Question 1

Answer the following:

(a) The following figures are available from the records of ABC Company as at 31st March:

Sales (2015 in lakhs): 200, (2016 in lakhs): 250
Profit (2015 in lakhs): 30, (2016 in lakhs): 60

Calculate:
(i) The P/V ratio and total fixed expenses.
(ii) The break-even level of sales.
(iii) Sales required to earn a profit of ₹ 70 lakhs.

(b) Supreme Limited is a manufacturer of energy saving bulbs. To manufacture the finished product one unit of component 'LED' is required. Annual requirement of component 'LED' is 72,000 units, the cost is ₹ 500 per unit. Other relevant details for the year 2015-2016 are:

Cost of placing an order: ₹ 2,250
Carrying cost of inventory: 12% per annum
Lead time: Maximum 20 days, Minimum 8 days, Average 14 days
Emergency purchase: 5 days
Consum…

Accepted Answer

**Part (a): Marginal Costing – P/V Ratio and Break-even Analysis**

**(i) P/V Ratio and Fixed Expenses**

**P/V Ratio** = Change in Profit ÷ Change in Sales × 100
= (₹60 – ₹30) ÷ (₹250 – ₹200) × 100
= ₹30 ÷ ₹50 × 100 = **60%**

**Fixed Expenses** (using 2015 data):
Contribution = Sales × P/V Ratio = ₹200 × 60% = ₹120 lakhs
Fixed Expenses = Contribution – Profit = ₹120 – ₹30 = **₹90 lakhs**

Verification (2016): Contribution = ₹250 × 60% = ₹150 lakhs; Fixed Expenses = ₹150 – ₹60 = ₹90 lakhs ✓

**(ii) Break-even Level of Sales**

BEP (Sales) = Fixed Expenses ÷ P/V Ratio = ₹90 ÷ 0.60 = **₹150 lakhs**

**(iii) Sales Required to Earn Profit of ₹70 Lakhs**

Required Sales = (Fixed Expenses + Desired Profit) ÷ P/V Ratio
= (₹90 + ₹70) ÷ 0.60 = ₹160 ÷ 0.60 = **₹266.67 lakhs**

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**Part (b): Inventory Management – EOQ and Stock Levels for Supreme Limited**

**(i) Re-order Quantity (EOQ)**

EOQ = √(2 × Annual Demand × Ordering Cost ÷ Carrying Cost per unit per annum)
Carrying cost per unit = 12% × ₹500 = ₹60
EOQ = √(2 × 72,000 × ₹2,250 ÷ ₹60) = √5,400,000 = **2,324 units (approx.)**

**(ii) Re-ordering Level**

**Re-ordering Level** = Maximum Consumption per day × Maximum Lead Time
= 400 units × 20 days = **8,000 units**

**(iii) Minimum Stock Level**

**Minimum Stock Level** = Re-ordering Level – (Average Consumption × Average Lead Time)
= 8,000 – (300 × 14) = 8,000 – 4,200 = **3,800 units**

**(iv) Maximum Stock Level**

**Maximum Stock Level** = Re-ordering Level + Re-order Quanti…

Question 2

ABC Company's equity shares is quoted in the market at ₹ 25 per share (Market price). The company pays a dividend of ₹ 2 per share and the investor's market expects a growth rate of 6% per year. You are required to: (i) Calculate the company's cost of equity capital. (ii) Calculate the company's cost of debt capital in 8% per annum, calculate the indicated market price per share. (iii) If the company issues 10% debentures of face value of ₹ 100 each and realizes ₹ 96 per debenture while the debentures are redeemable after 12 years at a premium of 12%, what will be the cost of debenture? Assume Tax Rate is 50%. (d) The following information is related to VZ Company Ltd. for the year ended 31st March, 2016: Equity share capital of ₹ 10 each ₹ 50 lakhs; 12% Bonds of ₹ 1,000 each ₹ 37 lakhs; S…

Accepted Answer

**Part (a): Cost of Equity Capital**

Using the **Gordon's Dividend Growth Model**:

Ke = (D / P₀) + g

Where D = ₹2 (dividend per share), P₀ = ₹25 (market price), g = 6% = 0.06

Ke = (2 / 25) + 0.06 = 0.08 + 0.06 = **14%**

The **cost of equity capital is 14% per annum**.

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**Part (b): Indicated Market Price when Cost of Equity = 8%**

Using the same Gordon model, rearranged to find price:

P₀ = D / (Ke − g)

P₀ = 2 / (0.08 − 0.06) = 2 / 0.02 = **₹100**

If investors are satisfied with an 8% return (equal to cost of debt), the **indicated market price per share would be ₹100**.

