Strategic Cost Management
1. X Ltd has to replace its machine and the production manager has to decide between Machine A and Machine B. Machine A is having installation cost of ₹ 160 and annual electric bill ₹ 200. Machine B has installation cost of ₹ 760 and annual electric bill of ₹ 80. If both have life of 8 years which machine will you recommend if interest rate is 9 % for five years. P/V factor @ 9 % for 8 years is 5.5348
2. A company manufacturing two products furnishes the following data for a year.
| Product | Annual Output Units | Total machine hours | Total No. of purchase orders | Total No. of setups |
| A | 5,000 | 20,000 | 160 | 20 |
| B | 60,000 | 120,000 | 384 | 44 |
The annual Overheads are as under:
| Volume related activity cost ( Activity driver-Machine hours ) | ₹ 5,50,000 |
| Setup related cost | ₹ 8,20,000 |
| Purchase related cost | ₹ 6,18,000 |
You are required to calculate cost per unit of each product A & B based on
i. Traditional method of charging overhead and
ii. Activity based costing method
3. Project X Involves an initial outlay of Rs 32,400.Its working life is 3 years. The cash streams are as follows
| Year | Inflows ₹ | P .V Factor @ 14% | P .V Factor @ 16% |
| 1 | 16,000 | 0.877 | 0.862 |
| 2 | 14,000 | 0.769 | 0.743 |
| 3 | 12,000 | 0.675 | 0.641 |
Calculate:
a. NPV at 14 % & 16%
b. IRR