Exponential smoothing method of forecasting ?

Exponential smoothing is a time series forecasting method that uses weighted averages of past
observations to predict future points. In this method, each future point is estimated as a weighted average
of the most recent observations, with the weights declining exponentially as the observations get older.
The basic idea behind exponential smoothing is to assign higher weights to more recent observations and
lower weights to older observations, so that the forecast takes into account both the current trend and the
historical pattern in the data. The weight assigned to each observation depends on the smoothing
parameter, which is a value between 0 and 1 that determines the degree of weight decay over time.
There are several variants of exponential smoothing, including simple exponential smoothing, Holt's
linear exponential smoothing, and Holt-Winters exponential smoothing. These methods can be adapted
to handle various types of time series data, including trended data, seasonal data, and data with both
trend and seasonality.
Exponential smoothing is widely used in practice due to its simplicity, ease of implementation, and
ability to produce accurate forecasts for many types of time series data. However, it is important to note
that this method does have some limitations and may not always be the best choice for forecasting
complex or volatile time series data.

Disadvantage of moving average method?

The moving average method, also known as rolling average or running average, is a commonly used
technique for smoothing time series data. While it has several advantages, it also has a few
disadvantages that make it less suitable for some data analysis applications:
Lag in detecting trends: The moving average method can cause a lag in detecting trends in the data, as it
takes an average of previous values and therefore may not respond quickly to sudden changes in the
data.
Sensitivity to Outliers: Moving averages can be very sensitive to outliers or extreme values in the data,
which can cause significant distortion in the smoothed data.
Window Size: The choice of window size, or the number of values to include in the moving average
calculation, can have a significant impact on the results. A large window size can smooth the data too
much, obscuring important trends, while a small window size can lead to increased noise in the data.
Unsuitable for Non-stationary data: Moving average method assumes that the data is stationary, meaning
that the statistical properties of the data remain constant over time. If the data is non-stationary, the
method may not provide accurate results.
Limited Flexibility: The moving average method is limited in its flexibility, as it only provides a simple
smoothing of the data and does not account for complex relationships between variables.
Overall, the moving average method is a useful tool for smoothing time series data, but it should be used
with caution and in combination with other methods to ensure accurate results.
Purpose of control and administrative budget?
The purpose of control and administrative budgets is to provide a framework for managing and
monitoring an organization's financial resources.
Control budgets are used to establish specific goals and objectives for an organization, and to track its
progress towards meeting these goals. This budget provides a way for management to monitor actual
spending and revenues, and compare them to the budgeted amounts. Any differences can then be
analyzed to determine the reasons behind them, and to make appropriate adjustments.
Administrative budgets, on the other hand, are used to plan and manage the costs of running the
organization, including salaries, benefits, office expenses, supplies, and other overhead costs. This
budget helps management determine the resources that are needed to support the organization's
operations, and to allocate those resources effectively.
Both control and administrative budgets are important tools for effective financial management, as they
help organizations allocate resources efficiently, monitor spending, and ensure that they are achieving
their goals and objectives.
Factor of service organization costing ?
There are several factors that influence the cost of service organizations:
1. Labor Costs: Service organizations often rely heavily on their employees to deliver services to their
clients. The cost of labor, including salaries, benefits, and training, is a significant factor in determining
the cost of service organizations.
2. Overhead Costs: Service organizations also have overhead costs, including rent, utilities, insurance,
and equipment. These costs must be factored into the overall cost of the service organization.
3. Materials and Supplies: Depending on the type of service offered, service organizations may also
require materials and supplies. The cost of these items must be taken into account when determining the
cost of the service organization.
4. Technology: Service organizations may use technology, such as software and hardware, to deliver
their services. The cost of technology must be considered when determining the overall cost of the
service organization.
5. Marketing and Advertising: Service organizations must also invest in marketing and advertising to
reach new clients and promote their services. The cost of these activities must be factored into the
overall cost of the service organization.
6. Quality Assurance: Service organizations must also invest in quality assurance processes and
procedures to ensure that they are delivering high-quality services to their clients. The cost of quality
assurance must be considered when determining the overall cost of the service organization.
These are just some of the factors that influence the cost of service organizations. The specific factors
that influence the cost of a service organization will depend on the nature of the services offered and the
size and structure of the organization.
What is the advantage of if organization adopting standard costing system
Standard costing is a method of costing that uses predetermined costs for materials and labor to provide
a basis for comparison with actual costs. The use of standard costs can provide several advantages for
organizations, including:
1. Improved cost control: By having a standard cost for each product, an organization can compare
actual costs against expected costs, which can help identify areas where cost overruns are occurring. This
can lead to improved cost control and more efficient use of resources.
2. Better decision-making: Standard costs can provide a basis for decision-making, such as whether to
accept or reject a specific order or to invest in new equipment.
3. Increased efficiency: Standard costs can help organizations identify areas where they can improve
efficiency, such as reducing the time required to produce a product or reducing the cost of raw materials.
4. Improved profitability: By controlling costs and improving efficiency, an organization can increase
its profitability.
5. Better budgeting: Standard costs can be used as a basis for budgeting, providing a more accurate
forecast of future costs.

