PAPER – 16 : STRATEGIC COST MANAGEMENT

SUGGESTED ANSWERS
SECTION-A

1.
(i) (B)
(ii) (D)
(iii) (A)
(iv) (D)
(v) (D)
(vi) (A)
(vii) (D)
(viii) (B)
(ix) (C)
(x) (C)
(xi) (D)
(xii) (A)
(xiii) (B)
(xiv) (A)
(xv) (A)
SECTION– B
2. (a)
Statement Showing Allocation of Seats in the Aircraft:
Existing Situation for Destination A to B:
Seating Capacity of the Aircraft 260
passengers
Average Number of Passengers per flight 240
passengers
Proposed Situation for Destination D to B
Seat Booked by ZOMB Ltd. 50 Seats
For Destination A to B
Seats Available 210 Seats
{260 (Capacity) – 50 (booked by ZOMB Ltd. for Destination D to B)}
Requirement of Regular Passengers 215 Seats
{240 (original no. of passengers) – 25 (no. of passengers drop out due to wastage of time
)}
Possible Allocation of Seats to Regular Passengers 210 Seats
For Destination A to D
Seats Available 50 Seats
{260 (capacity) – 210 (seats allocated to regular passengers of destination A to B)}
Requirement of Agents 60 Seats
(tickets can be sold by Airway’s Travel Agents)
Possible Allocation to Agents of Airways Ltd. 50 Sets

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(i) Analysis of Profit Per flight
₹ ₹
Revenue per passenger (Gross Fare) 5,000
Less: Total variable Cost per passenger
10 % Commission on Fare 500
Food 300 800
Contribution per passenger 4,200
Contribution per flight (Contribution for 240 10,08,000
Passengers)
Less: Fixed Costs per Flight
Fuel Cost 90,000
Annual Lease Cost 2,00,000
Group Service, Baggage Handling / Checking in 40,000
Flight Crew Salaries 48,000 3,78,000
Profit per Flight 6,30,000

(ii) Break-even number of Passengers for each flight from A to B

Total Fixed cost per flight
Break-even number of Passengers =
Contribution per Passenger
 ₹ 378000 
Break-even number of Passengers @   = 90 Passengers
 ₹ 4200 

2. (b) Proposed Situation:

Contribution per Passenger (A to D)
₹ ₹
Revenue per passenger (Gross Fare) 3,000
Less: Total Variable Cost per Passenger:
10 % Commission on Fare 300
Food # 300 600
Contribution per Passenger 2,400

(#) All the passengers booked for destination A to D are also served food.

(i) Analysis of Additional Profit Per Flight earned by Airway Ltd. from the offer of ZOMB Ltd.
Additional
Cost (₹) Revenue (₹)
Revenue from Destination D to B (50 Seats x ₹ 2,700) 1,35,000
Contribution from Destination A to D (50 Sets x ₹ 2,400) 1,20,000
Contribution Lost for Destination A to B (30 Seats x ₹ 4,200) 1,26,000
*
Snacks (260 Passengers x ₹ 200) 52,000
Fuel Cost 45,000
Airport Landing / Baggage Handling Charges 19,000
Total 2,42,000 2,55,000
Profit (Additional) Per Flight (2,55,000 – 2,42,000) 13,000
(*) 240 Seats (existing) Less 210 Seats (Proposed)

(ii) Advice:
Since Airway Ltd. will gain of ₹ 13,000 per flight, it should accept the ZOMB Ltd’s Offer.

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3. (a)
(i) When Component is purchased by Division Y from outside:
(₹) (₹)
Division Y sales 2,500 x ₹ 540 13,50000
Less: Cost of purchase 2,500 x ₹ 6,75,000
270
Own Variable cost 2,500 x ₹ 202.50 5,06,250 11,81,250
Division Y Contribution 1,68,750
Division X Contribution Nil
Total Contribution 1,68,750

When component is purchased from Division X:

Division X (₹) (₹)
Sales 2,500 x ₹ 297 7,42,500
Less: Variable cost 2,500 x ₹ 256.50 6,41,250
Division X Contribution (A) 1,01,250
Division Y
Sales 2,500 x ₹ 540 13,50,000
Less: Variable Cost
Purchase Cost 2,500 x ₹ 297 7,42,500
Variable Cost of division Y 2,500 x ₹ 5,06,250
202.50
Division Y Contribution(B) 1,01,250
Total Contribution (A+B) 2,02,500

Decision: Thus, it will be beneficial for the company as whole to buy component from division X.

