Minimum Price GTM Ltd.

consists of three departments: grinding, turning, and milling, all of which have the same productive capacity. The overhead budget for the next cost period of 1000 machine hour capacity for each department is as follows: Machine Operation Fixed Costs Direct VC per machine hour Grinding 20000 2.50 Turning 10000 2.00 Milling 7500 3.75 The company wishes to participate in a tender in which there are three contracts- X, Y, and Z. However, as per the tender terms, contracts Y and Z have to be offered as a package and GTM feels that it would not offer the package unless it is as profitable as contract X since capacity can be utilized elsewhere. The works manager has studied the specifications relating to these three contracts and has worked out the following details: Contract X Contract Y Contract Z Direct material Costs 18000 16100 12400 Direct labour cost ( per hour) Grinding 3.00 2.50 4.50 Turning 2.00 2.50 4.00 Milling 1.50 2.00 2.25 Use of Capacity (MH) Grinding 660 400 400 Turning 760 500 420 Milling 864 400 320 It will be necessary to employ three men in each department for the number of hours during which machine facilities are used in the work with respect to each of the three contracts. Required:

(a)

(b)

(c)

Prepare a comparative statement showing the minimum amount at which the firm could afford to accept the contracts. If at least one man (included under direct labour) has to be employed in each department regardless of the level of activity, indicate the amendment to your computation in (a). Assuming that tenders would be accepted if GTM quoted the following price: X Rs.41,000, Y Rs.32,000, and Z Rs. 26,500. Advise the firm what it should do.

Selection of the market segment Asha Electronics (AE) manufactures and supplies high-quality electronic components to reputed manufacturers of electronic goods, mainly consumer durables. It has now developed an excellent product of very distinctive design using most advanced technology. AE has special skill in that it can apply advanced technique to medium-sized quantities. One of the customers of AE has agreed to allow use of its brand name on payment of royalty of 5% of the RSP. AE will sell the product through retailers who will charge a commission of 25% on RSP. These retailers have agreed not to offer trade discount. The marketing-research team of AE has collected the following data detailing the position of products from which the new product will face competition: Category Technology Design Qt. No. of RSP sold(pa) models 1 Good Standard 26000 5 10001400 2 Good Good 4800 4 18002200 3 Advanced Good 800 2 28003400 AE assessed that its direct cost per product will be Rs.900 (excluding royalty and retailers commission). The annual fixed cost has been Rs.6,00,000. You are required to:

(a) (b)

Suggest the market segment, in terms of RSP range, which AE should select to sell its product. Select one particular price from your suggested range at which AE should sell the product, mention any assumption that you have made.

Break even analysis A hospital operates a 40-bed capacity special health care department. The said department levies a charge of Rs.425 per bed-day from the patient. Data relating to fees collected and cost incurred during 2007 are given below: Rs. Fees collected during the year 34,95,625 Variable costs based on patient days 13,57,125 Departmental fixed costs 6,22,500 Allocated administration overhead 10,00,000 Besides the above, nursing staff were employed at Rs.48,000 per annum per nurse as per the following requirements: Annual Patient days No. of nurses required Less than 5000 3 5000-7000 4 7000-9000 6 Above 9000 8 The projections for the year 2008 are as under: (a) The costs (other than allocated overhead) will go up by 10%. (b) The allocated overhead will increase by Rs.2,50,000 per annum. (c) The salary of the nursing staff will increase to Rs.54,000 per annum per nurse. The occupancy rate is not likely to increase in 2008 and consequently the management is actively considering a proposal to

close down the department. In that event, the departmental fixed costs can be avoided. Required: (a) Prepare statements to show the profitability of the department for the year 2007 and 2008 (b) Calculate: a. Break even bed capacity for 2008 b. Increase in fee per bed-day required to justify continuation of the department. Variance Analysis X Ltd. is producing floor covers in roll of standard size measuring 3 meters wide and 30 meters long by feeding raw materials to continuous process machine. The standard mixture fixed for a batch of 900 sq.mts of floor cover is as follows: 2000 kg of material A at Re. 1/kg 800 kg of material B at Rs.1.50/kg 20 gallons of material C at Rs.30/gallon During the period, 1505 standard size rolls were produced from materials issued for 150 batches. The actual usage and the cost materials were: 300,500 kg of material A at Rs. 1.10/kg 1,19,600 kg of material B at Rs.1.65/kg 3,100 gallons of material C at Rs.29.50/gallon Present the figures to management sowing breakup of materials cost variances arising during the period.