Economics/Management/Entrepreneurship

Prof. P.K.J. Mohapatra

PROBLEMS

Question 2 – 5.1

In economics, what is meant by “market” and “market equilibrium?”

Answer

Market is a kind of arrangement whereby buyers and sellers interact to exchange goods, services, stocks,
contracts, and so on.

Market Equilibrium is perfect balance in demand and supply under a given set of market conditions

Question 2 – 5.2

Fill in the missing data for price (P), total revenue (TR), marginal revenue (MR), total cost (TC), marginal
cost (MC), and profit (p) in the following table:

Q P (Rs) TR (Rs) MR (Rs) TC (Rs) MC (Rs) AC (Rs) p (Rs)

0 75 0 - 25 - 25
1 70 70 70 44 19 44 26
2 68 66 68 34
3 198 93 105
4 54 106 40 150
5 62 32

Answer

Q P (Rs) TR (Rs) MR (Rs) TC (Rs) MC (Rs) AC (Rs) p (Rs)

0 75 0 - 25 - 25
1 70 70 70 44 19 44 26
2 68 136* 66 68 24+ 34# 68@
3 66” 198 62o 93 25 31 105
4 64 256 54 106 40 26.5 150
5 62 310 54 160 54 32 150

*136 = (68)(2); +24 = 68 – 44; #

34 = 68/2; @
68 = (34)(2) ”66 = 198/3; o
62 = 198 – 136

Question 2 – 5.3

Gopal Sports is an export sport vehicle manufacturing company. Demand and supply functions for the
vehicle are as follows:

QD = 75,000 – 4P (Demand)
 QS = 6P (Supply)

Calculate the market equilibrium price/output combination.

Answer

QD = 75,000 – 4P

QS = 6P

At the equilibrium, QD = QS.

Solving, P = Rs. 7,500.00

Equilibrium Dmand = 75,000 – (4)(7,500) = 45,000 Rs.

Equilibrium Supply = (6)(7,500) = 45,000 Rs.

Question 2 – 5.4

Sharma Sports produces football footwear. It gave a Rs 50 discount on the Rs 500 price of a football
footwear, and the sales rose from 9,000 to 10,000 units in the month of August. Calculate the price
elasticity for the football footwear.

Answer

Price elasticity = (∆Q/∆P)/(Q/P) = [(10,000 – 9,000)/(450 – 500)]/(9,000/500) = -1.11

Question 2 – 5.5

What is cross elasticity of demand? In which conditions can this elasticity become positive or negative?

Answer

Cross elasticity of demand measures the change in demand of a good with respect to the change in price
of another good.

Cross elasticity is positive in case of a substitute and is negative in case of a complement.

Question 2 – 5.6

What is forecasting? Indicate four areas of application where forecasting is useful.

Answer

Forecasting is an estimate of the value of a variable in the future. It is an input to planning. Planning for
production, capacity, inventory, and cash requires forecasting.

Question 2 – 5.7

What is a production function? Determine the nature of returns to scale when the production function has
the following shape?

Q = 20 L0.25 K0.70
Answer

Production function is the maximum possible output that can be produced using a given combination of
inputs.

Given Q = 20 L0.25 K0.70

When the inputs are changed to c times their original values, the output is given by

Q1 = 20 (cL)0.25 (cK)0.70 = c0925 (20L0.25 cK0.70) = c0925 Q

c0925 < c; hence the production function exhibits diminishing returns to scale.

Question 7.1

Define the following terms:

- Cost driver
- Fixed cost
- Variable cost
- Contribution margin
- Break-even point

Answer

Cost driver is any output measure that causes costs (i.e., that causes the use of a costly resource).

Fixed cost is that which is not immediately affected by changes in the cost driver level.

Variable cost is that which changes in direct proportion to changes in the cost driver level.

Contribution margin is sales price minus the unit variable cost.

Break-even point is the level of output at which revenue equals expenses and the net income is zero.

Question 7.2

The following list gives several potential cost drivers for a manufacturing company that makes several
products that vary in size from small to large:

- Number of setups
- Cubic meters
- Cubic meters per week
- Setup time
- Square meters

For each of the following situation, pick up the best cost driver:

a. Operators set up the machines for the products. Setup times are almost the same irrespective of
the sizes of the products. What is the cost driver for the operator wage?
b. Operators set up the machines for the products. Setup times differ from product to product.
What is the cost driver for the operator wage?
 c. What driver should be used for warehouse occupancy costs (depreciation and insurance) if the
warehouse is used to store finished products for a small period of time?
d. What driver should be used for warehouse occupancy costs (depreciation and insurance) if the
warehouse is used to store finished products for a long period of time?

Answer

a. Number of setups
b. Setup time
c. Cubic meters
d. Cubic meters per week

Question 7.3

Fill in the blanks for each of the following cases:

Case Selling price Variable Total units Total Total fixed Net income
per unit cost per unit sold contribution costs
margin
1. Rs.25 ——— 120,000 720,000 640,000 ———
2. 10 6 100,000 ——— 320,000 ———
3. 20 15 ——— 100,000 ——— 15,000

Answer

Case Selling price Variable Total units Total Total fixed Net income
per unit cost per unit sold contribution costs
margin
1. Rs.25 19 120,000 720,000 640,000 80,000
2. 10 6 100,000 400,000 320,000 80,000
3. 20 15 20,000 100,000 85,000 15,000

Question 7.4

Janapur Fashion sells both designer and moderately priced women’s wear. Profits have been volatile.
Top management is trying to decide which product line to drop. Accountants have reported the following
data:

Per Item
Designer Moderately Priced
Average selling price Rs. 240 Rs. 140
Average variable expenses 120 75
Average contribution margin 120 65
Average contribution-margin (%) 50% 46%
The store has 8,000 square feet of floor space. If moderately priced goods are sold exclusively, 400 items
can be displayed. If designer goods are sold exclusively, only 300 items can be displayed. Moreover, the
rate of sale (turnover) of the designer items will be two-thirds the rate of moderately priced goods.

a. Prepare an analysis to show which product to drop.

b. What other considerations might affect your decision to requirement a?

Answer

Assuming only moderately priced goods will be stored and sold and assuming that all the goods are sold
out, the contribution to profit

= (65)(400) = 26,000 Rs.

If only designer goods are stored and sold out, the number of designer goods that will be sold

= (2/3)(400) = 266 units

The contribution to profit

= (120)(266) = 31,200 Rs.

Hence the designer goods should be stored and the moderately priced goods are to be dropped.

Other considerations:

Both the goods can be stored.

Let

X1 be the number of moderately priced goods stored

X2 be the number of designer goods stored

The area occupied by these items should be less than the available area:

(8,000/400)X1 + (8,000/400)X2 ≤ 8,000

Also the equality sales constraints hold:

X2 = (2/3)X1

The store should maximize the total contribution to profit:

65 X1 + 120 X2

Solving one gets the optimum values of the number of moderately priced and designer goods as

X1 = 3,600/17 units and X2 = 2,400/17 units

That means the store should store both the goods of quantities mentioned above.
Queston 7.5

The manager of operations of Blue Sky Airlines is trying to decide whether to adopt a new discount fare.
Focus on one 134-seat 737 airplane now operating at a 56% load factor (i.e, on the average the airplane
has 0.56 × 134 = 75 passengers). The regular fares produce an average revenue of Rs.1.20 per passenger
kilometer.

Suppose an average of 40% fare discount (which is subject to restrictions regarding time of departure and
length of stay) will produce three new additional passengers. Also suppose that three of the previously
committed passengers accept the restrictions wand switch to the discount fare from thee regular fare.

a. Compute the total revenue per airplane kilometer with and without the discount fares.
b. Suppose the maximum allowed allocation to new discount fares is 50 seats. These will be filled.
As before some previously committed passengers will accept the restrictions and switch to the
discount fare from the regular fare. How many will have to switch so that the total revenue per
kilometer will be the same either with or without the discount plan?

