Select College

Faculty of Business and Economics

Department of Accounting and Finance
Cost Accounting II Group Assignment
GENERAL DIRECTIONS

o This work sheet consists of TWO PARTS. Read carefully the instruction of each part and
give your answer accordingly.
o Don’t use pencil or red pen!
o Attempt all question INDEPENDENTLY.
o The NEATNESS of your work would have a positive impact on your achievement.
o This work sheet has a MAXIMUM VALUE of 15%.
o Delay in sending the answer would result in lower grades.
o Send your answer to the following:

1
Part I: Discussion Questions
1. Is cost accounting a subset of management accounting or is management accounting a
subset of cost accounting? Why?
2. What is the deference between an operating and financial budget?
3. Define “flexible budget” and explain its importance as a budgeting technique and tool of
control.
4. Cost Volume Profit Analysis (CVP) is a decision making model that can be used only by
business organizations. Comment
5. You are considering the sale of your old stereo system. According to your records, you
paid Br. 500 for the stereo system. The current market value of the stereo is Br. 150. A
new stereo of the same make and model could be purchased today for Br. 375. Which of
these figures is relevant to your decision to sell or keep the stereo system? If any figures
are not relevant, explain why.
6. Kelly XY, owner of Mexican Cafe, is trying to decide whether to make Enjera or buy
them from a supplier. Kelly has come to you for advice. What factors would you tell her
to consider in making her choice?

Part II: Work Out Problems

Q1. Betiret Company manufactures and sales a single product. During the year just ended the
company produced and sold 60,000 units at an average price of Br. 20 per unit. Variable
manufacturing costs were Br. 8 per unit, and variable marketing costs were Br 4 per unit sold.
Fixed costs amounted to Br 180,000 for manufacturing and Br 72,000 for marketing. There was
no year-end work- in – progress inventory. Ignore income taxes.
Required:
1. Compute Betiret’s breakeven point (BEP) in sales Birrs for the year.
2. Compute the number of sales units required to earn a net income of Br. 180,000
during the year
3. Betiret’s variable manufacturing costs are expected to increase 10% in the coming
year. Compute the firm’s breakeven point in sales Birrs for the coming year.
4. If Betiret’s variable manufacturing costs do increase 10% compute the selling price
that would yield the same CM – ratio in the coming year.
(N.B.: show your answer in equation method and contribution margin method separately)

Answer:

1) a. equation method
NI = PQ-VQ-F
At break-even NI=0
0 = PQ-VQ-F
0 = 20Q – (8+4)Q – (180,000 + 72,000)
Q = 31,500 unit

2
BEP Sales = Br. 20 x 31,500
= Br. 630,000
b. contribution margin method
BEP (in sales birrs) = Fixed expenses = F
CM ratio P-V
Q = FC
P-V
= 180,000 + 72,000
20 – (8 + 4)
= 31,500 unit
BEP Sales = Br. 20 x 31,500
= Br. 630,000

2) a. equation method
TI = PQ – VQ – FC
180, 000 = 20Q – 12Q – 252, 000
8Q= 180, 000 + 252, 000
Thus, Q = Br.432, 000 = 54, 000 units
8
b. contribution margin method
Target sales in units = Fixed expenses + Target Profit
Unit CM
= Br.252, 000+180, 000
Br. 8
= 54, 000 units
3) a. equation method
10% increase in variable manufacturing cost will change from Br. 8 to Br. 8.8 (Br. 8 (1.1))
NI = PQ-VQ-F
At break-even NI=0
0 = PQ-VQ-F
0 = 20Q – (8.8+4)Q – (180,000 + 72,000)
Q = 35,000 unit
BEP Sales = Br. 20 x 35,000
= Br. 700,000
b. contribution margin method
10% increase in variable manufacturing cost will change from Br. 8 to Br. 8.8 (Br. 8 (1.1))
BEP (in sales birrs) = Fixed expenses = F
CM ratio P-V

