MANAGEMENT AND FINANCIAL ACCOUNTING-ASSESSMENT - 2

VIDHARSHANA

Question 1.

Fuzzy Breeze is located in a resort area where the county assesses an occupancy tax that has
both a fixed and a variable component. Fuzzy Breeze pays Rs.2,000 per month, regardless of
the number of rooms rented. Even if it does not rent a single room during the month, Fuzzy
Breeze still must remit this tax to the county. The hotel treats this Rs. 2,000 as a fixed cost.
However, for every night that a room is rented, Fuzzy Breeze must remit an additional tax
amount of Rs. 50 per room per night.

What will be the total cost incurred by the resort at the following number of room occupancy - (i)
0; (ii) 60; (iii) 85; and (iv) 100?

Assumption- At the level of occupancy, the rooms are rented out for a single overnight

Cost incurred=total variable cost+total fixed cost*Quantity

Variable cost=Rs 50 per night
Fixed cost=Rs 2000
I Number of room-0
=(2000+50)*0
Total cost incurred=0

II Number of room=60
=2050*60
Total cost incurred =123000

III Number of room=85

=2050*85
Total cost incurred =174250

IV Number of room=100
=2050*100
Total cost incurred =205000

Question 2

Sethi Manufacturing sold 25,000 units of its products for Rs.150/- per unit in 2020, where the
variable cost is Rs. 60/- per unit and fixed costs are Rs. 250,000.Required: Based on the above
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VIDHARSHANA

information calculate the following. State your assumptions (if any) clearly before attempting
the question (s):

a) Calculate – (i) Contribution Margin; (ii) Operating Income (Contribution Margin - Fixed Cost)

I contribution margin=sales-variable cost of goods sold

=25000*150-60*25000
=22,50,000
II operating income=contribution margin-Fixed cost
=22,50,000-2,50,000
=20,00000

b) Sethi’s current manufacturing process is labor-intensive. Ms. Simran, Sethi Manufacturing’s

production manager has proposed an up-gradation of the existing machinery & other
equipment, which will increase the annual fixed cost to Rs. 775,000, while the variable cost on
other hand, is expected to decrease by Rs. 30/- per unit. The company expects to maintain the
same sales volume and selling price for 2021. How would acceptance of Ms. Simran’s proposal
affect your answers to (i)Contribution Margin and (ii) Operating Income

I Fixed cost-775000
Variable cost-30% decrease
=42Rs
Contribution margin=25000*150-42*25000
=27,00,000
II operating income=27,00,000-7,75,000
=19,25000

c) Should Sethi Manufacturing accept Ms. Simran’s proposal? Explain.No,we cannot accept
because increase in fixed cost lead to decrease in operating income by 3.75%.And with the
same selling price and manufacturing unit it is not ok to accept the Ms.simran proposal

Question 3

Suppose Mitra & Sons’ breakeven point is revenue of Rs. 1,500,000 and fixed costs are Rs.
720,000. Compute the following:
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VIDHARSHANA

a) Contribution Margin Percentage

.BEP=1500000
Fixed cost=720000
BEP=FC/CONTRIBUTION MARGIN
Contribution ratio=720000/1500000*100
=48%

b) Calculate the selling price if variable cost is Rs. 13 per unit

.BEP=FC*SP/SP-VC
1500000=720000*s/s-13
=25Rs/unit

c) Suppose 90,000 units are sold, calculate the margin of safety in units and rupees

Margin of safety=Actual sales-BEP sales

=90000*25-1500000
=27,50,000
IN UNIT
Contribution margin=sales cost-variable cost
=90000*25-90000*13
=10,80,000
Profit=contribution margin-fixed cost
=10,80,000-7,20,000
3,60,000
Margin of safety=profit%contribution/unit
=3,60,000/12
=30,000 units

d) What does this tell you about the risk of firm making a loss? What are the most likely
reasons for this risk to increase?

If selling price increases then BEP decreases. If the selling price decreases then BEP
increases. Thus, we can say that there is an inverse relationship between selling price and
BEP.
MANAGEMENT AND FINANCIAL ACCOUNTING-ASSESSMENT - 2

VIDHARSHANA

If variable cost decreases profit will increase and if variable cost increases then obviously
profit will decrease so then the firm will make a loss..

The most likely reason for the increments of risk is when variable cost per unit increases,
continuously.

Question 4

Soneva Enterprise manufactures two models of boats- Regular & Deluxe, using a
combination of hand finishing and machining. Machine setup costs are driven by the
number of setups. Indirect labor cost increase with direct labor costs. Equipment and
maintenance costs increase with the number of machine hours, and facility rent is paid per
square foot. The capacity of the facility is 6250 square foot and Soneva is using only 80%
of this capacity. Soneva records the cost of unused capacity as a separate line item and
not as a product cost. For 2021, Soneva has budgeted the following:

Required: Based on the above information answer the following. State your assumptions
(if any) clearly before attempting the question.

a) Identify the various cost drivers rate for each activity cost pool.

cost pool cost driver

Direct Materials- No.of.units in regular/deluxe boats
Direct Labour No.of.units in regular/deluxe boats
Indirect Labour Costs No.of.units in regular/deluxe boats
Machine Setup Costs No.of.setups
Equipment and Maintenance Costs No.of.machine hours
Facility Rent No.of.sq feet

b) What is the budgeted cost for the unused capacity?

80% of total 6250 square feet is used

=5000 sq feet
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Cost for 6250sq.ft=20,00,000

Cost per sq feet=20,00,000/6250=320Rs

6250-5000sq.ft=1250sq.ft

=1250*320=Rs 4,00,000

Budgeted cost for the unused capacity=4,00,000rs

c) Calculate the budgeted total cost and the cost per unit for each model.

BUDGETED COST FOR EACH MODEL

REGULAR BOAT DELUXE BOAT

Amount (in
Particulars Amount (in Rs.) Particulars Rs.)
Direct Materials- 3250000 Direct Material 2400000
Direct Labour- 1100000 Direct Labour 1300000
Indirect Labour Costs 450000 Indirect Labour Costs 270000
Machine Setup Costs 243000 Machine Setup Costs 162000
Equipment and Maintenance Equipment and Maintenance
Costs 1100000 Costs 1250000

Facility Rent 915200 Facility Rent 684800

Total budgeted cost 7058200 Total budgeted cost 6066800

COST PER UNIT FOR EACH MODEL

REGULAR BOAT DELUXE BOAT

Amount (in
Particulars (cost /unit) Amount (in Rs.) Particulars (cost /unit) Rs.)
Direct Materials- 650 Direct Material 800
MANAGEMENT AND FINANCIAL ACCOUNTING-ASSESSMENT - 2

VIDHARSHANA

Direct Labour- 220 Direct Labour 433

Indirect Labour Costs 90 Indirect Labour Costs 90
Machine Setup Costs 810 Machine Setup Costs 810
Equipment and Maintenance Equipment and Maintenance
Costs 100 Costs 100

Facility Rent 320 Facility Rent 320

d) Why might excess capacity be beneficial for Soneva? What are some of the issues
Soneva should consider before increasing production to use the space?

As the soneva is paying for all 6250 sq.feet but using only 80% of it .It spends a 400000
rupees extra as rent.So utilizing the space will benefit them.

It should consider the demand for the product in the market to increase the production.Else
the excess production in increased capacity will lead to increase in shelf life of products
which affects the income .