COST OF CAPITAL

1. Five years ago, Sona Limited issued 12 per cent irredeemable debentures at ₹ 103, at ₹ 3 premium to their par
value of ₹ 100. The current market price of these debentures is ₹ 94. If the company pays corporate tax at a rate of
35 per cent CALCULATE its current cost of debenture capital?
2. A company issued 10,000, 10% debentures of ₹ 100 each at a premium of 10% on 1.4.2017 to be matured on 1.4.2022.
The debentures will be redeemed on maturity. COMPUTE the cost of debentures assuming 35% as tax rate.
3. A company issued 10,000, 10% debentures of ₹ 100 each at par on 1.4.2012 to be matured on 1.4.2022. The company
wants to know the cost of its existing debt on 1.4.2017 when the market price of the debentures is ₹ 80. COMPUTE
the cost of existing debentures assuming 35% tax rate.
4. Institutional Development Bank(IDB) issued Zero interest deep discount bonds of face value of ₹ 1,00,000 each issued
at ₹ 2500 & repayable after 25 years. COMPUTE the cost of debt if there is no corporate tax.
5. RBML is proposing to sell a 5-year bond of ₹ 5,000 at 8 per cent rate of interest per annum. The bond amount will be
amortised equally over its life. CALCULATE the bond’s present value for an investor if he expects a minimum of 6%
return.
6. A company issued 10,000, 15% Convertible debentures of ₹100 each with a maturity period of 5 years. At maturity
the debenture holders will have the option to convert the debentures into equity shares of the company in the
ratio of 1:10 (10 shares for each debenture). The current market price of the equity shares is ₹12 each and
historically the growth rate of the shares are 5% per annum. Compute the cost of debentures assuming 35% tax
rate.
7. XYZ Ltd. issues 2,000 10% preference shares of ₹ 100 each at ₹ 95 each. The company proposes to redeem the
preference shares at the end of 10th year from the date of issue. CALCULATE the cost of preference share?
8. XYZ & Co. issues 2,000 10% preference shares of ₹ 100 each at ₹ 95 each. CALCULATE the cost of preference
shares.
9. If R Energy is issuing preferred stock at ₹100 per share, with a stated dividend of
10. ₹12, and a floatation cost of 3% then, CALCULATE the cost of preference share?
11. A company has paid dividend of ₹ 1 per share (of face value of ₹ 10 each) last year and it is expected to grow @ 10%
next year. CALCULATE the cost of equity if the market price of share is ₹ 55.
12. Mr. Mehra had purchased a share of Alpha Limited for ₹ 1,000. He received dividend for a period of five years at the
rate of 10 percent. At the end of the fifth year, he sold the share of Alpha Limited for ₹ 1,128. You are required to
COMPUTE the cost of equity as per realised yield approach.
13. Calculate the cost of equity from the following data using realized yield approach:
Year 1 2 3 4 5
Dividend per share 1.00 1.00 1.20 1.25 1.15
Price per share (at the beginning) 9.00 9.75 11.50 11.00 10.60
14. CALCULATE the cost of equity capital of H Ltd., whose risk free rate of return equals 10%. The firm’s beta equals 1.75
and the return on the market portfolio equals to 15%.
15. Face value of equity shares of a company is Rs.10, while current market price is Rs.200 per share. Company is going
to start a new project, and is planning to finance it partially by new issue and partially by retained earnings. You
are required to CALCULATE cost of equity shares as well as cost of retained earnings if issue price will be Rs.190 per
share and floatation cost will be Rs.5 per share. Dividend at the end of first year is expected to be Rs.10 and
growth rate will be 5%.
16. ABC Company provides the following details:
D0=₹ 4.19, P0 = ₹ 50 g = 5%
CALCULATE the cost of retained earnings.
17. ABC Company provides the following details:
Rf = 7% ß = 1.20 Rm - Rf = 6%
CALCULATE the cost of retained earnings based on CAPM method.
18. Cost of equity of a company is 10.41% while cost of retained earnings is 10%. There are 50,000 equity shares of
Rs.10 each and retained earnings of Rs.15,00,000. Market price per equity share is Rs.50. Calculate WACC using
market value weights if there is no other sources of finance.
CALCULATE the WACC using the following data by using:
(a) Book value weights
(b) Market value weights
The capital structure of the company is as under:
 (₹)
Debentures (₹ 100 per debenture) 5,00,000
Preference shares (₹ 100 per share) 5,00,000
Equity shares (₹ 10 per share) 10,00,000
20,00,000
The market prices of these securities are: Debentures ₹ 105 per debenture Preference shares ₹ 110 per
preference share Equity shares ₹ 24 each.
Additional information:
i. ₹ 100 per debenture redeemable at par, 10% coupon rate, 4% floatation costs,
10 year maturity.
ii. ₹ 100 per preference share redeemable at par, 5% coupon rate, 2% floatation cost
and 10 year maturity.
iii. Equity shares has ₹ 4 floatation cost and market price ₹ 24 per share.
The next year expected dividend is ₹ 1 with annual growth of 5%. The firm has practice of paying all earnings in the
form of dividend.
Corporate tax rate is 50%. Assume that floatation cost is to be calculated on face value

19. ABC Ltd. has the following capital structure EXAMINE which is considered to be optimum as on 31st March, 2017.

(₹)
14% Debentures 30,000
11% Preference shares 10,000
Equity Shares (10,000 shares) 1,60,000
2,00,000
The company share has a market price of ₹ 23.60. Next year dividend per share is 50% of year 2017 EPS. The
following is the trend of EPS for the preceding 10 years which is expected to continue in future.

Year EPS (₹) Year EPS (₹)

2008 1.00 2013 1.61
2009 1.10 2014 1.77
2010 1.21 2015 1.95
2011 1.33 2016 2.15
2012 1.46 2017 2.36
The company issued new debentures carrying 16% rate of interest and the current market price of debenture is ₹ 96.
Preference share ₹ 9.20 (with annual dividend of ₹ 1.1 per share) were also issued. The company is in 50% tax bracket.
i. CALCULATE after tax:
1. Cost of new debt
2. Cost of new preference shares
3. New equity share (assuming new equity from retained earnings)
ii. CALCULATE marginal cost of capital when no new shares are issued.
iii. DETERMINE the amount that can be spent for capital investment before new ordinary shares must be sold. Assuming
that retained earnings for next year’s investment are 50 percent of 2017.
iv. COMPUTE marginal cost of capital when the funds exceeds the amount calculated in (C), assuming new equity is
issued at ₹ 20 per share?

20. DETERMINE the cost of capital of Best Luck Limited using the book value (BV) and market value (MV) weights from
the following information:
Sources Book Value Market Value
 (₹) (₹)
Equity shares 1,20,00,000 2,00,00,000
Retained earnings 30,00,000 —
Preference shares 36,00,000 33,75,000
Debentures 9,00,000 10,40,000

Additional information:
i. Equity: Equity shares are quoted at ₹ 130 per share and a new issue priced at ₹ 125 per share will be fully subscribed;
flotation costs will be ₹ 5 per share.
ii. Dividend: During the previous 5 years, dividends have steadily increased from ₹ 10.60 to ₹ 14.19 per share. Dividend
at the end of the current year is expected to be ₹ 15 per share.
iii. Preference shares: 15% Preference shares with face value of ₹ 100 would realize₹ 105 per share.
iv. Debentures: The company proposes to issue 11-year 15% debentures but the yield on debentures of similar maturity
and risk class is 16%; flotation cost is 2%.
v. Tax: Corporate tax rate is 35%. Ignore dividend tax.

21. Gamma Limited has in issue 5,00,000 ₹ 1 ordinary shares whose current ex- dividend market price is ₹ 1.50 per share.
The company has just paid a dividend of 27 paise per share, and dividends are expected to continue at this level
for some time. If the company has no debt capital, COMPUTE the weighted average cost of capital?
22. Masco Limited wishes to raise additional finance of ₹ 10 lakhs for meeting its investment plans. It has ₹ 2,10,000 in
the form of retained earnings available for investment purposes. Further details are as following:
Debt/equity mix 30%/70%
Cost of debt
upto₹ 1,80,000 10% (before tax)
Beyond ₹ 1,80,000 16% (before tax)
Earnings per share Rs. 4
Dividend Payout 50% of the earnigs
Expected growth rate in dividend 10%
Current market price per share Rs. 44
Tax rate 50%
You are required:
(a) To DETERMINE the pattern for raising the additional finance.
(b) To DETERMINE the post-tax average cost of additional debt.
(c) To DETERMINE the cost of retained earnings and cost of equity, and
(d) COMPUTE the overall weighted average after tax cost of additional finance.
23. The following details are provided by the GPS Limited:

(₹)
Equity Share Capital 65,00,000
12% Preference Share Capital 12,00,000
15% Redeemable Debentures 20,00,000
10% Convertible Debentures 8,00,000
The cost of equity capital for the company is 16.30% and Income Tax rate for the company is 30%.
You are required to CALCULATE the Weighted Average Cost of Capital (WACC) of the company.

INVESTMENT DECISION
1. ABC Ltd is evaluating the purchase of a new machinery with a depreciable base of
₹1,00,000; expected economic life of 4 years and change in earnings before taxes and depreciation of ₹45,000 in
year 1, ₹30,000 in year 2, ₹25,000 in year 3 and ₹35,000 in year 4. Assume straight-line depreciation and a 20% tax
rate. You are required to COMPUTE relevant cash flows.
2. A project requiring an investment of ₹10,00,000 and it yields profit after tax and depreciation which is as follows:
Years Profit after tax and depreciation (₹)
1 50,000
2 75,000
3 1,25,000
4 1,30,000
5 80,000
Total 4,60,000
Suppose further that at the end of the 5th year, the plant and machinery of the project can be sold for ₹ 80,000.
DETERMINE Average Rate of Return.
3. COMPUTE the net present value for a project with a net investment of ₹1,00,000 and net cash flows year one is
₹55,000; for year two is ₹80,000 and for year three is ₹ 15,000. Further, the company’s cost of capital is 10%? [PVIF
@ 10% for three years are 0.909, 0.826 and 0.751]
4. ABC Ltd is a small company that is currently analyzing capital expenditure proposals for the purchase of equipment;
the company uses the net present value technique to evaluate projects. The capital budget is limited to ₹ 500,000
which ABC Ltd believes is the maximum capital it can raise. The initial investment and projected net cash flows for
each project are shown below. The cost of capital of ABC Ltd is 12%. You are required to COMPUTE the NPV of the
different projects.

