MBA 51013 – Accounting for Decision Making

Management Accounting Information for Decision Making

Practice questions

Question 1 - Special Order

Northern Optical ordinarily sells 50 000 X-lens for Rs.50. The variable production cost is Rs.10, the
fixed production cost is Rs.18 per unit, and the variable selling cost is Rs.1. A customer has requested
a special order for 10,000 units of the X-lens to be imprinted with the customer’s logo. This special
order would not involve any selling costs, but Northern Optical would have to purchase an imprinting
machine for Rs.50,000. What is the minimum price below which Northern Optical should not go in its
negotiations with the customer? In other words, below what price would Northern Optical actually be
losing money on the sale? There is ample idle capacity to fulfill the order.

a. Rs.50 b. Rs.10 c. Rs.15 d. Rs.29

Question 2- Make or Buy

Ecosystems requires packing boxes for their products. If the company were to make the boxes
themselves, the costs per unit would be:

Materials Rs.2
Labour Rs.3
Overhead Rs.5
Total Rs.10
The overhead consists of a variable cost of Rs.2 per unit and organisation wide fixed allocation of
Rs.60000 based on the normal output of 20 000 boxes.
Other costs include transport of the boxes to the assembly plant, Rs.0.20 per unit, and rent for the box
plant premises Rs.8 000 per year.
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An alternative is to purchase boxes from an external supplier for Rs.7 per box, including the cost of
delivery. If boxes were purchased externally, then the Ecosystems box plant would be shut down, and
a stores worker would need to be employed for Rs.14 000 per year.
a. Should Ecosystems make or buy the packing boxes?
b. What other factors should be considered?

Question 3 - Sell or Process Further

Macrobat produces two motorcycles for a major cycle maker, one type for racing, and the other type
for cruising. The completed cycles can be sold for Rs.45 000 and Rs.50 000 respectively.

The assembling costs Rs.1 800 000 for the racing cycle, and Rs.600 000 for the cruising cycle. Prior
to assembly, each cycle’s parts can be sold separately for the equivalent of Rs.20 000 for racing and
Rs.40000 for cruising. The company makes 100 units of racing, and 50 units of cruising.
Should Macrobat sell the cycles before assembly or after assembly?

Question 4 - Special Order

An organisation makes plastic soap dishes. Expected sales this year are 120 000 units at Rs.6 each.
Variable costs are Rs.2 per unit. Each unit needs 0.04 machine hours to produce. The injection
moulding machine used can make many products. The machine has Rs.250 000 fixed costs per year
and a capacity of 6 000 hours. Other fixed costs are for the plastic soap dish moulds that cost Rs.15000
each mould that are good for one year.

The company has been approached to make a special order of 80 000 ash-trays for Rs.3.00 each. The
company’s machine can process two of these trays in the time it takes to process one soap dish. The
ash-trays would have variable costs of Rs.1.70 each and the moulds would cost Rs.35 000 and last for
one year.

a. If the special order is accepted in full, how many soap dishes would the company produce?
b. Should the company accept the special order?

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Question 5- Dropping or Retaining a Segment
Ecosystems makes and sells several accessories. One of the accessories is an umbrella. Over the last
two years, the umbrella segment of the organisation has been experiencing losses. The company’s
management accountant has been assigned the task of deciding whether to drop or retain the umbrella
segment.

Using the following income statement of last years financial results of the umbrella segment, provide
a recommendation for the management accountant whether to continue or discontinue manufacture of
umbrellas. If Ecosystems discontinues the umbrella product line, then the General factory overhead
is allocated on the basis of 20 000 machine hours, and Purchasing expenses of the department are
allocated on the basis of sales.. Advertising is solely for each department. Equipment is specialised,
has been fully depreciated, and it would be difficult to sell, except for parts, therefore the equipment
is expected to have a resale value of Rs.10 000. Depreciation is on general equipment and calculated
on straight line depreciation at 10% of the original purchase price.

Ecosystems
Income statement of Umbrellas for the year ended 31 December
Sales Rs.450 000
Less variable expenses
Variable manufacturing expenses 130 000
Sales commissions 48 000
Shipping 12 000
Total variable expenses 190 000
Contribution Margin 260 000
Less fixed expenses
Salary of umbrella depart. Manager 21 000
General factory overhead 104 000
Depreciation of equipment 36 000
Advertising 110 000
Insurance on stock 9 000
Purchasing expenses of department 50 000
Total fixed expenses 330 000
Net profit (loss) (70 000)

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Question 6 – Replacement of Equipment
Sugath Fernando is a manager of the engineering development division of XY products. Fernando has
just received a proposal signed by all 15 of his engineers to replace the computer workstations with
networked personal computers (networked PCs). Data on computer workstations and networked PCs
are given below.

Computer workstations Networked PCs

(Rs) (Rs)
Original cost 150,000 67,500
Useful life 5 years 3 years
Current age 2 years 0 years
Remaining useful life 3 years 3 years
Accumulated depreciation 60,000 Not acquired yet
Current carrying amount 90,000 Not acquired yet
Current disposal value (in cash) 47,500 Not acquired yet
Terminal disposal value (in cash 3 years 0 0
from now)
Annual computer related cash operating 20,000 5,000
costs
Annual revenues 500,000 500,000
Annual non-computer related operating 440,000 440,000
costs

Required:
a) Compare the costs of computer workstations and networked PCs. Consider the
cumulative results for the three years together, ignoring the time value of money and
income taxes.
b) Should Fernando purchase the networked PCs?