_ pecsion Making jc _yncremental revenue from further ing i ii Processing is higher at jon: t ol Mot at €10,000 resulting in additional profit of £950, Th . Thus, i sed. + proces of Additional Shift hift is introduced, certain costs are bound ‘ i to rise. nd red with additional revenue so that their net saaans additional rofit can be 710,950 Af the Products should be 6 jonal sh addition wren a compa! ld be i differenti i i agerial decision. Thus, differential cost analysis helps mar 4 ivarel shift should be introduced or not. nagement to decide a PROBLEMS AND SOLUTIONS 20.1 (Export Order) producing 24,000 units provides you the following information: company c Direct material 1,20,000 Direct wages 84,000 Variable overheads 48,000 semi-variable overheads 28,000 Fixed overheads 80,000 Total cost 3,60,000 The product is sold at €20 per unit. duction by 3,000 units for sales in the The management proposes to increase the pro ion market. It is estimated that the semi-variable overheads will increase by €1,000. utthe product will be sold at 14 per unit in the foreign market. However, no additional qjital expenditure will be incurred. The management seeks your advice as a cost scountant. What will you advise them? Solution: Marginal Cost Statement Se Total Per unit (24,000 units) e W) a 4,80,000 Pirect materials aa tee 84,000 gy table overheads 48,000 | io, Matsinl cost Contribution (A = B) I ty, POduct Potion of of additional 3,000 units is undertaken for sale in the forei f cost and profit will be as follows: orelgn market Se. >carptance of tie otter for sie in the foreign market at €14 per unit will icy, ines poms ofc ‘Theretore, the offer should be accepted d an Problem 20.2 (Export orden 8B be Company is presently operating at 5% of practical capacity producin tunity aneually of + patented electromac component RB Thus acceplance of this offer will result in additonal probit of p00. foblem 20.3 (Export Order) @ s ved that would utilize half the capacity ofthe factory. to be taken in full and executed at 10% below maintain the present domestic Nn equipment that ‘ase of &1,00,000 in fi Vertime to meet balance of requires at one and a half times the normal ty by 10%. This will result inProfitability Statement e obtains an offe What minimum price would for a furthe 50,000 : You recom, : his potential ca Nie rictGagsecibee 2,00,000 251 3.25,000 aanufacturer and overall profit of 81,67 399p°"4 ©" acceptance ofthe eae Total Variable Cost (B) 16,00,000_ 20,00,000 26,50,000 Solution: 1 & ‘Contribution (A-B) 16,00,000 18,00,000 23,50,000 ce : ) piso ceca 13,00,000 13,00,000 = ment of Marginal Cost and Profie Profit 3,00,000 200/000) 950,000 current year ‘Conclusion: Alternative Ill is the best because it results in the highest amount of profi, Working Notes: 1. Sales at 80% capacity = %32,00,000 at 100% =32,00000 x 2 = £40,00,000 Variable cost | Sales (export) at 50% capacity = 20,00,000 ~ 10% = %18,00,000 ution (Sales ~ Variable cost) 3. Direct material cost for alternative II (100% capacity) 100,000 x 2% — #12,50,000 Cy ‘Direct material cost for alternative III (130% capacity) of fixed overheads Ficlory — 60,000 units@ %3.125 = 1,87,500 Sils — 60,000 units@ 060 =336,000 iable overheads at 100% and 130% \ 23500 " Gapacities, Labour cost at 130% is calculated on the assumption that overtime will be required ‘Add: 10% increase 22350 for 20% capacity because additional plant will raise capacity by 10% which will not requite. working. Fixed cost &245,850 Statement of Price Recommendation for 20,000 units At 100% = 4,00,000 x = = 85,00,000 ‘cost for alternative III: AIO = (+a x 57) + (400000223) re ‘ost (®8.385 x 20,000 units) ional profit required (1,67,300 ~ 1,09,050) pa Total sales value “Brice per unit (225,950 + 20,000) = ©1130 (Approx) = 5,50,000 + 1,50,000 = €7,00,000, "20.26 Problem 20.5 (Acceptance of a Special Order) PQR Ltd manufactures medals for winners of athletic eve: manufacturing plant has the capacity to produce 10,000 has current production and sales level of 7,500 medals per mor market price of the medal is %150. The cost data for the mont! Variable costs (that vary with units produced) Direct materials Direct manufacturing labour Variable costs (that vary with number of batches) Set-ups, materials handling, quality control 150 batches x 8500 per batch Fixed manufacturing costs Fixed marketing costs ‘PQR Ltd has received a special one-time order for 2,500 medals at €100 PQR Ltd makes medals for its existing customers in batch size of 50 m (150 batches x 50 medals per batch = 7,500 medals) The special order for 2500 medals requires POR Ltd to manufacture the medals in 25 batches of 100 each. Required: (9 Should PQR Ltd accept the special order? Why? Explain briefly. (@) Suppose the plant capacity was 9,000 medals instead of 10,000 medals each month ‘The special order must be taken either in full or re ‘accept the special order? Why? Explain briefly. Solution: SO Profitability Statement € i lance of spec Losin contribution (487,509 = 4.2 5h 8 Oder Conclusion: When plant ca cepted because it results in I Problem 20.6 (Special Order) ‘Amachine shop in a factory is workin, ‘60 per hour. The management inmediately. Material will be su ninimum of 10 hours. Wages pa sjected totally. Should POR Ltd be 150% of wages. If the customer 'yable will be 815 per hour ane Calculation of the cost of special order Sales (2,500 medals @ 100) Less: Variable Costs: ss Variable overheads (150% of 150) Loss of contribution (10 hrs x %50) plesleug~ lusion: The special order should be accepted because it gives a contribution of €50,000 When plant capacity is 9,000 me Decision: The order should not be accepted as it would give a loss of €75, Present contribution on 7,500 medals: Sales (7500 x %150) Variable costs: __ Set-up (150 batches x 8500) : Contribution Pblem 20.7 (Export Order A i" “mptny selling electric kits at a cost of 6,900 each, made up as under: earning a c Sh Proy onder wich wane chen ds will the order, should the order (CW inter) (Conta) qDepreciation Selling overheads-variable (@) A foreign buyer has offered to buy 200 such kits at 25, Accountant, would you advise accepting this offer. t price should the company quote for a kit to be purchased by a Seite tetaranigemate tf should be ot coot Y a cor Solution: (@) Variable cost per kit is computed as follows: Id yo Comparative sta Royalty (assumed to be on production) Gener Toll Offer should be accepted as it results incremental profit of %200 per kit and a Profit Sales ~ Cost of sales) total profit of ®40,000 (i, 200 kits x 2200). It is assumed (a) there is spare capacity, 3 and () selling overheads are not relevant for export order. Cision: Proposal I gives a higher profit of €14,75,000 and thus should be (®) Forthe company under the same management, price to be quoted is computed as yaking Notes: accepted under: Sis Proposal I — 50,00,000 x Price (excluding excise duty) cual Less: Profit i I 50,0000 x %49.50,000 cS Jor nteril "Note: Excise duty has not been included. It may be added wherever payable. al Hf So aed he . 