Answer

Regular fare = 1.20 Rs/km/person, Number of passengers = 75 persons

Total revenue without discount (i.e. regular) fare = (75)(1.20) = 90.00 Rs

Discount fare = (1 – 0.4)(1.20) = 0.72 Rs/km

Number of passengers with regular fare = 75 – 3 = 72 person

Number of passengers with discount fare = 3 + 3 = 6 person

Total revenue with discount fare = (72)(1.20) + (6)(0.72) = 90.72 Rs/km

Suppose X number of regular-fare passengers shift to discount-fare passengers, then the total revenue

= (75 – X)(1.20) + (50)(0.72) = 90 – 1.20X + 36 = 126 – 1.20X

If this amount equals the total revenue without discount fare, then

126 – 1.20X = 90

X = 30 persons.

That means if 30 regular-fare passengers switch to discount fare, then the total revenue per kilometer does
not change without or with discount.

Question 8.1

Differentiate between

a. Cost accumulation and Cost allocation

b. Direct cost and Indirect cost
 c. Product cost and Period cost

Answer

a. Cost accumulation is the activity of collecting costs by some natural classification such as
materials, labour, or activities performed (such as order processing or machine operating),
whereas cost allocation is the activity of tracing and reassigning costs to one or more cost
objectives such as activities, departments, customers, or products.
b. Direct costs are those that can be identified specifically and exclusively with a given cost
objective in an economically feasible way, whereas indirect costs are those that cannot be
identified specifically and exclusively with a given cost objective in an economically feasible
way.

Thus wages of operators working on a product is a direct cost, whereas lubricants used for
machining is an indirect cost.

c. Product costs are those that are identified with goods produced or purchased for resale, whereas
period costs are those that are deducted as expenses during the current period without going
through an inventory stage.

Thus material cost is a product cost, whereas advertising cost is a period cost.

Question 8.2

Distinguish between costs and expenses.

Answer

Cost is a sacrifice or giving up of resources, often measured in monetary terms, for a given purpose, such
as goods and services, whereas expense is that cost which is recognized and subtracted from revenue,
while delivering goods or services or using up assets, to yield income.

Thus when 10,000 Rs worth of goods are purchased, it increases material cost by Rs. 10,000. But when
8,000 Rs worth of these goods are sold for Rs 12,000, then the expense incurred is taken as Rs. 8,000,
yielding an income of Rs. 4,000.

Question 8.3

The cordless manufacturing division of a company uses activity based accounting. Its accountants have
identified only the following three activities and related cost derivers for indirect manufacturing costs:

Activity Cost Driver

Material activity Direct-material cost

Engineering Engineering change notices
Power Kilowatt hours

Three types of cordless phones are produced: C1, C2, and C3. Direct costs and cost-driver activity for
each product for a recent month are as follows:

C1 C2 C3
Direct-materials cost (Rs) 25,000 50,000 125,000
Direct-labour cost (Rs) 4,000 1,000 3,000
Kilowatt hours (Rs) 50,000 200,000 150,000
Engineering change notices 13 5 2

Indirect manufacturing cost for the month was

Material handling cost: Rs. 8,000

Engineering: Rs. 20,000
Power: Rs. 16,000
Total indirect manufacturing cost: Rs. 44,000
a. Using activity-based costing system, compute the indirect manufacturing cost allocated to each
product with the activity-based accounting system.
b. Find also the cost of each type of cordless phones manufactured.
c. If the number of cordless phones manufactured is 100, 200, and 500 respectively, find the unit
costs of the phones.

Answer

Cost drivers chosen for allocation of indirect manufacturing costs are the following:

Material handling cost: Direct-material cost

Engineering: Engineering change notices
Power: Kilowatt hours

C1: (8,000)[25/(25 + 50 + 125)] + (20,000)[13/(13 + 5 + 2)] + (16,000)[50/(50 + 200 + 150)]

= 1,000 + 13,000 + 2,000 = 16,000
C2: (8,000)[50/(25 + 50 + 125)] + (20,000)[5/(13 + 5 + 2)] + (16,000)[200/(50 + 200 + 150)]
= 2,000 + 5,000 + 8,000 = 15,000
C3: (8,000)[125/(25 + 50 + 125)] + (20,000)[2/(13 + 5 + 2)]
+ (16,000)[150/(50 + 200 + 150)]
= 5,000 + 2,000 + 6,000 = 13,000
Adding the direct costs, the costs of goods manufactured for the products are the following:
C1: 25,000 + 4,000 + 16,000 = 45,000 Rs.
C2: 50,000 + 1,000 + 15,000 = 66,000 Rs.
C3: 125,000 + 3,000 + 13,000 = 141,000 Rs.
The unit costs of manufacturing are the following:
C1: 45,000/100 = 450 Rs/unit
C2: 66,000/200 = 330 Rs/unit
C3: 141,000/100 = 1,410 Rs/unit

Question 9.1

What do you mean by relevant information and opportunity cost?

Answer

Relevant information is the predicted future cost and revenue that differs among alternatives.
Opportunity cost is the maximum contribution to profit that is foregone when limited resources are used
for a particular purpose.

Question 9.2

The budget for the Pratap University Press for the year 20XX is as follows:

Sales 1,100,000
Direct Material 280,000
Direct Labour 320,000
Overhead 400,000 1,000,000
Net Income 100,000

(Figures are in rupees)

The Press typically follows a cost-plus pricing system. Direct-material and direct-labour costs are
computed, overhead is added at a rate of 125% of direct labour, and 10% of the total cost is added to
obtain the selling price.

The sales manager has placed a Rs.22,000 bid on an order with a cost of Rs.5,600 direct labour. The
customer informs her that she can have the business for Rs. 9,800, take it or leave it. If she accepts the
order, total sales for 20XX will be Rs.1,119,800. The manager refuses the order ,saying, “I sell on a cost-
plus basis. It is bad policy to accept orders at below cost. I would lose Rs.200 on the job.”

If the company’s annual fixed overhead is Rs.160,000, what would net income have been with the order?
Without the order?

Question 10.1
Home Products Ltd. has two producing departments, Machining and Assembly, and two service
departments, Personnel and Plant Maintenance. The company’s budget for April 2012 is as follows:

Service Departments Production Departments

Personnel Plant Machining Assembly
Maintenance
Direct department costs Rs. 32,000 Rs. 70,000 Rs. 600,000 Rs. 800,000
Square Feet 2,000 1,000 10,000 25,000
Number of Employees 15 30 200 250

Allocate the personnel and plant maintenance costs to the producing departments using the step-down
method.

Answer
The service department costs are Personnel and Plant Maintenance. Plant maintenance direct department
costs are higher than that of the Personnel department. Hence its costs are to be allocated first.

Step 1: Allocating Plant maintenance direct department costs of Rs. 70,000

Basis: Square Feet

Costs for Personnel = 32,000 + (70,000)[2,000/(2,000+10,000+25,000)] = 35,783.78 Rs.

Costs for Machining = 600,000 + (70,000)[10,000/(2,000+10,000+25,000)] = 618,918.92 Rs.

Costs for Assembly = 800,000 + (70,000)[25,000/(2,000+10,000+25,000)] = 847,297.30Rs.

Step 2: Allocating Personnel department costs of Rs. 35,783.78

Basis: Number of Employees

Costs for Machining = 618,918.92 + (35,783.78)[200/(200+250)] = 634,822.82 Rs.

Costs for Assembly = 847,297.30 + (35,783.78)[ 250/(200+250)] = 867,176.74 Rs.

Question 13 - 14.1

Shoreline Marine Manufacturing applies factory overhead using machine hours and number of component
parts as cost derivers. In 2011, actual factory overhead incurred was Rs. 134,000 and applied factory
overhead was Rs. 126,000. Before disposition of under-applied or over-applied factory overhead, the cost
of goods sold was Rs. 525,000, gross profit was Rs. 60,000, and ending inventories were the following:
Direct Material: Rs. 25,000, WIP: Rs. 75,000, Finished Goods: Rs. 150,000

a. Was factory overhead under-applied or over-applied? By how much?

b. Assume that Shoreline writes off over-applied or under-applied factory overhead as an adjustment
to cost of goods sold. Compute adjusted gross profit.
c. Assuming Shoreline prorates the over-applied or the under-applied amount based on end-of-the-
year unadjusted balances, compute adjusted gross profit.

