question bank- practical questions

7/27/2019 Question Bank- Practical Questions

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QUESTION BANK- PRACTICAL QUESTIONS

EXERCISE 1- SALES FORECASTING

The following are the sales for first four years; predict the sales for 5th and 6th year.

Year Year Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total

2008-09 1 175,000 145,000 234,000 198,000 752,000

2009-10 2 181,000 152,000 242,000 208,000 783,000

2010-11 3 178,000 155,000 244,000 190,000 767,000

2011-12 4 188,000 147,000 254,000 210,000 799,000

2012-13 5

2013-14 6

EXERCISE 2- SALES FORECASTING (CONSTRAINTS)

Computer Products produces two keyboards, Regular and Special. Regular keyboards have a unit

contribution margin of128, and Special keyboards have a unit contribution margin of720. Thedemand for Regulars exceeds Computer Product's production capacity, which is limited by availablemachine-hours and direct manufacturing labour-hours. The maximum demand for Special keyboards is 80

per month. Management desires a sales mix that will maximize the contribution toward fixed costs andprofits.

Direct manufacturing labour is limited to 1,600 hours a month and machine-hours are limited to 1,200 amonth. The Regular keyboards require 20 hours of labour and 8 machine-hours Special keyboards require

34 labour-hours and 20 machine-hours.

Required:Formulate the objective function and constraints necessary to determine the optimal product mix. Suggest

the best production plan and the resultant profits that the company would earn according to yoursuggestions.

Maximize: 128R + 720SConstraints:

Labor-hours: 20R + 34S 1,600Machine-hours: 8R + 20S 1,200Special: S 80

S 0Regular: R 0

EXERCISE 3- SALES FORECASTING (CONSTRAINTS)

Local Steel Construction Company produces two products, steel and wood beams. Steel beams have a

unit contribution margin of200, and wood beams have a unit contribution margin of150. The demand

for steel beams exceeds Local Steel Construction Company's production capacity, which is limited byavailable direct labour and machine-hours. The maximum demand for wood beams is 90 per week.Management desires that the product mix should maximize the weekly contribution toward fixed costsand profits.


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Direct manufacturing labour is limited to 3,000 hours a week and 1,000 hours is all that the company's

outdated machines can run a week. The steel beams require 120 hours of labour and 60 machine-hoursWood beams require 150 labour hours and 120 machine-hours.

Maximize: 200S + 150W

Constraints: Labor hours: 120S + 150W 3,000

Machine-hours: 60S + 120W 1,000Wood beams: W 90 W 0

Steel beams: S 0

EXERCISE 4- COST FORECASTING

The following are the maintenance costs incurred in machine shop for six months with

corresponding machine hours :

Month No of hrs Cost Variable FixedJanuary 2,000 330

February 2,200 320

March 1,700 290

April 2,400 325

May 1,800 320

June 1,900 290

Analyze the maintenance cost which is semi variable into fixed and variable elements.

Also calculate the cost for the month of July and August.

EXERCISE 5

ABC Company has prepared a unit sales budget for the upcoming months as follows:

Month Units Month Units

January ...................... 5,000 June ........................... 30,000

February .................... 7,500 July ........................... 35,000

March ........................ 10,000 August ....................... 25,000

April .......................... 15,000 September ................. 10,000

May ........................... 20,000 October ..................... 6,000

ABC has a policy to maintain inventory levels equal to 30% of the coming months sales require ments.

Inventory on January 1 is projected to be 1,200 units.

Required:

Prepare a production budget for ABC Company for the next six months.