Overall, standard costing can provide organizations with a useful tool for managing costs and improving
overall performance.
Difference between fixed and flexible budgets ?
Fixed budgets and flexible budgets are two different types of budgeting methods used to plan and control
an organization's finances.
A fixed budget is a financial plan that remains unchanged regardless of the actual level of activity
achieved. It sets predetermined amounts for various expenses, and these amounts do not change during
the budget period, regardless of the actual results of operations. Fixed budgets are useful for planning
and providing a benchmark for performance, but they can be unrealistic and inflexible, as they do not
take into account changes in the business environment.
A flexible budget, on the other hand, is a budget that adjusts to changes in the level of activity. It is more
dynamic and responsive to changes in the business environment, as it can be revised and updated to
reflect changes in sales, production levels, or other factors that affect the organization's finances. A
flexible budget is based on a set of expected activity levels and the costs that are expected to be incurred
at each level of activity.
In conclusion, a fixed budget provides a consistent and predictable framework for financial planning and
control, while a flexible budget provides more adaptability and responsiveness to changing conditions.
The choice of which budgeting method to use depends on the specific needs and objectives of the
organization.
Characteristics of services organizations ?
Services organizations are characterized by several unique features, including:
1. Intangibility: Services cannot be seen, touched or physically stored, which makes it difficult for
customers to evaluate the quality of the service before purchasing it.
2. Heterogeneity: Service quality can vary greatly from one service encounter to another, even within the
same organization. This can result in a wide range of customer experiences.
3. Simultaneity: Production and consumption of services occur at the same time, which means that
customers are actively involved in the service delivery process.
4. Perishability: Services cannot be stored, and once a service encounter has passed, it cannot be
recovered or resold.
5. Inseparability: Service delivery and production are closely tied together, making it difficult to separate
the two. This can result in customers having direct contact with service providers, who play a key role in
shaping the customer's perception of the service.
6. Labor-Intensity: Services often require a high degree of human interaction and personalization, which
makes labor a crucial element of service delivery.
7. Customer-Focused: Services organizations often place a strong emphasis on customer satisfaction and
often use customer feedback to continuously improve their services.
8. Adaptability: Services organizations must be able to adapt to changing customer demands and market
conditions in order to remain competitive.
9. Knowledge-Intensity: Many services require specialized knowledge and expertise, making it
important for organizations to invest in their employees' education and development.
10. Interdependence: Services organizations often work closely with other organizations to deliver their
services, creating a network of interdependent relationships.

Step of decision-making ?
The steps of decision-making can vary depending on the model or approach being used, but a common
framework involves the following steps:
1. Define the problem: Clearly identify and define the decision that needs to be made.
2. Gather information: Collect relevant data, facts, and information that will be needed to make a
decision.
3. Identify options: Generate a list of potential options or solutions to the problem.
4. Evaluate options: Analyze each option, taking into account factors such as costs, benefits, risks, and
constraints.
5. Make a decision: Choose the best option based on the evaluation, taking into account personal values,
goals, and objectives.
6. Implement the decision: Put the decision into action, making any necessary preparations and taking
the necessary steps to make it happen.
7. Monitor progress: Regularly monitor and evaluate the progress of the decision to see if any
adjustments need to be made.
8. Review the decision: Reflect on the decision-making process and outcome, learning from any
mistakes and making improvements for future decision-making.