Answer

Given: Actual factory overhead incurred = Rs. 134,000; Applied factory overhead = Rs. 126,000

The overhead has been under-applied by Rs. 8,000 (= 134,000 – 126,000)

Given: COGS = Rs. 525,000; Gross Profit before adjustment = Rs. 60,000;
Rs. 8,000 is adjusted to COGS.

Gross Profit after adjustment = 60,000 – 8,000 = 52,000 Rs.

Given: WIP: Rs. 75,000; Finished Goods: Rs. 150,000; COGS = 525,000 Rs.

Under-applied cost applied to COGS (with proration) = (8,000)[525/(75 + 150 + 525)] = 5,600 Rs.

Gross Profit after the application = 60,000 – 5,600 = 54,400 Rs.

Question 13 – 14.2

Rainbow Paint Co. uses a process-costing system. Materials are added at the beginning of a particular
process, and conversion costs are incurred uniformly. Work in process at the beginning of the month is
40% complete; at the end, 20%. One gallon of material makes one gallon of product. Data follow.

Beginning inventory 550 gal

Direct materials added 7,150 gal
Ending inventory 400 gal
Conversion costs incurred Rs.35,724
Cost of direct materials added Rs.65,340
Conversion costs, beginning inventory Rs. 1910
Cost of direct materials, beginning inventory Rs. 3,190

Use the weighted-average method. Prepare a schedule of output in equivalent units and a schedule of
application of costs to products. Show the cost of goods completed and cost of ending work in process.

Answer

Step 1: Summarize the flow of physical units.

Material processed = Beginning inv + DM added = 550 + 7,150 = 7,700 gallon

Completed = Material processed – End inventory = 7,700 – 400 = 7,300 gallon

Partially completed = 400 gallon (receiving 20 % conversion resources)

Step 2: Calculate the output in terms of equivalent units.

Equivalent number of units completed

= 7,300 + (0.20)(400) = 7,380 units

Note:

• DM was received by all the 7,700 units.

• Conversion resources were received by 7,380 equivalent units.

Step 3: Summarize the total costs to account for.

DM cost, beginning inventory = 3,190 Rs.

Processing cost, beginning inventory = 1,914 Rs.

DM cost, for this month = 65,340 Rs.

Processing cost, for the month = 35,724 Rs.

Costs to account for = 3,190 + 1,914 + 65,340 + 35,724 = 106,168 Rs.

Step 4: Calculate unit costs.

For DM

[Beginning Inv (Rs) + DM (Rs)]/[Beginning Inv (units) + DM (units)]

= [3,190 + 65,340 ]/[550 + 7,150] = 68,530/7,700 = 8.90 Rs/unit

For Conversion

[Conversion Cost last month + Con Cost this month]/ Eq. units for conversion (units)

= [1,914 + 35,724]/7,380 = 37,638/7,380 = 5.10 Rs/unit

Step 5: Apply costs to units completed and to units in the ending WIP.

Costs applied to all completed units

Number of completed units = 7,300 units

Costs applied to all completed units

= (Number of completed units)(Unit cost for DM + Unit cost for conversion)

= (7,300)(8.90 + 5.10) = (7,300)(14) = 102,200 Rs.

Costs applied to units not completed:

Number of units not completed = 400

For DM, costs applied

= (Number of units not completed)(Unit cost for DM cost application) = (400)(8.90) = 3,560 Rs

For conversion, costs applied

= (No. of units not completed)(% completed)(Unit cost for conversion cost application)

= (80)(5.10) = 408 Rs

Total costs applied to units not completed = 3,560 + 408 = 3.968 Rs.

Question 15 – 16.1

What is a master budget? What are the important components of a master budget for a manufacturing
organization?

Answer

A master budget is a quantitative expression of management plan.

The important components of a master budget for a non-manufacturing organization are the following:

A. Operating Budget
1. Sales budget
2. Purchase budget
 3. COGS budget
4. Operating expenses budget
5. Budgeted income statement
B. Financial Budget
1. Capital budget
2. Cash budget
3. Balance sheet.

Question 15 – 16.2

The inventory of Kharagpur Appliance Company was Rs. 210,000 on May 31. The manager was upset
because the inventory was too high. She has adopted the following policies regarding merchandise
purchases and inventory. At the end of any month, the inventory should be Rs. 15,000 plus 90% f the
cost of goods to be sold during the following month. The cost of merchandise sold averages 60% of
sales. Purchase terms are generally net 30 days. A given month’s purchases are paid as follows: 20 %
during that month ad 80% during the following month.

Purchases in May had been Rs.150,000. Sales are expected to be June, Rs.300,000; July, Rs.280,000;
August, Rs.340,000, and September, Rs.400,000.

a. Compute the amount by which the inventory on May 31 exceeded the manager’s policies.
b. Prepare budget schedules for June July, and August for purchases and for disbursements for
purchases.

Answer

Following the inventory policy the May end inventory should have been

15,000 + (0.90)(June COGS) = 15,000 + (0.90)(0.60)(June Sales) = 15,000 + (0.54)(June Sales)

= 15,000 + (0.54)(300,000) = 15,000 + 162,000 = 177,000 Rs.

Actual May end inventory = 210,000 Rs.

The amount by which inventory on May 31 exceeded the manager’s policy

= 210,000 – 177,000 =33,000 Rs.

June July August September

Schedule c: Purchases Budget

Sales 300,000 280,000 340,000 400,000
COGS (= 60 % of sales) 180,000 168,000 204,000 240,000
90% of COGS of the next month 151,200 183,600 216,000
Desired end inventory
(=15,000 + 90% of COGS of the next month ) 166,200 198,600 231,000
Quantity needed (=Des end inv + COGS) 346,200 366,600 435,000
Beginning inventory 210,000 46,200 86,600
(= 210,000 for June,
= Beginning inv + Purchases – Sales, all in the
previous month, for July and August)
Purchases (= Qty needed – Beg inv) 136,200 320,400 348,400

June July August September

Schedule c: Disbursements for Purchases

Purchases 136,200 320,400 348,400
Payment for the current month
(20% of the current month’s purchase) 27,240 64,080 69,680
Payment for the previous month
(80% of the previous month’s purchases) 120,000 108,960 256,320
Total disbursement 283,440 173,040 326,000

Question 15 – 16.3

Khan Leather Company makes a variety of leather goods. It uses standard costs and a flexible budget to
aid planning and control. Budgeted variable overhead at a 45,000-direct-labour-hour level is Rs.27,000.

During April the company had an unfavourable variable-overhead efficiency variance of Rs.1,150.
Material purchases were Rs.241,900. Actual direct-labour costs incurred were Rs.140,700. The direct-
labour usage variance was Rs.5,100 unfavourable. The average wage rate was Rs.0.20 lower than the
average standard wage rate.

The company uses a variable-overhead rate of 20% of standard direct-labour cost for flexible-budgeting
purposes. Actual variable overhead for the month was Rs.30,750.

Compute (a) standard direct-labour cost per hour, (b) actual direct labour-hours worked, (c) total direct-
labour price variance, (d) total flexible budget for direct-labour costs, (e) total direct-labour cost variance,
and (f) variable-overhead spending variance in total. Indicate in each case whether the computed amount
is favourable (F) or unfavourable (U).

Answer

Given: Budgeted variable O/H cost = Rs.27,000; and Budgeted DL-hour = 45,000
Variable O/H rate = (0.2)(Standard DL cost per hour)

Variable O/H rate = 27,000/45,000 = 0.60 Rupee per labour hour

Standard DL cost per hour = Variable O/H rate/0.2 = 3 Rs/h

Given: Actual DL cost = Rs. 140,700

Actual wage rate = Standard DL cost per hour – 0.2 = 3 – 0.2 = 2.8 Rs/h

Actual DL-hours worked = Actual DL cost/ Actual wage rate = 140,700/2.8 = 50,250 hours
Total DL price variance = (Actual wage rate – Standard wage rate)(Actual DL used)
= (2.8 – 3)(50,250) = 10,050 (F)

Given: DL usage variance = 5,100 Rs.