Project A Project B Project C Project D

Initial Investment 200,000 190,000 250,000 210,000
Project Cash Inflows
Year 1 50,000 40,000 75,000 75,000
2 50,000 50,000 75,000 75,000
3 50,000 70,000 60,000 60,000
4 50,000 75,000 80,000 40,000
5 50,000 75,000 100,000 20,000
5. Suppose we have three projects involving discounted cash outflow of ₹5,50,000, ₹ 75,000 and ₹1,00,20,000
respectively. Suppose further that the sum of discounted cash inflows for these projects are ₹6,50,000, ₹95,000
and ₹1,00,30,000 respectively. CALCULATE the desirability factors for the three projects.
6. A Ltd. is evaluating a project involving an outlay of ₹10,00,000 resulting in an annual cash inflow of ₹ 2,50,000 for 6
years. Assuming salvage value of the project is zero; DETERMINE the IRR of the project.
7. CALCULATE the internal rate of return of an investment of ₹1,36,000 which yields the following cash inflows:
Year Cash Inflows (in ₹)
1 30,000
2 40,000
3 60,000
4 30,000
5 20,000
8. A company proposes to install machine involving a capital cost of ₹3,60,000. The life of the machine is 5 years and
its salvage value at the end of the life is nil. The machine will produce the net operating income after depreciation
of ₹68,000 per annum. The company's tax rate is 45%.
The Net Present Value factors for 5 years are as under:
Discounting rate 14 15 16 17 18
Cumulative factor 3.43 3.35 3.27 3.20 3.13
You are required to CALCULATE the internal rate of return of the proposal.
9. An investment of ₹1,36,000 yields the following cash inflows (profits before depreciation but after tax). DETERMINE
MIRR considering 8% as cost of capital.
Year ₹
1 30,000
2 40,000
3 60,000
 4 30,000
5 20,000
1,80,000
10. Suppose there are two Project A and Project B are under consideration. The cash flows associated with these
projects are as follows:
Year Project A Project B
0 (1,00,000) (3,00,000)
1 50,000 1,40,000
2 60,000 1,90,000
3 40,000 1,00,000
Assuming Cost of Capital equal to 10% IDENTIFY which project should be accepted as per NPV and IRR method?
11. Suppose ABC Ltd. is considering two Project X and Project Y for investment. The cash flows associated with these
projects are as follows:
Year Project X Project Y
0 (2,50,000) (3,00,000)
1 2,00,000 50,000
2 1,00,000 1,00,000
3 50,000 3,00,000
Assuming Cost of Capital be 10%, IDENTIFY which project should be accepted as per NPV Method and IRR Method.
12. Suppose MVA Ltd. is considering two Project A and Project B for investment. The cash flows associated with these
projects are as follows:
Year Project A Project B
0 (5,00,000) (5,00,000)
1 7,50,000 2,00,000
2 0 2,00,000
3 0 7,00,000
Assuming Cost of Capital equal to 12%, ANALYSE which project should be accepted as per NPV Method and IRR
Method?
13. Shiva Limited is planning its capital investment programme for next year. It has five projects all of which give a
positive NPV at the company cut-off rate of 15 percent, the investment outflows and present values being as
follows:

Project Investment NPV @ 15%

₹000 ₹000
A (50) 15.4
B (40) 18.7
C (25) 10.1
D (30) 11.2
E (35) 19.3
The company is limited to a capital spending of ₹1,20,000.
You are required to ILLUSTRATE the returns from a package of projects within the capital spending limit. The
projects are independent of each other and are divisible (i.e., part- project is possible).
14. R plc is considering modernizing its production facilities and it has two proposals under consideration. The expected
cash flows associated with these projects and their NPV as per discounting rate of 12% and IRR is as follows:
Year Cash Flow
Project A (₹) Project B (₹)
0 (40,00,000) (20,00,000)
1 8,00,000 7,00,000
2 14,00,000 13,00,000
3 13,00,000 12,00,000
4 12,00,000 0
5 11,00,000 0
6 10,00,000 0
NPV @12% 6,49,094 5,15,488
IRR 17.47% 25.20%
IDENTIFY which project should R plc accept?
15. Alpha Company is considering the following investment projects:
Cash Flows (₹)
Projects C0 C1 C2 C3
A -10,000 +10,000
B -10,000 +7,500 +7,500
C -10,000 +2,000 +4,000 +12,000
D -10,000 +10,000 +3,000 +3,000
ANALYSE the rank the projects according to each of the following methods: (i) Payback, (ii) ARR, (iii) IRR and (iv)
NPV, assuming discount rates of 10 and 30 per cent.
Assuming the projects are independent, which one should be accepted? If the projects are mutually exclusive,
IDENTIFY which project is the best?
16. The expected cash flows of three projects are given below. The cost of capital is 10 per cent.
CALCULATE the payback period, net present value, internal rate of return and accounting rate of return of each
project.
IDENTIFY the rankings of the projects by each of the four methods.
(figures in ‘000)
Period Project A (₹) Project B (₹) Project C (₹)
0 (5,000) (5,000) (5,000)
1 900 700 2,000
2 900 800 2,000
3 900 900 2,000
4 900 1,000 1,000
5 900 1,100
6 900 1,200
7 900 1,300
8 900 1,400
9 900 1,500
10 900 1,600
17. Lockwood Limited wants to replace its old machine with a new automatic machine. Two models A and B are
available at the same cost of ₹5 lakhs each. Salvage value of the old machine is ₹1 lakh. The utilities of the existing
machine can be used if the company purchases A. Additional cost of utilities to be purchased in that case are ₹1
lakh. If the company purchases B then all the existing utilities will have to be replaced with new utilities costing ₹2
lakhs. The salvage value of the old utilities will be ₹0.20 lakhs. The earnings after taxation are expected to be:
(cash in-flows of)
Year A₹ B₹ P.V. Factor
@ 15%
1 1,00,000 2,00,000 0.87
2 1,50,000 2,10,000 0.76
3 1,80,000 1,80,000 0.66
4 2,00,000 1,70,000 0.57
5 1,70,000 40,000 0.50
Salvage Value 50,000 60,000
at the end of Year 5
The targeted return on capital is 15%. You are required to compute for two machines separately net present value,
discounted payback period and desirability factor and advice which of the machines is to be selected.
18. Hindliver Company is considering a new product line to supplement its range of products. It is anticipated that
the new product line will involve cash investments
of ₹7,00,000 at time 0 and ₹10,00,000 in year 1. After-tax cash inflows of ₹2,50,000 are expected in year 2,
 ₹3,00,000 in year 3, ₹3,50,000 in year 4 and ₹4,00,000 each year thereafter through year 10. Although the product
line might be viable after year 10, the company prefers to be conservative and end all calculations at that time.
i. If the required rate of return is 15 per cent, COMPUTE net present value of the project? Is it
acceptable?
ii. ANALYSE What would be the case if the required rate of return were 10 per cent?
iii. CALCULATE its internal rate of return?
iv. COMPUTE the project’s payback period?

19. Elite Cooker Company is evaluating three investment situations: (1) produce a new line of aluminium
skillets, (2) expand its existing cooker line to include several new sizes, and (3) develop a new, higher-
quality line of cookers. If only the project in question is undertaken, the expected present values and the
amounts of investment required are:

Project Investment required Present value of Future Cash- Flows

₹ ₹
1 2,00,000 2,90,000
2 1,15,000 1,85,000
3 2,70,000 4,00,000
If projects 1 and 2 are jointly undertaken, there will be no economies; the investments required and present values
will simply be the sum of the parts. With projects 1 and 3, economies are possible in investment because one of the
machines acquired can be used in both production processes. The total investment required for projects 1 and 3
combined is ₹4,40,000. If projects 2 and 3 are undertaken, there are economies to be achieved in marketing and
producing the products but not in investment. The expected present value of futire cash flows for the projects 2
and 3 is Rs 620000. If all the three projects are undertaken simultaneously, the economies noted will still hold.
However, a Rs. 125000 extensions on the plant will be necessary, as space is not available for all three projects.
Analyze which project/projects should be chosen?
20. Cello Limited is considering buying a new machine which would have a useful economic life of five years, a cost of
₹1,25,000 and a scrap value of ₹30,000, with 80 per cent of the cost being payable at the start of the project and 20
per cent at the end of the first year. The machine would produce 50,000 units per annum of a new product with an
estimated selling price of ₹3 per unit. Direct costs would be ₹1.75 per unit and annual fixed costs, including
depreciation calculated on a straight- line basis, would be ₹40,000 per annum.
In the first year and the second year, special sales promotion expenditure, not included in the above costs, would
be incurred, amounting to ₹10,000 and ₹15,000 respectively.
ANALYSE the project using the NPV method of investment appraisal, assuming the company’s cost of capital to be
10 percent.

WORKING CAPITAL MANAGEMENT

1. The relevant financial data for Xavier Limited for the year ended 20X1 is given under:
Profit and loss (Rs. Balance sheet data Balance sheet data
account data millions) beginning of 20X1 end of 20X1
Sales 80 Inventory 9 12
Cost of goods sold 56 Accounts 12 16
receivable
Accounts 7 10
payable
What is the length of operating cycle? The cash cycle? Assume 365days in a year.

2. The relevant financial data for New Horizon Limited for the year ended 20X1 is given under:
Profit and loss (Rs. Balance sheet data Balance sheet data
account data millions) beginning of 20X1 end of 20X1
Sales 800 Inventory 96 102
Cost of goods sold 720 Accounts 86 90
receivable
 Accounts 56 60
payable
What is the length of operating cycle? The cash cycle? Assume 365days in a year.
3. From the following data, compute the duration of the operating cycle for each of years:
Year1 (₹) Year 2 (₹)
Stock:
Raw materials 20,000 27,000
Work-in-progress 14,000 18,000
Finished goods 21,000 24,000
Purchases 96,000 1,35,000
Cost of goods sold 1,40,000 1,80,000
Sales 1,60,000 2,00,000
Debtors 32,000 50,000
Creditors 16,000 18,000
Assume 360 days per year for computational purposes.

4. From the following data, compute the duration of the operating cycle for each of years: Rs.
Year1 Year 2
Stock:
Raw materials 20,000 27,000
Work-in-progress 14,000 18,000
Finished goods 21,000 24,000
Purchases 96,000 1,35,000
Cost of goods sold 1,40,000 1,80,000
Sales 1,60,000 2,00,000
Debtors 32,000 50,000
Creditors 16,000 18,000
Assume 360 days per year for computational purposes.
5. A company has prepared its annual budget, relevant details of which are reproduced below:

(a) Sales ₹ 46.80 lakhs (25% cash sales and balance on credit) 78,000 units
(b) Raw material cost 60% of sales value
(c) Labour cost ₹ 6 per unit
(d) Variable overheads ₹ 1 per unit
(e) Fixed overheads ₹ 5 lakhs (including
₹ 1,10,000 as depreciation)
(f) Budgeted stock levels:
Raw materials 3 weeks
Work-in-progress 1 week (Material 100%, Labour
& overheads 50%)
Finished goods 2 weeks
(g) Debtors are allowed credit for 4 weeks
(h) Creditors allow 4 weeks credit
 (i) Wages are paid bi-weekly, i.e. by the 3rd week and by the 5th week for
the 1st & 2nd weeks and the 3rd & 4th weeks respectively

(j) Lag in payment of overheads 2 weeks

(k) Cash-in-hand required ₹ 50,000
Prepare the Working Capital budget for a year for the company, making whatever assumptions that you may find
necessary.

6. A company plans to manufacture and sell 400 units of a domestic appliance per month at a price of ₹ 600 each.
The ratio of costs to selling price are as follows:

(% of selling price)
Raw materials 30%
Packing materials 10%
Direct labour 15%
Direct expense 5%
Fixed overheads are estimated at ₹ 4,32,000 per annum.
The following norms are maintained for inventory management:
Raw materials 30 days
Packing materials 15 days
Finished goods 200 units
Work-in-progress 7 days
Other particulars are given below:
(a) Credit sales represent 80% of total sales and the dealers enjoy 30 working days credit. Balance 20% are cash
sales.
(b) Creditors allow 21 working days credit for payment.
(c) Lag in payment of overheads and expenses is 15 working days.
(d) Cash requirements to be 12% of net working capital.
(e) Working days in a year are taken as 300 for budgeting purpose. Prepare a Working Capital
requirement forecast for the budget year.

