Case Study: (40 marks)

Nova Plastics Ltd. is engaged in the manufacture and sale of plastic bottles of a

standard size. Presently the company is having its quality control system in a small

way at an annual external failure and internal failure costs of Rs 440,000 and Rs

850,000 respectively. As the company is not able to ensure supply of good quality

products upto the expectations of its customers and wants to manage competition to

retain market share considers an alternative quality control system. It is expected

that the implementation of the system annually will lead to a prevention cost of Rs

560,000 and an appraisal cost of Rs 70,000. The external and internal failure costs

will reduce by Rs100,000 and Rs 410,000 respectively in the new system. All other

activities and costs will remain unchanged.

The factory has 5 machines of identical size, each capable of producing 40 bottles

per hour. The variable cost per bottle is Rs 0.32 and the selling price is Rs 0.80

each. The company has received an offer from another company for manufacture of

40,000 units of a plastic moulded toy. The price per toy is Rs 30 and the variable,

cost is Rs 24 each. In case of the company takes up the job, it has to meet the

expenses of making a special mould required for the manufacture of the toy. The

cost of the mould is Rs 1,00,000. The company's time study analysis shows that the

machines can produce only 16 toys per hour. The company has a total capacity of

10,000 hours during the period in which the toy is required to be manufactured. The

fixed costs excluding the cost of construction of the mould during the period will be

Rs 1,000,000.

The company has an order for the supply of 300,000 bottles during the period.

In the year 2019, the finance department provided the following information related to

the production of toys:

Sales budget for calendar year 2019 by quarters is as under:

Quarters 1st 2nd 3rd 4th

No. of units to be sold 20,000 24,000 30,000 36,000

The year is expected to open with an inventory of 6,000 units of finished products and

close with inventory of 8,000 units. Production is customarily scheduled to provide for

70% of the current quarter's sales demand plus 30% of the following quarter demand.

The budgeted selling price per unit is Rs 40. The standard cost details for one unit of

the product are as follows: Variable Cost Rs35 per unit. Fixed Overheads 2 hours 30

minutes @ Rs2 per hour based on a budgeted production volume of 100,000 direct

labour hours for the year. Fixed overheads are evenly distributed throughout the year.

You are required to:

(i) EXAMINE the new quality control proposal and recommend the

acceptance or otherwise of the proposal both from financial and nonfinancial

perspectives. (6 Marks)

(ii) What is your ADVICE to the company, if the company wants to achieve zero

defect through a continuous quality improvement programme? (2 Marks)

(iii) SUGGEST a suitable quality control level at a minimum cost. (2 Marks)

(iv) Do you ADVISE the company to take up the order for manufacturing plastic

moulded toys during the time when it has an order in its book for the supply

of 300,000 bottles. (3 Marks)

(v) If the order for the supply of bottles increases to 400,000 bottles, will you

ADVISE the company to accept the order for the supply of plastic moulded

toys? State the reasons. (3 Marks)

(vi) An associate company of Nova Plastics Ltd. has idle capacity and is willing

to take up the whole or part of the manufacturing of the plastic moulded

toys on sub-contracting basis. The subcontract price inclusive of the cost

of construction of mould is Rs 28 per toy. DETERMINE the minimum

expected excess machine hour capacity needed to justify producing any

portion of the toy order by the company itself rather than subcontracting.

(4 Marks)

(vii) Prepare Quarterly Production Budget for the year. (12 Marks)

(viii) In which quarter of the year, company expected to achieve break-even

point. (8 Marks)