DL usage variance = (Actual DL hours used – Standard DL hours used)(Standard wage rate)
= (50,250 – Standard DL hours used)(3) = 5,100

Standard DL hours used = 50,250 – 1,700 = 48,550

Flexible budget for direct-labour costs = (Actual DL-hour)(Standard wage rate)

= (50,250)(3) = Rs.145,650

Total DL cost variance = Actual DL cost – Flexible budget DL cost

= 140,700 – 145,650 = 4,950 Rs. (F)

Given: Actual variable overhead for the month = Rs.30,750.

Budgeted variable overhead = (Standard DL-hour)(Standard Variable O/H rate/hour)

= (48,550)(0.60) = Rs.29,130

Variable-Overhead Spending Variance

= (Actual DL-hour cost – Standard DL-hour cost)
= (30,750 – 29,130) = 1,620 Rs. (U)

Given: Variable O/H efficiency variance = 1,150 (U)

Variable O/H price variance = 1,620 – 1,150 = 470 Rs. (U)

Question 12, 17 – 19.1

Ashok and two of his friends started a consulting firm.

1. They contributed Rs. 500,000 each.

2. They took a 10-year loan of Rs. 1,000,000 from a bank at an interest rate of 12% per year.
3. They rented a house for a monthly rental of Rs. 10,000 and had to pay three months’ advance
payment that was to be adjusted at the end of every month.
4. The first assignment for them was to conduct a productivity improvement study for Rs. 1,000,000
for a company for which they received an initial payment of Rs. 200,000.
5. For this study they hired an analyst who was to be paid Rs. 80,000 per month.
6. At the end of every month the interest on the loan was paid and the rental was adjusted against
the advance given.
7. The analyst was paid Rs. 50,000 at the end of the month.
8. The travel cost to carry out the consulting work came to Rs. 200,000, half of which was paid by
cash, and the other half remained to be paid later.

Prepare the T-accounts for the operations and the balance sheet at the end of the first month of operation.
Answer
Balance Sheet

Assets (Rs) Liabilities and Owners’ Equity (Rs)

Cash: 2,510,000 Paid-up Capital: 1,500,000
Advance: 20,000 Loans: 1,000,000
A/Cs Payable: 100,000
Accrued Salary Payable: 30,000
Client Advance: 200,000
Retained Earning: (300,000)

Total: 2,530,000 Total: 2,530,000

Question 12, 17 – 19.2

Fill in the missing values in the table given below.

Assets (Rs) Liabilities (Rs)

Fixed Assets — Paid-up Capital 50,000
Cash — Retained Earning —
Inventory — Current Liabilities 46,000
Accounts Receivables —
Total — Total —

Given:
Average Collection Period = 30 days (Take 1 year has 360 working days)
Net Profit Margin = 0.10
Sales = 60,000 Rs/year
Dividends = Rs. 4,000
Administrative and Selling Expenses = Rs. 2,000
Inventory Turnover Ratio = 3.0
Current Ratio = 1

Answer
Inventory Turnover Ratio = 3.0 = Sales/Inventory = 60,000/ Inventory
Inventory = 60,000/3 = 20,000 Rs.

Current Ratio = 1 = Current Assets/Current Liabilities = Current Assets/46,000

Current Assets = 46,000 = Cash + Inventory + A/Cs Receivables = Cash + 20,000 + A/Cs Receivables
Cash + A/Cs Receivables = 26,000 Rs.

Net Profit Margin = 0.10 = Net Profit/Sales = Net Profit/60,000

Net Profit = (0.10)(60,000) = 6,000 Rs.

Retained Earning = Net Profit – Dividends = 6,000 – 4,000 = 2,000 Rs.

Total Liabilities = Paid-up capital + Retained Earning + Current Liabilities

= 50,000 + 2,000 + 46,000 = 98,000 Rs.

Total Assets = Total Liabilities = 98,000 Rs.

Average Collection Period = 30 = Receivables/(Sales/360) = Receivables/(60,000/360)Receivables

= (30)(60,000)/360 = 5,000 Rs

Cash + A/Cs Receivables = 26,000 Rs. = Cash + 5,000

Cash = 26,000 – 5,000 = 21,000 Rs.

Total Assets = 98,000 = Fixed Assets + Cash + Inventory + Accounts Receivables

= Fixed Assets + 21,000 + 20,000 + 5,000 = Fixed Assets + 46,000
Fixed Assets = 98,000 – 46,000 = 52,000 Rs.

Assets (Rs) Liabilities (Rs)

Fixed Assets 52,000 Paid-up Capital 50,000
Cash 21,000 Retained Earning 2,000
Inventory 20,000 Current Liabilities 46,000
Accounts Receivables 5,000
Total 98,000 Total 98,000

Question 21– 24.1

What do you mean by discount rate? What are the determinants of discount rate?

Answer

Discount rate represents the way money now is worth more than money later. It indicates by how much a
future amount is reduced to make it correspond to an equivalent amount today. It is similar to an interest
rate, but, as a concept, it is different from interest rate. Whereas the former represents a real change in
value to a person or group, as determined by their possibilities for productive use of the money and the
effects of inflation, the latter narrowly defines a contractual agreement between a borrower and a lender.

In general, discount rate is greater than the interest rate (or cost of capital), because of the following:

– Investors borrow money because they hope to get a profit, the difference between their
discount rate and the interest rate.
 – Bankers would never lend their money unless they are pretty sure that the borrower gets
more than the interest rate and pay back the loan in time.

Discount rate is also the minimum attractive rate of return (MARR) for an individual or group.

Question 21– 24.2

A person deposits Rs. 1,000 every year for 10 years starting from the beginning of current year and
wishes to get back a constant amount every year for the next 5 years, starting from the end of the 10th
year. At an annual interest rate of 10 percent, what annual amount will he get back? Draw the cash flow
diagram.

Answer

Equivalence of cash outflow at the end of 9th year and of cash inflow at the beginning of 10th year (same
as the end of 9th year) leads to

(1,000)(F/P, 0.10, 9) + (1,000)(F/ A, 0.10, 9) = (A)(P/A, 0.10, 5)

(1,000)(2.35795) + (1,000)(13.57948) = (A)(3.79079)

A = 15,937.43/3.79079 = 4,204.25 Rs./year

Question 21– 24.3

A 20-year bond with a face value of Rs.5,000 is offered for sale at Rs.3,800. The nominal rate of interest
on the bond is 7%, paid semiannually. This bond is now 8 years old (i.e., the owner has received 16
semiannual interest payments). If the bond is purchased for Rs.3,800, what effective annual rate of
interest would be realized on this investment opportunity?

Answer:

The remaining life of the bond is 12 (= 20 – 8) years.

The semi-annual receipts amount to (0.07/2)(5,000) = 175 Rs.

There are 24 semi-annual payments.

The amount of Rs. 5,000 will be received at the end of 12 years.

So

3,800 = (175)(P/A, r%, 24) + (5,000)(P/F, r%, 24)

Taking r = 5%, (175)(P/A, r%, 24) + (5,000)(P/F, r%, 24) = 3,965.25

Taking r = 6%, (175)(P/A, r%, 24) + (5,000)(P/F, r%, 24) = 3,431.25

Interpolating (175)(P/A, r%, 24) + (5,000)(P/F, r%, 24) = 3,800 at r = 5.30946%

The effective annual interest rate = (1 + r)2 – 1 = 0.109 = 10.90 %

Question 21– 24.4

What are the advantages and disadvantages of net present worth cost comparison method?

Answer

Net present worth cost comparison method has the following advantages:

(1) It is simple.
(2) It is applicable if the projects have the same life span.

The method has the following disadvantages:

(1) It is not applicable to projects with differing lives.

Question 21– 24.5

Discuss where internal rate of return and the annual cost of comparison are used.

Answer

Internal rate of return is used when trying to find the economic feasibility of a single project.

Annual cost of comparison is used while making an economic comparison of projects with differing lives.

Question 21– 24.6

Find the effective annual interest rate if the annual interest rate is 10% compounded quarterly.

Answer

The effective annual interest rate is given by

re = (1 + r/4)4 - 1 = (1 + 0.10/4)4 - 1 = 0.10382 (10.382 % per year)

Question 25 – 26.1

Which assets depreciate over time and why?

Answer
Usually tangible assets (except land, rare paintings, etc.) age and their value decrease as time progresses.
Depreciation occurs due to (1) physical depreciation, such as wear and tear and corrosion, (2) functional
depreciation, such as decrease in productivity and obsolescence, and (3) minor accidents.