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**Part (c): Cost of Debentures (After-Tax)**

Using the **approximation formula** for cost of debt:

Kd = [I(1−t) + (RV − NP) / n] / [(NP + RV) / 2]

Where:
- Face Value = ₹100; Coupon Rate = 10%, so I = ₹10
- Tax rate (t) = 50%; After-tax interest = 10 × (1 − 0.50) = ₹5
- Net Proceeds (NP) = ₹96
- Redemption Value (RV) = ₹100 + 12% premium = ₹112
- n = 12 years

Kd = [5 + (112 − 96) / 12] / [(96 + 112) / 2]
= [5 + 1.33] / [104]
= 6.33 / 104
= **6.09% per annum**

The **after-tax cost of debentures is approximately 6.09%**.

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**Part (d): VZ Company Ltd. — Operating Leverage, Combined Leverage, and EPS**

Given data: Sales = ₹84 lakhs; P/V Ratio = 27.55%; Fixed cost (including interest) = ₹6.96 lakhs; 12% Bonds = ₹37 lakhs; Financial Leverage (FL) = 1.49; Tax = 40%; Equity = ₹50 lakhs of ₹10 each.

**Step 1 — Contribution:** = Sales × P/V Ratio = 84 × 27.55% = ₹23.14 lakhs

**Step 2 — Int…

Question 3

(a) A company has introduced a new product and marketed 20,000 units. Variable cost of the product is ₹ 20 per unit and fixed overheads are ₹ 1,20,000. You are required to: (i) Calculate selling price per unit to earn a profit of 10% on sales value, BEP and Margin of Safety. (ii) If the selling price is reduced by the company by 10%, demand is expected to increase by 5000 units, then what will be the impact on Profit, BEP and Margin of Safety? (iii) Calculate Margin of Safety if profit is ₹ 64,000. (b) The following figures and ratios pertain to ARO Company Limited for the year ending 31st March, 2016: Annual Sales (credit) ₹ 50,00,000; Gross Profit Ratio 25%; Fixed assets turnover ratio (based on cost of goods sold) 1.5; Stock turnover ratio (based on cost of goods sold) 6; Quick ratio 1:…

Accepted Answer

**Part (a): CVP Analysis**

**(i) Selling Price, BEP, and Margin of Safety at Original Level**

Let SP = selling price per unit. Given profit = 10% on sales:

Sales − Total Cost = 10% of Sales → 0.9 × Sales = Total Cost

0.9 × (20,000 × SP) = (20,000 × ₹20) + ₹1,20,000
18,000 SP = ₹5,20,000 → **SP = ₹28.89 per unit**

**Contribution per unit** = ₹28.89 − ₹20 = ₹8.89 (= 80/9)
**P/V Ratio** = 8.89/28.89 = **30.77% (= 4/13)**

**BEP (units)** = Fixed Cost ÷ Contribution per unit = 1,20,000 ÷ (80/9) = **13,500 units**
**BEP (₹)** = Fixed Cost ÷ P/V Ratio = 1,20,000 ÷ (4/13) = **₹3,90,000**

Actual Sales = 20,000 × ₹28.89 = ₹5,77,778
**Margin of Safety (₹)** = 5,77,778 − 3,90,000 = **₹1,87,778**
**MOS (units)** = 20,000 − 13,500 = **6,500 units**
**MOS (%)** = 6,500 ÷ 20,000 = **32.5%**

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**(ii) Impact when SP reduced by 10% and Demand increases by 5,000 units**

New SP = ₹28.89 × 0.90 = **₹26 per unit**; New Volume = 25,000 units

New Contribution/unit = ₹26 − ₹20 = **₹6**
New Total Contribution = 25,000 × ₹6 = ₹1,50,000
**New Profit** = 1,50,000 − 1,20,000 = **₹30,000**

**Impact on Profit:** Original profit = ₹57,778; New profit = ₹30,000 → **Decrease of ₹27,778** (profit falls despite higher volume because margin is thinner)

**New BEP (units)** = 1,20,000 ÷ 6 = **20,000 units** (increased from 13,500)
**New BEP (₹)** = 20,000 × ₹26 = **₹5,20,000** (increased from ₹3,90,000)

New Actual Sales = 25,000 × ₹26 = ₹6,50,000
**New MOS (₹)** = 6,50,000 − 5,20,000 = **₹1,30,000** …