(ii) When there is no alternative use of Division X and selling price of components reduces in the
Market:
(₹) (₹)
Division Y sales 2,500 x ₹ 540 13,50,000
Less: Cost of purchase 2,500 x 6,24,375
249.75
Own Variable cost 2,500 x 202.50 5,06,250
Division Y Contribution 2,19,375
Division X Contribution NIL
Company’s total contribution 2,19,375

Decision: When the component is purchased from outside market, total contribution comes to ₹ 2,19,375
which is more than the total contribution of ₹ 2,02,500, when the component is purchased from Division X
(calculated above). Therefore, Division Y should purchase the component from outside supplier.

(iii) Transfer Price:

(a) Where there is no alternative use of capacity of division X, then variable cost i.e. ₹ 256.50 per
component will be charged.

(b) If market price gets reduced to ₹ 249.75 and there is no alternative use of facilities of Division X,
transfer should take place at incremental cost of production, which in this case is ₹ 256.50 per
component.
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3. (b)
(i) Calculation of Target Cost at Full Capacity:

Projected Demand:
Selling Price (₹ Per Unit) Demand (Units) Capacity Utilisation
100 20,000 25%
90 (20,000 × 2) = 40,000 50%
80 (40,000 × 2) = 80,000 100%

Selling Price at Full Capacity = ₹ 80.00;

Target Profit = 25% on Sales = ₹ 20.00
Target Cost at Full Capacity =₹ (80 – 20) = ₹ 60.00 per unit

(ii) Cost Reduction Scheme:

(a) Computation of Variable Cost per unit at the Present Capacity of 20,000 units
Selling Price = ₹ 100.00 per unit
Profit Margin = 25% on Sales = ₹ 25.00
Total Cost = (100 – 25) = ₹ 75.00
Variable Cost = 40% of total cost = 40% of 75 = ₹30.00

(b) Existing Projections of Total Cost at full capacity

Total Variable Cost = (₹ 30 × 80000) = ₹ 24.00 lakhs
Total Fixed Cost = ₹ 36.00 lakhs
Total Cost = ₹ (24.00 + 36.00) lakhs =₹ 60.00 lakhs

(c) Target Cost = (₹ 60 × 80,000) = ₹ 48.00 lakhs

(d) Cost Reduction Scheme

Cost Reduction needed = (Existing Cost – Target Cost) = (60.00 – 48.00) = ₹ 12.00 lakhs

(iii) Maximum Investment at full capacity:

a) Target Profit at full Capacity:

Sales = 80.00 × 80,000 units = ₹ 64.00 lakhs
Target Cost = ₹ 48.00 lakhs
Target Profit = (64.00 – 48.00) = ₹ 16.00 lakhs

b) Rate of Return on Investment = 16%

c) Maximum Investment
Investment needed
= (Target Profit ÷ Target Return on Investment)
= (16.00 ÷ 16%)
= ₹ 100.00 lakhs

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4. (a)
(i)
Calculation of Activity Based Costing Recovery Rate:
Activity Activity Cost Pool Cost Driver Quantity ABC RATE
Set Up 20,000 + 28,000 = ₹ 48,000 No. of Production Runs 96 ₹ 500 per Run
Stores Receiving 15,000 + 21,000 = ₹ 36,000 Requisitions raised 50 x 4 = 200 ₹ 180 per Reqn.
Inspection 10,000 +14,000 = ₹ 24,000 No. of Production Runs 96 ₹ 250 per Run
Material Handling Given = ₹ 2,592 Orders executed 192 ₹ 13.5 per Batch

Note:
1. Machine Operation and Maintenance Cost of ₹ 63,000 is apportioned to the first three activities in the
ratio 4:3:2, i.e. ₹ 28,000, ₹ 21,000 and ₹ 14,000.

2. Number of Production Runs and Number of Batches are computed as under:

Product A B C D Total
(a) Output Quantity 720 units 600 units 480 units 504 units
(b) Quantity per Production Run 24 units 24 units 24 units 24 units
(c) Number of Production Runs (a ÷ 30 runs 25 runs 20 runs 21 runs 96 runs
b)
(d) Quantity per Batch Order 12 units 12 units 12 units 12 units
(e) Number of Batches (a ÷ d) 60 batches 50 batches 40 batches 42 batches 192 batches

