Accountancy – ABC Ltd. Produces room coolers

 Q1) ABC Ltd. Produces room coolers. The company is considering whether it should continue to manufacture air circulating fans itself or purchase them from outside. Its annual requirement is 25000 units. An outsider vendor is prepared to supply fans for Rs 285 each. In addition, ABC Ltd will have to incur costs of Rs 1.50 per unit for freight and Rs 10,000 per year for quality inspection, storing etc of the product.

In the most recent year ABC Ltd. Produced 25000 fans at the following total cost :

Material Rs. 50,00,000
Labour Rs. 20,00,000
Supervision & other indirect labour Rs. 2,00,000
Power and Light Rs. 50,000
Depreciation Rs. 20,000
Factory Rent Rs. 5,000
Supplies Rs. 75,000


Power and light includes Rs 20,000 for general heating and lighting, which is an allocation based on the light points. Indirect labour is attributed mainly to the manufacturing of fans. About 75% of it can be dispensed with along with direct labour if manufacturing is discontinued. However, the supervisor who receives annual salary of Rs 75,000 will have to be retained. The machines used for manufacturing fans which have a book value of Rs 3,00,000 can be sold for Rs 1,25,000 and the amount realized can be invested at 15% return. Factory rent is allocated on the basis of area, and the company is not able to see an alternative use for the space which would be released. Should ABC Ltd. Manufacture the fans or buy them?



Q2) Usha Company produces three consumer products : P, Q and R. The management of the company wants to determine the most profitable mix. The cost accountant has supplied the following data.

Usha Company : Sales and Cost Data

Description     Product   Total
    P Q R  
Material Cost per unit          
Quantity (Kg)   1.0 1.2 1.4  
Rate per Kg (Rs)   50 50 50  
Cost per unit (Rs)   50 60 70  
Labour Cost per unit   30 90 90  
Variable Overheads per unit   15 10 25  
Fixed Overheads (Rs .000)         9,175
Current Sales (Units ,000)   100 50 60 210
Projected Sales (Units ,000)   109 55 125 289
Selling Price per unit (Rs)   150 200 270  

Raw material used by the firm is in short supply and the firm can expect a maximum supply of 350 lakh kg for next year. Is the company’s projected sales mix most profitable or can it be changed for the better?


Q3)       DSQ Company Ltd, a diversified company, has three divisions, cement, fertilizers and textiles. The summary of the company’s profit is given below :

  Cement Fertilizer   Textiles Total
Sales 20.0 12.0   18.0 50.0
Less : Variable Cost 8.0 9.6   5.4 23.0
Contribution 12.0 2.4   12.6 27.0
Less : Fixed Cost (allocated to 8.0 4.8   7.2 20.0
divisions  in  proportion  to          
volumes of Sales)          
Profit (Loss) 4.0 (2.4)   5.4 7.0

After allocating the company’s fixed overheads to products the Fertilizers, division incurs a loss of Rs 2.4 crore. Should the company drop this division?

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