Question 4

Royal transport company has been given a 50 kilometre long route to haul boulders. The cost of each km is ₹ 7,30,000. The buses will make 3 round trips per day carrying on an average 75 percent passengers of their seating capacity. The seating capacity of each bus is 48 passengers. The buses will run on an average 25 days in a month. The other information is as below:

| Item | Cost |
|------|------|
| Garage Rent | ₹ 6,000 per month |
| Annual Repairs & Maintenance | ₹ 24,000 each bus |
| Salary of drivers | ₹ 4,000 each per month |
| Wages of 6 conductors | ₹ 1,000 each per month |
| Wages of 6 cleaners | ₹ 1,000 each per month |
| Manager's salary | ₹ 10,000 per month |
| Road Tax, Permit fee, etc. | ₹ 6,000 for a quarter |
| Office expenses | ₹ 2,500 per month |
| Cost of diesel per li…

Accepted Answer

**Statement of Cost and Fare Calculation — Royal Transport Company**

**Number of Buses:** 6 buses are inferred from 6 conductors and 6 cleaners (one each per bus).

**Operating Data per Month:**
- Distance per bus per day: 3 round trips × 2 × 50 km = **300 km**
- Total km per month (all buses): 300 × 25 days × 6 buses = **45,000 km**
- Passengers per bus per trip: 75% × 48 = **36 passengers**
- One-way trips per bus per day: 3 round trips × 2 = 6 trips
- Passenger km per bus per day: 36 × 50 km × 6 trips = 10,800
- Total passenger km per month: 10,800 × 25 × 6 buses = **16,20,000 passenger km**

**Monthly Cost Statement:**

| Item | Calculation | ₹ |
|---|---|---|
| Garage Rent | Given | 6,000 |
| Repairs & Maintenance | ₹24,000 × 6 ÷ 12 | 12,000 |
| Salary of 6 Drivers | 6 × ₹4,000 | 24,000 |
| Wages of 6 Conductors | 6 × ₹1,000 | 6,000 |
| Wages of 6 Cleaners | 6 × ₹1,000 | 6,000 |
| Manager's Salary | Given | 10,000 |
| Road Tax & Permit | ₹6,000 ÷ 3 | 2,000 |
| Office Expenses | Given | 2,500 |
| **Diesel** | 45,000 ÷ 6 × ₹66 | **4,95,000** |
| **Depreciation** | 50% × ₹7,30,000 × 6 ÷ 12 | **1,82,500** |
| **Insurance** | 4% × ₹7,30,000 × 6 ÷ 12 | **14,600** |
| Engine Oils & Lubricants | (45,000 ÷ 1,000) × ₹2,000 | 90,000 |
| **Total Monthly Cost** | | **8,50,600** |

**Fare Computation:**

Profit is **35% on takings** (i.e., 35% of Revenue), so Cost = 65% of Revenue.

**Cost per passenger km** = ₹8,50,600 ÷ 16,20,000 = ₹0.5249 per passenger km

**Fare per passenger km*…

Question 5

You are required to prepare the Balance Sheet as at 31st December 2016 based on the above information. Assume 360 days in a year.

Accepted Answer

**Note: The question references 'the above information' but no supporting data (ratios, figures, or additional details) has been provided in this prompt. The solution below demonstrates the standard methodology for this type of question — a Balance Sheet prepared from given financial ratios — which is the typical format for CA Intermediate Paper 3 (Financial Management) Balance Sheet preparation questions. Once the actual data is provided, the same steps apply.**

**Approach — Preparing Balance Sheet from Ratios (Standard Method):**

When a Balance Sheet is to be prepared from given ratios (e.g., Current Ratio, Quick Ratio, Gross Profit Ratio, Stock Turnover Ratio, Debtors Turnover Ratio, Fixed Assets Turnover, Debt-Equity Ratio, etc.), the following sequence is followed:

**Step 1 — Identify the given anchor figure.** Usually, one absolute value (e.g., Share Capital, Net Sales, or Net Profit) is directly stated. All other figures are derived from this.

**Step 2 — Derive Sales and Gross Profit.** Using the Gross Profit Ratio and Sales figure, compute Cost of Goods Sold (COGS) = Sales × (1 – GP%).

**Step 3 — Compute Closing Stock.** Stock Turnover Ratio = COGS ÷ Closing Stock (or Average Stock, as specified). Using 360-day convention: Stock Holding Period (days) = (Closing Stock ÷ COGS) × 360.