(ii) Computation of OH Costs using Activity Based Costing System

Product A B C D Total
500 x 30 500 x 25 500 x 20 500 x 21
Setup ₹ 48,000
= ₹ 15,000 = ₹ 12,500 = ₹ 10,000 = ₹ 10,500
Stores Receiving ₹ 9,000 ₹ 9,000 ₹ 9,000 ₹ 9,000 ₹ 36,000
250 x 30 250 x 25 250 x 20 250 x 21
Inspection ₹ 24,000
= ₹ 7,500 = ₹ 6,250 = ₹ 5,000 = ₹ 5,250
13.50 x 60 13.50 x 50 13.50 x 40 13.50 x 42
Material Handling ₹ 2,592
= ₹ 810 = ₹ 675 = ₹ 540 = ₹ 567
Total OH Cost ₹ 32,310 ₹ 28,425 ₹ 24,540 ₹ 25,317 ₹ 1,10,592
Output 720 units 600 units 480 units 504 units
OH Cost per unit ₹ 44.875 ₹ 47.375 ₹ 51.125 ₹ 50.232

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4. (b)
The term quality is a perception which is personal to an individual. In plain terms, quality is “features” or
“worth” or “value”. Today, there is no single universal definition of quality. Some common definitions of
quality are as under Conformance to specifications: It measures how well the product or service meets the
targets and tolerances determined by its designers.
Fitness for use: It focuses on how well the product performs its intended function or use.
Value for price paid: It is a definition of quality that consumers often use for product or service usefulness.
Support services: These services provided are often how the quality of a product or service is judged.
Psychological criteria: It is a subjective definition that focuses on the judgmental evaluation of what
constitutes product or service quality.
Costs of quality can be classified into the following groups for better quality costs management:
(i) Prevention costs, (ii) Appraisal costs, (iii) Internal failure costs and (iv) External failure costs.
(i) Prevention costs:
Prevention costs are all costs incurred in the process of preventing poor quality from occurring. They
include quality planning costs, such as the costs of developing and implementing a quality plan. Also
included are the costs of product and process design, from collecting customer information to
designing processes that achieve conformance to specifications.
Example: Quality training, Quality circles, Statistical process control activities, System Development
for prevention. Quality improvement.

(ii) Appraisal costs:

Appraisal costs are incurred in the process of uncovering defect. They include the cost of quality
inspections, product testing, and performing audits to make sure that quality standards are being met.
Also included in this category are the costs of worker time spent measuring quality and the cost of
equipment used for quality appraisal.

Example: testing and inspecting materials, final product testing and inspecting, WIP testing and
inspecting, package inspection and depreciation of testing equipment.
(iii) Internal failure costs:
Internal failure costs are associated with discovering poor product quality before the product reaches
the customer site. One type of internal failure cost is rework, which is the cost of correcting the
defective item. Sometimes the item is so defective that it cannot be corrected and must be thrown
away. This is called scrap, and its costs include all the material, labor, and machine cost spent in
producing the defective product.

Example: cost of scrap (net of realization), cost of spoilage, cost of rework, down time due to defect
in quality and retesting.

(iv) External failure costs:

External failure costs are incurred when inferior products are delivered to customers. They include
cost of handling customer complaints, warranty replacements, repairs of returned products and cost
arising from a damaged company reputation.

Example: cost of field servicing, cost of handling complaints, warranty repairs, lost sales, warranty
replacements.

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5.
(i) Statement showing Standard Cost of output produced:
Element of Cost Calculation Amount (₹)
Direct Material 18,000 x ₹48 8,64,000
Direct Labour 18,000 x ₹35 6,30,000
Variable Production Overhead 18,000 x ₹10 1,80,000
Fixed Production Overhead 18,000 x ₹50 9,00,000
Total 25,74,000

(ii) Analysis of Variances:

1. Direct Material Cost variance:
Direct Material Price Variance
= (Standard price/Kg – Actual Price/Kg) x Actual Quantity
= (₹ 12 – ₹ 11) x 76,000 = ₹ 76,000 (F)
Direct Material Usage Variance
= Standard Price (Standard Quantity for actual production – Actual Quantity)
= ₹12 (4 x 18000 – 76000) = ₹ 48,000 (A)

2. Direct Labour Cost Variance:

Direct Labour Rate Variance
= (Standard rate per hour – Actual rate per hour) x Actual hour
= (₹ 7 – ₹ 7.2) x 84,000 = ₹ 16,800 (A)

Direct Labour Efficiency Variance

= SR / hour (Std. Hours for actual production – Actual Hours)
= ₹ 7 (5 hours x 18,000 – 84,000) = ₹ 42,000 (F)

