NMIMS Global Access

School for Continuing Education (NGA-SCE)

Course: Strategic Cost Management

Internal Assignment Applicable for April 2020 Examination

1. A Company is considering replacing one of existing machine with either a state of the art “Automatic Machine” which will reduce the labor cost by 80% or with a standard machine. The automatic machine will cost ₹ 2,50,000 with an estimated life of 5 year, whereas the standard machine will cost ₹ 2,00,000 with an estimated life of 8 year. Both machine have no residual value. Assume tax rate to be 40%.

The annual sales and costs are estimated as below:

Automatic Machine (₹)Standard Machine (₹)Sales200,000200,000Costs:Materials40,00040,000Labour40,00070,000Variable Overheads20,00015,000

Calculate the payback period and advice the management. (10 Marks)

2. ABC Limited has provided following information related to sales, cost and margins for March 2020:

Sales (₹)

₹ 150,000

Total Cost

₹ 120,000

Fixed Cost

₹ 45,000

Net Profit

₹ 30,000

Calculate P/V ratio, Break-even Point (Sales), and Margin of Safety. (10 Marks)

3. You have been hired as a consultant by an auto parts manufacturing company. The company is currently dealing with an issue with the production of defective components costing them the loss of customers and sales. The company has identified that the main issue lies with a component supplier. The company has already gathered some information but unable to make a decision.

Automatic Machine (₹)Standard Machine (₹)Sales200,000 200,000 Costs: Materials 40,000 40,000 Labour 40,000 70,000 Variable Overheads 20,000

You have been provided with this information, the company can purchase the components in question from two suppliers, existing supplier A or new Supplier B. The price quoted by Supplier A is ₹18.00 per 100 numbers of the components and it is found that on an average 5% of the total receipt from this supplier is defective. The corresponding quotation from Supplier B is ₹15.00 per 100 numbers of the components but the defectives would go up to 10% for the total supply. If the defectives are not detected, they are utilized in production causing damage of ₹18 per 100 components. The company intends to introduce a system of inspection for the components on the receipt which would cost ₹5.00 per 100 components. The new inspection system will be able to detect only 90% of the defective components received. No payment will be made for defective components in the inspection. Assume the total requirements of components to be 25,000 numbers. (Hint: Use total cost for your analysis and recommendation.

You are asked to advice company management on:

a. Whether inspection at the point of receipt is justified? (5 Marks)

b. Which of the two suppliers should be asked to supply? (5 Marks)

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