Question 25 – 26.2

Why is depreciation accounting done? What is the philosophy underlying depreciation accounting?

Answer

Depreciation accounting is done to (1) estimate the loss of capital due to depreciation and recover the
capital that is used up, (2) measure the value of an enterprise’s unexpended assets, (3) charge the cost of
depreciation to products/services, (4) help pricing, and (5) compute tax.

To account for depreciation of an asset in a year, the full purchase price of the asset is spread over its life
and depreciation is charged to a particular year following one of the many popular depreciation
accounting methods.

Question 25 – 26.3

Name the common methods of depreciation accounting and state their characteristics.

Answer

The common methods of depreciation accounting and their characteristics are the following:

- The Straight-Line method - The value of an asset decreases at a constant rate

- Fixed-percentage (or Declining-Balance) Method -

- Double-Declining-Balance Method - The value of an asset decreases at a decreasing rate.

- Sum-of-the-Years-Digits Method - The value of an asset decreases at a decreasing rate.

Question 25 – 26.4

Why is sinking-fund method of depreciation accounting not preferred in practice?

Answer

The sinking-fund method of depreciation accounting allows less depreciation in the beginning years of an
asset and more and more depreciation as time progresses. That means the profit after depreciation is more
in the beginning years and decreases as time progresses. It means that the taxes paid in the beginning
years are more compared to the later years and hence the profit after taxes is less in the beginning years
than the later years.

It is well known that the present worth of such a cash flow is less than when the cash flows are more in
the beginning years than in the later years. This is the reason the owner of an asset rarely goes for sinking
fund method of depreciation accounting.

Question 28.1

What is management? Is it an art or science?

Answer
Management is concerned with efficient utilization of human, physical and financial resources, for socio-
economic well-being of man, to the specific objectives of remunerative wages and good service
conditions to employees, adequate return on investment, and quality product/service to the customer at the
minimum price.

It is both an art and a science. It is an art because many decisions are taken based on observations,
experience, and individual judgment. It is science because much of the real-life data can be organized
and analyzed systematically and decisions then can be based on inferences drawn on the basis of scientific
method of analysis of decision situations.

Question 28.2

Briefly state the main contributions of Fredrick Taylor and Elton Mayo

Answer

Contributions of Fredrick Taylor are the following:

• Use the elements of ‘the scientific method’, rather than ‘rules of thumb’, for each element of a
man’s work.

• Management should plan the method of doing a work, rather than leave it to the worker to choose
his/her own methods and select his/her own tools and equipment.

• Management must select the best worker for each particular task and than train, teach, and
develop him, instead of allowing him to select his own task and train himself as best as possible.

• There should be equitable division of work and responsibility between management and worker.

• Introduced stop-watch time study.

• He introduced wage incentive systems to pay higher wages to more productive workers. The
'piece-rate system' is his idea.

• He suggested a 'functional organization' of flow of authority in which he called for managers with
specialized knowledge to guide the workers to do their work efficiently. He thus introduced the
idea that specialization can be achieved in managerial functions.

Contribution of Elton Mayo is the following:

Based on experiments that he carried out at Western Electric Company at Hawthorne, he developed the
Humanistic School of Thought in Management Theory that showed that human factors are more
important than technical and physical factors.

Question 28.3

Match the management exponents with their contributions.

Fayol Therbligs

Peter Drucker Theory of Administration

 Walter Schewhart Operations Research

Frank and Lilian Gilbreths MBO

Dantzig Statistical Quality Control

Answer

Fayol Theory of Administration

Peter Drucker MBO

Walter Schewhart Statistical Quality Control

Frank and Lilian Gilbreths Therbligs

Dantzig Operations Research

Question 29.1

State the generic functions of management.

Answer

They are many classifications of functions of management. One classification of the generic functions of
management are (1) Planning, (2) Organizing, (3) Directing, and (4) Controlling.

Question 29.2

What are the different levels in management hierarchy and Briefly mention how they differ in their
functions and skill requirements?

Answer

Management hierarchy generally consists of (1) Top-, (2) Middle-, and (3) Operating-level management.

The functions and skill requirements are tabulated for different levels of management:

Top Middle Operating

Planning High Moderate Low
Organizing High Moderate Low
Directing Low Moderate High
Controlling Low Moderate High
Technical skill Low Moderate High
Human skill High High High
Conceptual skill High Moderate Low
Question 29.3

What are the three broad groups of role of management?

Answer

The roles of management can be broadly grouped as the following:

1. Interpersonal role
2. Informational role
3. Decision role

Question 29.4

What do 6 M’s stand for?

Answer

The 6 M’s stand for (1) Man, (2) Machine, (3) Material, (4) Money, (5) Management, and (6)
Management information system.

Question 29.5

Name the important stakeholders of a manufacturing organization.

Answer

The important stakeholders of a manufacturing organization are (1) Owners, (2) Lending institutions, (3)
Suppliers, (4) Customers, (5) Employees, and (6) Society

Question 29.6

What is a code of business ethics? State five ethical rules that should appear in a code of ethics for an
organization .

Answer

A code of business ethics is a set of statements of policies, principles, or rules that guide ethical behavior
of business firms.

Five ethical rules that can appear in a code of ethics for an organization are the following:

1. Conduct business in compliance with all laws.

2. Do not give bribes.
3. Convey true claims in product advertisements.
4. Racial, ethnic, religious, and sexual harassment at work is prohibited.
5. Demonstrate courtesy, respect, honesty, and fairness.

Question 30–32.1

What are different elements of planning?

Answer
The different elements of planning are the following:

- Selecting the goals and objectives

- Selecting alternative courses of action

- Deciding on the best course of action

Question 30–32.2

What are salient features of vision and mission?

Answer

Vision is

 A dream, an aspiration, a passion, a shared mental image of some ideal future state that neither
specify the means to achieve it nor is written down and made public.

 An emotional appeal to the members of the organization that inspires them to think big.

Mission is

• A tangible form of the vision

• An expression of the organization’s beliefs, thrust and broad directions in which the organization
will be navigated.

• An explicit statement of the organization’s most fundamental intentions regarding (1) its
obligation to stakeholders, (2) the scope of the organization, and (3) the skills to develop and the
principal means to adopt to achieve the vision.

Question 30–32.3

What is SWOT analysis?

Answer

SWOT analysis is an analysis of internal and external environment of an organization. The analysis of
internal environment involves finding the strengths and weaknesses of the organization whereas the
analysis of external environment involves finding the opportunities and threats. SWOT analysis helps in
implementing appropriate strategies to take advantage of the opportunities and meet the threats with the
help of its strengths and by overcoming its weaknesses.

Question 30–32.4

What are the principal components of organizing?

Answer
The principal components of organizing are (1) rational grouping of enterprise activities for allocation to
departments, sections or individuals, (2) delegating authority to individual managers, (3) designing the
organization structure, and (4) coordinating the activities

Question 30 – 32.5

What is an organization chart?

Answer

It is a pictorial representation of the formal relationships with regard to authority, responsibilities, and
communication in a formal organization. It shows the superior-subordinate authority relationships and
the functional interdependency of the units and the individual members of the organization.

Question 30 – 32.5

What are line and staff functions?

Answer

A line function is one that can be implemented, whereas a staff function is advisory.

Question 30 – 32.6

What do you mean by unity of command and span of control?

Answer

Unity of command refers to the principle of each member of an organization reporting to no more than
one superior.

Span of control refers to the principle of limiting the number of subordinates a manager can effectively
supervise to 4 or 5. With information technology playing an effective role and with knowledge workers,
the span of control can exceed this traditional limit.

Question 30 – 32.7

What are the basic principles of humanistic school of thought in organization theory?

Answer

The basic principles of humanistic school of thought are the following:

• Concern for human reaction and social values (emotions, sentiment, prejudice)

• Importance attached to group reaction to organizational change

• Leadership (the power to influence the group behaviour) instead of headship.

• Motivation instead of compulsion

Question 30 – 32.7

What are the human needs recognized by Maslow?