3. Variable Overhead Cost Variance:

Variable Overhead Expenditure Variance
= (Standard rate / hour – Actual rate / hour) x Actual hours
𝑅𝑠172,000
= (₹ 2 – ) x 84,000 = ₹ 4,000 (A)
84,000

Variable Overhead Efficiency variance

= Standard rate / hour (Std hours for Actual Output – Actual Hours)
= ₹ 2 (5 x 18,000 – 84,000) = ₹ 12,000 (F)

4. Fixed Overhead Cost Variance:

Fixed Overhead Expenditure variance
= Budgeted Fixed overhead – Actual Fixed Overhead
= 20,000 x ₹ 50 – ₹ 10,30,000 = ₹ 30,000 (A)

Fixed Overhead Volume variance

= Recovered Fixed overhead – Budgeted Fixed overhead
= ₹ 50 x 18,000 – ₹ 10,00,000 = ₹ 1,00,000 (A)
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(iii) Statement showing reconciliation of Standard Cost with Actual Cost:
Standard Cost of Actual Output ₹ 25,74,000
Adjustment for Variances Favourable Adverse
Direct Material Price Variance 76,000
Direct Material Usage Variance 48,000
Direct Labour Rate Variance 16,800
Direct Labour Efficiency Variance 42,000
Variable Overhead Expenditure Variance 4,000
Variable Overhead Efficiency Variance 12,000
Fixed Overhead Expenditure variance 30,000
Fixed Overhead Efficiency variance 1,00,000
1,30,000 1,98,800 68,800 (A)
Actual Cost ₹ 26,42,800

Alternative Solution
(i) Statement showing Standard Cost of output produced:
Element of Cost Calculation Amount (₹)
Direct Material 18,000 x ₹ 48 8,64,000
Direct Labour 18,000 x ₹ 35 6,30,000
Variable Production Overhead 18,000 x ₹ 10 1,80,000
Fixed Production Overhead 18,000 x ₹ 50 9,00,000
Total 25,74,000

(ii) Analysis of Variances:

For Direct Material Cost Variances Amount (₹)
1. M1 – Actual cost of material used 8,36,000
M2 – Standard cost of actual material (76,000 kgs. x ₹ 12) 9,12,000
M4 – Standard material cost of output (18,000 x ₹ 48) 8,64,000
Material price variance = (M1 – M2) = ₹ 8,36,000 –₹ 9,12,000 76,000 (F)
Material usage variance = (M2 – M4) = ₹ 9,12,000 – ₹ 8,64,000 48,000 (A)
2. For Direct Labour Cost Variances
L1 — Actual payment made to workers for actual hours worked 6,04,800
L2 — Payment involved, if the workers had been paid at standard rate (84,000 hours x ₹ 5,88,000
7)
L5 — Standard labour cost of output achieved (18,000 units x ₹ 35) 6,30,000
Labour Rate Variance = L1 — L2 = ₹ 6,04,800 —₹ 5,88,000 16,800 (A)
Labour efficiency variance = L2 — L5 = ₹ 5,88,000 — ₹ 6,30,000 42,000 (F)
3. For Variable Overhead Cost Variances
VO1 — Actual Variable Overhead 1,72,000
VO2 — Actual hours worked at standard variable overhead rate (84,000 hrs. x ₹ 2) 1,68,000
VO3 — Standard variable overhead for the production (18,000 units x ₹10) 1,80,000
V.O. Expenditure Variance = VO1 — VO2 = 172000 — 168000 4,000 (A)
V.O Efficiency Variance V2 – V3 168000 — 180000 12,000 (F)
4. For Fixed Overhead Cost Variance
FO1 – Actual Fixed Overhead incurred 10,30,000
FO2 – Budgeted Fixed Overhead for the period 1,00,000 x ₹ 10 10,00,000
FO3– Standard Fixed Overhead for production 18,000 units x ₹ 50 9,00,000
F.O. Expenditure variance = FO1 – FO2 = 10,30,000 – 10,00,000 30,000 (A)
F.O. Volume variance = FO2 – FO3 = 10,00,000 – 9,00,000 1,00,000 (A)

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(iii) Statement showing relevant variances and reconciliation of standard cost with actual cost
Standard cost Actual
Ref No. Variances
of output (₹) Cost (₹)
Direct Materials 8,64,000
Price variance (1) 76,000 (F)
Usage variance (1) 48,000 (A)
Actual Direct Material cost 8,36,000
Direct labour 6,30,000
Rate variance (2) 16,800 (A)
Efficiency variance (2) 42,000 (F)
Actual Direct Labour cost 6,04,800
Variable Production Overhead 1,80,000
Expenditure variance (3) 4,000 (A)
Efficiency variance (3) 12,000 (F)
Actual Variable Prodn. OH 1,72,000
Fixed production overhead 9,00,000
Expenditure variance (4) 30,000 (A)
Volume variance (4) 100,000 (A)
Actual Fixed Overhead 10,30,000
TOTAL 25,74,000 68,800 (A) 26,42,800

6. (a)
(i) The given problem is a balanced minimization transportation problem. The objective of the company
is to minimize the cost. Let us find the initial feasible solution using Vogel’s Approximation method
(VAM).