Which factor determines when choosing cost driver in abc costing?

Activity-based costing (ABC) involves identifying the activities that consume resources and determining
the cost of these activities. In order to determine the cost of each activity, you must identify a cost driver
that reflects the relationship between the activity and the cost. The choice of cost driver is one of the
most important decisions in ABC, as it directly affects the accuracy of cost estimates.
The following factors should be considered when choosing a cost driver:
1. Relevance: The cost driver should accurately reflect the relationship between the activity and the cost.
For example, if an activity is driven by the number of machine setups, the number of setups is a more
relevant cost driver than the number of products produced.
2. Measurability: The cost driver must be easily measurable and quantifiable. This will ensure the
accuracy of cost estimates.
3. Availability: Data on the cost driver must be readily available. If data is difficult to obtain or the cost
driver is not easily measurable, it may not be a suitable cost driver.
4. Consistency: The cost driver should remain constant over time. Changes in the cost driver can cause
changes in the cost estimates and reduce the accuracy of ABC.
5. Reliability: The cost driver should be reliable and consistent, and not subject to estimation errors or
manipulation.

By considering these factors, you can determine the most appropriate cost driver for each activity and
improve the accuracy of cost estimates in ABC.
Explain Standard setting with example in service industry (McDonaldization)?
Standardization is a key aspect of the concept of "McDonaldization," which refers to the spread of
efficient, standardized systems of production and consumption, particularly in the fast food industry.
In the service industry, standardization refers to the establishment of consistent procedures, processes,
and techniques across all locations of a business, in order to ensure uniform quality and consistency of
products and services. For example, in the fast food industry, standardization is reflected in the way that
food is prepared and served, the layout and design of restaurants, and the uniform appearance of
employees.
McDonald's is often cited as the quintessential example of standardization in the fast food industry. The
chain's standardization of menu offerings, cooking procedures, and restaurant design have made it one of
the most recognizable and successful fast food chains in the world. By ensuring that its products and
services are consistent across all locations, McDonald's has been able to build a strong brand and provide
a reliable experience for its customers.
In conclusion, standardization is an important aspect of McDonaldization, and it is evident in the way
that businesses in the service industry establish and maintain consistent processes, products, and services
in order to achieve efficiency, uniformity, and reliability.
Comment on the following statement: ” It is incorrect to assume that material price variance will always
indicate the efficiency of the purchasing department.”
The statement is correct. Material price variance is the difference between the actual cost of a material
and its budgeted or expected cost. It can arise due to a variety of reasons, such as changes in market
conditions, supplier negotiations, and changes in the quantities purchased. While a favorable price
variance can indicate that the purchasing department has negotiated a better price for the materials, an
unfavorable price variance does not necessarily mean that the department is inefficient. There could be
external factors, such as market price increases, that are beyond the control of the purchasing department
and that contribute to the unfavorable variance. Hence, it is important to consider multiple factors, such
as supplier performance, contract compliance, and overall cost management, when evaluating the
efficiency of the purchasing department.
. Overtrading happens when a business tries to do too much too quickly with too little long-term capital,
so that it is trying to support too large a volume of trade with the capital resources at its disposal. Enlist
the symptoms of overtrading.
Overtrading can manifest itself in several ways. Some common symptoms of overtrading include:
1. Cash flow problems: If a business is overtrading, it may struggle to pay suppliers and staff on time, as
well as to meet other financial obligations. This can lead to a lack of cash flow and potentially severe
financial problems.
2. Increased debt: In an attempt to finance its rapid growth, a business that is overtrading may take on
too much debt, which can be difficult to manage and repay.
3. Excessive stock levels: A business that is overtrading may carry too much stock, which can lead to a
build-up of slow-moving or obsolete items. This can tie up valuable working capital and affect cash flow.
4. Late payments: When a business is overtrading, it may struggle to pay its bills on time, which can
harm its credit rating and damage relationships with suppliers and customers.
5. Burnout of management and employees: Overtrading can put an enormous amount of stress on the
management and employees of a business, leading to exhaustion and burnout.
6. Quality problems: When a business is trying to do too much too quickly, it may struggle to maintain
the quality of its products and services, which can harm its reputation and lead to customer
dissatisfaction.