100,000 — = t1800.000 a (Selling Price Decision) ‘tour ee. Proposal uh %6,00,000 + 50% = 900,000 ‘Company Private Limited, manufacturing pressure cookers has drawn up the tee cee lowing budget for the year 2005-06. hblen 20.9 (Selling Price Decision) n materials 100, RS per our, stores, power and other variable costs ip Motte capa, : Viable Ti°®.2 single product which is sold by it presently in the domestic market The present production and sale is 40,000 units per month representing ‘ity available. The cost data of the product are as under: Ried coe Pet Unit 50; osts per month %10 lakh Toi, 6 eS Profitability, the management has 3 proposals on hand as under: peru €Xport supply order for 30,000 units per month at a reduced price of 6 Per unit, incurri iti 4 ; Picking and dues & ditional variable costs of &5 per unit towards export aa20.30 . by sellis (b) to increase the co aS eating sales at the existing price units at &55 per unit, re! : le as advised by th : the increased domestic sa the sae, price for (0) to reduce the selling it as under: _ Increase in sal oer pedce ein price pr i (in we 10,000 5 30,000 3 35,000 uu the results of the above proposals and give Your commen Prepare a table to present CWA and advice on the proposals. Solution: fer) Profitability Statement a | O |_© Selling price reduce by Export | Increase Existing | 30,000 | sales |” (y ai iti units 30,000 ee units | © a1 ‘Selling price | 67 oy i) Co 55 70 Leet 50 55 50 50. 50 50 ea = oS. 3B 5 5 20 7 4 Sales na 40,000 | 70,000 | 70,000 | 50,000 | 70,000 | 75,000 10.00 10.00 10.00 — 1.50 1.50 zak — — 10.00 11.90 10.50, 11.50 10.00 11.90 10.50 On the basis of above statement, proposal C ‘of 811.90 lakh and thus is the most profitabl ite the company should also consider accepting export order on na Bons, Acceptance of export order will enable the company earning valuable exchange, entering export market, income tax benefits, export status etc. em 20.10 (Export Order and Key Factor) ‘A Lid, operating at 75% level of activi a ty, produces and sells two products X and Y. The cost sheets of these products are a follows: ) yields the largest total Y Product X Pt ‘Units produced and sold 3,000 ut Per unit tg £ Direct materials 10 co (contd) ing price per unit overheads are absorbed o Fact machine hour rate is 810 pe ee TY panty receives an o ‘: unit. Alternativel ng factor) per unit of out e made as follows: (A) Factory overheads per unit Machine hour rate Machine hours per unit (A + B) Units produced Tolal machine hours used (C x D) 2 Calculation of surplus machine hours available: Total machine hours used for product X and Y Product X a Machine hours available at 1 Surplus machine hours (14,0 5 Gileulation of fixed cost: Fixed factory overheads: X: 3,000 units @ @10 __-¥:2,000 units @ 6 xed adm. and selling overheads X: 3,000 units @ &24 ¥: 2,000 units @ &15 Total fixed cost 100 — 10,500) 00% capacity (10,500 + ae | 20.31 4 20 40 va A 2B 55 om iis %5 ‘oposal should be accepted 'y of the company after (CA Inter) tput of product X and Y and other y = «6 Scene eens m0 10 25 15 3,000 2,000 7,500 3,000 7,500 hours 3,000 hours 10,500 hours 75%) — 14,000 hours 3,500 hours e 30,000 12,000 42,000 72,000 30,000 1,02,000 1,44,000 i20.33 jon) anagement Accounriy " ake of Buy Dec uto parts. The wing costs are incurred for processing, 1, 20.32 me Export to Ban, Product va ir ct Firect 1000 ple factory overends Bed vactory overheads once of the component is 822. The 7 ‘hase price 0 P \e fixed overheads would co rie puctase Phen the component is bought from outside al aan ba o th ed aa vane Oe ak although there would be wen wired! nui te part be made or bought, considering that the present facility when 0) Sted following a buying decision would remain idle? sete rleased capacity can be rented out to another pa e the decision? EN Se ata 