7. A Company provided the following data:

Cost per unit (₹)
Raw materials 52.00
Direct labour 19.50
Overheads 39.00
Total Cost 110.50
Profit 19.50
Selling Price 130.00
The following additional information is available:
(a) Average raw materials in stock: one month.
(b) Average materials in process: half-a-month
(c) Average finished goods in stock: one month
(d) Credit allowed by suppliers: one month
(e) Credit allowed to debtors: two months.
(f) ) Time lag in payment of wages: one and a half weeks.
(g) Overheads: one month
(h) One-fourth of sales are on cash basis.
(i) Cash balance is expected to be ₹ 1,20,000.
You are required to prepare a statement showing the Working Capital needed to finance a level of activity of
70,000 units of annual output. The production is carried throughout the year on even basis and wages and overheads
accrue similarly. (Calculation be made on the basis of 30 days a month and 52 weeks a year).
8. From the following details, prepare an estimate of the requirement of Working Capital:

Production 60,000 units

Selling price per unit ₹5
Raw material 60% of selling price
Direct wages 10% of selling price
Overheads 20% of selling price
Materials in hand 2 months requirement
Production Time 1 month
Finished goods in Stores 3 months
Credit for Material 2 months
Credit allowed to Customers 3 months
Average Cash Balance ₹ 20,000
Wages and overheads are paid at the beginning of the month following/In production all the required
materials are charged in the initial stage and wages and overheads accrue evenly.
What is the effect of Double Shift Working on the requirement of Working capital?

9. Solaris Ltd. sells goods in domestic market at a gross profit of 25 percent, not counting on depreciation as a part of
the ‘cost of goods sold’. Its estimates for next year are as follows:
Amount (₹ in lakhs)

Sales - Home at 1 month’s credit 1,200

Exports at 3 months’ credit, selling price 10 percent below home price 540
Materials used (suppliers extend 2 months’ credit) 450
Wages paid, ½ month in arrears 360
Manufacturing expenses, paid 1 month in arrears 540
Administrative expenses, paid 1 month in arrears 120
Sales promotion expenses (payable quarterly - in advance) 60
Income - tax payable in 4 instalments of which one falls in the next financial year 150
 The company keeps 1 month’s stock of each of raw materials and finished goods and believes in keeping ₹20 lakh as
cash. Assuming a 15 percent safety margin, ascertain the estimated Working Capital requirement of the company
(ignore work -in-process).

10. Camellia Industries Ltd. is desirous of assessing its Working Capital requirements for the next year. The finance
manager has collected the following information for the purpose.
Estimated cost per unit of finished product (₹)
Raw materials 90
Direct labour 50
Manufacturing and administrative overhead (Excluding depreciation) 40
Depreciation 20
Selling overheads 30
Total Cost 230
The product is subject to excise duty of 10 percent (levied on cost of production) and is sold at ₹ 300 per unit.
Additional information:
(i) Budgeted level of activity is 1,20,000 units of output for the next year.
(ii) Raw material cost consists of the following:
Pig iron 65 per unit
Ferro alloys 15 per unit
Cast iron borings 10 per unit
(iii) Raw materials are purchased from different suppliers, extending different credit period.
Pig iron 2 months
Ferro alloys ½ months Cast iron borings 1 month.
(iv) Product is in process for a period of 1/2 month. Production process requires full unit (100 percent) of pig iron and
ferroalloys in beginning of production: cost iron boring is required only to the extent of 50 percent in the beginning
and the remaining is needed at a uniform rate during the process. Direct labour and other over- heads accrue similarly
at a uniform rate throughout production process.
(v) Past trends indicate that the pig iron is required to be stored for 2 months and other materials for 1 month.
(vi) Finished goods are in stock for a period of 1 month.
(vii) It is estimated that one-fourth of total sales are on cash basis and the remaining sales are on credit. The past
experience of the firm has been to collect the credit sales in 2 months.
(viii) Average time-lag in payment of all overheads is 1 month and ½ month in the case of direct labour.
(ix) Desired cash balance is to be maintained at ₹ 10 lakh.
You are required to determine the amount of Net Working Capital of the firm. State your assumptions, if any.
 Ratio Analysis
1. Following is the Profit and Loss Account and Balance Sheet of PKJ Ltd. Redraft them for the purpose of analysis
and calculate the following ratios:
1) Gross Profit Ratio
2) Overall Profitability Ratio
3) Current Ratio
4) Debt-Equity Ratio
5) Stock-Turnover Ratio
6) Finished goods Turnover Ratio
7) Liquidity ratio

Dr. Profit and Loss

A/c Cr.

Particulars Amount (₹) Particulars Amount (₹)

Opening stock of finished goods 1,00,000 Sales 10,00,000
Opening stock of raw material 50,000 Closing stock of raw material 1,50,000
Purchase of raw material 3,00,000 Closing stock of finished goods 1,00,000
Direct wages 2,00,000 Profit on sale of shares 50,000
Manufacturing Exp 1,00,000
Administration Exp 50,000
Selling & distribution Exp 50,000
Loss on sale of Plant 55,000
Interest on debentures 10,000
Net Profit 3,85,000
13,00,000 13,00,000

Balance Sheet

Liabilities Amount (₹) Assets Amount (₹)

Equity share capital 1,00,000 Fixed assets 2,50,000
Preference share capital 1,00,000 Stock of raw material 1,50,000
Reserves 1,00,000 Stock of finished goods 1,00,000
Debentures 2,00,000 Bank balance 50,000
Sundry Creditors 1,00,000 Debtors 1,00,000
Bills Payable 50,000
6,50,000 6,50,000

2. A company has a profit margin of 20% and asset turnover of 3 times. What is the company’s return on investment?
How will this return on investment vary if?
(i) Profit margin is increased by 5%?
(ii) Asset turnover is decreased to 2 times?
(iii) Profit margin is decreased by 5% and asset turnover is increase to 4 times?

3. The following is the Balance Sheet of M/S Yamuna Enterprise for the year ended 31-12-2015:
Balance Sheet as on 31st December, 2015

Liabilities Amount (₹) Assets Amount (₹)

Equity share capital 1,00,000 Cash in hand 2,000
12% Preference share capital 1,00,000 Cash in bank 10,000
 16% Debentures 40,000 Bills Receivable 30,000
18% Public debts 20,000 Investment 20,000
Bank overdraft 40,000 Debtors 70,000
Creditors 60,000 Stock 40,000
Outstanding Creditors 7,000 Furniture 30,000
Proposed dividends 10,000 Machinery 1,00,000
Reserves 1,50,000 Land & Building 2,20,000
Provision for taxation 20,000 Goodwill 35,000
Profit & Loss Account 20,000 Preliminary expenses 10,000
5,67,000 5,67,000
During the year provision for taxation was ₹ 20,000. Dividend was proposed at ₹ 10,000. Profit carried forward
from
the last year was ₹ 15,000. You are required to calculate:
a) Short term solvency ratios, and
b) Long term solvency ratios.

4. Following is the Balance Sheet of Sun Ltd., as on December 31, 2015.

Liabilities Amount (₹) Assets Amount (₹)

Equity Share Capital 20,000 Goodwill 12,000

Capital Reserves 4,000 Fixed Assets 28,000
8% Loan on mortgage 16,000 Stocks 6,000
Trade creditors 8,000 Debtors 6,000
Bank over draft 2,000 Investments 2,000
Taxation: Cash in hand 6,000
Current 2,000
Future 2,000
Profit & Loss A/c:
PAT for the year
Less: Transfer to: 12,000
Reserves 4,000
Dividend 2,000 6,000
60,000 60,000
Sales amounted to ₹1,20,000. Calculate ratio for (a) testing liquidity, and (b) testing solvency.

5. With the help of the following information complete the Balance Sheet of PKJ Ltd.

Equity share capital ₹ 1,00,000

The relevant ratios of the company are as follows:
Current debt to total debt 40
Total debt to owner’s equity 60
Fixed assets to owner’s equity 60
Total assets turnover 2 Times
Inventory turnover 8 Times
6. Using the following data, prepare the Balance Sheet:

Gross profits ₹ 54,000

Shareholders Funds ₹ 6,00,000
Gross Profit Margin 20%
Credit Sales to Total Sales 80%
Total Assets turnover 0.3 times
Inventory turnover 4 times
Average collection period (a 360 days year) 20 days
Current ratio 1.8
Long-term Debt to Equity 40%

7. PKJ Limited has the following Balance Sheets as on March 31, 2016 and March 31, 2015:
Balance Sheet
(₹ in Lakhs)
Particulars March 31, 2015 March 31, 2016
Source of Funds
Shareholders Funds 2,377 1,472
Loan Funds 3,570 3,083
5,947 4,555
Application of Funds
Fixed Assets 3,466 2,900
Cash and bank 489 470
Debtors 1,495 1,168
Stock 2,867 2,407
Other Current Assets 1,567 1,404
Less: Current Liabilities (3,937) (3,794)
5,947 4,555

The Income Statement of the PKJ Ltd. for the year ended is as follows:
(₹ in Lakhs)
March 31, 2015 March 31, 2016
Sales 22,165 13,882
Less: Cost of Goods sold 20,860 12,544
Gross Profit 1,305 1,338
Less: Selling, General and Administrative expenses 1,135 752
Earning before Interest and Tax (EBIT) 170 586
Less: Interest Expenses 113 105
Profits before Tax 57 481
Less: Tax 23 192
Profits after Tax (PAT) 34 289

Required:
1. Calculate for the year 2015-16:
a) Inventory Turnover Ratio
b) Financial Leverage
c) Return on Investment (ROI)
d) Return on Equity (ROE)
e) Average Collection period.
2. Give a brief comment on the Financial Position of PKJ Limited.

8. The following figures and ratios are related to a company:

(a) Sales for the year (all credit) ₹ 30,00,000

(b) Gross Profit ratio 25 per cent
(c) Fixed assets turnover (basis on cost of goods sold) 1.5
(d) Stock turnover (basis on cost of goods sold) 6
(e) Liquid ratio 1:1
(f ) Current ratio 1.5 : 1
(g) Debtors collection period 2 months
(h) Reserve and surplus to share capital 0.6 : 1
(i) Capital gearing ratio 0.5
(j) Fixed assets to net worth 1.20 : 1
You are required to prepare Balance Sheet of the company on the basis of above details.

