_________________________________GROUPE HEC____________________________

MANAGEMENT AND COST

ACCOUNTING

FINAL & REMEDIAL TEST

December 11th, 2020

1.5 hours

Open-book

Calculator, class notes and reference book allowed

Last name and first name: Professor: Keith ROBSON

ESWARAPRAKASH
Raghava Raj

L'Ancienne Biscuiterie 32 points

Grade out of 70:
The Tata Nano 16 points
Sky Gourmet 22 points
70 points

 Answer all three questions in this file (complete your last name and first name)
that is to be uploaded on BlackBoard at the end of the Examination. Register your
exam paper with your last name and Student ID number.
 Do not only show end results, but also the major calculation steps.
 Answer only on this document.
 If you feel that there is ambiguity in a question, clearly state your assumptions.
 L'Ancienne Biscuiterie
(32 points)

L'Ancienne Biscuiterie is a biscuit maker located at Quimper. It makes two popular types of
Breton biscuits, called “palets” and “galettes”. Yves Le Coz, who took over this old family
business around ten years ago, is very proactive and L'Ancienne Biscuiterie operates at full
capacity. Its products are traditional, but very fresh and provide value for money. The
company is still housed in its original premises along a popular tourist route. Yves designed
the shop next to the workshop (customers in the shop can watch the biscuits being made
through a glass wall), and tourists queue up to buy the famous biscuits from Quimper.
The production process is similar for both biscuits, but the “palet” costs a little more
because it has a higher proportion of salted butter (the most expensive ingredient) and its
baking time is longer (because it is thicker).
The “production” side of L'Ancienne Biscuiterie comprises two workshops:

 In the first workshop, the doughs are prepared, and the biscuits are baked. This
preparation/baking workshop is largely automated, and the most expensive
equipment is the tunnel oven. The biscuits are fed into the tunnel oven on baking
trays: each tray carries the same number of “palets” as “galettes”.
 In the other quality control/packaging workshop, the staff check the quality of the
finished biscuits and pack them in boxes. Each box contains 500g of biscuits (either
“palets” or “galettes”) and the same boxes are used for both types of biscuit. At this
stage, there is no real difference in the way the two products are handled.

The preparation/baking workshop is staffed by one worker, and the quality

control/packaging workshop by three workers. A young workshop manager called Eloise
supervises production and place orders for the ingredients. Eloise spends most of her time
on “management”, i.e. supervising, training and motivating the four production staff
working under her.
Two sales assistants work in the shop in shifts so that longer opening hours are possible.
Other information: Yves is trying to cut the company’s expenses. He has little room for
savings on energy costs, which are generated by the tunnel oven and are directly related to
the quantity of biscuits produced. He considers that the Quimper premises, which have
belonged to the family for several decades, are more than fully written off and should not
be included in costs.
Finally, Yves Le Coz’s salary and certain overheads (internet, insurance, local taxes) are
considered as period costs and for 2019 they are €80,000.
The tables below summarize the available information about the company. All figures relate
to 2019. There are no stocks.
 Palets Galettes
Sale price per box €10 €8
Number of boxes sold 28,000 40,000
Cost of ingredients per box (including €1 for
€3.5 €2.5
the box itself)
Baking time 7 min 5 min
Table 1: Statistics for 2019

Quality
Workshops Preparation/baking
control/packaging Shop
supervisor workshop
workshop
Number of staff 1 1 3 2
1
Salaries €44,000 €23,400 €64,800 €43,200
Depreciation: oven €38,000 - -
Energy €75,000
Table 2: Costs for 2019
1
Total salary costs for the workshop or for the shop, including social security charges

Required:
1. What is the variable cost of one box of “palets” and one box of “galettes”? (6
points)

Assumption: We assume that All the Palets and Gallets produced are sold and
there is no remaining inventory
Assumption 2: Energy is distributed to Palets and Gallettes based on Boxes
produced and I am considering energy as a variable cost.