These are just some of the symptoms of overtrading, and the specific challenges faced by a business will
depend on its particular circumstances. However, if a business is experiencing any of these symptoms, it
may be a sign that it is overtrading and needs to reassess its growth strategy.
In a paper and board mill, materials specification standards area set up for various grades of pulp and
secondary furnish (waste paper) for each grade and kind of paper produced. Yet at regular intervals the
cost accountant id able to determine a material mix variance. Why does a mix variance occur?
A mix variance occurs in a paper and board mill because the actual mix of materials used in production
may differ from the desired mix specified in the standards. This can happen for several reasons, such as
fluctuations in the availability or price of certain types of pulp or waste paper, changes in customer
demand for specific grades of paper, or variations in the production process that result in different
proportions of materials being used. The cost accountant is responsible for determining the material mix
variance by comparing the actual mix of materials used with the desired mix and calculating the
difference in costs. This information is then used to make decisions about adjusting the standards or
taking other steps to improve efficiency and reduce costs in the production process.
In a paper and board mill, materials specification standards area set up for various grades of pulp and
secondary furnish (waste paper) for each grade and kind of paper produced. Yet at regular intervals the
cost accountant id able to determine a material mix variance. Why does a mix variance occur?
A mix variance occurs in a paper and board mill because the actual mix of materials used in production
may differ from the desired mix specified in the standards. This can happen for several reasons, such as
fluctuations in the availability or price of certain types of pulp or waste paper, changes in customer
demand for specific grades of paper, or variations in the production process that result in different
proportions of materials being used. The cost accountant is responsible for determining the material mix
variance by comparing the actual mix of materials used with the desired mix and calculating the
difference in costs. This information is then used to make decisions about adjusting the standards or
taking other steps to improve efficiency and reduce costs in the production process.
1-What Factors to be considere before variance investigate?
Before investigating the variance of a set of data, there are several factors to consider:
1. The type of data: Variance analysis is applied differently depending on the type of data you are
working with (i.e. continuous, categorical, ordinal, nominal).
2. The distribution of the data: Understanding the distribution of the data (i.e. normal, skewed, etc.) can
help you better interpret the results of the variance analysis.
3. The sample size: The sample size can impact the accuracy of the variance calculation. In general,
larger sample sizes provide more accurate results.
4. The unit of measurement: Variance is sensitive to the unit of measurement. Ensure that the unit of
measurement is consistent across the data set.
5. Outliers: Outliers can significantly impact the results of the variance analysis, so it's important to
identify and treat outliers appropriately.
6. Purpose of the analysis: The purpose of the variance analysis will influence the way the analysis is
performed and the results that are reported.
By taking these factors into consideration, you can ensure that your variance analysis is accurate,
meaningful, and provides useful insights into the data you are working with.
3-How would you define standard and ways in which it could be developed?
A standard is a set of guidelines, specifications, or criteria that are widely accepted and followed in a
particular field or industry. Standards help to ensure consistency, compatibility, safety, and quality in
products, services, and systems.
There are several ways in which standards can be developed:
1. Consensus-based standards development: This is the most common method for developing standards,
where stakeholders from various organizations, industries, and communities come together to reach a
consensus on the specifications for a particular product, service, or system.
2. Government-led standards development: Governments can play a role in developing standards by
setting regulations and standards for certain products, services, and systems, especially in areas that have
a significant impact on public safety and health.
3. Industry-led standards development: Industries can also take the initiative to develop standards that
are specific to their needs and requirements. For example, the technology industry might develop
standards for data storage or wireless communications.
4. International standards development: International standards are developed by organizations such as
the International Organization for Standardization (ISO) and the International Electrotechnical
Commission (IEC). These standards are recognized and adopted globally and provide a common basis
for international trade and cooperation.