9. PKJ Limited has made plans for the next year 2015-16. It is estimated that the company will employ total assets of ₹
25,00,000; 30% of assets being financed by debt at an interest cost of 9% p.a. The direct costs for the year are estimated
at ₹ 15,00,000 and all other operating expenses are estimated at ₹ 2,40,000. The sales revenue are estimated at ₹
22,50,000. Tax rate is assumed to be 40%.
Required to calculate:
(a) Net profit margin
(b) Return on Assets
(c) Asset turnover
(d) Return on equity

10. With the help of the following ratios regarding Indu Films draw the Balance Sheet of the company for the year 2015:

Current Ratio 2.5

Liquidity ratio 1.5
Net working capital ₹ 3,00,000
Stock turnover ratio (cost of sales /closing stock) 6 times
Gross profit ratio 20%
Fixed Assets turnover ratio (on cost of sales) 2 times
Debt collection period 2 months
Fixed Assets to share holders net worth 0.80
Reserve and surplus to capital 0.5

Funds Flow Statement

1. From the following Balance Sheet of PKJ Ltd., Prepare Funds Flow Statement for 2016.
₹ ‘000
Liabilities 31-3-15 31-3-16 Assets 31-3-15 31-3-16
Equity Share Capital 150 200 Goodwill 50 40
9% Redeemable Preference Share capital 75 50 Land & Buildings 100 85
Capital Reserve — 10 Plant & Machinery 40 100
 General Reserve 20 25 Investments 10 15
Profit & Loss Account 15 24 Sundry Debtors 70 85
Proposed Dividend 21 25 Stock 39 55
Sundry Creditors 13 24 Bills Receivable 10 15
Bills Payable 10 8 Cash in hand 7 5
Liability for Expenses 15 18 Cash at bank 5 4
Provision for tax 20 25 Preliminary Exp. 8 5
339 409 339 409
Additional information:
1. A part of land was sold out in 2016, and the profit was credited to Capital Reserve.
2. A machine has been sold for ₹5,000 (written down value of the machinery was ₹6,000). Depreciation of ₹5,000 was
charged on plant in 2016.
3. An interim dividend of ₹10,000 has been paid in 2016.
4. An Amount of ₹1,000 has been received as dividend on investment in 2016.

2. The Balance Sheets of A, B, & C Co. Ltd. as at the end of 2015 and 2016 are given below:

LIABILITIES 2015 (₹) 2016 (₹) ASSETS 2015 (₹) 2016 (₹)
Share Capital 1,00,000 1,50,000 Freehold land 1,00,000 1,00,000
Share premium --- 5,000 Plant at cost 1,04,000 1,00,000
General Reserve 50,000 60,000 Furniture at cost 7,000 9,000
Profit & Loss Account 10,000 17,000 Investments 60,000 80,000
6% Debentures 70,000 50,000 Debtors 30,000 70,000
Provision for Depreciation on Plant 50,000 56,000 Stock 60,000 65,000
Provision for Dep. on Furniture 5,000 6,000 Cash 30,000 45,000
Provision for taxation 20,000 30,000
Sundry Creditors 86,000 95,000
3,91,000 4,69,000 3,91,000 4,69,000
A plant purchased for ₹ 4,000 (Depreciation ₹ 2,000) was sold for Cash for ₹ 800 on September 30, 2015. On June 30,
2015 an item of furniture was purchased for ₹ 2,000. These were the only transactions concerning fixed assets during
2015. A dividend of 22½ % on original shares was paid. You are required to prepare funds Flow Statement and verify
the results by preparing a schedule of changes in Working Capital.

3. From the Balance Sheet of A Ltd., Please prepare:

A. A Statement of changes in the Working Capital.
B. Funds Flow Statement.
BALANCE SHEET

31st March 31st March

LIABILITIES 2015 (₹) 2016 (₹) ASSETS 2015 (₹) 2016 (₹)
Equity Share Capital: 3,00,000 4,00,000 Goodwill 1,15,000 90,000
8% Preference share capital 1,50,000 1,00,000 Land & Buildings 2,00,000 1,70,000
P & L A/c 30,000 48,000 Plant 80,000 2,00,000
General Reserve 40,000 70,000 Debtors 1,60,000 2,00,000
Proposed Dividend 42,000 50,000 Stock 77,000 1,09,000
Creditors 55,000 83,000 Bills Receivable 20,000 30,000
Bills Payable 20,000 16,000 Cash in hand 15,000 10,000
Provision for Taxation 40,000 50,000 Cash at Bank 10,000 8,000
 6,77,000 8,17,000 6,77,000 8,17,000
Following is the additional information available:
(i) Depreciation of ₹ 10,000 and ₹ 20,000 have been charged on Plant and Land and Buildings respectively in 2016.
(ii) Interim dividend of ₹ 20,000 has been paid in 2016.

4. From the following figures, prepare a statement showing the changes in the Working Capital and Funds Flow
Statement during the year 2015.

ASSETS: Dec.31, 2014 Dec.31, 2015

Fixed Assets (net) ₹ 5,10,000 6,20,000
Investments 30,000 80,000
Current Assets 2,40,000 3,75,000
Discount on debentures 10,000 5,000
7,90,000 10,80,000
Liabilities:
Equity share capital 3,00,000 3,50,000
Preference share capital 2,00,000 1,00,000
Debentures 1,00,000 2,00,000
Reserves 1,10,000 2,70,000
Provision for doubtful debts 10,000 15,000
Current Liabilities 70,000 1,45,000
7,90,000 10,80,000
You are informed that during the year:
(a) A machine costing ₹ 70,000 book value ₹ 40,000 was disposed of for ₹ 25,000.
(b) Preference share redemption was carried out at a premium of 5% and
(c) Dividend at 15% was paid on equity shares for the year 2014.

Further:
1. The provision for depreciation stood at ₹ 1,50,000 on 31.12.14 and at ₹ 1,90,000 on 31.12.15; and
2. Stock which was valued at ₹90,000 as on 31.12.14; was written up to its cost, ₹ 1,00,000 for preparing Profit and Loss
account for the year 2015.

5. The directors of Chintamani Ltd. present you with the Balance Sheets as on 30th June, 2015 and 2016 and ask you to
prepare statements which will show them what has happened to the money which came into the business during the
year 2016.

(₹) (₹)
Liabilities: 30.6.15 30.6.16
Authorised Capital 15,000 shares of ₹ 100 each 15,00,000 15,00,000
Paid up capital 10,00,000 14,00,000
Debentures (2016) 4,00,000 ---
General Reserve 60,000 40,000
P & L Appropriation A/c 36,000 38,000
Provision for the purpose of final dividends 78,000 72,000
Sundry Trade Creditors 76,000 1,12,000
Bank Overdraft 69,260 1,29,780
Bills Payable 40,000 38,000
Loans on Mortgage – 5,60,000
 17,59,260 23,89,780
Assets
Land & Freehold Buildings 9,00,000 9,76,000
Machinery and Plant 1,44,000 5,94,000
Fixtures and Fittings 6,000 5,500
Cash in hand 1,560 1,280
Sundry Debtors 1,25,600 1,04,400
Bills Receivable 7,600 6,400
Stock 2,44,000 2,38,000
Prepayments 4,500 6,200
Share in other companies 80,000 2,34,000
Goodwill 2,40,000 2,20,000
Preliminary expenses 6,000 4,000
17,59,260 23,89,780

You are given the following additional information:

(a) Depreciation has been charged (i) on Freehold Buildings @ 2½% p.a. on cost ₹10,00,000. (ii) on Machinery and Plant
₹32,000 (iii) on Fixtures and Fittings @5% on cost, ₹10,000. No depreciation has been written off on newly acquired
Building and Plant and Machinery.
(b) A piece of land costing ₹1,00,000 was sold in 2016 for ₹2,50,000. The sale proceeds was credited to Land and Buildings.
(c) Shares in other companies were purchased and dividends amounting to ₹6,000 declared out of profits made prior to
purchase has received and used to write down the investment (shares).
(d) Goodwill has been written down against General Reserve.
(e) The proposed dividend for the year ended 30th June 2015 was paid and, in additions, an interim dividend,
₹52,000 was paid.

6. The following is the Balance Sheets of the Andhra Industrial Corporation Ltd. as on 31st December 2015 and 2016.
BALANCE SHEET

Assets: 2015 2016

Fixed Assets: Property 1,48,500 1,44,250
Machinery 1,12,950 1,26,200
Goodwill ---- 10,000
Current Assets: Stock 1,10,000 92,000
Trade Debtors 86,160 69,430
Cash at Bank 1,500 11,000
Pre-payments 3,370 1,000
4,62,480 4,53,880
Liabilities:
Shareholders’ funds: Paid up Capital 2,20,000 2,70,000
Reserves 30,000 40,000
Profit and Loss Account 39,690 41,220
Current Liabilities: Creditors 39,000 41,660
Bills Payable 33,790 11,000
Bank Overdraft 60,000 –
Provision for taxation 40,000 50,000
 4,62,480 4,53,880
During the year ended 31st December, 2016, a divided of ₹ 26,000 was paid and assets of another company were
purchased for ₹ 50,000 payable in fully paid-up shares. Such assets purchased were:
Stock ₹ 21,640; Machinery ₹ 18,360; and Goodwill ₹ 10,000. In addition, Plant at a cost of ₹ 5,650 was purchased
during the year; depreciation on Property ₹ 4,250; on Machinery ₹ 10,760. Income tax during the year amounting to ₹
28,770 was charged to provision for taxation. Net profit for the year before tax was ₹ 76,300.
Prepare Funds Flow Statement for the year 2016.

7. The following is the Balance Sheet of Gama Limited for the year ending March 31, 2015 and March 31, 2016;

Particulars 2015 (₹) 2016 (₹)

Capital and Liabilities
Share Capital 6,75,000 7,87,500
General Reserves 2,25,000 2,81,250
Capital Reserve (Profit on Sale of Investment) -- 11,250
Profit & Loss Account 1,12,500 2,25,000
15% Debentures 3,37,500 2,25,000
Accrued Expenses 11,250 13,500
Creditors 1,80,000 2,81,250
Provision for Dividends 33,750 38,250
Provision for Taxation 78,750 85,500
Total 16,53,750 19,48,500
Assets
Fixed Assets 11,25,000 13,50,000
Less: Accumulated depreciation 2,25,000 2,81,250
Net Fixed Assets 9,00,000 10,68,750
Long – Term Investments (at cost) 2,02,500 2,02,500
Stock (at cost) 2,25,000 3,03,750
Debtors (net of provision for doubtful debts of ₹ 45,000 and ₹ 56,250 respectively for 2,53,125 2,75,625
2015 and 2016 respectively)
Bills receivables 45,000 73,125
Prepaid Expenses 11,250 13,500
Miscellaneous Expenditure 16,875 11,250
Total 16,53,750 19,48,500

Additional Information:
1. During the year 2015-16, fixed assets with a net book value of ₹11,250 (accumulated depreciation, ₹ 33,750)
was sold for ₹ 9,000.
2. During the year 2015-16, Investments costing ₹90,000 were sold, and also Investments costing ₹90,000 were
purchased.