0) ert would b sq released capacity wil remain idle, variable costs to make the component %5 lakh Direct material 8 lakh igher in product Y. Thus Y units of Y that canbe 9 oe it ie, machine hour) is hi of ey factor (fed, Total number Contribution per unit export of from Bangkok should be acceP! y ee ‘surplus machine hours is calculated as follows: pee ichour ‘Surplus machine hows 3500 _ 9333 units of Y Variable overhead % lakh =Nachinehrsperunit, 15 Relevant cost-to-make 19 lakh : Purchase price of the component @ 222 per cent 222 lakh Statement of Overall Profit Liss Reduction in fixed cost ae Total . Ps x Relevant cost to buy 220 lakh cr The cost to make the component is I ae 15 95 iponent is less than cost to bt eae i to make the component. jo buy. Therefore itis advisable ‘Direct Material 10 20 (i) When released capacity is rented out: Direct Labour 20 20 Insuch a situation, the cost to make will remai , main at €19 lakh. a Factory overheads 5 9 further reduce by the income of rent. This the cost to buy oa conc as ‘Adm. and sling overheads 16 10 Rane : us e 222 lakh Ee lesieean A a & ss: Saving in fixed cost 2.00 - 54 36 Rental income (©) Number of units 150 oa Total contribution pa 2,000 Relevant cost to bur aa a ee P 162,000 mon — ‘| 208000 lite cate en a Bed ee uy is less than Sega ons scons) sat em me cost of making, it is advisable to buy it. Over issn — | ara | 9B, (Make or Buy Decisi Less: Total fixed cost Oe Seni EES 20 hours t "ae Total AOD Bs Ril cost of Ro to process on machin‘ Ree nt Fi | isa 8° Yo component part sed in prodcton selling price of €100 and We Discus, @ ™2tginal cost of %5. The production) could be made on machine thee 8 both situations (?) when supplier's price is 710. Should one make 1en machine 99 is working at full capacity and May le capacity, ®e other Non-cost ¢ 2 ‘onsiderations t& in such cases’ ration in mind i ‘0 be kept in mind in such cases?20.35 yy the company, ie same, should be bought from the gestion in (b) is accepted. (ICWA Inter) n od : king, at full the perio solutions apachine 99 i ution ost during the P When tus contribu component supplies Pr of Z=4+5+6=15 ee rite in 12,000 hrs = 12,000 + 15 = 800 selling price © = e218 farginal cost Less: Mi ‘i 3300 - 218 = %82 ‘bution ae 249+ 20 HOUT Sutin lst 65,600 Contribution Per PO | farginal cost + CTT nour) 50,000 Se ee Profit 15,600 itional cost per hour, if component is purchased from market @ Raia ‘hour is key factor) Component [A B c Market price per unit z 64 a] 110 ass: Variable cost of making z 48 60 80 ( Extra cost, if purchased z 16 15 30 io. of hours per unit 4 5 6 itional cost per hour + (ii) z 4 3 5 ‘Component B has the least additional cost per hour. Therefore, it is best to purchase B component. For next month demand is = 800 units + 25% = 1,000 units Hours required for 1,000 units of Z Component C (1,000 x 6 hrs) 6,000 A (1,000 4 hrs) 4,000 B Balance (400 units x 5 hrs) 2,000 Total 12,000 The balance of 600 units (1,000 - 400) of B are to be purchased from the market. ) Computation of profit as per ‘b’ above Sales (1 7 z Fem cua 00) 300,000 iable cost of Component C _ (1,000 units @ 80) ‘80,000 A (1,000 units @ %48) 48,000 Cost B (400 units @ %60) 24,000 Cae oe B (600 units @ 75) 45,000 1,000 units @ %30) ised cost per month amount to €50,000, Product Z is sold at €300 Pe UY oy, ¢ ) 30,000 |next month onwards, the company expects the demand for ‘Z’ t rise by 70 Caen Total variable cost 2,27,000 ne capacity is limited, the company wants to meet the increase 39 4 te: Fixed ee (Sales ~ variable cost) 73,000 as 50,000 ‘such numbers of A, B or C which is most. profitable, - Profit 