Energy Cost 75000

Energy per
box(75000/680 1.1029411
00) 76

We consider that salaries as indirect fixed cost which have to allocated

Variable cost

  Palet Galettes
Cost of 3.5 2.5
1
 Ingrediants
1.10294
Energy 1 1.102941176
4.60294
VC 1 3.602941176

2. What is the contribution margin of one box of “palets” and one box of “galettes”?
What is the 2019 net income of l'Ancienne Biscuiterie? (6 points)

Contribution Margin: Revenue per box – VC

Galette
  Palets
s
Sale price per
10 8
box
4.60294117 3.60294
VC 6 1
Contribution
margin € 5.40 € 4.40

Net income

L'Ancienne
  Palets Galettes
Biscuiterie
Sale price per box € 10 €8  
Number of boxes sold 28,000 40,000  
Cost of ingredients per box (including €1 for
€ 3.50 € 2.50
the box itself)  
Contribution Margin € 5.40 € 4.40  
€
Total Contribution 1,51,117.6 €
5 1,75,882.35 € 3,27,000.00
Salaries     € 1,75,400

Depreciation
    € 38,000

Period Costs
    € 80,000

Net income
    € 33,600.00

3. What cost drivers would you propose to use to allocate:

 i. The workshop supervisor’s salary;
ii. The costs of the preparation/baking workshop;
iii. The costs of the quality control/packaging workshop;
iv. The sales assistants’ salaries.

Explain your choices. (6 points)

ANSWER
i. The workshop supervisor’s salary;

Cost Driver: number oemployees being supervised: Equally split across 6 individuals

ii. The costs of the preparation/baking workshop;

Cost Driver: Number of Breton biscuits (palets and galettes produced)

iii. The costs of the quality control/packaging workshop;

Cost Driver: Number of Breton biscuits (palets and galettes packed)

iv. The sales assistants’ salaries.

Cost Driver: Number of Breton biscuits sold

4. Calculate the costs of cost drivers for each workshop and the shop, allocate
indirect overhead costs and calculate the full cost of one box of “palets” and one
box of “galettes”. (8 points)

Depreciation is fixed cost which cannot be allocated.

The supervisor’s job is related to others. Consider this a service department and the other 3
as independent production departments

Cost for managing 1 person

C
ost for managing €
1 person 7,333.33

Quality
Preparation/
  control/packagi Shop
baking workshop
ng workshop

Cost for managing 1 person

 Salaries[
Salaries[ €
€ 23,400 € 64,800
1] 43,200
Depreciatio
€ 38,000 - -
n: oven
Energy € 75,000    
Salaried of €
super visor 14,666.6
distributed € 7,333.33 € 22,000.00 7
Cost per
department € 1,43,733 € 86,800 € 57,867

5. What is the full cost margin of one box of “palets” and one box of “galettes”?
Present an income statement for each product and recalculate the net income of
L'Ancienne Biscuiterie. Comment on your results. (4 points)

Full cost

L'Ancienn
e
Biscuiteri
  Palets Galettes e
Sale price per box 10 8  

Number of boxes sold 28000 40000  

0.45196078 0.45196
Preparation/baking workshop 4 1  
Quality control/packaging 1.27647058 1.27647
workshop 8 1  
0.85098039
Shop 2 0.85098  
4.60294117 3.60294
VC 6 1  
7.18235294 6.18235
Full cost 1 3  
2.81764705 1.81764
Contribution Margin(Full cost) 9 7  
78894.1176 72705.8
New Total Contribution margin 5 8 151600
Depreciation     € 38,000
Period Costs     € 80,000

Salaries[
       € 33,600

Net income of the organisation won’t change, its just that the indirect costs are now
assigned to per box of biscuits

6. Yves Le Coz considers that his company’s buildings, which are now fully
depreciated, should not be included in costing calculations. What do you think of
this decision?
What are the possible consequences for:
Buildings and properties are not subject to depreciation, maybe the equipments in
the building are but not land value.

a. the costing of products?