3
Q = FC
P-V
= 180,000 + 72,000
20 – (8.8 + 4)
= 35,000 unit
BEP Sales = Br. 20 x 35,000
= Br. 700,000

4)
Before After 10% increase
Amount Percent Amount Percent

Sales Br. 1,200,000 100 Br. 1,280,000 100

Variable costs 720,000 60 300,000 60
Contribution Margin 480,000 40 200,000 40
Fixed costs 252,000 252,000
Net income Br. 128,000 Br. 100,000

P
Therefore sales should be Br. 1,280,000
Or price should rise to Br. 21.33

Q2. Topper Sports Incorporation produces high quality sports equipment. The company’s
Racket Divisions manufactures three tennis rackets- the Standard, the Deluxe, and the Pro-that
are widely used in amateur play. Selected information on the rackets is given below:

Standard Deluxe Pro

Selling price per racket Br. 40. 00 Br. 60.00 Br. 75.00
Variable expense per Racket:
Production 22. 00 27.00 40.45
Selling
(5% of selling Price) 2.00 3.0 3.75
Total Variable Cost 24.00 30.00 44.20

All sales are made through the company’s own retail outlets.

The Racket Division has the following fixed costs:

Per Month
Fixed Production Costs Br. 120,000
Advertising Expenses 100, 000
Administrative salaries 50,000
Total Fixed Costs Br 270,000

4
Sales, in units, for the month of May have been as follows:

Standard Deluxe Pro Total

Sales in unit 2,000 1,000 5,000 8,000____

Required:
1) Compute the weighted –average unit contribution margin, assuming the above sales mix
is maintained
2) Compute the Racket Division’s breakeven point in Birrs for May.
3) How many units of each product should the company sale in order to earn a Br162, 000
incomes? Ignore income tax.

Answer:

Method I: Equation method

Sales – variable expenses – fixed expenses = Net income (at BEP net income equals zero)
Sales – variable expenses – fixed expenses = zero
Let: X = Standard, Y = Deluxe, Z = Pro
As given here above, for every unit of sales in made Y we expect 5 units and 2 units of X and Z,
respectively. Therefore, let
K=number of units of Y to break-even, the break even sales for X and Z will be 2K and 5K,
respectively.
Sales – variable expenses – fixed expenses = O
Total contribution margin - fixed expenses= O
For three products, the formula for the net income would be:
(TCM1 + TCM2 + TCM3) – fixed expenses = O

Where TCM = total contribution margin

16(2K) + 30(K) + 30.8(5K) – 270,000 = 0
216K =270, 000
K = 270, 000 = 1, 250 units
216
Thus, the breakeven sales for each product line would be:
Standard =2K=2 x 1, 250= 2, 500 units
Deluxe = K = 1, 250 units

5
Pro =5K =5 x 1, 250 = 6, 250 units
Topper Sports Inc., breakeven at 10, 000 units, i.e., 2, 500 + 1, 250 + 6, 250
Multiply unit sales to break even by the selling price of each product in order to determine break-
even sales volume in total birrs
Racket BEP in birrs
Standard 2, 500 x Br. 40 = Br.100, 000
Deluxe 1, 250 x Br. 60 = Br.75, 000
Pro 6, 250 x Br. 75 = Br.468, 750
Total…………………………………… Br.643, 750

Method II. Contribution Margin Method

Sales mix, given above, for the three rackets X : Y : Z = 2: 1: 5

BEP (in units for Topper Sports) = Fixed Costs
Cm1n1 + Cm2n2 + Cm3n3
n1 + n2 + n3
= Br.270, 000
16(2)+30(1)+30.8(5)
2 +1+5
=10, 000 units

Racket BEP in units

Standard 10, 000 x 2/8 = 2, 500 units
Deluxe 10, 000 x 1/8 = 1, 250 units
Pro 10, 000 x 5/8 = 6, 250 units
Total 10, 000 units