Diff. 0 1 4 0
0 1 - 0
- 1 - 0
- 1 - 1

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 The initial feasible solution obtained by VAM is given below:

Since the number of allocations = 6 = (m + n – 1), the above initial basic feasible solution is non-degenerate
and hence an optimum solution can be obtained.
Test of Optimality:
Let us introduce Ui (i = 1, 2, 3) and Vj (J = 1, 2, 3, 4) . We assume U1 = 0 and other Ui and Vj can be
calculated by using the relation Cij = Ui + Vj for allocated cells.
( )
The opportunity costs for the unallocated cells can be calculated using the relation Δ ij = Cij − U i + Vj . The
calculations of U i ' S , Vj ' S and Δ ij ' S are given below:

On Calculating Δ ij ' S for non-allocated cells, we found that all the Δ ij  0 , hence the initial solution obtained
above is optimal.

(ii) Calculations of the total costs:

Plants Outlet Units Cost Total Cost
X →B 400 X 6 = 2,400
X →D 300 X 6 = 1,800
Y →B 50 X 5 = 250
Y →C 350 X 2 = 700
Z →A 400 X 3 = 1,200
Z →D 200 X 5 = 1,000
7,350

The minimum cost = 7,350 thousand rupees.

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6. (b) Allocation of Random No- Selling Price:
Selling Price (₹) Probability Cumulative Probability Allocation of RN
3 0.20 0.20 00-19
4 0.50 0.70 20-69
5 0.30 1.00 70-99

Allocation of Random No- Variable Cost:

Variable Cost (₹) Probability Cumulative Probability Allocation of RN
1 0.30 0.30 00-29
2 0.60 0.90 30-89
3 0.10 1.00 90-99

Allocation of Random No- Sales Units:

Sales (Units) Probability Cumulative Probability Allocation of RN
2,000 0.30 0.30 00-29
3,000 0.30 0.60 30-59
5,000 0.40 1.00 60-99

Calculation of Simulated Profit:

Trial RN SP RN VC RN Sales Units Profit (₹)
1 81 5 32 2 60 5,000 (5-2)5,000-4,000 = 11,000
2 4 3 46 2 31 3,000 (3-2)3,000-4,000 = -1,000
3 67 4 25 1 24 2,000 (4-1)2,000-4,000 = 2,000
4 10 3 40 2 2 2,000 (3-2)2,000-4,000 = -2,000
5 39 4 68 2 8 2,000 (4-2)2,000-4,000 = 0

Total = 10,000
₹ 10,000
Average Annual Profit = = ₹ 2,000
5
Alternative Solution
Probability Distribution (Selling Price):
SP Probability Cum. Prob. Probability range Probability range for simulation
3 0.20 0.20 0 – 0.20 0 – 0.19
4 0.50 0.70 0.20 – 0.70 0.20 – 0.69
5 0.30 1.00 0.70 – 1.00 0.70 – 0.99

Probability Distribution (Variable Cost):

VC Probability Cum. Prob. Probability range Probability range for simulation
1 0.30 0.30 0 – 0.30 0 – 0.29
2 0.60 0.90 0.30 – 0.90 0.30 – 0.89
3 0.10 1.00 0.90 – 1.00 0.90 – 0.99

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 Probability Distribution (Sales Units):
Sale units Probability Cum. Prob. Probability range Probability range for simulation
2000 0.30 0.30 0 – 0.30 0 – 0.29
3000 0.30 0.60 0.30 – 0.60 0.30 – 0.59
5000 0.40 1.00 0.60 – 1.00 0.60 – 0.99

Simulated Profit:
Trial RN Profit (₹)
1 81, 32, 60 (5 – 2) (5,000) – 4,000 = 11,000
2 04, 46, 31 (3 – 2) (3,000) – 4,000 = -1,000
3 67, 25, 24 (4 – 1) (2,000) – 4,000 = 2,000
4 10, 40, 02 (3 – 2) (2,000) – 4,000 = -2,000
5 39, 68, 08 (4 – 2) (2,000) – 4,000 = 0
Total = ₹10,000

