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Pakistan: Extra Reading Time: 15 Minutes Writing Time: 02 Hours 45 Minutes Maximum Marks: 90 Roll No.
Pakistan: Extra Reading Time: 15 Minutes Writing Time: 02 Hours 45 Minutes Maximum Marks: 90 Roll No.
(b) Pak Products Ltd., sells restaurant equipment and supplies throughout the country. The
management of company intends to add an ice cream machine to its line of products
and is in process of negotiation with an overseas manufacturer who has demanded
Rs. 7,000 per ice cream machine.
Management of Pak Products Ltd., believes that the ice cream machine could be sold to
its customers for Rs. 7,500 each. At that price, annual sales of the ice cream machines
would be 40,000 units. If the ice cream machine is added to Pak Products Ltd., product
lines, the company will have to invest Rs. 20,000,000 in inventories and special
warehouse fixtures. The variable cost of selling the ice cream machine would be Rs. 500
per unit.
Required:
(i) If Pak Products Ltd., requires a 20% return on investment (ROI), what is the
maximum amount the company would be willing to pay to the overseas
manufacturer for an Ice cream machine? 04
(ii) After negotiations, management has concluded that the overseas manufacturer
would not sell the ice cream machine at a lower price for Pak Products Ltd., to earn
its 20% required ROI. What alternative could be opted if the management does not
want to give up the idea of adding machine to its line of products? 01
(c) English Shoes Ltd., supplies shoes to Karachi Shoes Company and Lahore Shoes
Company. Each pair of shoes has a list price of Rs. 1,000 which costs Rs. 500 to
English Shoes Ltd. As Lahore Shoes Company buys in bulk it receives a 10% trade
discount for every order for 100 pairs of shoes or more. Karachi Shoes Company
receives a 15% discount irrespective of order size, because the company itself collects
the shoes, thereby saving the seller any distribution cost. The cost of administering each
order is Rs. 100 and the distribution cost is Rs. 2,000 per order. Karachi Shoes
Company makes 10 orders in the year, totalling 420 pairs of shoes, and Lahore Shoes
Company places 5 orders for 100 pairs.
Required:
Who is most profitable client for the English Shoes Ltd.? Show your workings. 07
Q. 3 Suppose you have been working as management accountant at ABC Ltd. Your company
manufactures a variety of lawn mowers. The production manager of your company has
approached you for some costing advice on submitting a tender to an overseas customer for
a state-of-the-art lawn mower. It is one time order and the costs associated with lawn mower
are as follows:
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Marks
Rupees
Material-X at cost 8,000
Material-Y 16,000
Direct labour 12,000
Supervision 4,000
Manufacturing overheads 24,000
64,000
Q. 4 (a) The Data Company produces three products, ‘A’, ‘B’, and ‘C’, as the result of initial joint
processing plus separable processing after the split-off point. Records for July show the
following:
Products A B C Total
Materials used (Rs.) – – – 300,000
Joint processing cost (Rs.) – – – 340,000
Separable processing costs (Rs.) 100,000 160,000 140,000 –
Unit produced 6,000 12,000 6,250 –
Unit sold 4,000 9,000 4,250 –
Unit sales price (Rs.) 100 75 80 –
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Required:
(i) Calculate the cost assigned to ending inventory for each product and in total,
assuming no beginning inventory and using the market value method for joint cost
allocation. 09
(ii) A prospective customer is willing to buy all the output of product ‘B’ at the split-off
point for Rs. 60 per unit. Would you recommend the Data Company to accept this
offer? Is there any advantage which would make the sale of product ‘B’ at split-off
point desirable? 04
(b) “Benchmarking is the establishment through data gathering, of targets and comparators,
through whose use relative levels of performance and particularly underperformance
can be identified. By the adoption of identified best practices, it is hoped that
performance will improve.” What are the three distinct approaches to benchmarking?
Explain. 06
Q. 5 (a) XYZ Ltd., has produced just one fairly successful product in the past. Recently,
however, a new version of this product has been launched. Development work
continues to add a related product to the product list. Given below are some details of
the activities during the month of June:
Existing Product New Product
Units produced 50,000 10,000
Cost of units produced (Rs.) 750,000 140,000
Sales revenue (Rs.) 1,100,000 250,000
Hours worked 10,000 2,500
Development costs (Rs.) 94,000
Required:
(i) Calculate performance indicators that could be calculated for each of the four
perspectives on the balanced score card. 07
(ii) Suggest how this information would be interpreted. 02
The Gamma Division has been offered a government contract to supply a new
electronic product in large quantities to military installations. Production of the new
electronic product would require an additional investment in operating assets of
Rs. 1,000,000. Annual sales and segment income from the government contract would
be Rs. 2 million and Rs. 180,000 respectively.
Required:
(i) Calculate the margin earned, turnover of assets, and return on investment (ROI) for
each division. 06
(ii) Compute the residual income (RI) for each division. 03
(iii) Evaluate how the contract of electronic product would affect the Gamma division’s
profit performance, based on return on investment and residual income using the
2013 results. 06
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Marks
Q. 6 Skyways Ltd., has three manufacturing divisions. Blue Division manufactures product ‘B’
which is then sold to Green Division as a component of product ‘G’; product ‘G’ is then sold to
White Division which uses it as a component in processing product ‘W’. Product W, the final
product is sold for Rs. 5,600 each.
Product ‘B’ and ‘G’ have no outside market. A unit of product ‘W’ uses one unit of product ‘B’
and one unit of product ‘G’. Current standard costs and other data relating to the three
products for the forthcoming year 2014 are shown below:
Rupees
Product ‘B’ ‘G’ ‘W’
Standard cost per unit:
Material purchased from outside 400 600 200
Direct labour (variable) 200 200 400
Variable overhead 200 200 400
Fixed overhead 600 800 200
Standard volume (units) 10,000 10,000 10,000
Stock and work in process (average) 14,000,000 3,000,000 6,000,000
Fixed assets (net) 6,000,000 9,000,000 3,200,000
The following alternative rules may be practiced for the inter-divisional transfer pricing of
products ‘B’ and ‘G’ to the White Division during the next year:
Standard cost per unit, plus an additional charge per unit based on a 10% return per
annum on average stocks and work in process and on fixed assets.
Standard variable cost per unit, plus a fixed monthly charge equal to their total fixed
overhead costs together with a 10% return per annum on the current average stocks,
work in process and fixed assets.
Required:
As a general manager of White Division, your aim is to maximize your reported divisional
profits.
(a) Prepare a profit and loss forecast for the White Division for 2014 on the basis of 90% of
standard volume under each of the alternative rules for the inter – divisional transfer
pricing of products ‘B’ and ‘G’. 13
(b) Comment, with reasons, as to which of the two transfer pricing rules is likely to be
preferred by the managing director of Sky Ways Ltd. 02
THE END
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