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Pakistan: Extra Reading Time: 15 Minutes Writing Time: 03 Hours Maximum Marks: 100 Roll No.
Pakistan: Extra Reading Time: 15 Minutes Writing Time: 03 Hours Maximum Marks: 100 Roll No.
SMA-Feb.2014 1 of 6 PTO
Marks
Later on Sales Manager of Stylish Furniture Ltd., joined the meeting and stated that at least
50,000 units of Product-B must be produced for customers who want to buy the full-range
from the company.
Acquiring the Dream Beds Company
During the meeting, with Mr. Adeel Hashmi, the following latest income statement of Dream
Beds Company has been provided to you:
Dream Beds Company
Statement of Profit or Loss
as at June 30, 2013
Model - Sales Units Rupees
Model-L 1,620 673,920
Model-M 2,160 1,516,320
Model-N 1,620 2,021,760
Turnover 4,212,000
Expenses: Rs.
Cost of beds 3,240,000
Sales commission 421,200
Delivery expenses 432,000
Rates and insurance 16,900
Light heat and power 20,000
Assistants’ salaries 80,000
Manager’s salary 80,000 4,290,100
Net (loss) (78,100)
SMA-Feb.2014 2 of 6
Marks
Storage space is critical factor as customers ask immediate delivery of the products and
would not wait until the new stock arrives. The statement of profitability is as under:
Model P Q R
Monthly demand (beds in units) 350 450 200
Rupees/ unit
Selling price 4,800 8,960 13,440
Cost per bed 2,600 6,200 11,000
Transportation-in 400 400 400
Staff salaries 432 806 1,210
Department fixed overheads 400 400 400
General fixed overheads 500 500 500
Total cost/ expenses 4,332 8,306 13,510
Profit/ (loss) 468 654 (70)
Storage required per bed (square meters) 3 4 5
The Managing Director has also provided you with the following additional information:
(i) The salaries of sales staff is Rs. 756,000 per month for the bed department and has been
apportioned to unit on the basis of planned turnover.
(ii) Departmental fixed overhead of Rs. 400,000 per month is directly attributable to the
department and is apportioned on the number of beds planned to be sold.
(iii) General fixed overheads of Rs. 500,000 are also apportioned on the number of beds
planned to be sold. The Managing Director of Stylish Furniture Ltd., believes this to be a
fair apportionment of the store’s general fixed overheads.
(iv) The cost of transportation-in and the cost of beds vary directly with the number of beds
purchased.
Required:
The Managing Director of Stylish Furniture Ltd., has asked you to:
(a) Prepare a next year’s production schedule for the four products (A, B, C & D) that will
result in the maximum amount of total contribution margin. 12
(b) Explain how the production of 50,000 units of Product-B would affect the total
contribution margin. 05
(c) What possible actions Stylish Furniture Ltd., could take to meet the total demand for its
products? 02
(d) Identify the minimum profit required to compensate for the employment of new manager
and loss of interest in acquiring the Dream Beds Company and show the number of
beds to be sold to achieve that profit. 06
(e) Calculate the likely maximum number of beds that Dream Beds Company would sell in a
year. 03
(f) Justify whether or not Stylish Furniture Ltd., should purchase the Dream Beds
Company. 02
(g) State two possible reasons why your estimate of the maximum annual sales volume of
Dream Beds Company may prove inaccurate. 02
(h) Prepare a recommended monthly sales schedule which will maximize the profitability of
Stylish Furniture’ bed department. 08
SMA-Feb.2014 3 of 6 PTO
Marks
Q. 2 The details of the cost, volume and cost drivers for a particular period in respect of Daata
Textile Limited are as under:
Product Alpha Beta Zeta Total
Production and sales (units) 45,000 35,000 10,000
Sale price (Rs.) 100 110 100
Raw material usage (units) 5 5 11
Direct material cost (Rs./ unit & total) 30 25 15 2,375,000
Direct labour hours 2 4 2 250,000
Machine hours 2 3 2 215,000
Direct labour cost (Rs./ unit) 12 15 10
Number of production runs 3 7 20 30
Number of deliveries 9 3 20 32
Number of receipts of inventory components 15 35 220 270
Number of production orders 15 10 25 50
Overhead cost: Rupees
Set-up 50,000
Machines 800,000
Receiving 500,000
Packing 300,000
Engineering 400,000
2,050,000
In the past the company has allocated overheads to products on the basis of direct labour
hours, though the majority of overheads are more closely related to machine hours than direct
labour hours.