₹ 10,000
Average Annual Profit = = ₹ 2,000
5

7.
(i) Calculation of Expected Project Duration:
Expected Duration
Activity Most Likely (M) Optimistic (O) Pessimistic (P)
(O+4M+P)/6 (Days)
A 5 4 6 5
B 12 8 16 12
C 5 4 12 6
D 3 1 5 3
E 2 2 2 2
F 5 4 6 5
G 14 10 18 14
H 20 18 34 22

(ii) Project Network Diagram

(iii) Critical Path, Expected project duration & Std. Deviation:

From the EST and LST calculated above, it is clear that, tasks B, G and H are in critical path. The
overall project duration is 48 days.

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 Calculation of Standard Deviation of the activities in Critical Path
Activity Pessimistic time Optimistic Time Standard Deviation
B 16 8 1.33
G 18 10 1.33
H 34 18 2.67

Standard Deviation of the Project = √ (1.332 +1.332 +2.672) = 3.27

(iv) Calculation of probability that the project will be completed in 54 days:

Using Z value, we have Z = (54-48)/3.27= 1.84

Using area under standard normal curve, the probability of finishing the project in 54 days is 0.5-
+0.4667=0.9667= 96.67%

(v) Calculation of new probability:

The revised estimates do not affect the average task times as the reduction in optimistic time equals
the increase in pessimistic times. Therefore, tasks B, G & H are still in critical path and the expected
project duration is still 48 days.

However, increase in variability will affect the standard deviation of the project.

Calculation of Revised Standard Deviation of the project:

Activity Pessimistic time Optimistic Time Standard Deviation
B 17 7 2.78
G 20 8 4.00
H 36 16 11.10

Standard Deviation of the project = √ (2.78+4+11.10) = 4.23

Using Z value, we have Z = (54-48)/4.23= 1.42
Using area under standard normal curve, the probability of finishing the project in 54 days is 0.5-
+0.4222=0.9222= 92.22%.

8. (a)
Price Discrimination:
P1 = 400 − 2 Q1
TR1 = 400 Q1 − 2 Q12

MR1 =
(
d 400 Q1 − 2 Q12 )
= 400 − 4 Q1
d Q1
P2 = 300 − 2 Q2
TR2 = 300 Q2 − 2 Q22

MR2 =
(
d 300 Q1 − 2 Q22 )
= 300 − 4 Q2
d Q2
Total Cost Function (C) = 3000 + 60 Q
Where Q = Q1 + Q2
d ( 3000 + 60 Q )
MC = = 60
dQ

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To maximize profits, the discrimination monopolist should equate
MR1 = MC and MR2 = MC
So, 400 – 4Q 1 = 60
Q 1 = 85
Similarly, 300 – 4Q 2 = 60
So, Q 2 = 60

Prices in the sub-markets are

P1 = 400 – (2 x 85) = 230
P2 = 300 – (2 x 60) = 180
Q1 = 85 P1 = 230
Q2 = 60 P2 = 180

Profit of the discriminating monopolist:

= (TR1 + TR2) – TC
= (85 x 230 + 60 x 180) – [(3,000 + 60 x (85 + 60)] = 30,350 – 11,700
= ₹ 18,650
The maximum possible profit that can be earned by the monopolist from the two sub -division
market with price discrimination is ₹18,650.
8. (b)
Statement Showing the Forecasted demand of Material unloaded (in Tons)
Demand (in Previous Forecast
Quarter of Correction
Year tons) Forecast Error ei = New Forecast
Year σe (σ = 0.1)
(Yi) Ui (Yi – Ui)
(1) (2) (3) (4) (5) (6)
(2 - 3) (4) x 0.1 (3) + (5)
I 200 195.00 5.00 0.50 195.5
II 188 195.50 – 7.50 – 0.75 194.75
2023

III 179 194.75 – 15.75 – 1.575 193.175

IV 195 193.175 1.825 0.1825 193.3575
I 210 193.3575 16.6425 1.6642 195.0217
II 225 195.0217 29.9783 2.9978 198.0195
2024

III 200 198.0195 1.9805 0.1981 198.2176

IV 202 198.2176 3.7824 0.3782 198.5958
2025

I 198.5958

Hence Forecast Figure for 1st quarter of 2025 is 198.5958 i.e. 198.60 Tons

______________________________

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