Depreciation expenses are not assigned to products,hence no change in costing
b. any decisions the company may have to make regarding expansion or
relocation?
Since currently we are not including any building cost, while expanding we might
have to consider building depreciation,rent andso forth

(2 points)
 The Tata Nano
(16 points)

In 2008 the Indian automaker Tata launched the Nano, a small car intended for the Indian
market, sold at the record low price of 100,000 Rupees (or 1 lakh). The Indian magazine
article below discusses this launch.
Building a car for 100,000 Rupees is much harder than it is romantic. Everything about the
car has to be worked backwards from the set target price. The challenge that Tata engineers
face was to build a small car that is almost half the price of the world's cheapest car (the
Maruti 800), and be at least as good if not better. Moreover, it has to meet all the safety and
emission norms.
The Suzuki-owned Maruti Udyog, a small car, already sells for Rs 200 000, which, minus the
tax component of 40 per cent on the costs, and profit margins (five per cent), costs Rs 130
000 or so to build. But according to Mr. Kumar, Engineering Advisor on the construction of
the Maruti Udyog, and the man who helped build the company's vendor base from scratch,
"the 800 and the Alto have already been pared to the bone." Therefore, he believed that no
amount of value engineering can shave another 25 per cent off the production cost.
Tata company refuses to share details of the project, but outside sources have been able to
piece together at least an outline of Tata's small car strategy by speaking with several
vendors, rival carmakers, automotive designers and engineers, and industry watchers. The
picture that emerges is of one company braving ridicule, cynicism and, perhaps, subterfuge
to push the limits of automotive engineering. The guiding mantra is to think outside-of-the-
box, and question some or all of the industry's long-held beliefs.
Update: Tata Motors launched the Rs 1-lakh car last year, and has been criticized for its
basic functionality and technical limitations. A few Nano models have caught fire raising
safety concerns, but the company has downplayed the incidents.

Required:

1. The Maruti 800, a competitor of the Nano, has a market price of 200 000 Rupees.
Do you agree with the target cost figure (130 000 “or so”) mentioned in the article?
(3 points)

2. Assuming Tata wants to make 4% profit on the cost of the Nano and that taxes are
brought down to 23% (of the pre-sales tax price) for a car of this size, what is the
target cost of the Nano for a target price of 100 000 rupees? What do you think of
this objective? (3 points)
 3. What types methods or processes do you think Tata’s engineers and managers
should have used to meet the target cost for the Nano? (3 points).

4. What kinds of pricing strategy do you think that Tata might have adopted in setting
its initial target price? (3 points).

Cost + margin approach would help in target pricing

5. The Nano was launched but sales were well below forecast sales volumes. What, in
your opinion, is the reason for this? Does it call into question the target costing
method? (4 points).
 Sky Gourmet
(22 points)

Sky Gourmet is a gourmet catering firm specialized in providing Michelin-awarded airline

meals for first- and business class passengers. While Sky Gourmet maintains a diversity in its
meals over time, the firm has agreed with airlines to sell meals at a fixed average annual
price. Business class meals are sold to airlines at a price of $35 and first class meals at a price
of $60 (difference is due to top-notch ingredients such as Beluga caviar, Swiss Balik salmon
or white truffle). In 2019, the total production was 3,000,000 meals out of which 35 percent
were first class meals. Total revenues for 2019 were $126 million. Fixed costs made up 60
percent of Sky Gourmet’s total costs in 2019. This included the rent for production- and
office space of $5 Mio, salaries of $35 Mio and equipment depreciation of 30 Mio.