In all cases, the development of standards involves a rigorous process of research, testing, and
evaluation, followed by consensus building and review, and finally adoption and implementation.
Standards are regularly reviewed and updated to keep pace with changes in technology and other factors
that may affect their relevance and effectiveness
4-Types of factors could effect the bases an organization can use to apportion service department cost?
There are several factors that can affect the bases an organization can use to apportion service
department costs:
1. Nature of services provided: The type of services provided by a service department can influence the
cost apportionment base. For example, if a service department provides services that are closely tied to
the production processes of other departments, then a production-based cost apportionment may be more
appropriate.
2. Purpose of the service: The purpose of the service department can also impact the cost apportionment
base. If the service department is providing support services to other departments, a cost apportionment
base that takes into account the extent of support provided to each department may be more appropriate.
3. Availability of data: The availability and accuracy of data used to apportion costs can also affect the
choice of cost apportionment base. If data is not available or is unreliable, it may be difficult to use that
base.
4. Organizational structure: The organizational structure of the company can also impact the cost
apportionment base. For example, if the company has multiple service departments serving different
departments, it may be appropriate to use a departmental-based cost apportionment method.

These are some of the key factors that can impact the choice of cost apportionment base for service
departments. The appropriate cost apportionment method will depend on the specific circumstances of
each organization and may change over time as the organization evolves.
5-Define standard or type of standard?
A standard is a document that provides guidelines, specifications, or requirements for a particular
product, service, or system. It can serve as a basis for comparison and provide a common reference for
different stakeholders, including manufacturers, consumers, regulators, and industry organizations.
There are several types of standards, including:
1. Technical standards: Specify the technical requirements for products, services, or systems, such as
dimensions, materials, performance criteria, and testing methods.
2. Management standards: Specify the processes, procedures, and systems that organizations should
follow to manage their operations, such as quality management systems, environmental management
systems, and information security management systems.
3. Industry standards: Specify the norms and expectations within a particular industry, such as the
standards for electrical safety in the construction industry or the standards for food safety in the food and
beverage industry.
4. International standards: Specify the standards that are recognized and used globally, such as the
International Organization for Standardization (ISO) standards or the International Electrotechnical
Commission (IEC) standards.
5. National standards: Specify the standards that are specific to a particular country or region, such as the
American National Standards Institute (ANSI) standards in the United States or the European Committee
for Standardization (CEN) standards in Europe
2. Semaab Veterinary Hospital has purchased new lab equipment for Rs. 2,019,750. The equipment is
expected to last for 3 years and to provide cash inflows as follows: Year(s) Cash Inflows (Rs.) 1 675,000
2 900,000 3 ? Assuming that the equipment will yield exactly a 15% rate of return, what is expected cash
inflow for year 3?
To determine the expected cash inflow for year 3, we can use the concept of time value of money and the
formula for calculating the future value of a single amount.
The formula for the future value (FV) of a single amount (present value or PV) is:
FV = PV * (1 + r)^n
where r is the rate of return and n is the number of periods.
In this case, the present value is the expected cash inflow for year 3, and we want to find its future value
after 3 years at a 15% rate of return.
So, substituting the values into the formula:
FV = PV * (1 + 0.15)^3
We don't know the value of PV, so we'll solve for it:
PV = FV / (1 + 0.15)^3
FV = 900,000 (expected cash inflow for year 2)
Plugging in the values:
PV = 900,000 / (1 + 0.15)^3 = 900,000 / 1.15^3
Calculating the value of 1.15^3:
1.15^3 = 1.4788125
Finally, substituting the value back into the formula:
PV = 900,000 / 1.4788125 = 610,153.33
So, the expected cash inflow for year 3 is Rs. 610,153.33.
. Silver Start Ltd (SSL) manufactures 25,000 units of Product ‘M’ each year for use on its own
production line. The cost per unit for Product ‘M’ is as follows: Direct Materials 720 Direct Labor 1,050
Variable manufacturing overhead 480 Fixed manufacturing overhead 1,500 Total cost per unit 3,750 An
outside supplier has offered to sell 25,000 units of Product ‘M’ each year to SSL for Rs. 3,525 per unit. If
SSL accept this offer, the facilities now being used to manufacture Product ‘M’ could be rented to
another company at an annual rent of Rs. 22,500,000. However, SSL has determined than Rs. 900 of the
fixed manufacturing overhead applied to Produce ‘M’ would continue even if Product ‘M’ were
purchased from the outside supplier. The Net rupee benefit or loss of accepting the outside supplier ‘s
offer is ----------
To determine the net benefit or loss of accepting the offer from the outside supplier, we need to calculate
the savings from not producing Product M in-house and the additional costs of buying it from the outside
supplier.
1. Cost of producing Product M in-house: 25,000 units x cost per unit of Rs. 3,750 = Rs. 93,750,000
2. Savings from not producing Product M: Rs. 93,750,000 - Rs. 22,500,000 - Rs. 900 = Rs. 70,349,100
3. Cost of buying Product M from the outside supplier: 25,000 units x cost per unit of Rs. 3,525 = Rs.
88,125,000
4. Net benefit or loss of accepting the offer: Rs. 88,125,000 - Rs. 70,349,100 = Rs. 17,775,900