Answer

The human needs recognized by Maslow are (1) physiological needs, (2) safety needs, (3) social needs,
(4) esteem needs, and (5) self-actualization needs.

Question 30 – 32.8

What is Herzberg’s two-factor theory?

Answer

Herzberg’s two-factor theory divides the factors influencing worker motivation into two classes: (1)
hygiene or motivational factors and (2) motivational factors. The former, if deficient, will de-motivate a
worker. Examples of the maintenance factors are: (1) wages, salaries, and other benefits, (2) working
conditions and job security, and (3) interpersonal relations. The latter, if present, will motivate a worker.
Examples of the motivational factors are: (1) the nature of the job, (2) recognition and satisfaction of
having done the job, (3) achievement, and (3) prospects of growth and achievement. It consists of

Question 30 – 32.9

What are the different elements of control?

Answer

The different elements of control are: (1) Goal, (2) Measured value of the system state, (3) Deviation of
the measured value from the goal, (4) Decision to correct the deviation, (5) Action based on the decision,
(6) Actual system state

Question 30 – 32.10

Cite five control techniques that are used in a manufacturing environment.

Answer

Control techniques that are used in a manufacturing environment are: (1) Standard cost, (2) Budgets, (3)
Statistical process control, (4) Project networks, and (5) Audits

Question 33.1

Give five distinguishing features of products that differentiate them from services.

Answer

1. Products are tangible things that we can carry whereas services are not.
2. A product waits to be consumed, whereas service facilities wait to be rendered.
3. A product can be produced to inventory whereas a service cannot be inventoried.
4. Consumption can be delayed for a product whereas it cannot be delayed for a service.
5. Products are equipment intensive whereas services are labour intensive.

Question 33.1

What are different phases of a product life cycle. What are the characteristics of the Growth phase?

Answer
The phases of a product life cycle are: (1) Introduction, (2) Growth, (3) Maturity, and (4) Decline.

The characteristics of the Growth phase are low inventory, high backlog, high delivery delay, low and
capacity and capacity expansion, and new competitors.

Question 33.2

What are the different stages of a new product development?

Answer

The stages of a new product development are: (1) Idea generation, (2) Screening, (3) Evaluation, (4)
Development, (5) Test marketing, and (6) Commercialization

Question 33.3

Differentiate between diversification, product-line simplification, and standardization.

Answer

Diversification is adding new products or models to capture new market and achieving financial stability.

Product-line simplification is reducing the variety of products by dropping less profit-making products.

Standardization is establishing technical uniformity so to achieve ease of specification and

interchangeability of parts and the advantages of low-cost production and high substitutability.

Question 33.4

Why is value engineering?

Answer

Value engineering is an organized, systematic study of the function of a material, component, product or
service, with the objective or yielding value improvement through the ability to accomplish the desired
function at the lowest cost without degradation of quality.

It is achieved by designing products/services that offer functional value with the minimum cost.

Question 34 – 36.1

Match the following regression techniques with the forecast horizon time:

Regression analysis Long-term

Delphi Short-term

Time-Series analysis Intermediate-term

Answer

The regression techniques and the forecast horizon time match as follows:

Regression analysis Intermediate-term

Delphi Long-term

Time-Series analysis Short-term

Question 34 – 36.2

State three differences between regression and correlation.

Answer

Regression can take place for two or more than two variables, whereas correlation is always between two
variables.

Regression is asymmetric, whereas correlation is symmetric.

Question 34 – 36.3

What assumptions are made for a linear regression model?

Answer

The assumptions underlying a linear regression model are the following:

1. The explained variable is linearly dependent on the explanatory variables.

2. The explanatory variables are independent of one another.
3. The noise terms are independently and identically normally distributed with zero mean and
constant variance.

Question 34 – 36.4

What are components of a time series?

Answer

The components of a time series are (1) average, (2) trend, (3) seasonality, (4) random noise, and (5)
autocorrelation.

Question 34 – 36.5

Under what situations one selects the values of smoothing constant as 0.1 and 0.9?

Answer

A small value of smoothing constant is chosen when it is desired to smooth the random fluctuations.

A large value is chosen when it is desired to track the underlying changes in the data value.

Question 37 – 40.1

What do you mean by capacity of a manufacturing plant? What are the alternative ways of augmenting
capacity of the plant?

Answer

Capacity of a manufacturing plant is its limiting capability to produce a certain output within a specified
time period, normally expressed in terms of output units per unit time.
Capacity can be augmented by (1) overtime, (2) additional shifts per day, (3) subcontracting, and (4) new
capacity addition.

Question 37 – 40.2

Each unit of the final product requires 4 units of part A. Part A is produced in a machine. The annual
demand for the product is 20,000 units/year, percent defective f is 5 %, average machine utilization (due
to breakdown) is 90 %, standard time for part A is 5 min/unit, the shop works for 3 shifts a day, with 8
hours per shift, but the idle time (due to shift hours not being fully utilized) is 25 %.

Find the number of machines required to produce the required number of parts A.

Answer

Considering scrap (5 %), the no. of part A required to be produced is

P = (20,000)(4)/(1 – 0.05) = 40,000/0.95 = 84,210 units/year

3 shifts a day, 8 hours per shift and idle time 25 %.

The operating hours of the machine = (3)(8)(1 – 0.25) = 18.00 h/day

Assuming 25 working days a month, the available operating time for the machine in a year is

(18.00)(25)(12) = 5,400 hours/month

Hence, the number of machines required is

[(5)(84,210)]/[(60)(5,400)(0.90) = 1.44

Thus, 2 machines are required to produce the required number of units of A.

Question 37 – 40.3

List five factors that are important for consideration for location of a steel plant

Answer

Five factors that are important for consideration for location of a steel plant are the following:

Proximity to iron ore mines, Availability of power and water, Availability of land, Availability of
transport infrastructure, Political and social environment.

Question 37 – 40.4

Consider two candidate sites A and B, with the following costs:

Location Fixed Costs (Rs) Variable Costs (Rs)

A 1,200,000 200

B 800,000 300

Find the range of output for which each site is the best choice.
Answer

If x is the amount of output, then the breakeven output amount is given by

1,200,000 + 200 x = 800,000 +300 x

Solving, the breakeven output = 400

Hence, location A is better when its output > 400, B is better when its output < 400, and both A and B
give the same cost when output = 400.

Question 37 – 40.5

What are the different types of plant layout?

Answer

The different types of plant layout are: (1) Product (or Line) layout, (2) Process (or Functional) layout, (3)
Group layout, and (4) Fixed layout.

Question 37 – 40.6

What are the differences between product and process layouts?

Answer

The product layout is preferred in mass production systems where the sequence of operations is the same
for all products. The machines are arranged according to the sequence of operations. It results in low
material handling costs, less in-process inventory, and in high utilization of space.

The process layout is preferred in job shops where the sequence of operations is different from one
product to another. The machines are arranged according to functions (departments or sections). It
results in high flexibility, and high-skilled workers are required here.

Question 37 – 40.7

What do you mean by line balancing?

Answer

A line balancing problem arises in a line layout where the problem is to allocatie operations to
workstations such that the operation sequence is maintained while the balance delay is the minimum.

Question 37 – 40.8

What is the objective of a good functional layout?

Answer

The objective of a good functional layout is to minimize the cost of transporting goods between work
centers, i.e., to minimize the cost of transportation, which is equal to the sum of the products of the
amount of materials moving between work centers and the distance travelled during the ith movement.

Question 40 – 41.1
What do you mean by production planning and what functions are carried out in a production planning
department?

Answer

Production planning is concerned with translating overall sales orders and plans to specific schedules and
meeting them by efficiently coordinating and integrating the factors of production.

The functions that are carried out in a production planning department are: Programming, Product
Analysis and Routing, Scheduling and Loading, Authorization of Production, and Follow-up.

Question 40 – 41.2

Potential sales of two products manufactured by a shop are estimated as 500 and 700 units. Their unit
sales prices are Rs. 10 and Rs. 15 respectively. The unit variable costs of the products are Rs. 2 and Rs. 3
respectively. The two products require 2 and 3 minutes per unit in machine A and 1 and 1.5 minutes in
machine B. The total weekly machine times are 35 and 32 hours respectively. Formulate the problem as
a linear programming model to find the number of units that the shop should produce to maximize its
contribution to profit.