Required:

1. What was Sky Gourmet’s operating profit (loss) in 2019? (5 points)

Revenue 126000000
rent 5000000
Salaries 35000000
Depreciation 30000000
Total fixed cost 70000000
Total cost (fixed cost 116666666.
*10/6) 7
46666666.6
VC 7
9333333.33
Operating profit 3

2. Considering that the variable costs (ingredients) of first class meals made up 2/3 of
all variable costs and the ratio between business- and first class meals has been
constant throughout 2019, what was the breakeven point for Sky Gourmet in
2019? (5 points)
Total fixed cost 70000000
Total cost (fixed cost *10/6) 116666667
VC 46666666.7

Total VC 46666666.7    
  Business class First Class  
VC 15555555.6 31111111.1  
 Meals 19,50,000 1050000  
VC per meal 7.97720798 29.6296296  
Sales per meal 35 60  
Contribution Margin 27.022792 30.3703704  
Meal ratio 65 35  
Contribution mmrgin for 100 meals 1756.48148 1062.96296 2819.444

In Every 100 meals 35 is first class and 65 is business class. We make our composite
product

FC 70000000
BEP =(FC/CM of composite) 24827.5862

Number of business class meals(65%) 1613793.1

Number of First class meals(35%) 868965.517
Total Meals is sum of the above meals

3. While Sky Gourmet’s performance in 2019 was considered by investors to remain

at an acceptable level, the COVID-19 crisis which unfolded throughout 2020 put all
of Sky Gourmet’s ambitious plans to halt. Sales in the first three quarters of 2019
dropped by 85 percent.

By 31st August 2020, Sky Gourmet’s management still had about 50,000 frozen
meals on stock and predictions for Q3 of 2020 indicated that only about 30,000 of
those can be sold to airlines. At a meeting of the core management team,
alternative ways for generating revenues were discussed. Among the many
proposals, was a suggestion by Helen, an ambitious intern from a leading European
business school. She suggested that airline meals would be a perfect meal
opportunity also for students (ready to be put in microwave for 5 minutes). The
management was impressed by the proposal and decided to give it a try in the
month of October at 4 university locations in the region.

Helen assumes that there were some additional costs associated with the
proposal. These include the rent for a small shop on the campus, additional fuel for
delivery vehicles and the wages for students as selling staff. Including the variable
costs of ingredients, she summarized the following costs when calculating the price
for the student offering:

a. Ingredients per meal: $ @ unit variable costs

b. Wages for students: $8,000 per month
c. Fuel for deliveries: $2,750 per month
 d. Rent: $7,250 per month

What would your advice be to Helen with regards to the minimum selling price for
a volume of 15,000 meals to students under purely economic considerations?
(4 points)

We would give lower cost meals (Business class) where VC is 8$

We have to break even here : Fixed cost = 18000

BEP = FC/ CV =1

Volume =15000
CV =1.2
Hence sell the product 9.2$

4. Would your answer change if the demand in the university sector would be 30,000
meals (no calculation required)? (1 point)

We can sell it for slightly lesser to breakeven or make a profit by selling at 9.2
5. It is now December 2020 and the management is planning ahead for January 2021.
Helen’s proposal continues to be well-received amongst student populations at
universities. Since its inception, the management has steadily refined the offering
for students and was able to reduce the variable costs for meals to $4 (it turned
out that the exclusive ingredients of first class meals were not really valued by
students). Sky Gourmet was also able to cut the original fixed costs by about 50
percent along with a reduction of the production volume to 120,000 meals a
month for January 2021.This happened by renting out storage space, selling
delivery vehicles and making use of temporary employment.

However, recent news on successful vaccinations to combat COVID-19 have led to

a rise of orders by airlines for January 2021. An alliance of four airlines asks Sky
Foods to reserve a capacity of up to 100,000 business class meals in January 2021.
However, due to the uncertainty, the airline alliance would only guarantee to buy
a minimum of 20,000 meals (this condition applies if the travel ban remains intact
in January). Furthermore, the airline group would only be willing to pay $ 25 per
meal.

The demand for student meals is expected to rise to 90,000 meals in January 2021
if the price will be set at $8. No orders are expected from other airlines in January.
The meal stock is expected to be fully emptied by 31st December. Would you agree
to reserve the capacity for the airline? (4 points)
6. What other strategic factor would you consider in deciding whether or not to
accept the airlines group’s offer? (3 points)