23,00020.36 ey Problem 20.14 (sales aera following costs rn data fo j-product comP™ ieee Profects__ ‘A multi-prod . + 5 a (O% Fes. 3 z t Sales mix Baer re Selling price ; 10 is jariable unit 1,50,000 oe ae aa %5,00,000 Total sales Jace Product Z bY Product S. Estimated cost and output repl ‘The company proposes ee eee 50% «30% += 20% ‘Sales mix t x z seting es Se ost pe unt om eis000 Total fixed cost %5,00,000 sales i jsion the company should take. Total change and suggest what decision the c’ FEDNE :6: 7. Since the company desires \d price structures, it has been 's total available capacity: in a recite Mix I Mix IIT (in units) (in units) (in units) P 25,000 20,000 30,000 Q 15,000 12,000 5,000 R 10,000 18,000 15,000 and advise the Youare required to compute the quantum of loss now being incurred (ICWA Inter) 1x profitable mix which could be considered by the company: Seton: \able cost per unit is calculated as under: Product Output units Cost ratio Equivalent units P 20,000 4 80,000 Q 15,000 6 90,000 R 15,000 7 1,05,000 Total 50,000 2,75,000 ee Variable cost — %13,75,000 ble cost per equivalent unit = 13,75,000 + 2,75,000 units = o Variable cost of P = 4 x 5 = €20 per unit Q =6 «5 =%30 per unit R =7x 5 =%35 per unitCost and M 20.38 Contribution per unit P = 25-20 =%5 Q =32-30=%2 R =42-35=°7 Total contribution P = 20,000 units x %5 Q =15,000 units x %2 R = 15,000 units x %7 "ood a) Less: Total fixed cost @ %5 for 50,000 units hy Salling price per box @ Loss (@) Season's yield in boxes per acre — 5.000 Comparative Statement of Profitability eee eee Mies. Ma . ud tt Growing labour ° es a ‘Picking and packing costs Contribution P @%5 125,000 1,00,000 150000 “Transport per acre ger 30,000 24,000 1000 Rew 70,000 126,000 isa ics O23) Total 2,25,000 2,50,000 265.000 aking Less: Fixed cost 2,50,000 2,50,000 250000 Profit/Loss (-) 25,000(-) Nil 500 Minimum acres to be allotted act } -% | =20 | -1 =% Acres allotted out of 450 acres | 2) jagenpi ewes Conclusion: Mix III is the most profitable as it gives profit Problem 20.16 (Sales Mix and Key Factor) Fal Csatrbation ‘The Cost Accountant of a company running an orchard with an adequate supply of labour, (Contribution per acre x Acres all | 168,480 | 149, | presents the following data and requests you to advise about the area to be allotted for = 49400 | 4,15,800 | 781470 | the cultivation of various types of fruits, which would result in maximization of profits ‘The company contemplates growing apples, lemons, oranges and peaches. Apples Lemons Oranges Peaches 800 + 7,81,470) = 215,15,150 _ Selling price per box (®) 15 15 30. 45 ‘Season's yield in boxes per acre 500 150 100 200 i Cost: z z z & 'oblem 20.17 (Sales Mix s and Key Factor) Material per acre 270 105 90. 150 M2 Ud, which ee poe acre ete ee ‘50 9 ann, Produces three products, furnishes you the following data for the year ie Picking and packing per box 1.50 1.50 3 aa Transport per box 3 3 150 q = Frees The total fixed costs in each season would be €2,10,000. Seling price per unit a ee 10,000. per unit () ee pare eee are also placed before you: eee yett/Votume ratio a Fe ‘oe area available is 450 acres, but out of this 300 acres are suitable of “ximum sales i : a 2% "i , only oranges and lemons. The balance of 150 acres is suitable for growing: ey Raw Material ate aN ; ee ee the four fruits. ‘ a ilined ones tent 88 Percentage of variable costs 50% 50% 50% _(b) As the produce may be hypothecated to banks, area allotted for any fruit show aN the three ne are estimated at %6,80,000. The company uses a single raw material tsuppty of reaue's. Raw material isin short supply and the company has a