3. Debentures were retired at a Premium of 10%.

4. Tax of ₹61,875 was paid for 2015-16.
5. During the year 2015-16, bad debts of ₹ 15,750 were written off against the provision for Doubtful Debt ac- count.
6. The proposed dividend for 2007-2008 was paid in 2015-16.
Required:
Prepare a Fund Flow Statement (Statement of changes in Financial Position on working capital basis) for the year
ended March 31, 2016.
Cash flow statement
1. From the information contained in Income Statement and Balance Sheet of ‘A’ Ltd, prepare Cash Flow Statement.
Income Statement for the year ended March 31, 2016

(₹)
Net Sales (A) 2,52,00,000
Less:
Cash cost of sales 1,98,00,000
Depreciation 6,00,000
Salaries and Wages 24,00,000
Operating Expenses 8,00,000
Provision for Taxation 8,80,000
(B) 2,44,80,000
Net Operating Profit (A – B) 7,20,000
Non-recurring Income – Profits on sale of equipment 1,20,000
8,40,000
Retained earnings and Profits brought forward 15,18,000
23,58,000
Dividends declared and paid during the year 7,20,000
Profit and Loss A/c balance as on March 31, 2016 16,38,000
Balance Sheet as on

(₹) (₹)
Assets March 31, 2015 March 31, 2016

Fixed Assets:
Land 4,80,000 9,60,000
Buildings and Equipment 36,00,000 57,60,000
Current Assets:
Cash 6,00,000 7,20,000
Debtors 16,80,000 18,60,000
Stock 26,40,000 9,60,000
Advances 78,000 90,000
90,78,000 1,03,50,000
Balance Sheet as on

(₹) (₹)
Liabilities and Equity March 31, 2015 March 31, 2016
Share Capital 36,00,000 44,40,000
Surplus in Profit and Loss A/c 15,18,000 16,38,000
Sundry Creditors 24,00,000 23,40,000
Outstanding Expenses 2,40,000 4,80,000
Income – Tax payable 1,20,000 1,32,000
Accumulated Depreciation on Buildings and Equipment 12,00,000 13,20,000
90,78,000 1,03,50,000

The original cost of equipment sold during the year 2015-16 was ₹ 7,20,000.
2. The Balance Sheet of JK Limited as on 31st March, 2015 and 31st March, 2016 are given below:
Balance Sheet as on
(₹ ‘000’)
Liabilities 31.03.15 31.03.16 Assets 31.03.15 31.03.16
Share Capital 1,440 1,920 Fixed Assets 3,840 4,560
Capital Reserve -- 48 Less: Depreciation 1,104 1,392
General Reserve 816 960 Net Fixed Asset 2,736 3,168
Profit and Loss A/c 288 360 Investment 480 384
9% Debenture 960 672 Cash 210 312
Current Liabilities 576 624 Other Current Assets
Proposed Dividend 144 174 (including Stock) 1,134 1,272
Provision for Tax 432 408 Preliminary Expenses 96 48
Unpaid Dividend -- 18
4,656 5,184 4,656 5,184
Additional Information:
1. During the year 2015-2016, Fixed Assets with a book value of ₹2,40,000 (accumulated depreciation ₹ 84,000)
was sold for ₹ 1,20,000.
2. Provided ₹ 4,20,000 as depreciation.
3. Some investments are sold at a profit of ₹48,000 and profit was credited to Capital Reserve.
4. It decided that stocks be valued at cost, whereas previously the practice was to value stock at cost less 10 per cent.
The stock was ₹ 2,59,200 as on 31.03.15. The stock as on 31.03.16 was correctly valued at ₹ 3,60,000.
5. It decided to write off Fixed Assets costing ₹60,000 on which depreciation amounting to ₹ 48,000 has been provided.
6. Debentures are redeemed at ₹ 105.
Required:
Prepare a Cash Flow Statement.

3. Balance Sheets of a company as on 31st March, 2015 and 2016 were as follows:
(₹‘000’)
Liabilities 31.03.15 31.03.16 Assets 31.03.15 31.03.16
Equity share capital 10,00,000 10,00,000 Goodwill 1,00,000 80,000
8% Pref. Share capital 2,00,000 3,00,000 Land and Building 7,00,000 6,50,000
General Reserve 1,20,000 1,45,000 Plant and Machinery 6,00,000 6,60,000
Securities Premium --- 25,000 Investments (non trading) 2,40,000 2,20,000
Profit & Loss A/c. 2,10,000 3,00,000 Stock 4,00,000 3,85,000
11% Debentures 5,00,000 3,00,000 Debtors 2,88,000 4,15,000
Creditors 1,85,000 2,15,000 Cash and Bank 88,000 93,000
Provision for tax 80,000 1,05,000 Prepaid Expenses 15,000 11,000
Proposed Dividend 1,36,000 1,44,000 Premium on Redemption of debenture --- 20,000
24,31,000 25,34,000 24,31,000 25,34,000
Additional Information:
1. Investments were sold during the year at a profit of ₹ 15,000.
2. During the year an old machine costing ₹ 80,000 was sold for ₹ 36,000. Its written down value was ₹ 45,000.
3. Depreciation charged on Plant and Machinery @ 20% on the opening balance.
4. There was no purchase or sale of Land and Building.
5. Provision for tax made during the year was ₹ 96,000.
6. Preference shares were issued for consideration of cash during the year.
 You are required to prepare:
a. Cash Flow Statement as per AS-3.
b. Schedule of changes in Working Capital.

4. The Balance Sheets of a company as on 31st March, 2015 and 2016 are given below:
(₹)

Liabilities 31.03.15 31.03.16 Assets 31.03.15 31.03.16

Equity Share Capital 14,40,000 19,20,000 Fixed Assets 38,40,000 45,60,000
Capital Reserve -- 48,000 Less: Depreciation (11,04,000) (13,92,000)
General Reserve 8,16,000 9,60,000 27,36,000 31,68,000
Profit & Loss A/c 2,88,000 3,60,000 Investment 4,80,000 3,84,000
9% Debentures 9,60,000 6,72,000 Sundry Debtors 12,00,000 14,00,000
Sundry Creditors 5,50,000 5,90,000 Stock 1,40,000 1,84,000
Bills Payable 26,000 34,000 Cash in hand 4,000 --
Proposed Dividend 1,44,000 1,72,800 Preliminary Expenses 96,000 48,000
Provision for tax 4,32,000 4,08,000
Unpaid dividend -- 19,200
46,56,000 51,84,000 46,56,000 51,84,000

Additional Information:
During the year ended 31st March, 2016 the company:
i. Sold a machine for ₹ 1,20,000; the cost of machine was ₹ 2,40,000 and depreciation provided on it was ₹ 84,000.
ii. Provided ₹ 4,20,000 as depreciation on fixed assets.
iii. Sold some investment and profit credited to capital reserve.
iv. Redeemed 30% of the debenture @ 105.
v. Decided to write off fixed assets costing ₹ 60,000 on which depreciation amounting to ₹ 48,000 has been pro- vided.
You are required to prepare Cash Flow Statement as per AS-3.

5. The summarized Balance Sheet of XYZ Limited as at 31st March, 2015 and 2016 are given below:

Liabilities 2015 (₹) 2016 (₹) Assets 2015 (₹) 2016 (₹)
Preference share capital 4,00,000 2,00,000 Plant and Machinery 7,00,000 8,20,000
Equity share capital 4,00,000 6,60,000 Long term investment 3,20,000 4,00,000
Share Premium A/c 40,000 30,000 Goodwill --- 30,000
Capital Redemption Reserve --- 1,00,000 Current Assets 9,10,000 11,41,000
General Reserve 2,00,000 1,20,000 Short term investment (less than 2 50,000 84,000
months)
P & L A/c 1,30,000 1,75,000 Cash and Bank 1,00,000 80,000
Current Liabilities 6,40,000 9,00,000 Preliminary Expenses 40,000 20,000
Proposed Dividend 1,60,000 2,10,000
Provision for tax 1,50,000 1,80,000
21,20,000 25,75,000 21,20,000 25,75,000
Additional Information:
During the year 2016 the company:
1. Preference share capital was redeemed at a premium of 10% partly out of proceeds issue of 10,000 equity
shares of ₹10 each issued at 10% premium and partly out of profits otherwise available for dividends.
2. The company purchased plant and machinery for ₹95,000. It also acquired another company stock ₹25,000
and plant and machinery ₹1,05,000 and paid ₹1,60,000 in Equity share capital for the acquisition.
3. Foreign exchange loss of ₹1,600 represents loss in value of short term investment.
4. The company paid tax of ₹1,40,000.
You are required to prepare Cash Flow Statement.

CVP ANALYSIS and decision making

1. The sports material manufacturing company budgeted the following data for the coming year.

₹
Sales (1,00,000 units) 1,00,000
Variable cost 40,000
Fixed cost 50,000

Find out
(a) P/V Ratio, B.E.P and Margin of Safety
(b) Evaluate the effect of
(i) 20% increase in physical sales volume
(ii) 20% decrease in physical sales volume
(iii) 5% increase in variable costs
(iv) 5% decrease in variable costs
(v) 10% increase in fixed costs
(vi) 10% decrease in fixed costs
(vii) 10% decreases in selling price and 10% increase in sales volume
(viii) 10% increase in selling price and 10% decrease in sales volume
(ix) ₹ 5,000 variable cost decrease accompanied by ₹ 15,000 increase in fixed costs.

2. Two businesses AB Ltd and CD Ltd sell the same type of product in the same market. Their budgeted profits and loss
accounts for the year ending 30th June, 2016 are as follows:

AB Ltd (₹) CD Ltd (₹)

Sales 1,50,000 1,50,000
Less: Variable costs 1,20,000 1,00,000
Fixed Cost 15,000 1,35,000 35,000 1,35,000
Profit 15,000 15,000
You are required to calculate the B.E.P of each business and state which business is likely to earn greater profits
in conditions.
(a) Heavy demand for the product
(b) Low demand for the product.

3. A factory is currently working to 40% capacity and produces 10,000 units. At 50% the selling price falls by 3%. At 90%
capacity the selling price falls by 5% accompanied by similar fall in prices of raw material. Estimate the profit of the
company at 50% and 90% capacity production.
The cost at present per unit is:

₹
Material 10
Labour 3
Overheads 5 (60% fixed)
 The selling price per unit is ₹ 20/- per unit.

4. The sales turnover and profit during two periods were as follows:

Period Sales (₹) Profit (₹)

1 2,00,000 20,000
2 3,00,000 40,000
What would be probable trading results with sales of ₹1,80,000? What amount of sales will yield a profit of ₹
50,000?

5. The following figures for profit and sales obtained from the accounts of X Co. Ltd.

Period Sales (₹) Profit (₹)

2014 20,000 2,000
2015 30,000 4,000
Calculate:
(a) P/V Ratio
(b) Fixed cost
(c) B.E. Sales
(d) Profit at sales ₹ 40,000 and
(e) Sales to earn a profit of ₹ 5,000.

6. The following results of a company for the last two years are as follows:

Period Sales (₹) Profit (₹)

2014 1,50,000 20,000
2015 1,70,000 25,000
You are required to calculate:
(i) P/V Ratio
(ii) B.E.P
(iii) The sales required to earn a profit of ₹ 40,000
(iv) Profit when sales are ₹ 2,50,000
(v) Margin of safety at a profit of ₹ 50,000 and
(vi) Variable costs of the two periods.

7. The Reliable Battery Co. furnishes you the following income information:

Year 2015
First Half (₹) Second Half (₹)
Sales 8,10,000 10,26,000
Profit earned 21,600 64,800

From the above you are required to compute the following assuming that the fixed cost remains the same in both
periods.
1. P/V Ratio
2. Fixed cost
3. The amount of profit or loss where sales are ₹ 6,48,000
4. The amount of sales required to earn a profit of ₹ 1,08,000

8. The following figures relate to a company manufacturing a varied range of products:

 Total Sales (₹) Total Cost(₹)
Year ended 31-12-2014 22,23,000 19,83,600
Year ended 31-12-2015 24,51,000 21,43,200
Assuming stability in prices, with variable cost carefully controlled to reflect pre-determined relation.
(a) The profit volume ratio to reflect the rates of growth for profit and sales and
(b) Any other cost figures to be deduced from the data.