At this it is possible to multiply break-even sales for each product by their corresponding sales
price to a break-even sales of Br.643, 750 for the company as a whole. Or this break –even sales
can be computed with the following short cut formula:

BEP (in birrs for Topper Sports) = Fixed expenses

Cm1n1 + Cm2n2 + Cm3n3
p1n1 + p2 n2 + p3n3
= Br.270, 000

6
16(2)+30(1)+30.8(5)
40(2)+60(1)+75(5)
= Br. 270, 000
216
515
= Br. 270, 000 x 515
216
= Br. 643, 750

In order the company sale in order to earn a Br162, 000 incomes:

Sales mix, given above, for the three rackets Standard: Deluxe: Pro = 2:1:5
Share of each racket from the targeted sale and in unit will be:
Standard = 2/8 x Br. 162,000 = Br. 40,500
Br. 40,500/Br. 40 = 1,012.5 unit
Deluxe = 1/8 x Br. 162,000 = Br. 20,250
Br. 20,250/Br. 60 = 337.5 unit
Pro = 5/8 x Br. 162,000 = Br. 101,250
Br. 101,250/Br. 75 = 1,350 unit

Q3. Super Hand tools, a manufacturing business that sells tools, wants a master budget to be
prepared, beginning January 1, and 20X6.
The managers of the different departments have provided the following information:
The Sales Manager has projected the following sales:
o 1st Quarter 700 units
o 2 Quarter
nd
850 units
o 3 Quarter
rd
1,000 units
o 4 Quarter
th
1,150 units
o Projected selling price is Birr 9.00/unit.
The Manufacturing Manager has estimated the cost per unit will be:
o Birr.05 for direct material
o Birr 1.75 for direct labor
o Birr 0.75 for manufacturing overhead
Your Production Manager gave the following information:
• Ending Inventory is to be 35% of next month’s production need, rounded to the nearest 10.
• Next year’s 1st Quarter needs: 1,280 units

7
• Beginning Inventory for the 1st Quarter is 200 units.

The Accounting Department Manager has provided the following information:

• Selling Expenses:
o Variable: Commission 5% of Sales
o Fixed: (split evenly over the 4 quarters)
• Rent Birr 1,200 per year
• Advertising Birr 400 per year
• Telephone Birr 800 per year
• Depreciation Expense – Office Birr 500 per year
• Administrative Expenses:
o Variable: Bad Debts Expense – estimated at 1% of Sales
o Fixed: (split evenly over the 4 quarters)
• Salaries Birr 6,000 per year
• Insurance Birr 440 per year
• Telephone Birr 800 per year
• Supplies Birr 200 per year
• Other Expenses Birr 400 per year
•Cash Receivable:
o 4 Quarter Sales of previous year was Birr 900
th

o 90% of sales is collected in the quarter in which they were made

o 9% of sales collected in the following quarter in which they were made
o 1% of sales is uncollectible
• Accounts Payable:
o One half of a month’s purchases are paid for in the quarter of purchase; the other
half is paid for in the following quarter.
o The accounts payable balance on December 31 of the previous quarter is Birr 300
• Income Tax is estimated at 25% average.
• Depreciation of Manufacturing Overhead is Birr 200 divided evenly over the 4 quarters.
• Super Hand tools has a Birr 10,000 cash balance for the beginning of the 1st quarter
• Super Hand tools borrowed $10,000 in the 1st Quarter and paid it back in the 4th Quarter.
• Dividends of Birr 5,000 are to be paid in the fourth quarter.
• From the beginning Balance Sheet:
o Land = Birr 20,000
o Building = Birr 148,000
o Depreciation (Building) = Birr 33,000

8
o Retained Earnings = Birr 51,717.50
o Capital Stock = Birr 90,000
For the Master Budget, you are expected to prepare the following:
1) Sales Budget
2) Cost of Goods Sold Budget
3) Selling Expense Budget
4) Administrative Expense Budget
5) Production Budget
6) Budgeted Income Statement plus a Budget of Collections of Accounts Receivable
7) Direct Materials Budget plus a Schedule of Expected Cash Disbursements
8) Direct Labor Budget
9) Manufacturing Overhead Budget
10) Cash Budget
11) Budgeted Balance Sheet

