MANAGEMENT AND
FINANCIAL ACCOUNTING
[ASSIGNMENT- 2]
[Submitted by – Kashish Agarwal]
Question 1:
Fuzzy Breeze is located in a resort area where the county assesses an occupancy tax that
has both a fixed and a variable component. Fuzzy Breeze pays Rs.2,000 per month,
regardless of the number of rooms rented. Even if it does not rent a single room during the
month, Fuzzy Breeze still must remit this tax to the county. The hotel treats this Rs. 2,000
as a fixed cost. However, for every night that a room is rented, Fuzzy Breeze must remit an
additional tax amount of Rs. 50 per room per night.
What will be the total cost incurred by the resort at the following number of room
occupancy - (i) 0; (ii) 60; (iii) 85; and (iv) 100?
Assumption- At the level of occupancy, the rooms are rented out for a single overnight
stay.
SOLUTION:
Given:
Fixed Price 2000
Variable
Price 50
No. of rooms Variable Total
Rented/Month Fixed cost cost Cost
0 2000 0 2000
60 2000 3000 5000
85 2000 4250 6250
100 2000 5000 7000
Variable cost = Number of rooms rented*50 (cost per room per night)
Therefore, we can see that when the number of room occupancy is 0 total cost is 2000
When total occupancy is 60 then total cost is 5000
When total occupancy is 85 then total cost is 6250
When total occupancy is 100 then total cost is 7000
Question 2:
Sethi Manufacturing sold 25,000 units of its products for Rs.150/- per unit in 2020, where
the variable cost is Rs. 60/- per unit and fixed costs are Rs. 250,000.
Required: Based on the above information calculate the following. State your assumptions
(if any) clearly before attempting the question (s):
a) Calculate – (i) Contribution Margin; (ii) Operating Income (Contribution Margin -
Fixed Cost)
b) Sethi’s current manufacturing process is labor-intensive. Ms. Simran, Sethi
Manufacturing’s production manager has proposed an up-gradation of the existing
machinery & other equipment, which will increase the annual fixed cost to Rs. 775,000,
while the variable cost on other hand, is expected to decrease by Rs. 30/- per unit. The
company expects to maintain the same sales volume and selling price for 2021. How would
acceptance of Ms. Simran’s proposal affect your answers to (i)Contribution Margin and (ii)
Operating Income
c) Should Sethi Manufacturing accept Ms. Simran’s proposal? Explain.
SOLUTION:
Part a.)
GIVEN
:
Fixed Cost: 250000
Variable
Cost/unit: 60
Total variable 150000
cost: 0
No. of units
sold: 25000
Selling Price/
unit: 150
Total Selling 375000
Price 0
1.) Contribution Margin = Selling Price – Variable cost
= 3750000 - 1500000
=2250000/-
2.) Operating Income = Contribution margin – Fixed cost
= 2250000 - 250000
= 20,00,000/-
Part b.)
GIVEN
:
Fixed cost: 775,000
Variable cost/
unit: 30
Total variable
cost: 750000
No. of units
sold: 25000
Selling Price: 3750000
1.) Contribution Margin= Selling Price – Variable cost
= 3750000 - 750000
Margin in this case is = 3000000/-
2.) Operating Income= Contribution Margin – Fixed cost
= 3000000 – 775000
Margin in this case is = 2225000/-
Part c.) Yes, Sethi Manufacturing should accept Ms. Simran’s proposal as the operating income
would increase by 2,25,000/-
[Operating Income (Part 2.) – Operating Income (Part 1.)] -> 22,25,000 – 20,00,000 = 2,25,000/-
Question 3:
Suppose Mitra & Sons’ breakeven point is revenue of Rs. 1,500,000 and fixed costs are Rs.
720,000. Compute the following:
a) Contribution Margin Percentage
b) Calculate the selling price if variable cost is Rs. 13 per unit
c) Suppose 90,000 units are sold, calculate the margin of safety in units and rupees
d) What does this tell you about the risk of firm making a loss? What are the most likely
reasons for this risk to increase?
SOLUTION:
GIVEN
:
Break Even Point: 1500000
Fixed Cost: 720000
Variable cost: 13/Unit
Part a.) Contribution Margin Percentage = (Fixed cost/ Break Even Point Revenue) *100
= (720000/ 1500000) *100
Therefore, contribution Margin Percentage is = 48%
Part b.) Selling Price?
Contribution Margin Percentage = (Selling Price – Variable cost)/ Selling Price
0.48 = (selling price – 13)/ selling price
0.48 * Selling Price = Selling – 13
0.52 (Selling Price) = 13
Selling Price = 25
Part c.)
Revenue/
Break-even point Sales unit= Selling Price
60000
Units given = 90000
Margin of safety (units)= 30000
Margin of safety (Units) = Number of units give in question – Break-even point sales unit
= 90000 – 60000
Therefore, Margin of safety in units is = 30000/-
Margin of safety in Rupees:
Units Given 90000
Selling Price 25
Revenue 2250000
Breakeven point 1500000
Margin of safety 750000
Revenue = Units given * selling price
= 90000 *25
= 22,50,000
Break even point given in question = 15,00,000
Margin of safety in rupees = 22,50,000 – 15,00,000 = 7,50,000/-
Part d.) The above calculation of margin of safety suggests that there is very low risk for this
firm to make any loss. The sales would have to go down by 33% before Mitra and Son’s make
any loss.
