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Using Relevant Cost for Optimum Product Mix Decisions
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Class Test | Short-Run Decision Making Using Relevant Cost | 13-Dec-21 | Sec A and D

Started on Monday, 13 December 2021, 9:04 PM

State Finished
Completed on Monday, 13 December 2021, 10:19 PM
Time taken 1 hour 15 mins
Grade 20.00 out of 20.00 (100%)

Question 1
Correct
Upstate Mechanical, Inc. has been producing two components T79 and B81 in a division, for use in
Mark 3.00 out of
production of its finished product making use of its maximum available machine hour capacity. Data
3.00 regarding the costs of manufacturing these two components in this division at this capacity level is as
follows:

T79 B81

 Annual requirement and full     12800    17600 

 production capacity (in Units)
  Direct Material (Rs.) 46080  105600 

  Direct Labor (Rs.) 81920  126720 

  Manufacturing Overhead (Rs.) 117760  190080 

 Full Cost Per Unit (Rs.) 19.2  24 

The
manufacturing overheads include allocated fixed manufacturing overheads cost of
Rs. 76800 for
T79 and Rs. 126720 for B81 which is applied to the respective
components at Rs. 2.4 per machine
hour. This fixed cost is capacity related and will not change even if the company does not make use
of the machine to produce these components. The firm is considering to buy components from an
outside supplier. 

Assuming that the total fixed manufacturing will not change, what in-house per unit cost of
component B81 should be used to compare with the quotation received from
the outside
supplier?

(enter ONLY numerical answer up to two decimals wherever applicable. Do NOT write any prefix or
suffix)

Answer: 16.80 

The correct answer is: 16.80

Question 2
Upstate Mechanical, Inc. has been producing two components T79 and B81 in a division, for use in
Correct

Mark 2.00 out of

production of its finished product by making use of its maximum available machine hour capacity.
2.00 Data regarding the costs of manufacturing these two components in this division at this capacity level
is as follows:
  T79 B81

 Annual requirement and full     production  8000  11000

capacity (in Units)
 Variable Cost per unit (Rs.) 8.25 10.50

 Full Cost Per Unit (Rs.) 12.0 15.0

 Machine Hours Per Unit  2.5  3.0
 Outside Supplier's Offer Price per unit (Rs.)  11.25  13.5

This fixed cost allocated to these components is capacity related and will not change even if the
company does not make use of the machine to produce these components. Both these components
are produced on the same machine and these machine hours are in limited supply. 

In order to optimally utlize the limited machine hours available, the comapny must identify a
component that should be made in-house and the component that should be bought from outside
supplier. Which of these statements truly reflects the appropriate base for deciding this priority? 

Select one:

The component for which the gain per machine hours of buying from outside (i.e. difference
between the variable cost per unit of producing in-house and the Vendor's price) is the higher
should be purchased form outside. 
The component that requires lower machine hours per unit to manufacture should be produced
in-house. 

The component for which the gain  per unit of buying from outside (i.e. difference between the
variable cost per unit of producing in-house and the Vendor's price) is the higher should be
purchased form outside. 
The component with lowest full cost per unit should be produced in-house. 

The component with lower purchase price (vendor's offer price) per unit should be purchased
from outside. 

The component for which the loss per unit of buying from outside (i.e. difference between
Vendor's price and variable cost per unit of producing in-house) is the lower should be purchased
form outside. 
The component with lower variable cost per unit should be produced in-house. 

The component for which the loss per machine hour of buying from outside (i.e. difference
between the Vendor's price and the variable cost per unit of producing in-house) is the lower
should be purchased form outside.  

Your answer is correct.

The correct answers are: The component for which the gain per machine hours of buying from outside
(i.e. difference between the variable cost per unit of producing in-house and the Vendor's price) is the
higher should be purchased form outside. , The component for which the loss per machine hour of
buying from outside (i.e. difference between the Vendor's price and the variable cost per unit of
producing in-house) is the lower should be purchased form outside. 
Question 3
Correct
Upstate Mechanical, Inc. has been producing two components T79 and B81 in a division, for use in
Mark 2.00 out of
production of its finished product by making use of its maximum available machine hour capacity.
2.00 Data regarding the costs of manufacturing these two components in this division at this capacity level
is as follows:

  T79  B81 

 Annual requirement and full production capacity (in   9600   13200

Units)
Variable Cost per unit (Rs.) 9.9 12.6

Full Cost Per Unit (Rs.) 14.4 18

 Machine Hours Per Unit  2.5 3.0
Outside Supplier's Offer Price per unit (Rs.)  13.5 16.2

Both these components are produced on the same machine and have similar production processes.
Recently, due to an accident, the availability of total hours on this machine will reduce to 49200 hours
till a component part is replaced.

Assume that the company decides to stop manufacturing the component B81 and continues to
manufacture only T79 on this machine and that out of the fixed cost allocated to these
components, there is an annual fixed cost of Rs. 52800 that will be incurred only if the machine
capacity is used. Under such circumstances, the maximum price Upstate Mechanical should pay
to the outside supplier for component T79?