9. SV Ltd a multi product company furnishes you the following data relating to the year 2015:

First Half of the year (₹) Second Half of the year (₹)
Sales 45,000 50,000
Total cost 40,000 43,000

Assuming that there is no change in prices and variable cost and that the fixed expenses are incurred equally in
the two half year period, calculate for the year, 2015
(i) The P/V Ratio,
(ii) Fixed Expenses
(iii) Break-even sales
(iv) Percentage of Margin of safety.

10. S Ltd. furnishes you the following information relating to the half year ended 30th June, 2015.

(₹)
Fixed expenses 45,000
Sales value 1,50,000
Profit 30,000
During the second half the year the company has projected a loss of ₹10,000. Calculate:
(1) The B.E.P and M/S for six months ending 30th June, 2015.
(2) Expected sales volume for the second half of the year assuming that the P/V Ratio and Fixed expenses remain
constant in the second half year also.
(3) The B.E.P and M/S for the whole year for 2015.
11. The following is the statement of a Radical Co. for the month of June.

Products Total
L (₹) M (₹) (₹)
Sales 60,000 60,000 1,20,000
Variable costs 42,000 30,000 72,000
Contribution 18,000 30,000 48,000
Fixed cost 36,000
Net Income 12,000
You are required to compute the P/V ratio for each product and then compute the P/V Ratio, Breakeven Point and
net profit for the following assumption.
(i) Sales revenue divided 60% to Product L & 40% to Product M.
(ii) Sales revenue divided 40% to Product L & 60% to Product M.
Also calculate the profit estimated on sales upto ₹ 1,80,000/- p.m. for each of the sales mix provided above.

12. Accelerate Co. Ltd., manufactures and sells four types of products under the brand names of A, B, C and D. The
1 2 2 1
sales Mix in value comprises 33 %, 41 %, 16 %, and 8 % of products A, B, C & D respectively.
 3 3 3 3
The total budgeted sales (100% are ₹60,000 p.m.). Operating costs are:
Variable Costs:
Product A 60% of selling price Product B 68% of selling price Product C 80% of selling price Product D 40% of selling
price Fixed Costs: ₹ 14,700 p.m.
(a) Calculate the break - even - point for the products on overall basis and
(b) Also calculate break-even-point, if the sales mix is changed as follows the total sales per month remaining the same.
Mix: A - 25% : B - 40% : C - 30% : D - 5%.

13. Present the following information to show to management:

(i) The marginal product cost and the contribution p.u.
(ii) The total contribution and profits resulting from each of the following sales mix results.

Particulars Product Per unit (₹)

Direct Materials A 10
Direct Materials B 9
Direct wages A 3
Direct wages B 2
Fixed Expenses – ₹ 800
(Variable expenses are allotted to products at 100% Direct Wages)
Sales Price ----------------------------- A ₹ 20 Sales Price B ₹15
Sales Mixtures: a) 100 units of Product A and 200 of B.
b) 150 units of Product A and 150 of B.
c) 200 units of Product A and 100 of B.

14. The following particulars are extracted from the records of a company:

PER UNIT
PRODUCT A PRODUCT B
Sales (₹) 100 120
Consumption of material 2 Kg 3 Kg
Material cost (₹) 10 15
Direct wages cost (₹) 15 10
Direct expenses (₹) 5 6
Machine hours used 3 Hrs 2 Hrs
Overhead expenses:
Fixed (₹) 5 10
Variable (₹) 15 20
Direct wages per hour is ₹ 5
(a) Comment on profitability of each product (both use the same raw material) when:
1) Total sales potential in units is limited;
2) Total sales potential in value is limited;
3) Raw material is in short supply;
4) Production capacity (in terms of machine hours) is the limiting factor.
(b) Assuming raw material as the key factor, availability of which is 10,000 Kgs. and each product cannot be sold more
than 3,500 units find out the product mix which will yield the maximum profit.

15. A company has a capacity of producing 1 lakh units of a certain product in a month. The sales department reports that
the following schedule of sales prices is possible.
 VOLUME OF PRODUCTION SELLING PRICE PER UNIT
% (₹)
60 0.90
70 0.80
80 0.75
90 0.67
100 0.61
The variable cost of manufacture between these levels is 15 paise per unit and fixed cost ₹ 40,000. Prepare a statement
showing incremental revenue and differential cost at each stage. At which volume of production will the profit be
maximum?
16. The operating statement of a company is as follows:

₹ ₹
Sales (80,000 @ ₹15 each) 12,00,000
Costs:
Variable:
Material 2,40,000
Labour 3,20,000
Overheads 1,60,000
7,20,000
Fixed Cost 3,20,000 10,40,000
PROFIT 1,60,000
The capacity of the plant is 1 lakh units. A customer from U.S.A. is desirous of buying 20,000 units at a net price of
₹ 10 per unit. Advice the producer whether or not offer should be accepted. Will your advice be different, if the
customer is local one.

17. A company manufactures scooters and sells it at ₹ 3,000 each. An increase of 17% in cost of materials and of 20% of
labour cost is anticipated. The increased cost in relation to the present sales price would cause at 25% decrease in the
amount of the present gross profit per unit.
At present, material cost is 50%, wages 20% and overhead is 30% of cost of sales. You are required to:
(a) Prepare a statement of profit and loss per unit at present and;
(b) Compute the new selling price to produce the same percentage of profit to cost of sales as before.

18. An umbrella manufacturer marks an average net profit of ₹ 2.50 per piece on a selling price of ₹14.30 by producing
and selling 6,000 pieces or 60% of the capa city. His cost of sales is

(₹)
Direct material 3.50
Direct wages 1.25
Works overheads (50% fixed) 6.25
Sales overheads (25% variable) 0.80

During the current year, he intends to produce the same number but anticipates that fixed charges will go up by 10%
which direct labour rate and material will increase by 8% and 6% respectively but he has no option of increasing the
selling price. Under this situation, he obtains an offer for further 20% of the capacity. What minimum price you will
recommend for acceptance to ensure the manufacturer an overall profit of ₹16,730.

19. The Dynamic company has three divisions. Each of which makes a different product. The budgeted data for the
 coming year are as follows:

A (₹) B (₹) C (₹)

Sales 1,12,000 56,000 84,000
Direct Material 14,000 7,000 14,000
Direct Labour 5,600 7,000 22,400
Direct Expenses 14,000 7,000 28,000
Fixed Cost 28,000 14,000 28,000
61,600 35,000 93,400

The Management is considering to close down the division C’. There is no possibility of reducing fixed cost. Advise
whether or not division C’ should be closed down.

20. Mr. Young has ₹ 1,50,000 investment in a business. He wants a 15% profit on his money. From an analysis of recent
cost figures he finds that his variable cost of operating is 60% of sales; his fixed costs are ₹75,000 per year. Show
supporting computations for each answer.
a) What sales volume must be obtained to break-even?
b) What sales volume must be obtained to his 15% return on investment?
c) Mr. Young estimates that even if he closed the doors of his business he would incur ₹25,000 expenses per year.
At what sales would be better off by locking his sales up?

21. The manager of a Co. provides you with the following information:

₹
Sales 4,00,000
Costs: Variable (60% of sales)
Fixed cost 80,000
Profit before tax 80,000
Income-tax
Net profit 32,000
The company is thinking of expanding the plant. The increased fixed cost with plant expansion will be ₹ 40,000. It is
estimated that the maximum production in new plant will be worth ₹2,40,000. The company also wants to earn
additional income ₹ 3,200 on investment. On the basis of computations give your opinion on plant expansion.

22. A manufacturer with overall (interchangeable among the products) capacity of 1,00,000 machine hours has been so
far producing a standard mix of 15,000 units of product A, 10,000 units of product B and C each. On experience, the
total expenditure exclusive of his fixed charges is found to be ₹ 2.09 lakhs and the cost ratio among the product
approximately 1, 1.5, 1.75 respectively per unit. The fixed charges comes to ₹ 2 per unit. When the unit selling prices
are ₹ 6.25 for A, ₹ 7.5 for B and ₹10.5 for C. He incurs a loss.

Mix-I Mix-II Mix-III

A 18,000 15,000 22,000
B 12,000 6,000 8,000
C 7,000 13,000 8,000
As a management accountant what mix will you recommend?

23. A Co. has annual fixed costs of ₹ 1,40,000. In 2015 sales amounted to ₹6,00,000, as compared with ₹ 4,50,000 in
2014, and profit in 2015 was ₹ 42,000 higher than that in 2014.
(i) At what level of sales does the company break-even?
(ii) Determine profit or loss on a forecast sales volume of ₹ 8,00,000
(iii) If there is a reduction in selling price by 10% in 2016 and the company desires to earn the same amount of profit
as in 2015, what would be the required sales volume?

24. A Co. currently operating at 80% capacity has the following; profitability particulars:

₹ ₹
Sales 12,80,000
Costs:
Direct Materials 4,00,000
Direct labour 1,60,000
Variable Overheads 80,000
Fixed Overheads 5,20,000 11,60,000
Profit: 1,20,000

An export order has been received that would utilise half the capacity of the factory. The order has either to be
taken in full and executed at 10% below the normal domestic prices, or rejected totally.
The alternatives available to the management are given below:
a) Reject order and Continue with the domestic sales only, as at present;
b) Accept order, split capacity equally between overseas and domestic sales and turn away excess domestic demand;
c) Increase capacity so as to accept the export order and maintain the present domestic sales by:
i) buying an equipment that will increase capacity by 10% and fixed cost by ₹40,000 and
ii) Work overtime a time and a half to meet balance of required capacity.
Prepare comparative statements of profitability and suggest the best alternative.

25. A Company has just been incorporated and plan to produce a product that will sell for ₹ 10 per unit. Preliminary market
surveys show that demand will be around 10,000 units per year.
The company has the choice of buying one of the two machines ‘A’ would have fixed costs of ₹ 30,000 per year and
would yield a profit of ₹ 30,000 per year on the sale of 10,000 units. Machine rB’ would have fixed costs ₹18,000 per year
and would yield a profit of ₹ 22,000 per year on the sale of 10,000 units. Variable costs behave linearly for both
machines.
Required to:
a) Break-even sales for each machine
b) Sales level where both machines are equally profitable
c) Range of sales where one machine is more profitable than the other.

26. A practicing Cost Accountant now spends ₹ 0.90 per k.m. on taxi fares for his client’s work. He is considering to
other alternatives the purchase of a new small car or an old bigger car.

Item New Small Car Old bigger Car

Purchase price (₹) 35,000 20,000
Sale price after 5 years (₹) 19,000 12,000
Repairs and servicing per annum (₹) 1,000 1,200
Taxes and insurance p.a. (₹) 1,700 700
Petrol consumption per liter (K.m.) 10 7
Petrol price per liter (₹) 3.5 3.5

He estimates that he does 10,000 K.m. annually. Which of the three alternatives will be cheaper? If his practice expands
he has to do 19,000 Km p.a. which is cheaper? Will cost of the two cars break even and why? Ignore interest and
 Income-tax.

27. There are two plants manufacturing the same products under one corporate management which decides to merge
them.

PLANT - I PLANT - II
Capacity operation 100% 60%
Sales (₹) 6,00,00,000 2,40,00,000
Variable costs (₹) 4,40,00,000 1,80,00,000
Fixed Costs (₹) 80,00,000 40,00,000
You are required to calculated for the consideration of the Board of Directors
a) What would be the capacity of the merged plant to be operated for the purpose of break-even?
b) What would be the profitability on working at 75% of the merged capacity.