The most likely reasons for this risk to increase could be –
Increase in market competition which might reduce the demand from Mitra and Son’s.
Profitability falls due to some wrong decisions by management.
Some kind of un predicted situation which might weaken the economy.
Question 4
Soneva Enterprise manufactures two models of boats- Regular & Deluxe, using a
combination of hand finishing and machining. Machine setup costs are driven by the
number of setups. Indirect labor cost increase with direct labor costs. Equipment and
maintenance costs increase with the number of machine hours, and facility rent is paid per
square foot. The capacity of the facility is 6250 square foot and Soneva is using only 80% of
this capacity. Soneva records the cost of unused capacity as a separate line item and not as
a product cost. For 2021, Soneva has budgeted the following:
Soneva Adventures- Budgeted Costs & Activities (Year Ending 31st March 2021)
Particulars Amount (in Rs.)
Direct Materials- Regular Boats 3,250,000
Direct Materials- Deluxe Boats 2,400,000
Direct Labour- Regular Boats 1,100,000
Direct Labour- Deluxe Boats 1,300,000
Indirect Labour Costs 720,000
Machine Setup Costs 405,000
Equipment and Maintenance Costs 2,350,000
Facility Rent (for 6250sq foot capacity) 2,000,000
Total 13,525,000
Other budget information is given below:
Particulars Regular Deluxe
Number of Boats 5000 3000
Machine Hours 11000 12500
Number of Setups 300 200
Square footage of production space used 2860 2140
Required: Based on the above information answer the following. State your
assumptions (if any) clearly before attempting the question.
a) Identify the various cost drivers rate for each activity cost pool.
b) What is the budgeted cost for the unused capacity?
c) Calculate the budgeted total cost and the cost per unit for each model.
d) Why might excess capacity be beneficial for Soneva? What are some of the
issues Soneva should consider before increasing production to use the space?
SOLUTION:
GIVEN:
Direct Material- Regular Boats 3250000
Direct Material- Premium
Boats 2400000
Direct Labour - Regular Boats 1100000
Direct Labour - Premium
Boats 1300000
Indirect Labour costs 720000
Machine Setup costs 405000
Equipment and Maintenance
costs 2350000
Facility Rent 2000000
1352500
Total 0
Total space rented/sq. feet 6250
Part a.)
Regula Premiu
Cost drivers r m Total
Number of Boats 5000 3000 8000
Machine Hours 11000 12500 23500
Number of setups 300 200 500
Square footage of production
space 2860 2140 5000
330,00 72000
Indirect Manufacturing cost 0 390000 0
Total Indirect manufacturing
Cost 720000
Machine setup Costs 810
Equipment and Maintenance 100
Cost
Facility Rent Cost 320
Total indirect labor cost is 7,20,000 which is derived from the direct labor cost of 24,00,000.
Machine setup cost = 4,05,000/ 500 = 810 (Machine setup cost given/ Total number of
setups)
Equipment setup cost = 23,50,000/ 23,500 = 100 (Equipment and total cost given/ Total
machine hours)
Facility Rent cost = (0.8 * 20,00,000)/ 5000 = 320 [(0.8 * Facility rent given)/ Total
square footage of production space]
(0.8 taken here as we know through the question that only 80% of the total capacity is
used)
*Assumption: There is need for the allocation of total indirect manufacturing cost
product wise with per unit cost calculation as in this case indirect manufacturing labor
cost is the part of budgeted activity.
Part b.)
Budgeted cost of unused capacity = Facility rent cost *(total space rented – total used
space)
= 320* (6250- 5000) = 4,00,000
Part c.)
Regula Premiu
r m
325000
Direct Material 0 2400000
110000
Direct Labour 0 1300000
Indirect Manufacturing cost 330,000 390000
Machine setup 243000 162000
Equipment and Maintenance 110000
cost 0 1250000
Facility rent 915200 684800
693820
Total cost 0 6186800
2062.26
Per unit cost 1387.64 7
*Formulas for derivation of values:
Machine setup cost = Machine setup cost * Number of setups
Equipment and Maintenance cost = Equipment and Maintenance cost * Machine hours
Facility rent = Facility rent cost * Square footage of production space.
Total cost for Regular Boats = Sum of direct material, direct labor, indirect
manufacturing cost, machine setup, equipment and maintenance cost and facility rent
(Regular Boats)
= 6938200
Total cost for Premium Boats = Sum of direct material, direct labor, indirect
manufacturing cost, machine setup, equipment and maintenance cost and facility rent
(Premium Boats)
= 61,86,800
Per unit cost of regular = Total cost of regular/ number of Boats (Regular)
= 6938200/ 5000
= 1,387.64
Per unit cost of Premium = Total cost of Premium/ number of Boats (Premium)
= 61,86,800/ 3000
= 2,062.27
Part d.) As we know that the budgeted cost of unused capacity for Soneva is 4,00,000/- it is a
big cost for the company to pay annually. However, on the other hand if we see the company can
use this extra capacity for its expansion, or to entertain new special orders when received, it can
also use the extra capacity to rent it out to a compatible user outside. Some of the issues which
Soneva needs to consider before expanding its production should be that there should be
availability of labor and machine hours to meet out the increased production demands.
