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Q. 1  (a)     The president of Bright Corporation tells you that he sees a dim future for his company. He feels that his hands are tied because fixed costs are too high. He says that fixed costs do not change and therefore the situation is hopeless. Do you agree? Explain.                                      (10)

         (b)     Distinguish between relevant and irrelevant costs and provide examples of each type of cost.     (10)

 

Q. 2  Salman Corporation estimated its overhead costs would be Rs. 24,000 per month except for January when it pays the Rs. 72,000 annual insurance premium on the manufacturing facility. Accordingly, the January overhead costs were expected to be Rs. 96,000 (Rs.72,000 + Rs. 24,000). The company expected to use 7,000 direct labor hours per month except during July, August, and September when the company expected 9,000 hours of direct labor each month to build inventories for high demand that normally occurs during the Christmas season. The company’s actual direct labor hours were the same as the estimated hours. The company made 3,500 units of product in each month except July, August, and September in which it produced 4,500 units each month. Direct labor costs were Rs. 24 per unit, and direct materials costs were Rs. 10 per unit.           (15)

         Required:

  1. Calculate a predetermined overhead rate based on direct labor hours.
  2. Determine the total allocated overhead cost for January, March, and August.
  3. Determine the cost per unit of product for January, March, and August.
  4. Determine the selling price for the product, assuming that the company desires to earn a gross margin of Rs. 20 per unit.

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