NMIMS - Strategic Cost Management

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NMIMS

Master of Business Administration - MBA Semester 3

Strategic Cost Management

Q1. A company has a contribution/sales ratio of 50%. It maintains a MOS of 25%. If its annual fixed cost is Rs. 50 lacs, calculate:

BE sales, MOS, Total Sales, Total Variable Cost and Profit

Answer. Break even sales = Fixed cost/P/v Ratio

= 5000000/50%

= 10000000

Total sales = Break even sales + Marin of safety

Margin of Safety = Actual Sales – Break-Even Sales

        

Q2. The following information is available from the records of Alpha Ltd. For the year 2019:

You are required to prepare a master budget.

Rs.

Sales of product A                                                                 25.0 Lacs

Sales of product B                                                                 75.0 Lacs

Material cost                                                                          55% of sales

Direct wages                                                                          50,000 per month per worker

Factory Overheads:

Indirect Labour:

Works Manager                                                                    10,000.0 per month

Foreman                                                                                 5,000.0 per month

Stores and spares                                                                 5.0% of sales

Depreciation of machinery                                                 1, 50,000.0

Light and power                                                                    1, 00,000.0

Repairs and maintenance                                                    1, 50,000.0

Other expenses                                                                      15% of direct wages

Administration expenses                                                      2, 00,000.0 per annum

Answer. Master budget for the year ending……..

Sales (as per sales budget)                                                              

Sales of product A                                                                                2500000

Sales of product B                                                                                7500000

                                                                                                                10000000

Less: cost of production

Q3. You are a consultant hired to advise ABC Limited on ROI and help with decision making for additional order. The company has provided you following information:

The amount of division investment is Rs. 15, 00,000 and the target rate of return on investment is 20%

Particulars                                                          Amount (Rs.)

Sales (2, 00,000 units at Rs. 20)                     4,000,000

Less: Variable costs @ Rs. 15 per unit          3,000,000

Contribution Margin                                         1,000,000

Less: Fixed costs                                                 750,000

Division Profit                                                     250,000

Factory Overheads:

a. Based on the information provided calculate ROI and Residual income of ABC Limited

b. Assume that division has offered to sell 50,000 units at Rs. 25 per unit. If additional order is accepted, the variable cost per unit will remain the same. However, fixed costs would increase by Rs. 250,000. A further additional investment of Rs. 10, 00,000 would also be required. Analyze the impact on residual income.

Answer:. a) ROI = 250000 *100

                             1500000

= 16.7%

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