PROBLEMS IN AMD III SEM M.COM.

, 31-10-2018

1. Modern packaging company specialized in the manufacture of one litre plastic bottles. The firm’s
customers include dairy processors, fruit juice makers and edible oil manufacturers. The bottles are
produced by a process of blow moulding. The firm has four moulding machine, each capable of
producing 100 bottles per hour. The firm estimates that the variable cost of producing a plastic bottle
is 20 paise. The bottles are sold for 50 paise each. Management has been approached by local toy
company that would like the firm to produce a moulded plastic toy for them. The toy company is
willing to pay Rs.3.00 per unit for the toy. The variable cost to manufacture the toy will be Rs.2.40. in
addition, the Modern Packing Corporation would have to incur a cost of Rs.20,000to contract the
needed mould exclusively for this order. Because the toy uses more plastic and is of a more intricate
shape than a bottle, a moulding machine can produce only 40 units per hour. The customer wants
1,00,000 units. Assuming Modern Packing Corporation has the total capacity of 10,000machine hours
available during the period in which the toy company wants the delivery of toys. The firm’s fixed
costs, excluding the costs to construct the toy mould, during the same period would be Rs.2,00,000.
Required : a) if the management predicts that the demand for its bottles will require the use of 7,500
machine hours or less during the period, should the special order be accepted? Give reasons. b) if the
management predicts that the demand for its bottles will be higher than its ability to produce bottles,
should the order be accepted? Why? C) if the management has located a firm that has just entered
the moulded plastic business. The firm has considerable excess capacity and more efficient moulding
machines and willing to sub contract the toy job or any portion of its for Rs.2.80 per unit. It will
contract its own toy mould. Determine Modern Packaging Corporation minimum expected excess
machine hour capacity needed to justify producing any portion of the order itself rather than
subcontracting it entirely. D) the management predicted that it would have 1,600 hours of excess
machine hour capacity available during the period. Consequently it accepted the toy order and
subcontracted36,000 units to the other plastic company. In fact the demand for bottles turned out to
be 9,00,000 units for the period. The firm was able to produce only 8,40,000 units because it had to
produce toys. What was the cost of the prediction error failure to predict demand correctly.

2. You have been approached by your friend to advice him whether he should give up his job as an
engineer, with current salary of Rs.14,800 per month and go into business on his own, assembling and
selling a component from a supplier. It is very difficult to forecast the sales potential of the
component, but after some research, your friend has estimated the sales as follows: i) between 600
and 900 components per month at a selling price of Rs. 250 per component. Ii) between 901 and
1,250 components per month at a selling price of Rs. 220 per component for the entire lot. The cost
of the parts required would be Rs.140 for each completed components. However, if more than 1000
components are produced in each month, a discount of 5% would be received from the supplier of
parts on all purchases. Assembly cost would be Rs.60,000 per month up to 750 components. Beyond
this level of activity assembly costs will increase to Rs.70,000 per month. Your friend has already
spent Rs.30,000 on development, which he would write off over the first five years of the venture.
Required:
i) Calculate for each of the possible sales levels at which your friend could expect to benefit by
going into the venture on his own.
ii) Calculate the break-even point of the venture for each of the selling price.
iii) Advise your friend as to the validity of the venture.