(enter ONLY numerical answer up to two decimals wherever applicable. Do NOT write any prefix or
suffix)

Answer: 15.40 

The correct answer is: 15.40

Question 4
Upstate Mechanical, Inc. has been producing two components T79 and B81 in a division, for use in
Correct

Mark 2.00 out of

production of its finished product by making use of its maximum available machine hour capacity.
2.00 Data regarding the costs of manufacturing these two components in this division at this capacity level
is as follows:

T79 B81

 Annual requirement and full    14400    19800 

 production capacity (in Units)
  Direct Material (Rs.) 58320  133650 

  Direct Labor (Rs.) 103680  160380 

  Manufacturing Overhead (Rs.) 149040  240570 
 Full Cost Per Unit (Rs.) 21.6  27 

The manufacturing overheads include allocated fixed manufacturing overheads cost of Rs. 97200 for
T79 and Rs. 160380 for B81 which is applied to the respective components at Rs. 2.7 per machine
hour. This fixed cost is capacity related and will not change even if the company does not make use
of the machine to produce these components.    
Both these components
are produced on the same machine and have similar production processes.
Recently,
due to an accident, the availability of total hours on this machine will reduce by 21600 hours
till a
component part is replaced. 

The remaining machine hours available for optimization considering the above referred break-
down are 73800  . 

(enter ONLY numerical answer up to two decimals wherever applicable. Do NOT write any prefix or
suffix)

The correct answer is: 73800.00

Question 5
Correct
Upstate Mechanical, Inc. has been producing two components T79 and B81 in a division, for use in
Mark 4.00 out of
production of its finished product by making use of its maximum available machine hour capacity.
4.00 Data regarding the costs of manufacturing these two components in this division at this capacity level
is as follows:

  T79 B81

 Annual requirement and full     production  12800   17600

capacity (in Units)
 Variable Cost per unit (Rs.) 13.2 16.8
 Full Cost Per Unit (Rs.) 19.2 24
 Machine Hours Per Unit  2.5  3.0
 Outside Supplier's Offer Price per unit (Rs.)  18  21.6

This fixed cost allocated to these components is capacity related and will not change even if the
company does not make use of the machine to produce these components. Both these components
are produced on the same machine and have similar production processes. Recently, due to an
accident, the availability of total hours on this machine will reduce to 65600 hours till a component
part is replaced.

Suppose the company decides to make the complete requirement of T79 first and utilizes the
remaining machine hours to make B81. Thus, buy the remaining requirements of B81 from
outside supplier at the price mentioned above. What will be the total gain / loss of buying the
remaining required units of B81 from outside supplier? 
(enter negative integer value using negative sign "-" in case of loss)

(enter ONLY numerical answer up to two decimals wherever applicable. Do NOT write any prefix or
suffix)

Answer: -30720 

The correct answer is: -30720.00

Question 6
Upstate
Mechanical, Inc. has been producing two components T79 and B81 in a
division, for use in
Correct

Mark 3.00 out of

production of its finished product by making use of its maximum available machine hour capacity.
3.00 Data regarding
the costs of manufacturing these two components in this division at this capacity level
is
as follows:

T79 B81
 Annual requirement and full production capacity (in 8000 11000
Units)
  Direct Material (Rs.) 18000  41250 

  Direct Labor (Rs.) 32000  49500 

  Manufacturing Overhead (Rs.) 46000  74250 
 Full Cost Per Unit (Rs.) 12  15 

The manufacturing overheads include allocated fixed manufacturing overheads cost of Rs. 30000 for
T79 and Rs. 49500 for B81 which is applied to the respective components at Rs. 1.5 per machine hour.
This fixed cost is capacity related and will not change even if the company does not make use of the
machine to produce these components. The firm is considering to buy components from an outside
supplier.   

Assuming that the total fixed manufacturing will not change, what in-house per unit cost of
component T79 should be used to compare with the quotation received from
the outside
supplier?

(enter ONLY numerical answer up to two decimals wherever applicable. Do NOT write any prefix or
suffix)

Answer: 8.25 

({DM} + {DL} + ({MO} - {MO-Fixed}))/ {Units}

The correct answer is: 8.25

Question 7

Correct
L&T Ltd. produces variety of products each having a number of
Mark 4.00 out of component parts. Product A takes 4 hours to process on a machine
4.00
working at full capacity. It is sold at a price of Rs. 60 and has a marginal
cost of Rs. 30.
‘B-777’ a component part used for Product B, could be made on the same
machine in 2  hours for a marginal cost of Rs. 5 per unit. A supplier has
offered to supply B-777 at Rs. 12 per unit.
What in-house unit cost of B-777 should be used to compare with the
supplier’s price if the availability of machine-hours is a limiting factor?

Answer: 20 

The correct answer is: 20.00

◄ QUIZ-III CVP Analysis | Sec A and D |
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