1.

A small factory has three service departments S1, S2, S3 and two production departments P1, P2.
Table below gives the proportion of services exchanges and relevant costs and volume of
Services.
S1 S2 S3
S1 0 20% 10%
S2 10% 0 20%
S3 20% 30% 0
P1 30% 25% 50%
P2 40% 25% 20%
Variables cost 130 170 230
Rs. `000
Unit of 2000 2500 3000
service

a. Find the adjusted costs of the service departments and the total cost of allocations
to each of the production departments.
b. After computing the allocation a revision had to be made on the output level of
two production departments – P1 output to be decreased by 10% and P2 output
to be increased by 20%. Determine how many units of the services S1, S2, S3
will be needed to support this revised activity level.
c. An external agency can offer the services of S2 at a unit price of Rs. 70/- and of
S3 at a unit price of Rs. 95. Would it be worthwhile to buy these services externally?

The factory cannot close down both S 2 and S3 as this will lead to labour problems.
Thus if only one of the two departments can be closed down, determine which
should be closed and the saving the workshop will derive

Note: The inverse of the required matrix given below may be used in calculations.

1 0.94 0.23 0.14

0.818 0.04 0.88 0.18
0.20 0.31 0.90

2.

FITWELL company has developed a new product which it wishes to launch in the market.
However, they are not very definite about the Sales off-take, the Selling Price, the Variable
Cost and the investment representing the Fixed Cost as all these are subject to some
uncertainties. FITWELL would like to assess the risk of not breaking-even in first year,
probability that the profit volume will meet desirable target etc.

The managers concerned have specified the following pattern of the various parameters, all
of which are assumed to be normally distributed and mutually independent.
 Mean Standard Deviation
First Year Sales (Units) (X) 90,000 2,500
Selling Price (Rs./Unit) (P) 90 12
Variable Cost (Rs./Unit) (V) 40 9
Fixed Cost (Rs. in Lacs) (F) 14 0.9

Find the Parameters of probability distribution of Profit Volume (π).

Hence find the probability that:
(i) The Company will not breakeven on this product, and
(ii) The Company will achieve at least Rs. 10 lacs as profit.
(iii) The profit achieved by the company will be in excess of Rs. 2 lacs
(iv) The Profit achieved by the company will not exceed Rs. 15 lacs
(v) The Profit achieved by the company will be in excess of Rs. 2 lacs but less than
Rs. 9 lacs

3.
A firm wishes to launch a new product. However there is no definite information as to the first
year sales, selling price variable cost and the incremental fixed costs to be incurred.
Manager concerned have given the following information.
Each factor is independent of the others.

Sales Selling Price Variable Cost Fixed Investment

(Units) Prob (Rs/Unit) Prob (Rs/Unit) Prob (Rs. Lakhs) Prob
25000 30% 35 35% 15 20% 2.5 30%
30000 45% 38 50% 17 55% 3.5 50%
35000 25% 40 15% 19 25% 4.5 20%
Derive the expected profit volume using simulation methods. Iterate for 10 instances.
Assess the probability that
a. The firm will not break even on this product in the first year,
b. It will earn more that 5 Lakhs profits in the first year.
USE RANDOM NUMBER TABLE

4.
The Suraksha Co. Ltd. makes fire alarm system. It has previously made about 10,000
systems exactly like the type ordered by Airport Authority of India (AAI). AAI’s new
order calls for 30,000 parts. The company's cost records yield the following cost data for
the 10,000 parts made to data.

Direct Material Rs. 100 lakhs

Direct labour (800,000 hours) Rs. 640 lakhs
Setup costs (no labour) Rs. 6 lakhs
Variable overhead (50% of DL) Rs. 320 lakhs
Fixed overhead (allocated at Rs. 10 per DLH) Rs. 80 lakhs

Rs.1146 lakhs.
Assuming an 80% learning rate on the average required and no change in unit
labour costs per hour, estimate the company's additional cost of accepting the
order.

