Latest Activity In Study Groups

Join Your Study Groups

VU Past Papers, MCQs and More

We non-commercial site working hard since 2009 to facilitate learning Read More. We can't keep up without your support. Donate.

ASSIGNMENT QUESTION
PUNJNAD Textile Industries (PTI) – a privately owned textile spinning unit is engaged in yarn manufacturing
since its incorporation. The unit produces high quality yarn which is sold out immediately like a hot cake. 5
years back, Mr. Entrepreneur - the owner of PTI had signed a contract with a local cotton supplier – Mr.
Supplier for supplying fine quality cotton bails to PTI as per specified requirement for five years at a cost of
Rs. 500 per bail. PTI estimated its requirement of 12,500 cotton bails per year for smooth operations. Both the
owner and the supplier were happy for signing the contract and a feeling of earning the good amount of profit.
Mr. Entrepreneur also estimated Rs. 2,000 as cost on issuing every new order and 10% as carrying and storage
cost associated with the inventory.
Mr. Supplier successfully supplied the cotton bails to PTI for 4 years but in 5th year of the contract, due to
heavy flood, cotton crops could not be reaped at full. But, due to the signed contract with PTI, Mr. Supplier
managed to supply cotton bails to PTI as per the agreed specification and completed the contract period
successfully.
This year, due to bumper cotton crop in the region, Mr. Supplier has desired to renew the cotton supply
contract with the condition to supply 25% extra bails over the previous contract for the next 5 years. Mr.
Entrepreneur as satisfied with the cotton quality supplied earlier is considering this new option and has called
upon his manager costing – Mr. Management Accountant to compare the proposal with the contract just
ended. The manager has advised him to reject the proposal as extra quantity purchased would increase the
carrying and storage cost by 2%.
REQUIREMENT:
Being a student of cost & management accounting you are asked to calculate the following:
1. The most economical order quantity in case of both the proposals (current as well as previous)
2. The total ordering cost which has to be borne by PTI on both the proposals (current as well as
previous)
3. The total Carrying cost which has to be borne by PTI on both the proposals (current as well as
previous)
4. Using the order quantities, total ordering cost and total carrying cost calculated above; calculate the
total cost for both proposals. Also suggests the most suitable proposal for PTI on total cost basis.

Views: 10007

Attachments:

Replies to This Discussion

Mr. Masood check it and then reply

Annual consumption=12500

Cost to place one order=2000

Cost per unit=500

carrying cost=10%

And in case of 25% increase

Annual consumption=15625 after 25% increase

Cost to place one order=2500 after 25% increase

Cost per one cottom bail=625 after 25% increase

Carrying cost=12.5% after 25% increase

What you say?

Bros yh confusion dur kro k krna kia hi aya k just ru 25% increase krna hi k cost bi krni hi

in my opinion first we have to find the EOQ, Total ordering cost, total carrying cost and total cost for both the contracts.

contract 1

RU=12500

OC = 2000

Uc = 500

CC = 10% of UC

similarly for proposed contract:-

RU = original RU + 25% = 15625,

OC = 2000

Uc = 500

CC = 12% of UC

formulas for EOQ, Total Ordering Cost and total carrying cost are given on page 56 and 57 of handouts, just put in these values and get the answers. in the end find total cost per contract

 the formula for total cost = total ordering cost + total carrying cost

put the values for both the contracts in this formula and then finally compare both the contracts to see which one is cheaper.

if some one has a better idea plz share

When annual consumption will increase to 25% I think all costs will also increase to 25%. But when we go through the question it is very clear that the difference is only 2%. So this is the confusion.

The manager is rejecting the proposal by saying that extra quantity purchased would increase the carrying and storage cost by 2%. It means the manager thinks that only CC will increase and all the other costs and values will remain same. So in this position it is correct but still a lot of questions. Any student who has a little more command in this subject must try to address the problem.

RU=12500

OC = 2000

Uc = 500

CC = 10% of UC

similarly for proposed contract:-

RU = original RU + 25% = 15625,

OC = 2000

Uc = 500

CC = 12% of UC

Dear Dr Anjum

My point of view is same as you have indicated now. The manager has advised not to increase the 25% of 12500 requirement per year as it will increase the cc and storage cost by 2%. we have to see if he is right or wrong. In this case according to my calculation he is right . My calculation exactly match and say that there is a difference of 2% between actual and proposed. Here we are only concerned with the increase of 25% in consumption per year. we do not have to increase every thing because we are looking at the effect of consumption on CC and Storage cost.  Thanks This is what feel and think. Best of luck.     

@masood
How did you calculate the total carrying cost for previous contract? 

Dear all Students

I just followed lesson no 9 Page no 56 and 57.

Follow the steps as per the hand out and steps given in the formulas.

Focus on 25%  increase in consumption rate only . Do not bother about 2% increase in calculations like CC or Ordering cost . This will/should not have affect the working because this has already been told by manager that it will have an increase of 2% by increasing the consumption by 25%. we are checking whether the manager is right or wrong. A t the end when we calculate total cost of present situation and the proposed scenario we find  difference of 2% as manager had said. As per my working/ given in hand out the difference is exactly 2% and so manager is right. This is what i feel about it. Thanks and good luck    

dear masood give us your calculations. Because you are surely saying the manager correct?

The economic order quantity (Previous Proposal)

EOQ=1000

The economic order quantity (Current Proposal)

EOQ=1020.63

Total ordering cost (Previous Proposal)

25000

Total ordering cost (Current Proposal)

30618.34

Total carrying cost (Previous Proposal)

312500

Total carrying cost (Current Proposal

468750

Total cost (Previous Proposal)

3150000

Total cost (Current Proposal)

499368.34

Previous proposal is suitable proposal for PTI


But here even in this case the difference is not of 2%. It means we are doing wrong?
If the solutions are not correct then please share the correct answers

In case if we don't increase 25% in annual consumption and take further 2% as carrying cost .

The economic order quantity (Previous Proposal)

EOQ=1000

The economic order quantity (Current Proposal)

EOQ=912.871

Total ordering cost (Previous Proposal)

25000

Total ordering cost (Current Proposal)

27386.126

Total carrying cost (Previous Proposal)

312500

Total carrying cost (Current Proposal

375000

Total cost (Previous Proposal)

3150000

Total cost (Current Proposal)

402368.34

Previous proposal is suitable proposal for PTI


But here even in this case the difference is not of 2%. It means we are doing wrong?
If the solutions are not correct then please share the correct answers

I dont think the costs will increase, because the annual consumption remains the same, the annual SUPPLY increases, since we have a bumper cotton crop, which is like more cotton that we can use. 
I dont think any other cost increases.....apart from those mentioned otherwise the question would have said and respectively increasing the rest of the costs. 

RSS

Looking For Something? Search Below

Latest Activity

VIP Member Badge & Others

How to Get This Badge at Your Profile DP

------------------------------------

Management: Admins ::: Moderators

Other Awards Badges List Moderators Group

© 2021   Created by + M.Tariq Malik.   Powered by

Promote Us  |  Report an Issue  |  Privacy Policy  |  Terms of Service