Answer:

1) Sales Budget
Super Hand Tools
Sales Budget
For the year ended Dec. 20x6
Quarter
1 2 3 4 Year
Budgeted sales in units 700 850 1,000 1,500 4,050
Selling price per unit X Br. 9 X Br. 9 X Br. 9 X Br. 9 X Br. 9
Total Sales Br. 6,300 Br. 7,650 Br. 9,000 Br. 13,500 Br. 36,450

2) Cost of Goods Sold Budget

Super Hand Tools
Cost of Goods Sold Budget
For the year ended Dec. 20x6
Quarter
1 2 3 4 Year
Budgeted sales in units 700 850 1,000 1,500 4,050
Manufacturing cost per unit* X Br. 2.55 X Br. 2.55 X Br. 2.55 X Br. 2.55 X Br. 2.55

9
Cost of goods sold Br. 1,785 Br. 2,167.5 Br. 2,550 Br. 3,825 Br. 10,327.5

* Manufacturing cost per unit = per unit cost of direct material + per unit cost of direct labor + per unit
cost of manufacturing overhead
= Br. 0.05 + Br. 1.75 + Br. 0.75
= Br. 2.55

3) Selling Expense Budget

Super Hand Tools

Selling Expense Budget
For the year ended Dec. 20x6

Quarter Total
1 2 3 4
Variable selling expenses
Budgeted sales Br. 6,300 Br. 7,650 Br. 9,000 Br. 13,500 Br. 36,450
Commission 5% of
Sales X 0.05 X 0.05 X 0.05 X 0.05 X 0.05
Total variable selling
Br. 315 Br. 382.5 Br. 450 Br. 675 Br. 1,822.5
expenses
Fixed selling expenses
Rent Br. 300 Br. 300 Br. 300 Br. 300 Br. 1,200
Advertisement Br. 100 Br. 100 Br. 100 Br. 100 Br. 400
Utility Br. 200 Br. 200 Br. 200 Br. 200 Br. 800
Depreciation Br. 125 Br. 125 Br. 125 Br. 125 Br. 500
Total fixed selling
Br. 725 Br. 725 Br. 725 Br. 725 Br. 2,900
expenses
Total budgeted selling
Br. 1,040 Br. 1,107.5 Br. 1,175 Br. 1,400 Br. 4,722.5
expenses
4) Administrative Expense Budget

Super Hand Tools

Administrative Expense Budget
For the year ended Dec. 20x6

10
Quarter Total
1 2 3 4
Variable administrative
expenses
Budgeted sales Br. 6,300 Br. 7,650 Br. 9,000 Br. 13,500 Br. 36,450
Bad debt expense
1% of Sales X 0.01 X 0.01 X 0.01 X 0.01 X 0.01
Total variable
Br. 63 Br. 76.5 Br. 90 Br. 135 Br. 364.5
administrative expenses
Fixed administrative
expenses
Salaries Br. 1,500 Br. 1,500 Br. 1,500 Br. 1,500 Br. 6,000
Insurance Br. 110 Br. 110 Br. 110 Br. 110 Br. 440
Utility Br. 200 Br. 200 Br. 200 Br. 200 Br. 800
Supplies Br. 50 Br. 50 Br. 50 Br. 50 Br. 200
Other expenses Br. 100 Br. 100 Br. 100 Br. 100 Br. 400
Total fixed administrative
Br. 1,960 Br. 1,960 Br. 1,960 Br. 1,960 Br. 7,840
expenses
Total budgeted
Br. 2,023 Br. 2,036.5 Br. 2,050 Br. 2,095 Br. 8,204.5
administrative expenses
5) Production Budget

