MANAC II, TEST NUMBER I (Answer Booklet)

YOUR FULL NAME ROLL NO. DATE OF BIRTH YEAR OF BIRTH

MODEL SOLUTION 50 (Say) 16th (Say) 1995 (Say)

ANSWER TO QUESTION NUMBER I

QUESTION ANSWER

The required “Margin of Safety” (in Rs) amounts to 125000

All supporting workings are given below for ready reference

Here, X = Rs 10.00 Lakhs. 1.25 X = Rs 12.50 Lakhs, Y = Rs 12,000.

Difference in Sales between two years = Rs 250000.

Difference in Profit between two years = Rs 24000.

Thus, C/S ratio = Difference in Profit UPON Difference in Sales = 24000 / 250000 = 0.096

Considering Previous Year Data

Contribution = 1000000 * 0.096 = Rs 96000

Fixed Cost = Contribution + Loss = 96000 + 12000 = Rs 108000

Thus, Break Even Sales (in Rs) = Fixed Cost UPON C/S ratio

= 108000 / 0.096 = Rs 1125000

Hence, Margin of Safety Sales (Current Year) = Actual Sales – Break Even Sales

= 1250000 – 1125000 = Rs 125000 (Answer)

ANSWERS TO QUESTION NUMBER II
SPECIFIC QUESTIONS YOUR ANSWERS

In case the company implements the proposal

under consideration, what will be the amount
of incremental contribution per week (in Rs) Rs 18400
that the company will generate pursuant to
the proposed change?

In case the company implements the proposal

under consideration, what will be the ROI (in
%) of this proposed investment in the new 329% (Approximately)
machine?

Should the company accept this proposal
(YES / NO). If Yes – clarify why YES. If NO
– clarify WHY NOT. As the decision maker,
would you like to advise the company
management about any additional relevant /
important aspect (in respect of this particular
decision making exercise)? If YES – what
advice? (Please clarify).
YES because the ROI of this proposed investment
option is higher compared to the existing ROI that is
being earned by the company.
As per the case facts - In case the proposal is
implemented, 50 workers of this department will be
made redundant. The company management may be
advised to consider making some alternative
arrangements for these 50 workers (or consider
paying them some attractive compensation) etc in
order to avoid possibilities of labour unrest (if any).

All supporting workings are given below (and in the next page) for ready reference
Here, X = Rs 299250 and Y = Rs 3.00
Existing production per week per worker = 100000 / 200 500 units
New production per week per worker = 500 * 160% 800 units
New production per week = 800 * 150 120000 units
Existing selling price per unit = 1250000 / 100000 Rs 12.50
Existing contribution per unit = 500000 / 100000 Rs 5.00
Existing variable cost per unit = 12.50 – 5.00 Rs 7.50
Existing labour cost per unit (piece rate, hence, variable) Rs 3.00
Existing other variable cost per unit = 7.50 – 3.00 Rs 4.50
New labour cost per unit (includes 6% incentive) 3.00 * 1.06 Rs 3.18
New variable cost per unit = 3.18 + 4.50 Rs 7.68
New selling price per unit = 12.50 * 96% Rs 12.00
New Contribution per unit = 12.00 – 7.68 Rs 4.32
Supporting workings continued………..

New Contribution per week = 120000 * 4.32 Rs 518400

Existing Contribution per week (as given) Rs 500000

Incremental Contribution per week (pursuant to the change) – First Answer Rs 18400

Annual Incremental Contribution = 50 * 18400 (There are 50 weeks in an year) Rs 920000

Incremental Fixed Cost (Depreciation on new machine) = 299250 / 3 Rs 99750
Incremental Profit Before Tax Rs 820250

Incremental Investment (Opening) Rs 299250

Closing Investment (299250 – 99750) Rs 199500
Average Investment = ½ (Opening Investment + Closing Investment) Rs 249375

ROI % (Applying the formula given in the question) 329%

= 820250 / 249375 (expressed in %) – Second Answer Approximately