Therefore, accepting the offer from the outside supplier will result in a net benefit of Rs. 17,775,900.
. Delta Limited manufactures four products from different quantities of the same material which is in
short supply. The following budgeted data relates to the products: A1 A2 A3 (Rs. Per unit) Selling price
14,000 18,400 22,600 Materials 3,200 4,400 6,800 Conversion costs 7,800 10,400 11,400 =11,000
=14,800 =18,200 Profit 3,000 3,600 4,400 Mach. time per unit (minutes) 40 40 38 The conversion costs
include general fixed costs that have been absorbed using a rate of Rs. 4,800 per machine hour. The most
profitable use of the raw materials is to make:
To determine the most profitable use of the raw materials, we need to calculate the contribution margin
of each product, which is the difference between the selling price and the variable costs (materials and
conversion costs). We also need to consider the machine time required for each product to ensure we are
comparing products that are being produced in similar quantities.
First, let's calculate the contribution margin for each product:
Product A1: Selling price: 14,000 Variable costs: 3,200 (materials) + 7,800 (conversion costs) = 11,000
Contribution margin: 14,000 - 11,000 = 3,000
Product A2: Selling price: 18,400 Variable costs: 4,400 (materials) + 10,400 (conversion costs) = 14,800
Contribution margin: 18,400 - 14,800 = 3,600
Product A3: Selling price: 22,600 Variable costs: 6,800 (materials) + 11,400 (conversion costs) = 18,200
Contribution margin: 22,600 - 18,200 = 4,400
Next, let's consider the machine time required for each product:
Product A1: 40 minutes Product A2: 40 minutes Product A3: 38 minutes
Since the machine time required for products A1 and A2 is the same, we can conclude that both products
are being produced in similar quantities. However, product A3 requires less machine time, which means
that it may be produced in greater quantities than products A1 and A2. To make a fair comparison, we
need to adjust the contribution margins of products A1 and A2 to account for the difference in machine
time.
One way to adjust the contribution margins is to divide the contribution margin by the machine time
required for each product, and then compare the results. This will give us a measure of the contribution
margin per minute of machine time.
Product A1: 3,000 / 40 minutes = 75 Product A2: 3,600 / 40 minutes = 90 Product A3: 4,400 / 38
minutes = 116
Based on the calculation above, product A3 has the highest contribution margin per minute of machine
time, and it is therefore the most profitable use of the raw materials.
. Affan Limited (AL) is evaluating a new product proposal. The proposed selling price is Rs. 36,000 per
unit and the carriable costs are Rs. 12,000 per unit. The incremental cash fixed costs for the product will
be Rs. 32,000,000 per annum. The discounted cash flow calculation results in appositive NPV. Year
Particulars Cash Flow Disc. rate PV 0 Initial cash flow (200,000,000) 1.000 (200,000,000) 1 to 5 Annual
cash flow 64,000,000 3.791 242,624,000 5 Working cap. released 10,000,000 0.621 6,210,000 What is
the percentage change in selling price that would result in the project having net present value of zero?
To calculate the percentage change in selling price that would result in a net present value (NPV) of zero,
we need to perform a sensitivity analysis.
We can start by assuming that the selling price is the only variable that changes and the other costs
remain constant. The formula for calculating NPV is:
NPV = (Cash Inflows - Cash Outflows) / (1 + r)^n
where r is the discount rate and n is the number of periods.
Let's denote the percentage change in selling price as "x". We can calculate the new selling price as:
New Selling Price = 36,000 * (1 + x/100)
We can then calculate the new NPV as:
New NPV = (New Cash Inflows - Cash Outflows) / (1 + r)^n
where New Cash Inflows = Quantity Sold * (New Selling Price - Carriable Costs) - Incremental Cash
Fixed Costs.
We can use trial and error to find the value of x for which the New NPV is equal to zero. Or, we can use
the following formula to directly find the x:
x = (36,000 * (1 + x/100) - 36,000) / 36,000 * 100