**Step 4 — Compute Debtors.** Debtors Collection Period = (Debtors ÷ Credit Sales) × 360. Rearrange to find Debtors.

**Step 5 — Compute Fixed Assets.** Fixed Assets Turnover = Net Sa…

Question 6

Following information relates to ABC company for the year 2016:

(i) Projected sales:
| Month | August | September | October | November | December |
|-------|--------|-----------|---------|----------|----------|
| Sale | 35 | 40 | 40 | 45 | 46 |
(in lakhs)

(ii) Gross profit margin will be 20% on sale.

(iii) 40% of projected cash sale will be in the cash sale. Out of credit sale of each month, 50% will be collected in the next month and the balance will be collected during the second month following the month of sale.

(iv) Creditors will be paid in the first month following credit purchase. Creditors for only.

(v) Wages and salaries will be paid on the first day of the next month. The amount will be ₹ 3 lakhs each month.

(vi) Interim dividend of ₹ 2 lakhs will be paid in December 2016.…

Accepted Answer

**Monthly Cash Budget of ABC Company (October to December 2016)**

**Working Assumptions:**
- Cash Sales = 40% of total sales; Credit Sales = 60% of total sales
- Cost of Goods (Purchases) = 80% of sales (since Gross Profit = 20% on sales)
- All purchases are on credit; creditors paid in the month following purchase
- Wages of each month paid on 1st of next month
- Machinery ₹10 lakhs purchased in September on instalment basis; ₹0.50 lakh p.m. from October
- Admin expenses paid in month of incurrence

**Cash Budget (₹ in Lakhs)**

| Particulars | October | November | December |
|---|---|---|---|
| **A. Opening Balance** | 10.00 | 12.00 | 17.50 |
| **B. Cash Receipts:** | | | |
| Cash Sales (40% of month's sales) | 16.00 | 18.00 | 18.40 |
| Collection: 50% of prev. month's credit sales | 12.00 | 12.00 | 13.50 |
| Collection: 50% of 2nd prev. month's credit sales | 10.50 | 12.00 | 12.00 |
| **Total Receipts (A + B)** | **48.50** | **54.00** | **61.40** |
| **C. Cash Payments:** | | | |
| Payment to Creditors (prev. month purchases) | 32.00 | 32.00 | 36.00 |
| Wages & Salaries (prev. month) | 3.00 | 3.00 | 3.00 |
| Machinery Instalment | 0.50 | 0.50 | 0.50 |
| Administrative Expenses | 1.00 | 1.00 | 1.00 |
| Interim Dividend | — | — | 2.00 |
| **Total Payments (C)** | **36.50** | **36.50** | **42.50** |
| **D. Closing Balance (A + B − C)** | **12.00** | **17.50** | **18.90** |

**Closing Cash Balances:** October — ₹12.00 lakhs; November — ₹17.50 lakhs; December — ₹18.90 lakhs.

Question 7

The following information is available from the cost records of a Company for the month of July, 2016: Material purchased: 22000 pieces @ ₹90,000; Material consumed: 21000 pieces; Actual wages paid for: 5150 hours @ ₹25,750; Fixed Factory overhead incurred: ₹46,000; Fixed Factory overhead budgeted: ₹42,000; Units produced: 1900. Standard rates and prices: Direct material: ₹4.50 per piece (Standard input: 10 pieces per unit); Direct labour rate: ₹6 per hour (Standard requirement: 2.5 hours per unit); Overheads: ₹5 per labour hour. Calculate the following variances: (i) Material price variance (ii) Material usage variance (iii) Labour rate variance (iv) Labour efficiency variance (v) Fixed overhead expenditure variance (vi) Fixed overhead efficiency variance (vii) Fixed overhead capacity var…

Accepted Answer

**Standard Costing — Variance Analysis for July 2016**

**Working Basis (Key Standards for Actual Output of 1,900 units):**
Standard material = 1,900 × 10 = 19,000 pieces; Standard labour hours = 1,900 × 2.5 = 4,750 hours; Budgeted hours = ₹42,000 ÷ ₹5 = 8,400 hours; Actual material rate = ₹90,000 ÷ 22,000 = ₹4.09 per piece; Actual labour rate = ₹25,750 ÷ 5,150 = ₹5 per hour.

