Costing questions

Q3

A consumer goods firm is now selling its products through a distributor on the payment of 10% over riding commissions on sales. All inventory and working capital lock up costs are also borne by distributor. The company is now thinking of setting up its own sales depot and dispensing with the distributor. The Annual cost of having the sales depot and its set up would come to Rs. 2 Lakhs. The company would also have to incur variable cost @ 6% on sales at its own depot. At what minimum level of sales would sales depot be viable?

Q2

Jai Textiles Ltd. has been earning low profits. A special task force appointed for reviewing performance and prospects reports the following:

The Company has 1200 looms working 2 shifts per day. There are 25 sections of 48 looms each. Each section has 24 weavers and a jobber. Thus there are 1250 direct labourers other than indirect labourers and service hands. The working time is between 7 A.M. and 12.00 Mid night comprising 2 Shifts of 8 hours each, with half an hour interval between shifts. The production is 18 Lakhs meters per month and the realization is Rs. 3 per meter. The average wage of the direct labourer is Rs. 800 per month and fixed costs amount to Rs. 175000 per month. The product cost is Rs. 2.25 meter in addition to direct wages.

The following suggestions are to be considered:

a)      Labour productivity can be improved by changing the layout of the machines.

b)      Given the space available, with the proposed change in layout only 1008 looms can be reinstalled with 48 looms in each section

c)      Technically a section of 48 looms can be run with 12 weavers, a helper and a jobber. It will be necessary to increase the wage of direct labour for such sections by Rs. 110 per head per month. There will be some drop in the production per loom. The Company is not for retrenchment of labour.

d)      The Company can run a third shift between 12 mid night and 7 am with half an hour interval. However for the six and half hour’s work 8 hours wages will have to be paid.

e)      Only 18 lakh meters can be sold at present price of Rs. 3 per meter. There is an export offer for 4.5 lakh meters at Rs. 2.70 lakh meters.

f)        As an initial step, the company can switch to 3 shifts working with 12 sections having 25 direct labourers each and 9 sections having 14 direct labourers each. Progressive conversion to 14 heads per sections can be planned as direct labourers retire or voluntarily leave the job. The production with three shifts working will be 22.5 lakh meters. Additions to the fixed costs will amount to Rs. 50000 per month.

Examine the implications of the proposals on the company’s profits and give your advice.

Q4

No Action Ltd. is experiencing trade difficulties and as a result the directors are considering whether or not to shut their single factory until recession has passed.

A flexible budget has been compiled which is as follows:

Additional Information

a)      Present sales at 50% capacity are estimated at Rs. 30000 Per annum

b)      Estimated cost of closing down is Rs. 4500. In addition maintenance of the plant and machinery is expected to Rs. 800 per annum

c)      Costs of reopening after being closed would be approximately Rs. 2000 for overhauling machines and getting ready and Rs. 1400 for training personnel.

d)      Investigations made by market research unit have indicated that sale should take an upward swing to around 70% capacity at prices which would produce revenue of Rs. 100000 in approximately 12 months time.

You are required to present the information in a manner that will show what decision should be taken whether to close down for 12 months or remain open indefinitely.

Q5

 Perfect Pistons Ltd. annually 60000 pistons for its parent company Perfect Motors Ltd. The pistons are sold to Perfect Motors at Rs. 200 per unit. The variable cost is Rs. 180 per piston. The annual fixed cost of perfect Pistons is Rs. 15 Lakhs and it is currently operating at 60% Capacity.

The Company desires to respond to an export order enquiry for 30000 pistons of the type it is currently manufacturing. The aim of the company is to improve capacity utilization and avoid loss.

You have to take note of the following benefits that will accrue to the export transaction while determining the FOB price to be quoted:

a)      Export Incentive by way of cash assistance at 10% of the FOB value of exports

b)      Reimbursement of excise duty on manufacturing inputs by way of 5% drawback of duty on FOB Value of the exports.

c)      Entitlement of import license to the extent of 10% on FOB Value of exports. The import license can be sold at a premium of 100% or it can be utilized to import certain critical auto components that will yield a 30% profit on cost.

Recommend the bare minimum price that the company should quote in order to break even assuming (a) it sells the import license in the market and (b) it imports components against the license and sells them for profit.