Answer

The problem is formulated as a linear programming problem as follows:

Let x1 and x2 be the numbers of units of the two products that should be produced by the shop in a week.
We have to find the values of x1 and x2 that maximize the total contribution to profit.

Maximize (10 – 2) x1 + (15 – 3) x2

Subject to the sales constraints, the machine constraints, and the non-negativity restrictions:

x1 ≤ 500 and x2 ≤ 700

2x1 +3x2 ≤ 35 and x1 + x2 ≤ 32

x1 ≥ 0 and x2 ≥ 0

Question 40 – 41.3

Apply the SPT rule for four jobs to be processed in one machine and find the completion times of the
jobs, given the following data:

A: 10 min, B: 5 min, C: 12 min, and D: 8 min

Answer

The sequence of jobs to be processed following the shortest processing time (SPT) rule is the following:

Job sequence: B–D–A–C

Processing times: 5, 8, 10, 12 min

Waiting times: 0, 5, 13, 23 min

Completion times: 5, 13, 23, 35 min

Question 40 – 41.4

Apply the Johnson’s rule for a two-machine four-job problem, given the following data to find the
optimal job sequence:

Job Machine 1 Machine 2

1 3 3
2 1 6
3 5 4
4 2 3

Answer

The minimum operation time occurs for job 2 (operation time 1 min). Assign job 2 to machine 1.

We remove job 2. The remaining jobs to be assigned are jobs 1, 3, and 4.

The minimum operation time from among the operation times of the remaining jobs occurs for job 4
(operation time 2 min). Assign job 4 to machine 1 after job 2.

We remove job 4. The remaining jobs to be assigned are jobs 1 and 3.

The minimum operation time from among the operation times of the remaining jobs occurs for job 1
(operation time 3 min). There is a tie. We assign job 1 to machine 1 after jobs 2 and 4 are assigned.

Job 3 is assigned last.

The optimal sequence of jobs is: Job 2 – Job 4 – Job 1 – Job 3.

Question 42-44.1

Why is inventory kept?

Answer

The motives for keeping inventory are the following:

• Transaction motive – ensure synchronization of inflow and outflow (i.e., decouple them)

• Precautionary motive - A cushion against uncertainty

• Speculative motive – store in anticipation of future price rise

• Economic motive – take advantage of economic lot size

Question 42-44.2
Why is ABC analysis done? What are A-class items and what managerial actions are taken on these
items?

Answer

ABC analysis is useful in multi-inventory situations in deciding where and to what extent the control
should be exercised. A-class items consist of a small percentage of items accounting for a major
proportion of the annual consumption. A-class items require tightest possible control, detailed record
keeping, real-time updating, accurate control, regular review, small lot size, small buffer stock, and close
follow up

Question 42-44.2

What are the assumptions made in deriving the basic EOQ model?

Answer

The assumptions made in deriving the basic EOQ model are the following:

1. Number of items is one.

2. Demand is deterministic.
3. No demand is lost or backordered.
4. Replenishment is instantaneous.
5. Unit price of the item is constant.
6. Set up cost is constant.

Question 42-44.2

The annual demand of an item is 10,000 units/year. The order cost is Rs. 48 per order. The holding
charge is 2 %/month. The unit cost is Rs. 100 per unit. The supply lead time is 50 days. Find the
economic order quantity and the reorder point.

Answer

λ = 10,000 units/year, K = 48 Rs/order, I = 0.02/month = 0.24/year, C = 100 Rs/unit, δ = 50 days.

Q* = √(2 λk/IC) = √[{(2)(10,000)(48)}/{(0.24)(100)}] = 200

T = Q*/ λ = 200/1000 = 0.20 year = 73 days

δ/T = 0.68.

m = the largest integer less than or equal to δ/T = 0.

ROP = λ(δ – mT) = (10,000)(13.5)/(365) = 1,369 units

Question 42-44.3
The average usage rate of an item is 200 units/day. The standard deviation of the daily demand is 4
units/day. The lead time is 16 days and the firm desires a service level of 95 %. Find the buffer stock and
the reorder level.

Answer

Given

μD = 200 units/day, σ = 4 units/day, L = 16 days,

Service level = 95 %.

Buffer stock = z(√Lσ) = 1.645(√16)(4) = 26.32 units

It means that by keeping a buffer stock of 26.32 units, there will be 1 stock out in 20 (5 % = 100(1 - .95)
% replenishment cycles.

Reorder Level = μDL + z(√Lσ) = (200)(16) + 26.32 =3,226.32 units

Question 42-44.4

Where is MRP used and how is MRP done?

Answer

Material requirements planning (MRP) is useful for the cases of dependent demand.

To carry out an MRP, one requires the following:

1. The master production schedule giving the gross requirements of the final product.
2. The bill of materials giving the number of subassemblies and parts required for one unit of the
product.
3. The inventory file giving the receipts and issues giving the status of the inventory.
4. Information on the lead time to manufacture/buy.
5. With the help of the above-mentioned information, one
- explodes the gross to net requirements
- offsets the order for these requirements considering their lead times – a process of back
scheduling.
- orders lot-for-lot (i.e., the required amount).
- generates the schedule of order and receipt of parts, subassemblies, and assemblies.

Question 44-45.1

Name the parties that are involved in a supply chain and mention the flows that take place among them.

Answer
The parties involved are the following component/raw-material suppliers, manufacturer, transporters,
wholesalers/distributors, retailers, and customers

The flows that take place among them are flows of material, cash, and information.

Question 44-45.2

What are the three macro processes of supply chain?

Answer

The three macro processes of supply chain are:

1. Customer relationship management (CRM) - preparing catalog, managing web site, providing
after-sales service,
2. Internal supply chain management (ISCM) - warehouse location and size, inventory
management, packing, and shipping goods, and
3. Supplier relationship management (SRM) - Supplier selection, negotiation of supply terms.

Question 44-45.3

What supply chain parameters are affected by the design of supply chain distribution network?

Answer

The design influences response time, product variety, product availability, customer experience, time to
market, order visibility, and returnability.

Question 44-45.4

What are the design options of a distribution network?

Answer

The design options of a distribution network are the following:

• Retail storage with customer pick-up

• Manufacturer storage with direct shipping

• Manufacturer storage with direct shipping and in-transit merge

• Distributor storage with packet carrier delivery

• Distributor storage with last-mile delivery

• Manufacturer/distributor storage with customer pick-up

Question 44-45.5

What is a cross docking?

Answer

Cross‐docking is a supply chain practice of unloading materials from incoming material‐carrying vehicles
directly into outbound material‐carrying vehicles, with little or no storage in between, thus combining
materials from different origins into transport vehicles with the same or similar destination.

Question 44-45.6

What are the design options for a transportation network?

Answer

The design options for a transportation network are the following:

• Direct shipment network

• Direct shipping with milk runs

• All shipments via central DC

• Shipping via DC using milk runs

• Tailored network

Question 44-45.7

What are the design options for a transportation network?

Answer

Supply chain surplus represents the value addition by supply chain function of an organization. It
is equal to the difference between the revenue generated from a customer and the total cost
incurred to produce and deliver the product.

Question 44-45.8

Which contracts are used for product availability and supply chain profits?

Answer

The contracts used for product availability and supply chain profits are (1) Contracts for product
availability, (2) Buyback or returns contracts, (3) Revenue-sharing contracts, and (4) Quantity flexibility
contracts

Question 46.1

a. What do you mean by “market?”

b. Can a seller be a marketer?
Answer

a. A market consists of all the potential customers sharing a particular need or want who might be
willing and able to engage in exchange to satisfy that need or want.
b. If several persons want to buy a plot of land, then these buyers are doing the marketing and are
the marketers.

Question 46.2

What are the ways in which a market can be segmented?

Answer

Market segmentation can be

- geographic

- demographic (age: young and old, income: high, medium, and low, sex: male or female)

- Psychological (social class, lifestyle, personality characteristics)

- Behavioural (occasions, benefits, user status, usage rate, loyalty status, buyer readiness stage,

and attitude)

- preferences toward product features (homogeneous, diffused, and clustered)

Question 46.3

On the basis of variety of products and markets what patterns of market coverage can a company think
of?