28. The particulars of two plants producing an identical product with the same selling price are as under:

PLANT - A PLANT - B
Capacity utilisation 70% 60%
(₹ in lakhs) (₹ in lakhs)
Sales 150 90
Variable Costs 105 75
Fixed costs 30 20
It has been decided to merge plant B with Plant A. The additional fixed expenses involved in the merger amount
to is ₹ 2 lakhs.
Required:
1) Find the break-even-point of plant A and plant B before merger and the break-even point of the merged plant.
2) Find the capacity utilisationsation of the integrated plant required to earn a profit of ₹ 18 lakhs.

29. A company engaged in plantation activities has 200 hectors of virgin land which can be used for growing jointly or
individually tea, coffee and cardamom, the yield per hector of the different crops and their selling prices per Kg. are as
under:

Yield in Kgs. Selling price per Kg. (₹)

Tea 2,000 20
Coffee 500 40
Cardamom 100 250
The relevant data are given below:

Tea Coffee Cardamom

Labour charges ₹ 8 10 120
Packing materials ₹ 2 2 10
Other costs ₹ 4 1 20
14 13 150

b) Fixed costs per annum:

₹
Cultivation and growing cost 10,00,000
Administrative cost 2,00,000
 Land Revenue 50,000
Repairs and maintenance 2,50,000
Other costs 3,00,000
Total Cost 18,00,000
The policy of the company is to produce and sell all three kinds of products and the maximum and minimum area
to be cultivated per product is as follows:

Hectors
Maximum Minimum
Tea 160 120
Coffee 50 30
Cardamom 30 10

Calculate the most profitable product mix and the maximum profit which can be achieved.

30. A Co. running an adequate supply of labour presents the following data requests your advice about the area to be
allotted for the cultivation of various types of fruits which would result in the maximization of profits. The company
contemplates growing Apples Lemons Oranges and Peaches.

APPLES LEMONS ORANGES PEACHES

Selling price per box (₹) 15 15 30 45
Seasons yield box per acre 500 150 100 200
Cost in Rupees:
Material per acre 270 105 90 150
Growing per acre labour 300 225 150 195
Picking & Packing per box 1.5 1.5 3 4.5
Transport per box 3.00 3.00 1.5 4.5
The fixed costs in each season would be:
Cultivation & Growing ₹56,000: Picking ₹42,000 Transport - ₹10,000: Administration-₹84,000 Land Revenue -
₹18,000
The following limitations are also placed before you:
a) The area available is 450 acres, but out of this 300 acres are suitable for growing only Oranges and Lemons
.The balance of 150 acres is suitable for growing for any of the four fruits viz., Apples, Lemons, Oranges and
Peaches.
b) As the products may be hypothecated to banks, area allotted for any fruit should be demarcated in complete acres and
not in fractions of an acre.
c) The marketing strategy of the company requires the compulsory production of all the four types of fruits in a
season and the minimum quantity of any type to be 18,000 boxes.
Calculate the total profits that would accrue if your advice is accepted.

31. A market gardener is planning his production for next season and he asked you, as a cost consultant, to recommend the
optimum mix of vegetable production for the coming year. He has given you the following data relating to the current
year:

POTATOES TOMATOES PEAS CARROTS

Area occupied in acres 25 20 30 25
Yield per acre in tons 10 8 90 12
Selling Price per ton (₹) 1,000 1,250 1,500 1,350
Variable Cost per acre:
 Fertilizer 300 250 450 400
Seeds 150 200 300 250
Pesticides 250 150 200 250
Direct Wages 4,000 4,500 5,000 5,700
Fixed Overhead per annum: ₹5,40,000
The land which is being used for the production of carrots and peas can be used for either crop but not for potatoes
and tomatoes. The land being used for potatoes and tomatoes can be used for either crops but not carrots and peas.
In order to provide an adequate market service, the gardener must produce each year at least 40 tons of each of
potatoes and tomatoes and 36 tons of each peas and carrots .You are required to present a statement to show :
(a) (1) The profit for the current year:
(2) The profit for the production mix you would recommend;
(b) Assuming that the land could be cultivated in such a way that any of the above crops could be produced and there was
no market commitment. You are required to:
(1) Advice the market gardener on which crop he should concentrate his production.
(2) Calculate the profit if he were to do so, and
(3) Calculate in rupees the breakeven - point of sales.

32. Small Tools Factory has a plant capacity adequate to provide 19,800 hours of machine use. The plant can produce
all A type tools or all B type tools or a mixture of these two type. The following information is relevant

A B
Selling price (₹) 10 15
Variable cost (₹) 8 12
Hours required to produce 3 4
Market conditions are such that not more than 4,000 A type tools and 3,000 B type tools can be sold in a year.
Annual fixed costs are ₹ 9,900.
Compute the product mix that will maximise the net income to the company and find that maximum net income.

33. Taurus Ltd. produces three products A, B and C from the same manufacturing facilities. The cost and other details
of the three products are as follows:

A B C
Selling price per unit (₹) 200 160 100
Variable cost per unit (₹) 120 120 40
Fixed expenses/month (₹) 2,76,000
Maximum production per month (units) 5,000 8,000 6,000
Total hours available for the month 200
Maximum demand per month (units) 2,000 4,000 2,400
The processing hour cannot be increased beyond 200 hrs per month.
You are required to:
(a) Compute the most profitable product-mix.
(b) Compute the overall break-even sales of the co., for the month based in the mix calculated in (a) above.

34. A factory budget for a production of 1,50,000 units. The variable cost per unit is ₹ 14 and fixed cost is ₹ 2 per unit.
The company fixes its selling price to fetch a profit of 15% on cost.
(a) What is the breakeven point?
(b) What is the profit volume ratio?
(c) If it reduces its selling price by 5% how does the revised selling price affect the BEP and the profit volume ratio?
(d) If a profit increase of 10% is desired more than the budget what should be the sale at the reduced prices?
35. VINAYAK LTD. which produces three products furnishes you the following information for 2015-16:

PRODUCTS
A B C
Selling price per unit (₹) 100 75 50
Profit volume ratio % 10 20 40
Maximum sales potential units 40,000 25,000 10,000
Raw Material content as % of variable cost 50 50 50
The expenses - fixed are estimated at ₹6,80,000. The company uses a single raw material in all the three products. Raw
material is in short supply and the company has a quota for the supply of raw materials of the value of ₹ 18,00,000 for
the year 2011-12 for the manufacture of its products to meet its sales demand.
You are required to:-
a. Set a product mix which will give a maximum overall profit keeping the short supply of raw material in view.
b. Compute that maximum profit.

36. A review, made by the top management of Sweet and Struggle Ltd. which makes only one product, of the result of two
first quarters of the year revealed the following:

Sales in units 10,000

Loss (₹) ₹ 10,000
Fixed Cost (for the year ₹1,20,000) 30,000 Quarter
Variable cost per unit ₹8
The finance Manager who feels perturbed suggests that the company should at least break-even in the second quarter
with a drive for increased sales. Towards this the company should introduce a better packing which will increase the
cost by ₹ 0.50 per unit.
The Sales Manager has an alternate proposal. For the second quarter additional sales promotion expenses can be
increased to the extent of ₹ 5,000 and a profit of ₹5,000 can be aimed at for the period with increased sales.
The production manager feels otherwise. To improve the; demand the selling price per unit has to be reduced by 3%.
As a result the sales volume can be increased to attain a profit level of ₹ 4,000 for the quarter.
The Managing Director asks for as a Cost Accountant to evaluate these three proposals and calculate the
additional units required to reach their respective targets help him to make a decision.

37. A limited company manufactures three different products and the following information has been collected from the
books of accounts.

PRODUCTS
S T Y
Sales Mix 35% 35% 30%
Selling price (₹) 30 40% 20
Variable Cost (₹) 15 20% 12
Total fixed cost (₹) 1,80,000
Total Sales (₹) 6,00,000
The company has currently under discussion, a proposal to discontinue the manufacture of product Y and replace
it with product M, when the following results are anticipated.

PRODUCTS
S T M
Sales Mix 50% 25% 25%
 Selling price (₹) 30 40% 30
Variable Cost (₹) 15 20% 15
Total fixed cost (₹) 1,80,000
Total Sales (₹) 6,40,000
Will you advise the company to changeover to production of M? Give reasons for your answer.
38. The following figures have been extracted from the accounts of manufacturing undertaking, which produces a single
product for the previous (base) year.
Units produced and sold 10,000 Fixed overhead (₹) 20,000 Variable overhead cost per unit:
Labour ₹4
Material ₹2
Overheads ₹ 0.8
Selling Price ₹10 per unit
In preparing the budget for the current (budget) year the undernoted changes have been envisaged:

Units to be produced and sold 15,000

Fixed overheads increased by ₹ 5,000
Fall in labour efficiency 20%
Special additional discount for Bulk purchased of material 2½ %
Variable overheads percentage reduced by 1¼ %
Fall in selling price per unit 10%
Calculate:
(i) the no. of units which must be sold to break even in each of the two years
(ii) the no. of units which would have to be sold to double the profit of the base year under base year conditions
(iii) the no. of units which will have to be sold in the budget year to maintain the profit level of preceding year.

39. VINAK Ltd. operating at 75% level of activity produces and sells two products A and B. The cost sheets of these two
products are as under:-

Product A Product B
Units produced and sold 600 400
Direct materials (₹) 2.00 4.00
Direct labour (₹) 4.00 4.00
Factory overheads (40% fixed) (₹) 5.00 3.00
Selling and administration overheads (60% fixed) (₹) 8.00 5.00
Total cost (₹) 19.00 16.00
Selling price per unit (₹) 23.00 19.00
Factory overheads are absorbed on the basis of machine hour which is the limiting factor. The machine hour rate is ₹2
per hour. The company receives an offer from Canada for the purchase of Product A at a price of ₹17.50 per unit.
Alternatively the company has another offer from the Middle East for the purchase of Product B at a price of
₹15.50 p.u.
In both cases, a special packing charge of fifty paise per unit has to be borne by the company.
The company can accept either of the two export orders and in the either case the company can supply such quantities
as may be possible to produce by utilising the balance of 25% of its capacity.
You are required to prepare:
(1) A statement showing the economics of the two export proposals giving your recommendation as to which the
proposal should be accepted, and
(2) A statement showing the overall profitability of the company after incorporating the export proposal
recommended by you.

40. Your company has a production capacity of 2,00,000 units per year. Normal capacity utilisation is reckoned at 90%.
 Standard Variable Production costs are ₹ 11p.u. The fixed costs are ₹ 3,60,000 per year. Variable selling costs are ₹ 3p.u.
and fixed selling costs are ₹2,70,000 per year. The unit selling price is ₹20. In the year just ended on 30th June, 2012,
the production was 1,60,000 units and sales were 1,50,000 units. The closing inventory on 30-6-2012 was 20,000 units.
The actual variable production costs for the year was ₹ 35,000 higher than the standard.
Calculate:
(1) The profit for the year
(a) by absorption costing method
(b) by the marginal cost method.
(2) Explain the difference in profits.

41. From the following data calculate:

(1) B.E.P expressed in amount of sales in rupees.
(2) Number of units that must be sold to earn a profit of ₹60,000 per year
(3) How many units must be sold to earn a net income of 10% of sales.
Sales price ₹ 20 per unit; variable manufacturing costs ₹ 11 p.u.; fixed factory overheads ₹ 5,40,000 p.a.; variable
selling costs ₹ 3 p.u. Fixed selling costs ₹ 2,52,000 per year.