Super Hand Tools

Production Budget
For the year ended Dec. 20x6
Quarter Total
1 2 3 4
Expected sales (units) 700 850 1,000 1,150 4,050
Add: Desired Ending
297.5 350 402.5 448 98
Inventory
Total needs 997.5 1,200 1,402.5 1,598 4,148
Lees: Beginning Inventory 200 297.5 350 402.5 200
Units to be produced 797.5 902.5 1,052.5 1,195.5 3,948

6) Budgeted Income Statement plus a Budget of Collections of Accounts Receivable

Super Hand Tools

Budgeted Income Statement
11
For the year ended Dec. 20x6

Sales [4,050 units at Br. 9] Br.36,450.00

Cost of Goods Sold [4,050 units at Br. 2.55] 10,327.50
Gross Margin 26,122.50
Selling & Administrative Expenses 12,927.00
Net Income before tax 13,195.50
Income tax [25%] 3,298.88
Net Income Br. 9,896.63

Super Hand Tools

Scheduled of expected cash collection
For the year ended Dec. 20x6
Quarter
1 2 3 4 Total
9% of the previous
Br. 81 Br. 567 Br. 688.5 Br. 810 Br. 2,146.5
quarter sales
90% of the current
Br. 5,670 Br. 6,885 Br. 8,100 Br. 12,150 Br. 32,805
quarter sales
Total collections Br. 5,751 Br. 7,452 Br. 8,788.5 Br. 12,960 Br. 34,951.5

7) Direct Materials Budget plus a Schedule of Expected Cash Disbursements

Super Hand Tools

Direct Material Budget
For the year ended Dec. 20x6
1 2 3 4 Total
Units to be produced 797.5 902.5 1,052.5 1,195.5 3,948
Direct materials cost per
x Br. 0.05 x Br. 0.05 x Br. 0.05 x Br. 0.05 x Br. 0.05
unit
Total Br. 39.88 Br. 41.10 Br. 52.63 Br. 59.78 Br. 197.4

Super Hand Tools

Schedule of Expected Cash Disbursements (for Materials Purchase)
For the year ended Dec. 20x6
Quarter Total
1 2 3 4

12
50% of the previous
Br. 0 Br. 19.94 Br. 20.55 Br. 26.32
quarter
50% of the current
19.94 20.55 26.32 29.89
quarter
Total cash
Br. 19.94 Br. 40.49 Br. 46.87 Br. 56.21 Br. 163.51
disbursement

8) Direct Labor Budget

Super Hand Tools

Direct Labor Budget
For the year ended Dec. 20x6
1 2 3 4 Total
Units to be produced 797.5 902.5 1,052.5 1,195.5 3,948
x Br. 1.75 x Br. 1.75 x Br. 1.75 x Br. 1.75 x Br. 1.75
Direct labor cost per unit
Total Br. 1,395.63 Br. 1,579.38 Br. 1,841.88 Br. 2,092.13 Br. 6,909

9) Manufacturing Overhead Budget

Super Hand Tools

Manufacturing Overhead Budget
For the year ended Dec. 20x6
1 2 3 4 Total
Units to be produced 797.5 902.5 1,052.5 1,195.5 3,948
x Br. 0.75 x Br. 0.75 x Br. 0.75 x Br. 0.75 x Br. 0.75
MOH cost per unit
Total Br. 598.13 Br. 676.88 Br. 789.38 Br. 896.63 Br. 2,961

10) Cash Budget

Super Hand Tools

Cash Budget
For the year ended Dec. 20x6
Quarter
1 2 3 4
Cash balance, beginning Br. 10,000 Br. 20,674.3 Br.22,685.55 Br.25,570.92
Add : Collection from customers 5,751 7,452 8,788.5 12,960
Total cash available before financing 15, 751 28,126.3 31,474.05 38,530.92
Less: Disbursements for

