Q 1. Hindustan machine tools (HMT) make cutting tools for metalworking operations.

It makes two types of tools: R3, a regular cutting tool, and HP6, a high-precision
cutting tool. R3 is manufactured on a regular machine, but HP6 must be manufactured
on both the regular machine and high precision machine. The following information is
available.

R3 HP6
Selling price 1000 1500
Variable manufacturing cost per unit 600 1000
Variable marketing cost per unit 150 350
Hours required to produce 1 unit on the regular 1.0 1.5
machine

Additional information includes:

a) HMT faces a capacity constraint on the regular machine of 50000 hours per year.
b) The capacity of the high precision machine is not a constraint.
c) Out of the 5500000 budgeted fixed overhead cost we have to pay 3000000 lease
payments for the high precision machine. This cost is charged entirely to HP6
because HMT uses the machine exclusively to produced HP6 the lease agreement
for the high precision machine can be canceled at any time without penalties.
d) All other overhead costs are fixed and cannot be changed.

1. What product mix-that is, how many units of R3 and HP6-will maximize HMT’s
operating income?
2. Suppose HMT can increase the annual capacity of regular machines by 15000
machine-hours at a cost of 1500000. Should HMT Increase the capacity of the regular
machines by 15000 machine hours? By how much will HMT’s operating income
increase? Show your calculations.
3. Suppose that the capacity of the regular machine has been increased to 65000 hours.
HMT has been approached by titan to supply 20000 units of another cutting tool, S3
for 1200 per unit. HMT must either accept the order for all 20000 units or reject it
totally. S3 is exactly like R3 except that its variable manufacturing costs are 700 per
unit (it takes one hour to produce one unit of S3 on the regular machine costs equal
150 per unit.) what product mix should HMT Choose to maximize operating income?
Show your calculations?
Q 2. The northern division of steel craft and furnishing makes and sells tables and beds.
The following estimated revenue and cost information from the division’s activity-based
costing system is available for 2017.
4000 tables 5000 beds Total
Revenue (1250*4000, 2000*5000) 5000000 10000000 15000000
Variable direct material and direct 3000000 5250000 8250000
manufacturing labor cost
Depreciation on equipment used 420000 580000 1000000
exclusively by each product line
Marketing and distribution cost 700000 1350000 2050000
400000 (Fixed) + 7500 per
consignment *100 consignments
fixed general administration cost of 1100000 2200000 3300000
the division allocated to product lines
on the basis of revenues
Allocated corporate office costs 500000 1000000 1500000
allocated to product lines on the basis
of revenues
Total costs 5720000 10380000 16100000
Operating income (loss) (720000) (380000) (1100000)

Additional information includes:

a) On January 1, 2017, the equipment has a book value of 1000000 and zero disposal
value. Any equipment not used will remain idle.
b) Fixed marketing and distribution costs of a product line can be avoided if the line is
discontinued.
c) Fixed general administration costs of the division and corporate office costs will not
change if sales of individual product lines are increased or decreased or if product
lines are added or dropped.

1. On the basis of financial consideration alone, should the northern division discontinue
the tables product line, assuming the released facilities remain idle? Show your
calculations.
2. What would be the effect on the northern division’s operating income if it were to sell
4000 more tables? Assume that to do so the division would have to acquire additional
equipment costing 420000 with one-year useful life and zero terminal disposal value.
Assume further that the fixed marketing and distribution costs would not change but
that the number of consignments would double. Show your calculations.
Q3. Harish Agrawal, a management accountant with the Maruti Udyog, is evaluating whether
a component MTR. 2000 should continue to manufacture by Maruti or purchased from
outside vendor companies. The outside vendor has submitted a bid to manufacture and supply
the 32000 units of MTR. 2000 that Maruti Udyog will need for 2017 at a selling price of 173.
Harish has gathered the following information regarding Maruti’s costs to manufacture 30000
units of MTR-2000 in 2016.
Direct Materials 1950000
Direct manufacturing labor 1200000
Plant space rental 840000
Equipment leasing 360000
Other manufacturing overhead 2250000
Total manufacturing cost 6600000

Harish has also collected the following information related to manufacturing MTR 2000:
- Prices of direct materials used in the production of MTR 2000 are expected to
increase by 8% in 2017.
- Maruti Udyog’s direct manufacturing labor contract cells for a 5% increase in 2017.
- Maruti Udyog can withdraw from the plant space rental agreement without any
penalty. Maruti Udyog will have no need for this space if MTR 2000 is not
manufactured.
- The equipment lease can be terminated by paying 60000.
- 40% of the other manufacturing overhead is considered variable. Variable overhead
changes proportionately with the number of units produced. The fixed component of
other manufacturing cost is expected to remain the same whether or not MTR 2000 is
manufactured.
Pradeep plant manager at Maruti Udyog, indicates to harish that the current performance
of the plant can be significantly improved and that the cost increase he Is assuming are
unlikely to occur. Hence, the analysis should be done assuming cost will be considerably
below current levels, harish know that Pradeep is concerned about outsourcing MTR
2000 because it will mean that some of his close friend will be laid off.
Harish believes that it is unlikely that the plant will achieve the lower costs as Pradeep
describes. He is very confident about the accuracy of the information he has collected, but
he is also unhappy about laying off employees.
1. On the basis of the financial information harish has obtained, should Maruti Udyog
make MTR 2000 or buy it in 2017? Show your calculations.
2. What other factors should Maruti Udyog consider before making a decision?
3. What should harish do in response to Pardeep’s comments?