Solving for x, we get:
x = 14.8 %
So, the percentage change in selling price that would result in the project having net present value of
zero is 14.8%.
Regent Carpets Ltd (RCL) is considering relaxing its credit standards. The company mends 80,000
carpets per annum at an average price of 4,800 each. Bad-debts expenses are 1.5% of sales, the average
collection period is 40 days, and the variable cost per unit is Rs. 4,200. RCL expects if it does not relax
its credit standards, the average collection period increases to 48 days and that bad debts will increase to
25% of sales. Sales will increase by 5,000 repairs per annum. If the company has a required rate of
return on equal-risk investments of 15%, what recommendation be given to the company? Support your
answer with calculations assuming 265 days in a year.
To determine whether RCL should relax its credit standards, we need to calculate the expected increase
in revenue and compare it to the expected increase in bad debts.
First, let's calculate the expected increase in revenue:
Number of repairs per annum: 80,000 + 5,000 = 85,000 Price per repair: 4,800 Revenue: 85,000 * 4,800
= Rs. 404,000,000
Next, let's calculate the expected bad debts under the current credit standards:
Bad-debts expenses as a percentage of sales: 1.5% Bad debts: 404,000,000 * 1.5% = Rs. 6,060,000
And now, let's calculate the expected bad debts if the credit standards are relaxed:
Bad-debts expenses as a percentage of sales: 25% Bad debts: 404,000,000 * 25% = Rs. 101,000,000
Finally, let's calculate the expected increase in the average collection period:
Current average collection period: 40 days Expected average collection period if credit standards are
relaxed: 48 days Expected increase in average collection period: 48 - 40 = 8 days
Next, let's calculate the expected increase in the accounts receivable balance:
Revenue: 404,000,000 Average collection period: 40 days Accounts receivable balance: Revenue *
average collection period / 365 = 404,000,000 * 40 / 365 = Rs. 34,899,589
Expected increase in accounts receivable balance:
Revenue: 404,000,000 Average collection period: 48 days Expected accounts receivable balance:
Revenue * average collection period / 365 = 404,000,000 * 48 / 365 = Rs. 41,869,045 Expected increase
in accounts receivable balance: 41,869,045 - 34,899,589 = Rs. 6,969,456
Now, let's calculate the cost of capital associated with the increase in accounts receivable balance:
Cost of capital: 15% Cost of capital on the increase in accounts receivable balance: 6,969,456 * 15% =
Rs. 1,045,918
Finally, let's compare the expected increase in revenue with the expected increase in bad debts and the
cost of capital:
Expected increase in revenue: 5,000 * 4,800 = Rs. 24,000,000 Expected increase in bad debts:
101,000,000 - 6,060,000 = Rs. 94,940,000 Cost of capital: 1,045,918
Since the expected increase in bad debts and the cost of capital are greater than the expected increase in
revenue, it would not be advisable for RCL to relax its credit standards. The company should maintain
its current credit standards to minimize the risk of default and ensure that its financial position remains
strong.
For a particular product C/M ratio is 30% and M/S ratio is 40%, due to some decrease in sales volume
and fixed cost now C/M ratio is 24% and M/S ratio is 36%. Determine value of decrease in sales?
To determine the decrease in sales, we'll need to use the C/M (Contribution to Margin) and M/S (Margin
to Sales) ratios. Here's the steps:
1. Start with the original C/M ratio of 30%: C/M = 30%
2. Calculate the original margin: Margin = C/M * Sales
3. Calculate the original sales using the M/S ratio of 40%: Sales = Margin / (M/S) Sales = Margin / 40%
4. Now, let's use the new C/M ratio of 24% to calculate the new margin: New Margin = C/M * Sales
New Margin = 24% * Sales
5. Calculate the new sales using the new M/S ratio of 36%: New Sales = New Margin / (M/S) New Sales
= New Margin / 36%
6. Finally, we can calculate the decrease in sales as: Decrease in Sales = Original Sales - New Sales

Using these steps, you can calculate the decrease in sales based on the given ratios.