The company has recently redesigned its costing system for recovering overhead of receiving
department using two volume-related bases: machine hours and a material handling
overhead rate.
Required:
(a) Compute the product-wise profitability using a traditional volume-related costing system
based on:
(i) past practice. 04
(ii) current practice. 04
(b) Compute product-wise profitability using an activity-based costing system. 06
(c) Briefly explain the differences between the product-wise profitability calculated in
(a) and (b) above. 03
Q. 3 An international airline, planning to outsource its local operations due to heavy load of
international flights. The local flight division currently operates 20 flights per annum. The
costs currently assigned to the local operation are as follows: Rupees
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Marks
The numbers of flights and above costs are expected to remain unchanged in the foreseeable
future, if the airline continues to operate locally. Contractual direct cost will be made
redundant. No redundancy cost will be incurred. Non-contractual direct cost and variable
overhead are avoidable and fixed overhead would be reduced by Rs. 100,000 per annum and
allocated other overheads will remain unchanged, if local operations got outsourced. Vacant
facilities after outsourcing will generate a cash flow of Rs. 800,000 per annum.
Blue Shine Limited, a local airline, has offered to operate required number of flights per
annum at a price of Rs. 170,000 per flight.
Required:
Would you recommend the outsourcing to local operations of Blue Shine Limited?
Substantiate your answer with analyses. 08
Q. 4 (a) Asma Building, a supplies company, has two stores one in old city area and other in
new city area. Both stores have their own managers who have a great deal of decision
authority over their store. Store performance related decisions regarding salaries,
wages, supplies and depreciation etc., are made by managers and strategic decisions
are taken by their head office. Asma Building allocates all costs to the stores.
The results for 2013 are as under:
Rupees
ITEM Total Old Area New Area
Sales revenue 820,000 410,000 410,000
Cost of merchandise sold 490,000 245,000 245,000
Gross margin 330,000 165,000 165,000
Operating Expenses:
Salaries and wages 75,000 35,000 40,000
Supplies 55,000 27,500 27,500
Rent and utilities 80,000 50,000 30,000
Depreciation 17,000 5,000 12,000
Allocated staff cost 90,000 45,000 45,000
Total operating expenses 317,000 162,500 154,500
Operating income (Loss) 13,000 2,500 10,500
Supplies are variable costs. Variable salaries and wages are equal to 10% of the cost of
merchandise sold; the remainder of salaries and wages is a fixed cost. Rent, utilities and
depreciation are also fixed costs. Allocated staff costs are unaffected by any event at
the stores, but they are allocated as a proportion of sales revenue.
Required:
(i) Using the contribution approach, prepare a performance report that distinguishes
the performance of each store from that of the store manager. 08
(ii) Evaluate the financial performance of each store. 03
(iii) Evaluate the financial performance of each manager. 03
(b) Although financial measures are important for evaluation purposes, many organizations
use a mix of financial and non-financial measures to evaluate performance. Usually,
airlines track on-time arrival percentages carefully, and delivery companies monitor
percentages of on-time deliveries.
Required:
What is a balanced scorecard and how does it help companies to evaluate
performance? 05
SMA-Feb.2014 5 of 6 PTO
Marks
Q. 5 Parkline Co., has trading stores worldwide. The company has a cosmetic production facility in
Pakistan. The total production capacity of division ‘P’ to produce cosmetic products is 400,000
units per annum. The variable cost of production is Rs. 30 per unit and the division can sell
75% units within home country per annum at Rs. 50 per unit.
Parkline Co., UK branch has two options to purchase cosmetic products either from UK local
market supplier at a price equivalent to Rs. 40 per unit or import from Pakistan at Rs. 45 per
unit. Total demand for UK market is 50,000 units.
Parkline Co., first priority goes to inter-company sales and so a few orders from external
customers would remain unfulfilled.
Required:
Determine from which branch, UK branch should purchase cosmetics product in each of the
following circumstances, if the aim is to maximize group profit:
(a) The tax rate in Pakistan is 35% and the tax rate in UK is 50%. 08
(b) The tax rate in Pakistan is 50% and the tax rate in UK is 35%. 08
Hint: You may assume that changes in contribution can be used as a basis of
calculating changes in tax charges and the UK branch is able to absorb any tax
benefit from the profit it generates on other activities.
THE END
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