**(i) Material Price Variance (MPV)**
MPV = (Standard Price − Actual Price) × Actual Quantity Purchased
= (₹4.50 × 22,000) − ₹90,000 = ₹99,000 − ₹90,000 = **₹9,000 (Favourable)**

**(ii) Material Usage Variance (MUV)**
MUV = (Standard Quantity for Actual Output − Actual Quantity Used) × Standard Price
= (19,000 − 21,000) × ₹4.50 = −2,000 × ₹4.50 = **₹9,000 (Adverse)**

**(iii) Labour Rate Variance (LRV)**
LRV = (Standard Rate − Actual Rate) × Actual Hours Paid
= (₹6 − ₹5) × 5,150 = **₹5,150 (Favourable)**

**(iv) Labour Efficiency Variance (LEV)**
LEV = (Standard Hours for Actual Output − Actual Hours) × Standard Rate
= (4,750 − 5,150) × ₹6 = −400 × ₹6 = **₹2,400 (Adverse)**

**(v) Fixed Overhead Expenditure Variance**
= Budgeted Fixed Overhead − Actual Fixed Overhead
= ₹42,000 − ₹46,000 = **₹4,000 (Adverse)**

**(vi) Fixed Overhead Efficiency Variance**
= (Standard Hours for Actual Output − Actual Hours Worked) × Standard Overhead Rate
= (4,750 − 5,150) × ₹5 = −400 × ₹5 = **₹2,000 (Adverse)**

**(vii) Fixed Overhead Capacity Variance**
= (Actual Hours Worked − Budgeted Hours) × Standard Overhead Rate
=…

Question 8

Following is the capital structure of RBT Limited as on 31st March 2016: Equity Shares (₹10 each): Book Value ₹50,00,000, Market Value ₹1,05,00,000; Retained earnings: ₹13,00,000; 11% Preference shares (₹100 each): Book Value ₹7,00,000, Market Value ₹9,00,000; 14% Debentures (₹100 each): Book Value ₹30,00,000, Market Value ₹36,00,000. Market price of equity shares is ₹40 per share and a dividend of ₹4 per share would be declared. The dividend per share is expected to grow at 8% every year. Income tax rate applicable to the company is 40% and shareholder's personal income tax rate is 30%. Calculate: (i) Cost of capital for each source of capital (ii) Weighted average cost of capital on the basis of book value weights (iii) Weighted average cost of capital on the basis of market value weight…

Accepted Answer

**Cost of Capital for Each Source:**

**1. Cost of Equity (Ke) — Dividend Growth Model:**
Ke = D₁/P₀ + g = ₹4/₹40 + 0.08 = 0.10 + 0.08 = **18%**
(D₁ = ₹4, next declared dividend; P₀ = ₹40, current market price; g = 8% growth rate)

**2. Cost of Retained Earnings (Kr):**
Shareholders forgo after-personal-tax dividends, so Kr is adjusted for personal tax:
Kr = Ke × (1 − Personal Tax Rate) = 18% × (1 − 0.30) = 18% × 0.70 = **12.6%**

**3. Cost of Preference Shares (Kp):**
No tax benefit (dividends paid from post-tax profits). Market price per share = ₹9,00,000 ÷ 7,000 shares = ₹128.57
Kp = Annual Dividend / Market Price = ₹11 / ₹128.57 = **8.56%**
Verification: ₹77,000 / ₹9,00,000 = 8.56%

**4. Cost of Debentures (Kd):**
After-tax interest per debenture = ₹14 × (1 − 0.40) = ₹8.40
Market price per debenture = ₹36,00,000 ÷ 30,000 debentures = ₹120
Kd = ₹8.40 / ₹120 = **7%**
Verification: (₹4,20,000 × 0.60) / ₹36,00,000 = ₹2,52,000 / ₹36,00,000 = 7%

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**Weighted Average Cost of Capital (WACC) — Book Value Weights:**

Total Book Value = ₹50,00,000 + ₹13,00,000 + ₹7,00,000 + ₹30,00,000 = **₹1,00,00,000**

| Source | Book Value (₹) | Weight | Cost (%) | Weighted Cost (%) |
|---|---|---|---|---|
| Equity Shares | 50,00,000 | 0.50 | 18.00 | 9.000 |
| Retained Earnings | 13,00,000 | 0.13 | 12.60 | 1.638 |
| 11% Preference Shares | 7,00,000 | 0.07 | 8.56 | 0.599 |
| 14% Debentures | 30,00,000 | 0.30 | 7.00 | 2.100 |
| **Total** | **1,00,00,000** | **1.00** | | **13.337** |

**WACC (Bo…

CA Inter Taxation

Drill 5 questions from this paper — instant grading

Worked Solution

Write it like this

1The skeleton

2Examiner-rewarded phrases

3Common trap