Question 1 Sun Co.

(Winter 2016 Q2)

Sun Co. makes four components, A, B, C and D, for which costs in the forthcoming year are expected to
be as follows.

A B C D
Production (Units) 2,000 1,500 4,000 3,000
Unit marginal cost Rs.
Direct materials 4 5 2 4
Direct labour 8 9 4 6
Variable production overheads 2 3 1 2
14 17 7 12

Directly attributable fixed costs per annum and committed fixed costs:

Incurred as direct consequence of making A 1,000

Incurred as direct consequence of making B 5,000
Incurred as direct consequence of making C 6,000
Incurred as direct consequence of making D 8,000
Other fixed costs (committed) 30,000
50,000

A sub-contractor has offered to supply units of A, B, C and D for Rs.12, Rs.21, Rs.10 and Rs.14
respectively.

Required:

Should Sun make or buy the components and what are the other considerations should be taken in to
account? (15-Marks)

Question 2 Further Processing (Winter 2016 Q3)

Product A and B are produced in a joint process. At split-off point, Product A is complete whereas
product B can be process further. The following additional information is available:

Product A B
No. of units 10,000 15,000
Selling price per unit
At split off point Rs. 20 Rs. 5
If processing further - Rs. 10
Cost after split off - Rs. 50,000

Required:

(a) Explain Incremental Approach, Opportunity Cost Approach and Total Project Approach briefly. 05-
Marks

(b) Perform sell-or-process-further analysis for product B. 05-Marks

Question 3 Best Buy Company (Summer 2017 Q7)

Best Buy Company is into manufacturing and due to high demand of its products in the market is always
operating at full capacity. It makes four products, Alpha, Beta, Gama and Hexa. All four products are
made on the imported machines, and the machine capacity for the year at Best Buy’s factory is 5,250
hours. However, it is able to obtain any of these products in unlimited quantities from a sub-contractor.
Budgeted data is as follows:

Alpha Beta Gamma Hexa

Annual sales demand (units) 6,000 9,000 4,500 7,500
Rs.
Sales price per unit 22.5 30 27 25.5
Variable cost per unit, in-house manufacture 7.5 10.5 9 10.5
Cost of external purchase (outsourcing) 12 17.7 15.75 16.5
Machine hours per unit, in-house production 0.38 0.75 0.45 0.6

Required:

(a) Which items should be produced in-house and which should be outsourced? Show all your workings
along with priority for in house production? 10-Marks

(b) Show total cost for in house production & out sourced production. 10-Marks

Question 4 Further processing (Summer 2018 Q7)

Product A and B are produced in a joint process. At split-off point, Product A is complete whereas
product B can be process further. The following additional information is available:

Product A B
No. of units 10,000 20,000
Selling price per unit
At split off point Rs. 20 Rs. 5
If processing further - Rs. 10
Cost after split off - Rs. 40,000

Required:

Perform sell-or-process-further analysis for product B. 15-Marks

Question-5 Rizwan Manufacturing Company

Rizwan Manufacturing Company (RMC) is engaged in production of three products. Due to increase in
demand of products, the RMC is facing difficulties in producing all units. The maximum machine hours
available in the month of March 2021 are 50,000. The relevant data is given in following table.

Product J Product S Product A

Maximum demand Units 6,000 8,000 10,000
Machine hours per unit Hr/U 4 3 2
 Variable production cost per unit Rs. 60 100 120
Cost to purchase per unit from
external supplier Rs. 90 120 140
Required

Calculate how many units should be bought or produced inhouse.

Question-6 Wombat Company

Wombat Company makes four products, W, X, Y and Z. All four products are made on the same
machines, and the machine capacity for the year at Wombat’s factory is 3,500 hours. However, it is able
to obtain any of these products in unlimited quantities from a sub-contractor.
Budgeted data is as follows.
Product W X Y Z
Annual sales demand (units) 4,000 6,000 3,000 5,000
Rs. Rs. Rs. Rs.
Sales price per unit 15 20 18 17
Variable cost per unit, in-house 5 7 6 7
manufacture
Cost of external purchase (outsourcing) 8.0 11.8 10.5 11.0
Machine hours per unit, in-house 0.25 0.50 0.30 0.40
production

Required

Which items should be produced in-house and which should be outsourced?

Question-7 Qamber Limited

Qamber Limited (QL) is engaged in the manufacture and sale of textile products. In February 2013
QL received an order from JCP, a chain of stores, for the supply of 11,000 packed boxes of its
products per month at an agreed price of Rs. 8,000 per box. The boxes would be supplied every
month for a period of one year. It was further agreed that:
 Each box would contain a pillow cover, a bed sheet and a quilt cover.
 QL would be solely responsible for the quality of supplied products whether
they are being manufactured at its own facility or outsourced to third party,
either wholly or partially.
 JCP would provide its logo and printed materials for the packing of these boxes.
Following information is available for the manufacture of each unit of these products:
Products

Pillow Bed Quilt

Cover Sheets Cover
 Cloth required (Meters) 1 4 5

Cost of cloth per meter (Rs.) 200 300 400

Direct labour per meter (Minutes) 30 15 18

Machine time (Minutes) 30 75 120

Variable overheads per machine

(Rs.)
minute 5 4 3.75

Outsourcing cost (Rs.) 750 2,000 3,500

For in-house completion of the above order, a total of 45,000 machine hours and 25,500 labour
hours are estimated to be available each month. The labourers are paid at a uniform rate of Rs.
400 per hour. The cost incurred on quality check, before supply of the boxes to JCP, is estimated
at Rs. 300 per box. Fixed overheads are estimated at Rs. 10,000,000 per month.
Required

Calculate net profit for the month, assuming QL wants to produce as many products as possible within
the available resources.