13
Direct materials 19.94 40.49 46.87 56.21
Direct labor 1,395.63 1,579.38 1,841.88 2,092.13
Manufacturing overhead 598.13 676.88 789.38 896.63
Selling & Administrative 3,063 3,144 3,225 3,495
Dividend - - - 5,000
Total disbursements 5,076.7 5,440.75 5,903.13 11,539.97
Cash available 10,674.3 22,685.55 25,570.92 26,990.95
Financing:
Borrowing (at beginning) 10,000 - - -
Repayments ( at ending) - - - (10,000)
Total financing 10, 000 - - (10,000)
Cash balance, ending Br. 20,674.3 Br. 22,685.55 Br.25,570.92 Br.16,990.95

11) Budgeted Balance Sheet

Super Hand Tools

Budgeted Balance Sheet
At Dec. 20x6

ASSETS
Current assets:
Cash Br. 16, 990.95
Accounts Receivable 1,215
Raw Materials Inventory 4, 500
Finished Goods Inventory 39, 000
Total current assets Br.61,706

Plant and Equipment:

Land Br.20, 000
Building 148, 000
Accumulated Depreciation (40, 400)
Plant net 107,600
Total assets Br. 146,944

14
LIABILTIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable (raw materials) Br.329.89
Stockholders’ equity:
Capital stock Br.90, 000
Retained earnings 56,614.13
Total stockholders’ equity 146,614.13
Total liabilities and stockholders’ equity Br. 146,944

Q4. Ramón Finance helps prospective homeowners find low cost financing and assists existing
homeowners in refinancing their current loans at lower interest rates. Ramón charges clients
0.5% of the average loan amount it arranges. In its 2009 static budget, Ramón assumes the
average loan amount would be Birr 200,000. Budgeted cost data per loan application for 2009
are:

 Professional labor: 6 hours at a rate of Birr 40.00 per hour.

 Loan filling fees: Birr 100
 Credit worthiness checks Birr 120
 Courier mailing Birr 50
Office support is budgeted to be Birr 31,000 per month. Ramón Finance views this amount as a
fixed cost.
Required:
(1) Prepare a static budget for November 2009 assuming 90 loan applications.
(2) Prepare a Level 2 variance analysis identifying sales- volume and flexible- budget variances
for Ramón Finance for November 2009. Actual loan applications in November 2009 were 120,
and the average loan amount was Birr 224,000. Other actual data for November 2009 were:
 Revenue : Birr 134,400
 Professional labor : 7.2 hours per loan application at Birr 42 per hour
 Loan filing fees: Birr 100 per loan application; Total cost Birr 12,000
 Credit worthiness checks :Birr 125 per loan application ; total cost
Birr 15,000
 Courier mailings Birr 54 per loan applications ; total cost Birr 6,480
 Office support costs Birr 33,500

Answer:

15
1) Sales Budget

Q5. Gugsa PLC has produced the following budget and actual information.
Gugsa budget and actual
Budget Actual
Sales units 10,000 11,000
Price per unit Br.37.10 Br 36
Direct materials
Magna – per unit 4 kg @ Br 1.50/kg 46,500 kg – cost Br 67,425
Carta – per unit 1 kg @ Br 5/kg 11,500 kg – cost Br 58,650
Labor – per unit 2.5 hours @ Br 7 26,400 – cost Br 187,440
Fixed costs Br 5,000 Br 68,000
Required:
a. Prepare a budget versus actual report using the above figures.
b. Prepare a flexible budget for Gugsa
c. Calculate all sales and cost price and efficiency variances.