42. The Board of Directors of KE Ltd. manufacturers of three products A, B and C have asked for advice on the
production mixture of the company.
(a) You are required to present a statement to advice the directors of the most profitable mixture of the products
to be made and sold.
The statement should show:
i) The profit expected on the current budgeted production, and
ii) The profit which could be expected if the most profitable mixture was produced.

(b) You are also required to direct the director’s attention to any problem which is likely to arise if the mixture in (a)
(ii) above were to be produced.
The following information is given:-
Data for standard Costs, per unit:

Product A Product B Product C

Direct material (₹) 10 30 20
Variable overhead (₹) 3 2 5

Direct Labour:

Department Rate per hour Hours Hours Hours

1 0.5 28 16 30
2 1.0 5 6 10
3 0.5 16 8 30

Data from current budget production

in thousands of units per year: 10 5 6

Selling price per unit: (₹) 50 68 90
Fixed cost per year ₹ 2,00,000

Maximum sales forecast by the Sales director for the year 2013 in 12 7 9
thousands of units
However the type of labour required by Dept 2 is in short supply and it is not possible to increase the manpower of
this dept. beyond its present level.
43. An engineering company receives in enquiry for the manufacture of certain products, where costs estimated as
follows per product. Direct materials ₹ 3.10; Direct labour (5 hours) ₹ 2.05; Direct expenses ₹ 0.05 Variable overheads
20 paise per hour.
The manufacture of these products will necessitate the provision of special tooling costing approximately ₹ 4,500. The
price per unit is ₹ 8.00. For an order to be considered profitable it is necessary for it to yield a target contribution at the
rate of ₹ 0.30 per Labour Hour (after tooling cost).
Find out:
a. The sales level at which contribution to profit commences.
b. The sales at which the contribution exceeds the target.

44. The present output details of a manufacturing department are as follows:

Average output per week - 48,000 units from 160 employees.

(₹)
Saleable value of the output 1,50,000
Contribution made by output towards fixed expenses and profit 60,000
The board of directors plan to introduce more mechanisation into the department at a capital cost of ₹ 40,000. The
effect of this will be to reduce the number of employees to 120, but to increase the output per individual employees
by 40%. To provide the necessary incentive to achieve the increased output, the board intends to offer a 1% increase
on the piece of work price of 25 paise per article for every 2% increase in average individual output achieved. To sell
the increased output, it will be necessary to decrease the selling price by 4%. Calculate the extra weekly contribution
resulting from the proposed change and evaluate for the board’s consideration, the worth of the project.

Budgeting
1. From the following figures prepare the raw material purchase budget for January, 2015:

Materials
A B C d e F
Estimated Stock on Jan 1 16,000 6,000 24,000 2,000 14,000 28,000
Estimated Stock on Jan 31 20,000 8,000 28,000 4,000 16,000 32,000
Estimated Consumption 1,20,000 44,000 1,32,000 36,000 88,000 1,72,000
Standard Price per unit 25 p. 5 p. 15 p. 10 p. 20 p. 30 p.

2. A company manufactures product - A and product -B during the year ending 31st December 2015, it is expected to sell
15,000 kg. of product A and 75,000 kg. of product B at ₹30 and ₹16 per kg. respectively. The direct materials P, Q and R
are mixed in the proportion of 3: 5: 2 in the manufacture of product A, Materials Q and R are mixed in the proportion
of 1:2 in the manufacture of product B. The actual and budget inventories for the year are given below:

Opening Stock Expected Closing stock Anticipated cost per Kg.

Kg. Kg. ₹
Material – P 4,000 3,000 12
Material –Q 3,000 6,000 10
Material – R 30,000 9,000 8
Product - A 3,000 1,500 —
B 4,000 4,500 —
Prepare the Production Budget and Materials Budget showing the expenditure on purchase of materials for the year
ending 31-12-2015.
3. The following details apply to an annual budget for a manufacturing company.
 Quarter 1st 2nd 3rd 4th
Working days 65 60 55 60
Production (units per working day) 100 110 120 105
Raw material purchases (% by weight of annual total) 30% 50% 20% —
Budgeted purchase price/Kg.(₹) 1 1.05 1.125 —
Quantity of raw material per unit of production 2 kg. Budgeted closing stock of raw material 2,000 kg. Budgeted
opening stock of raw material 4,000 kg. (Cost ₹ 4,000)
Issues are priced on FIFO Basis. Calculate the following budgeted figures.
(a) Quarterly and annual purchase of raw material by weight and value.
(b) Closing quarterly stocks by weight and value.

4. You are required to prepare a Selling overhead Budget from the estimates given below:

Particulars (₹)
Advertisement 1,000
Salaries of the Sales dept. 1,000
Expenses of the Sales dept.(Fixed) 750
Salesmen’s remuneration 3,000
Salesmen’s and dearness Allowance - Commission @ 1% on sales affected Carriage outwards: estimated @ 5% on
sales
Agents Commission: 7½% on sales
The sales during the period were estimated as follows:
(a) ₹80,000 including Agent’s Sales ₹8,000
(b) ₹90,000 including Agent’s Sales ₹10,000
(c) ₹1,00,000 including Agent’s Sales ₹10,500

5. ABC Ltd. a newly started company wishes to prepare Cash Budget from January. Prepare a cash budget for the first six
months from the following estimated revenue and expenses.

Month Total Sales (₹) Materials (₹) Wages (₹) Overheads

Production (₹) Selling & Distribution (₹)
January 20,000 20,000 4,000 3,200 800
February 22,000 14,000 4,400 3,300 900
March 28,000 14,000 4,600 3,400 900
April 36,000 22,000 4,600 3,500 1,000
May 30,000 20,000 4,000 3,200 900
June 40,000 25,000 5,000 3,600 1,200
Cash balance on 1st January was ₹10,000. A new machinery is to be installed at ₹20,000 on credit, to be repaid by two
equal instalments in March and April, sales commission @5% on total sales is to be paid within a month following
actual sales.
₹10,000 being the amount of 2nd call may be received in March. Share premium amounting to ₹2,000 is also obtained
with the 2nd call. Period of credit allowed by suppliers — 2months; period of credit allowed to customers
— 1month, delay in payment of overheads 1 month. delay in payment of wages ½ month. Assume cash sales to be
50% of total sales.

6. Prepare a Cash Budget for the three months ending 30th June, 2016 from the information given below:
(a)
 MONTH SALES (₹) MATERIALS (₹) WAGES (₹) OVERHEADS (₹)
February 14,000 9,600 3,000 1,700
March 15,000 9,000 3,000 1,900
April 16,000 9,200 3,200 2,000
May 17,000 10,000 3,600 2,200
June 18,000 10,400 4,000 2,300
(b) Credit terms are:
Sales/debtors: 10% sales are on cash, 50% of the credit sales are collected next month and the balance in the following
month.
Creditors: Materials 2 months Wages 1/4 month Overheads 1/2 month.
(c) Cash and bank balance on 1st April, 2016 is expected to be ₹ 6,000.
(d) other relevant information are:
(i) Plant and machinery will be installed in February 2016 at a cost of ₹96,000. The monthly instalment of
₹2,000 is payable from April onwards.
(ii) Dividend @ 5% on preference share capital of ₹2,00,000 will be paid on 1st June.
(iii) Advance to be received for sale of vehicles ₹9,000 in June.
(iv) Dividends from investments amounting to ₹1,000 are expected to be received in June.

7. Draw up a flexible budget for overhead expenses on the basis of the following data and determine the overhead
rates at 70%, 80% and 90%

Plant Capacity At 80% capacity (₹)

Variable Overheads:
Indirect labour 12,000
Stores including spares 4,000
Semi Variable:
Power (30% - Fixed: 70% -Variable) 20,000
Repairs (60%- Fixed: 40% -Variable) 2,000
Fixed Overheads:
depreciation 11,000
Insurance 3,000
Salaries 10,000
Total overheads 62,000
Estimated Direct Labour Hours 1,24,000
8. The profit for the year of Push On Ltd. works out to 12.5% of the capital employed and the relevant figures are as
under:

(₹)
Sales 5,00,000
direct Materials 2,50,000
direct Labour 1,00,000
Variable overheads 40,000
Capital employed 4,00,000

The new sales manager who has joined the company recently estimates for the next year a profit of about 23% on
capital employed, provided the volume of sales is increased by 10% and simultaneously there is an increase in selling
price of 4% and an overall cost reduction in all the elements of cost by 2%.
Find out by computing in detail the cost and profit for next year, whether the proposal of sales manager can be
adopted.
9. A glass Manufacturing company requires you to calculate and present the budget for the next year from the
following information.

Sales: Toughened glass ₹ 3,00,000

Bent toughened glass ₹ 5,00,000
direct Material cost 60% of sales
direct Wages 20 workers @ ₹150 p.m.
Factory Overheads:
Indirect Labour: Works Manager ₹ 500 per month
Foreman ₹ 400 per month
Stores and spares 2½% on sales
depreciation on machinery ₹12,000
Light and power 5,600
Repairs and maintenance 8,000
other sundries 10% on direct wages
Administration, selling and distribution expenses ₹14,000 per year.
10. Three Articles X, Y and Z are produced in a factory. They pass through two cost centers A and B. From the data
furnished compile a statement for budgeted machine utilization in both the centers.
(a) Sales budget for the year
Product Annual BudgetedOpening stock of finished products (units) Closing stock
Sales (units)
X 4800 600 equivalent to 2 months sales
Y 2400 300 --do--
Z 2400 800 --do--
(b) Machine hours per unit of product
Cost centers
Product A B
X 30 70
Y 200 100
Z 30 20
(c) Total number of machines
Cost Centre:
A 284
B 256
 Total 540
(d) Total working hours during the year: estimated 2500 hours per machine.
11. The monthly budgets for manufacturing overhead of a concern for two levels of activity were as follows:

Capacity 60% 100%

Budgeted production (units) 600 1,000
(₹) (₹)
Wages 1,200 2,000
Consumable stores 900 1,500
Maintenance 1,100 1,500
Power and fuel 1,600 2,000
depreciation 4,000 4,000
Insurance 1,000 1,000
9,800 12,000
You are required to:
(i) Indicate which of the items are fixed, variable and semi-variable;
(ii) Prepare a budget for 80% capacity and
(iii) Find the total cost, both fixed and variable per unit of output at 60%, 80% and 100%capacity.

12. X Chemical Ltd. manufacture two products AB and CD by making the raw material in the proportion shown:

Raw Material Product AB Product CD

A 80%
B 20%
C 50%
d 50%

The finished weight of products AB and CD are equal in the weight of in gradients. During the month of June, it is
expected that 60 tons of AB and 200 tons of CD will be sold.
Actual and budgeted inventories for the month of June as follows:

Actual Inventory (1st June) Quantity (Tons) Budgeted Inventory (30th June) Quantity (Tons)
A 15 20
B 10 40
C 200 300
D 250 200
Product AB 10 5
Product CD 50 60

The purchase price of materials for June is expected to be as follows:

Material Cost per ton

(₹)
A 500
B 400
C 100
D 200
All materials will be purchased on 3rd of June, Prepare:
(a) The Production Budget for the month of June,
(b) The Material Requirement budget for June,
(c) The Material Purchase Budget indicating the expenditure for material for the month of June.