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Solution:

ABC CompanyProduction Budget

January February March April May JuneSales ...................................... 5,000 7,500 10,000 15,000 20,000 30,000Ending inventory ................... 2,250 3,000 4,500 6,000 9,000 10,500Total needs ............................ 7,250 10,500 14,500 21,000 29,000 40,500Less: Beginning inventory ... 1,200 2,250 3,000 4,500 6,000 9,000Units to be produced ............. 6,050 8,250 11,500 16,500 23,000 31,500


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EXERCISE 6

PQR Company sells modems. PQR desires to hold a finished goods inventory equal to 100% of the next

months sales requirement of modems. The beginning finished goods inventory is 1,200 units. Forecasted

unit sales for April and the next three months are as follows:

April May June July800 850 925 1,000

The production of one finished unit requires 5 pounds of raw material. The company desires to have a

one-month supply of raw materials as the ending inventory for each month. The beginning inventory of

raw materials is 6,190 pounds.

Required:

Prepare a direct materials purchases budget (in pounds) for April.

Solution:

Production Budget for April

April May June JulySales ........................................................................... 800 850 925 1,000Desired finished goods ending inventory, 100% of

next months sales ................................................. 850 925 1,000Total needs ................................................................. 1,650 1,775 1,925Less: Finished goods beginning inventory ................ 1,200 850 925Units to be produced .................................................. 450 925 1,000

PQR Company

Raw Materials Budget for April

April May JuneProduction needs, 5 lbs. per finished goods unit ........ 2,250 4,625 5,000Desired raw materials ending inventory .................... 4,625Total needs ................................................................. 6,875Less: Raw materials beginning inventory ................. 6,190Raw materials to be purchased................................... 685


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Exercise 7

The actual information pertains to the third quarter. As part of the budgeting process, the DD Department

of Wooden Fines Pvt Ltd had developed the following static budget for the third quarter. DD is in the

process of preparing the flexible budget and understanding the results.

Exercise 8

The president of the company, Thomas Peters, has come to you for help. Use the following data

to prepare a flexible budget for possible sales/production levels of 10,000, 11,000, and 12,000units. Show the contribution margin at each activity level and calculate break-even point.

Units 10,000 12,000

Sales 240,000 288,000

Costs:

Manufacturing 180,000 204,000

Administrative 50,000 56,000

Selling 10,000 12,000

Operating income/(loss) - 16,000

Actual Flexible Static Variances

Results Budget Budget F/ U

Sales volume (in units) 13,000 units units 12,000 units

Sales revenues 257,500 250,000

Variable costs 154,000 175,000

Contribution margin 103,500 75,000

Fixed costs 50,500 49,500

Operating profit 53,000 25,500


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Solution:

Units 10,000 11,000 12,000

Per

unit Total

Per

unit Total

Per

unit Total

SALES 240,000 288,000

Variable costs:

ManufacturingAdministrative

Selling

Total variable costs

CONTRIBUTION

MARGIN

Fixed costs:

Manufacturing

Administrative

OPERATING

INCOME/(LOSS)

Exercise 9

ABC Company is developing its budgets for 2012-13 and, for the first time, will use the kaizen approach.

The initial 2012-13 income statement, based on static data from 2011-12, is as follows:

Sales (200,000 units) 600,000Less: Cost of goods sold 400,000

Gross margin 200,000Operating expenses (includes 30,000 of depreciation) 130,000

Net income 70,000

Selling prices for 2012-13 are expected to increase by 20%, and sales volume in units will decrease by

10%. The cost of goods sold as estimated by the kaizen approach will decline by 10% per unit. Other thandepreciation, all other operating costs are expected to decline by 5%.


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Required:

Prepare a kaizen-based budgeted income statement for 2012.

Answer: Sales (180,000 3.60) 6,48,000

Less: COGS (180,000 1.80) 3,24,000

Gross margin 3,24,000Operating expenses (30,000 + 95,000) 1,25,000

Net income 1,99,000

Exercise 10

PQR Corporation is using the kaizen approach to budgeting for 2011-12. The budgeted income statement

for April 2011 is as follows:

Sales (400,000 units) 12,00,000Less: Cost of goods sold 8,00,000

Gross margin 4,00,000

Operating expenses (includes 80,000 of fixed costs) 1,50,000

Net income 2,50,000

Under the kaizen approach, cost of goods sold and variable operating expenses are budgeted to decline by2% per month.

