Question

1. a) Bara enterprises operates in Kitale town. On annual basis, it orders 480,000 pens form a Nairobi based distributor. A packet of 24 pens delivered to Baras warehouse cost sh 480 including transport charges. The supermarket barrows money from ABC bank of an interest rate of 10% p.a to finance its inventories. The supermarket also incurs sh 1,500 to place an order for the pens and sh 8 carrying cost for each pen

REQUIRED:

i) Calculate the economic order quantity (EOQ) for the pens
ii) Total cost of the EOQ.
iii) For orders for 72,000 pens and above the distributer has offered a discount rate of 10% on delivery price.

Advice the management of the supermarket on whether to take advantages of the discount offer. (6 Marks)

b) Wilson an automotive technician has been operating a garage in Mombasa for the past two years. A year ago he converted part of his garage to a welding shop making and selling metal doors and windows. He had anticipated that he cost of welding shop would primarily be final but has realized that the welding cost increased with the increase in number of welding job assignment. The costs of welding job assignments are as follows.

Perched No of welding job assignments Total cost sh ‘000’
Sept 2008    280 700
Oct   2008    800 860
Nov 2008 1,240 110
Dec   2008 1,000 960
Jan   2009    600 720
Feb   2009    920 910
Mar 2009    860 880
Apr   2009 1,200 260

REQUIRED:
Formulate an equation to estimate the total cost of the welding shop and compute the cost of undertakings 1256 assignment using

i) High-low method
ii) Simple linear regression method. (6 Marks)

2. Tropical ltd produces powder soap for households use. The standard direct costs per carton containing 20 packets of one kg each is as follows:

Raw materials
15 kgs of tallons @ sh 10 per kg
10 kgs of caustic soda @ sh 16 per kg
Labour 20 hours @ 5 per hour

Packed materials
20 packets @ 50 cents each
1 carton @ sh 5 each

The monthly budget is per 1,000 cartons. The overhead expenses which are all Fixed are budgeted at sh 40,000 and selling price per 1kg packet of soap is sh
25. the following details relate to October 2007 when 1,200 cartons of soap
Were produced and sold

Ksh
Sales 1,200 cartons 552,000
Raw materials:
Tallow 10,800 kgs 129,600
Caustic soda 13200 kgs 198,000
Labour; 26,400 hours 145,200
Fixed overhead expenditure 42,000

REQUIRED: calculate

a) Price and usage variances each raw materials. (8 Marks)
b) Labour rate and efficiency variances. (3 Marks)
c) Sales price and volume variances. (5 Marks)
d) Overhead expenditure variances. (2 Marks

Answer 1

1. a) Compute EOQ for the pens as follows: E00=- 2x1500x20,000 18 = 2738.61or 2739 packets Where, S = Ordering cost D = Annual Quantity demanded (480,000 + 24 pens = 20,000) H = Holding cost Compute total cost of the EOQ: Total cost Purchase price+Ordering cost +Inventory carrying cost =(480x20,000 packets)+[(1500x(20.000/2.739)]+[8%(2739/2x480x0.1)] =9,687,645

For orders for 72.000 pens and above the distributer has offered a discount rate of 10% on delivery price. Assume order of (72,000 - 24) 3.000 packets in one time. Compute total cost Total cost = Purchase price + Ordering cost +Inventory carrying cost =(480x0.9) 20.000 packets)+[(1500x(20,000/3.000)]+[8(3.000/2) +(3000/2 x 480x0.9x0.1)] =8726800 Management advice: If supermarket takes advantage of discount then its cost will decrease by 960.845. Therefore should avail the benefit.