Answer

a) Gugsa PLC Performance Report

Particulars Budgeted Actual Budget Variances

Units 10,000 units 11,000 units 1,000 units F

Sales Br. 371,000 Br. 396,000 Br. 25,000 F

Costs:
Direct Materials:
* Magna Br. 60,000 Br. 67,425 Br. 7,425 U

* Carta 50,000 58,650 8,650 U

Direct Materials Cost Br. 110,000 Br. 126,075 Br. 16,075 U

Labor Cost Br. 175,000 Br. 187,440 Br. 12,440 U

Total Variable Cost Br. 285,000 Br. 313,515 Br. 28,515 U

Contribution Margin Br. 86,000 Br. 82,485 Br. 3,515 U

Fixed Cost Br. 5,000 Br. 68,000 63,000 U
Operating Income Br. 81,000 Br. 14,485 Br. 66,515 U

16
b) Flexible Budget for Gugsa PLC

Particulars Budget per unit Flexible Budget for various units

Units 10,000 units 11,000 units

Sales Br. 37.10 Br. 371,000 Br. 408,100

Costs:
Direct Materials:
* Magna 4 kg @Br 1.50/kg Br. 60,000 Br. 66,000

* Carta 1 kg @Br 5/kg 50,000 55,000

Direct Materials Cost Br. 110,000 Br. 121,000

Labor Cost 2.5 hours @ Br 7 Br. 175,000 Br. 192,500

Total Variable Cost Br. 28.50 Br. 285,000 Br. 313,500

Contribution Margin Br. 8.6 Br. 86,000 Br. 94,600

Fixed Cost Br. 5,000 Br. 5,000
Operating Income Br. 81,000 Br. 89,600

c) Sales and cost price and efficiency variances.

Flexible
Actual Flexible Master Sales Activity
Budget
Results Budget Budget Variances
Variance
11,000 11,000 10,000 - 1,000 F
Units
Br. 396,000 Br. 408,100 Br. 371,000 Br. 25,000 F
Sales
Variable costs 313,515 313,500 285,000 - 28,515 U
Contribution
Br. 82,485 Br. 94,600 Br. 86,000 Br.12,115 U Br. 3,515 U
margin
Fixed Costs 68,000 5,000 5,000 63,000 U 63,000 U

17
Operating
Br. 14,485 Br. 89,600 Br. 81,000 Br.75,115 U Br.66, 515 U
Income

Q6. ZK Ltd has been asked to quote a price for a special job that must be completed within one
week. The job requires a total of 100 skilled labor hours and 50 unskilled labor hours. The
current employees are paid a guaranteed minimum wage of Br. 525 for skilled workers and Br.
280 for unskilled workers for a 35-hour week. Currently, skilled labor has spare capacity
amounting to 75 labor hours each week and unskilled labor has spare capacity amounting to 100
labor hours each week. Additional skilled workers and unskilled workers can be employed and
paid by the hour at rates based on the wages paid to the current workers.
The materials required for the job are currently held in stock at a book value of Br. 5,000. The
materials are regularly used by ZK Ltd and the current replacement cost for the materials is Br.
4,500. The total scrap value of the materials is Br. 1,000.

Required:
1) What is the total relevant cost to ZK Ltd of using skilled and unskilled labor on this
job?
2) What is the relevant cost to ZK Ltd of using the materials in stock on this job?
Q 7. A manufacturing company produces and sells three products P, Q and R. It has an available
machine hour capacity of 100,000 hours, interchangeable among the three products. Presently
the company produces and sells 20,000 units of P and 15,000 each of Q and R. The unit selling
prices of the three products are Br. 25, Br. 32 and Br. 42 for P, Q and R respectively. With this
price structure and the aforesaid sales-mix the company is incurring loss. The total expenditure,
exclusive of Fixed charges (presently Br. 5 per unit), is Br. 1,375,000. The unit cost ratio
amongst the products P, Q and R is 4: 6: 7. Since the company desires to improve its profitability
without changing its cost and price structures, it has been considering the following three mixes
so as to be within its total available capacity.
Products Mix I Mix II Mix III
(in units) (in units) (in units)
P 25,000 20,000 30,000
Q 15,000 12,000 5,000
R 10,000 18,000 15,000
You are required to compute the quantum of loss now incurred and advice the most profitable
mix which could be considered by the company, applying the concept of relevance.

18