an accountant, but I am smart enough to know that I will lose Rs 3250 per unit if I make this sale Ther efore, I must refuse your offer” Required: i From the list of costs in the product cost report, which costs would be relevant to the decision to sell at the special price ? ii What will be the amount of the total relevant cost per unit in regard to this order ? iii What would be the differential income (loss) to Green Industries if this order were accepted ? iv Are there any non financial factors that you would consider in making this decision ? Marginal Costing : CVP Analysis 2 Vikas Travel Agency (VT A) specializes in flights between Delhi to Bangalore It books passengers on Dolphin Airlines at Rs 9,000 per round trip ticket Until last month , Dolphin paid V TA as a commission of 10% of the ticket price paid by each passenger This commission was V TA’ s only source of revenues V TA ’s fixed costs are Rs 1,40,000 per month (for salaries, rent and so on) and its variable costs are Rs 200 per ticket 2 purchased for a passenger This Rs 200 includes Rs 150 per ticket delivery fee paid to Senti Express (Rs 150 delivery fee applies to each ticket) Dolphin Airlines has just announced a revised payment schedule for travel agents It will now pay travel agents a 10% commission per ticket up to a maximum of Rs 500 Any ticket costing more than Rs 5,000 generates only a Rs 500 commission, regardless of the ticket price Required: i Under the old 10% commission structure, how many round trip tickets must V TA sell each month (a) to break even and (b) to earn an operating income of Rs 70,000 ii How does Dolphin revised payment schedule affect your answers to (a) and (b) in requirement (i) ? Decision Making: Product Mix Decision 3 STC company currently

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