Required:

Prepare a kaizen-based budgeted income statement for May of 2011.

Answer: Sales 12,00,000

Less: Cost of goods sold (800,000 0.98 ) 7,84,000

Gross margin 4,16,000

Operating expenses [(70,000 0.98 ) + 80,000] 1,48,600

Net income 247,400


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Target Costing

Question 1

Steven Corporation manufactures fishing poles that have a price of42.00. It has costs of32.64 A

competitor is introducing a new fishing pole that will sell for36.00. Management believes it must lower

the price to 36.00 to compete in the highly cost-conscious fishing pole market. Marketing believes that

the new price will maintain the current sales level. Steven Corporation's sales are currently 200,000 polesper year.

Required:

a. What is the target cost for the new price if target operating income is 20% of sales?

b. What is the change in operating income for the year if 36 is the new price and costs remain thesame?

c. What is the target cost per unit if the selling price is reduced to 36.00 and the company wants tomaintain its same income level?

Answer:

a. 36.00 - (36.00 0.20) = 28.80

b. Change = 200,000 (42.00 - 32.64) - [200,000 (36.00 - 32.64)]

= 1,872,000 - 672,000

= 1,200,000 reduction in income

c. Current income = 200,000 (42.00 - 32.64) = 1,872,000

Target cost per unit:

1,872,000 = (200,000 36.00) - 200,000y

200,000y = 5,328,000

y = 26.64


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Question 2

Robert's Medical Equipment Company manufactures hospital beds. Its most popular model, Deluxe, sells

for5,000. It has variable costs totaling 2,800 and fixed costs of1,000 per unit, based on an average

production run of 5,000 units. It normally has four production runs a year, with 400,000 in setup costs

each time. Plant capacity can handle up to six runs a year for a total of 30,000 beds.

A competitor is introducing a new hospital bed similar to Deluxe that will sell for4,000. Managementbelieves it must lower the price to compete. Marketing believes that the new price will increase sales by25% a year. The plant manager thinks that production can increase by 25% with the same level of fixedcosts. The company currently sells all the Deluxe beds it can produce.

Required:

a. What is the annual operating income from Deluxe at the current price of5,000?

b. What is the annual operating income from Deluxe if the price is reduced to 4,000 and sales in unitsincrease by 25%?

c. What is the target cost per unit for the new price if target operating income is 20% of sales?

Answer:

a. Sales (20,000 5,000) 100,000,000Costs:

Variable costs (20,000 2,800) 56,000,000

Fixed costs (1,000 5,000 4) 20,000,000

Setup costs (400,000 4) 1,600,000 77,600,000

Operating income 22,400,000

b. Sales (25,000 4,000) 100,000,000Costs:

Variable costs (25,000 2,800) 70,000,000

Fixed costs, same 20,000,000Setup costs (400,000 5) 2,000,000 92,000,000

Operating income 8,000,000

c. 4,000 - (4,000 0.20) = 3,200


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Question 3

XYZ currently sells radios for3,600. It has costs of2,800. A competitor is bringing a new radio to

market that will sell for3,200. Management believes it must lower the price to 3,200 to compete in themarket for radios. Marketing believes that the new price will cause sales to increase by 10%, even with a

new competitor in the market. XYZ's sales are currently 1,000 radios per year.

Required:

a. What is the target cost if target operating income is 25% of sales?b. What is the change in operating income if marketing is correct and only the sales price is changed?c. What is the target cost if the company wants to maintain its same income level, and marketing is

correct?

Answer:

a. 3,200 - (3,200 0.25) = 2,400

b. (1,000 (3,600 - 2,800)) - (1,100 (3,200 - 2,800)) = Decrease 360,000

c. Current income = 1,000 (3,600 - 2,800) = 800,000

Target cost y: 800,000 = (1,100 3,200) - 1,100y

y = 2,720,000/1,100

y = 2,472.72

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