Answer

1. Single-market concentration – Single-product single-market segment pattern

2. Product specialization – Single-product multiple market segment pattern
3. Market specialization – Multiple-product single-market segment pattern
4. Selective specialization – Selective multiple-product multiple-market segment pattern
5. Full coverage – multiple-product multiple-market segment pattern
6. Super segmentation – multiple-product multiple-market segment pattern pattern

Question 46.4

State five important marketing strategies that an entrepreneur can use.

Answer

Five marketing strategies are the following:

- Specializes in serving one type of end-use customer.

 - Concentrates on selling to small customers

- Produces a specific product or even part of a product

- Provides unique product feature

- Produces low price high-quality products

Question 46.5

What are the tools of market promotion?

Answer

Usually the following four tools are used for market promotion:

- Advertising – non-personal presentation

- Sales promotion – short-term incentives such as rebates, low-interest financing, lotteries, gifts,
demonstrations

- Publicity – non-personal stimulation of demand such as trade shows, speeches, seminars, annual
reports, charitable donations, public relations

- Personal selling – oral presentation such as sales meeting, telemarketing

Question 47.1

What are the main forms of business organization?

Answer

The main forms of business organization are (1) Sole Proprietorship, (2) Partnership Firms, (3) Joint
Hindu Family Business, (4) Cooperatives, (5) Private Limited Company, (6) Public Limited Company,
(7) Limited Liability Partnership, (8) Companies within Section 25 of Companies Act, 1956, and (9)
Franchise.

Question 47.2

What are the advantages and disadvantages of sole proprietorship and partnership?

Answer

Sole proprietorship is a one-person organization with no legal formalities. But it is suitable for businesses
that involve moderate risk, small financial resources, and small capital requirement. The proprietor has
Unlimited liability and the business ceases to exist after the owner dies.

A partnership form of organization can be registered with the Registrar of Firms. The partners can share
their experience in funding and managing the business. Here the risk is shared. It is appropriate for
medium sized business involving limited capital such as small scale industries, wholesale and retail trade;
small service concerns like transport agencies, real estate brokers; professional firms like charted
accountants, doctors' clinic, attorney or law firms.

Question 47.3

State three important differences between a private limited company and a public limited company.

Answer

A private limited company is formed with 2 – 50 members whereas a public limited company is formed
with a minimum of 7 members and with no maximum limit.

Transfer of shares in a private limited company is limited to its members, whereas shares can be freely
transferred in a public limited company.

A private limited company need neither file a prospectus with the Registrar nor obtain the Certificate for
Commencement of business, whereas these are required for a public limited company.

Question 47.4

State the main characteristics of a public liability partnership type of enterprise.

Answer

The main characteristics of a public liability partnership type of enterprise are the following:

• It combines the flexibility of a partnership and the advantages of limited liability of a company.

• It is useful for SMEs and for the enterprises in services sector, particularly for activities involving
professionals.

• Such a company is governed by the Limited Liability Partnership Act 2008.

• It is a legal entity separate from its partners.

• The minimum number of partners in such a company is 2.

• It is incorporated with the Registrar of Societies.

Question 47.4

What are the main provisions for companies within Section 25 of Companies Act, 1956

Answer

The main provisions for companies within Section 25 of Companies Act, 1956 are the following:

• Such a company is established for promoting art, science, religion, social cause, sports, education,
research, charity or any other activities with the sole objective to promote such activities.
 • Profit, if any, is used to further the same objectives, not for payment of dividends.

• It is exempted from the requirement of minimum paid-up capital and payment of stamp duty for
registration.

• It is a limited-liability company without the words “limited” or “private limited” appearing in its
name.

Question 48.1

What is a Memorandum of Association? What are its main clauses?

Answer

A memorandum of association is a document that gives the essential facts about a new company intended
to be formed. It is submitted to the Registrar of Companies. It has the following clauses: (1) Name, (2)
Place of the Registered Office, (3) Objects, (4) Liability, (5) Authorized share capital, and (6) Name,
address of subscribers, and number of equity shares held by each.

Question 48.2

What do you mean by essential commodities? State five products that are listed as essential commodities
in India.

Answer

The essential commodities are those for which the government has the power to produce, supply and
distribute. Five essential commodities include: (1) Cattle fodder, (2) Coal, (3) Cotton, (4) Drugs, and (5)
Cotton.

Question 48.3

Name five products that are listed in the Reserved List of Products for small-scale sectors.

Answer

The five products are: (1) Bread, (2) Mustard oil, (3) Wax candles, (4) Safety matches, and (5) Steel
almirah.

Question 49.1

State three components of equity funding and three components of debt funding.

Answer

Three components of equity financing are the following:

(1) Common stock, (2) Preferred stock, and (3) Retained Earnings

Three components of debt financing are the following:

(1) Debenture, (2) Term loan, and (3) Deferred credit

Question 49.2
State three main advantages of debt finance over equity finance.

Answer

Debt financing does not dilute the control over the company, whereas in equity financing the control is
diluted for the existing owners.

Interests on debt are tax-deductible, whereas dividends to equity holders are not.

Issue cost is significantly lower for debt financing compared to that of equity financing.

Question 49.3

Differentiate between promissory notes, bonds, and debentures.

Answer

Promissory notes, given to banks, can generate funds needed for short-term (2 – 5 years) needs. Bonds
and debentures help in generating funds for long-term needs.

Bonds are long-term unsecured notes issued by government, government undertakings, and financial
institutions, whereas debentures are secured debts that are issued by private.

Question 49.4

How can an entrepreneur get working capital advance and what are the types of such advances?

Answer

Working Capital Advances are given by commercial banks against hypothecation (against movable
property or inventory) or pledge (goods deposited with the banks). They can be (1) cash
credits/overdrafts where a borrowing company can borrows as often as it needs, but not exceeding a pre-
specified limit, (2) loans - a fixed amount, (3) purchase/discount of bills where the bank pays the
company’s purchase bill, and (4) letter of credit given by a bank undertaking the responsibility of meeting
a company’s purchase obligation and thus enabling the company to buy an asset/service.

Question 49.5

Differentiate between lease finance and hire-purchase and between a factor and a special purpose vehicle.

Answer

In case of lease finance, the owner receives payment from the user of an asset for a specified lease period,
whereas in a hire-purchase scheme the hirer of an asset becomes the owner after the payment of the
principal and the interests.

A factor is a financial institution to manage and finance credit sales, whereas a special-purpose vehicle
(SPV) is a trustee that issues securities against a pool of assets of a company that are transferred to the
SPV and whose cash flows are utilized to pay to the holders of these securities.

Question 49.6

State the characteristics of a venture capital form of financing.

Answer

Venture capital form of financing is basically equity investment in young, risky, and prospective private
companies. Capital is provided by venture capital firms (VCF). They do not need dividend or interest,
but they want but need long-term capitalization and increased net worth of the company.

Question 50.1

Briefly describe what you mean by entrepreneurship.

Answer

Entrepreneurship is the professional application of knowledge, skills and competencies and/or of

monetizing a new idea, by an individual or a set of people by launching an enterprise do novo or
diversifying from an existing one, thus to pursue growth while generating wealth, employment, and social
goal.

Important features of entrepreneurship are (i) innovation potential, (ii) risk-taking propensity, and (iii)
venturing into new business for profit.

Question 50.2

Mention five important principles of entrepreneurship.

Answer

The five important principles of entrepreneurship are the following:

1. Challenge the status-quo.

2. Search for new ideas.
3. Make the product, process, or service simple and understandable.
4. Make the product, process, or service customer based.
5. Work, work, and work.

Question 50.3

What is a business plan and what are its contents?

A business plan is a written document that details the proposed venture providing a roadmap for the
enterprise. It helps the entrepreneur to view the project comprehensively, critically, and objectively and is
a communication tool for the external stakeholders.

A business plan contains a description of the business, the opportunities in the market, the location of the
enterprise, the financial aspects, the risks involved, the management structure, the milestones, and the
successor details.

Question 50.4
What considerations are made in feasibility analysis?

Answer

Usually technical, marketing, financial, organizational capability and competitor analysis are done in a
feasibility analysis.