5.
Bandookwala & Co., a fire arms manufacturer as designed a new type of gun and a first lot
of 25 guns assembled for test purpose had the following costs:

Direct materials Rs. 24,500

Direct labour(5000 hrs @ Rs. 5/-) Rs. 22,500
Variable overheads 16,875 proportional to direct labour
Fixed overheads 11,250

Total costs 75,125

BSF being satisfied with this gun have asked the lowest bid for supply of 1000 guns.
The company will pass on the benefits of learning of 85% to the client in setting the
bid. The company will set a selling price to earn 35% gross profit margin.
Determine the unit price that should be bid.

6.
A government economist wishes to establish the relationship between annual
family income X and savings Y. A sample of 100 families has been randomly selected
for various annual income levels between; $ 5,000 and $ 30,000. A through
investigation of these families has been made and the following calculations
have been obtained (X and Y are measured in thousands of dollars):

 X = $1,239  X2 = $17,322
 Y = $79  Y2 = $293
 XY = $1,613
a. Determine the equation for the estimated regression line.
b. State the meaning of the slope b and the intercept value a.
c. Compute the coefficient of determination r2 and comment on your findings.
d. Estimate the savings for the family with income of $ 20,000 and place 95%
confidence limit on the estimate.

7.
A Chemical on processing jointly yield three products X, Y, Z in the
proportion of 6:4:2 (by volume). There are no losses in the process. A batch of 6000
liters of the Chemical costs Rs. 80,000 (materials), Rs. 20,000 (direct labour) and Rs.
10,000 (other variable costs) giving a total cost of Rs. 1,10,000. The products X, Y and Z
have respectively a sales value of Rs. 30, Rs. 16 and Rs. 35.
Allocate the joint cost by the methods discussed in the class.
Assume that in the above example that X and Z have to be processed further to make
them saleable. Processing X involves a separable cost of Rs. 30,000 and the selling price
of processed X becomes Rs. 45 per litre. Similarly Z has to be processed separately
at a cost of Rs. 12,000 to make it saleable at a unit price of Rs. 50 per litre.

Prepare a summary of the allocated costs by each of the above method and comment on
the relative merits of each method.

8.
A management accountant wishes to assess the behavior of the Overhead Costs of a
manufacturing department. She has surmised that Direct Labor Hours or Machine Hours could
be used as explanatory variables. Since she wishes to use only a simple linear regression model,
a choice has to be made between the two explanatory variables.

For this purpose, she has analysed the monthly data over the past one year, and derived the
following summary of totals.

Y - Overhead Costs in Rs. Thousands

X1 - Labor Hours in Hundreds
X2 - Machine Hours in Hundreds

 X1 = 405  (X1) 2 = 14,770  (X1 Y) = 72,310

 X2 = 170  (X2) 2 = 2,630  (X2 Y) = 29,900
 Y = 2,040  Y2 = 358,180

a. Using an appropriate statistical measure to assess the Goodness of the Fit of a linear model,
select the better explanatory variable to be used.
b. For the explanatory variable chosen in a, find the best – fit linear relation.
c. For the coming month, the production plan will use 3,900 hours of Direct Labor and 1,800
Machine Hours. Estimate the overhead cost of the next month and place a 95% confidence
interval on this estimate.

9.
U & M Ltd. has observed that a 90% learning rate is applied to all labour related cost, each
time a new model enters production. It is anticipated that 320 units will be manufactured
during current year. Direct labour cost for the first lot of 10 units amounts to 1000 hours
at a rate of Rs.8 per hour. Variable Overhead is assigned to the product at the rate of Rs.
2 per Direct Labour Hour. You are required to determine:

a. Total labour hours and related costs to manufacture 320 units of output.
b. Average cost of
i. The first 40 units produced
ii. The first 80 units produced
c. Incremental cost of manufacturing Units 41 – 80.