quota Pr raw materials of the value of €18,00,000 for the year for the manufacture be demarcated in complete acres and not in fractions of an acre- od NC to meet its sales demand. - adCost and MV 20.40 You are required to (i) set a product mix which will give the maximum overa keeping the short supply of raw material in views () compute that maxim Profitability Statement Finigeted quantity (units) (a) Selling price per unit Variable costs Total Contribution care (©) Contr Total contribution per unit Products [Link] | Material cost | Total material units cost 5 1,50,000 20 2,00,000 a = ar 750,000 15 3.75000 les: Fixed Cost x cs 9/00,000 (Balance) 10 2.00000 Budgeted Profit | Total i tir f Less: Fixed cost Profit poe 2 Contribution per unit @) » = Labour hrs in Deptt 2 20.18 (Sales Mix and Key Factor) election so ee etn aaa npany produces three products. The cost data are as under: opm, eo ae A By hs) | @9,000hrs) | G70 =) 8 z ‘ a 6 152 va contribution for optimal mix @) : 351000 : 243,750 2.11,680 otal Contributi nce i + 2,43,750 + 211. ee os e Uae pentibution of A,B and C Oe (51,000 + 249,750 + 211,680) z Profit : 7 0 2 we 4,06,430 6 5 Sel i G - - a sin Deptt 2 are calculated as follows: z 16 9 Product z= A 4,00,000 per annum = eet at a time when the market was sluggish. and selling prices are as under: 4 Setting Price (OME Budgeted Qty P rls quantities: E \aits “+ 20% = 12,700 units; B = 7,800 units +25% = 9,750 writs; 9,750 units i 7,800 units =7,800 units + 7,800 unitsFacto dC oducts A, B an rowsshol rodding price and cos of raw materi one of the follo lone product by 25% without ay on advertisement. There will be iy Product mix coer labour tant profit that the company Naof (ICWA Inte) 20.43 = 50,000 48,000 __ 40,000 2138.00 material is available only 12,100 kgs Contribution hour Profitability Statement Total Less Fixed Cost Profit Additional contribution from 5000 units x %5.50 = 227,500. ) When there is no shortage of material and thus this product should be selec 11 and labour, C is the most profitable product ‘ted for 25% increase in production and sale- its sale of extra 5,000 units (25% of 20,000 units) 1s Product mix ‘No, of units ‘Contribution Total per unit contribution 10, 90,000 96,000 137,500” Te iat 20.44 * Factor) Problem 20.20 (Sales Mi and key a asia your recomend" for op! eis given below: a1 mix of production for the coming ea, A farmer ‘The current Ttems produced 1 problem 20.21 (Sales Mix Decision) he following particulars are taken from the records of a company en O avvufacturing two products, A and B, from a certain material: rpany, enigagedt in a Product A items A and B, can be used for either (perunil os being used for producing items C and D z z 2,500 5,000 500 1250 750 1500 20 500 on the profitability of each product when: tal sales in value is limited current year “ . | Profitability Statement for the wvailability of raw materials is 20,000 kgs and maximum sales potential of each product is 1,000 units, find the product mix to yield maximum profits (CA Inter) Profitability Statement al Contribution (A+B + C + D) cost (Contd)20.46 (@ Variable cost ‘Contribution (A~ 8) P/V ratio (C/S) aw material conse e Ccontbuton per #5 smaterial Direct labour hours ‘Contribution per hour ‘ais more profitable because its P/V ratio i) When sles value amited — Product ome Beciee ty Protect 4 more profitable because is J pablem 20-23 (Sales Mix Decision) (i) hen per vg fra maeal SNS aactA ee ae Wace wes imi is more profit (i When production pact) Se ting cP ct A is more profitable because Product esliaie = fh = Pe icin short supply, product A is more profitable and thus pS 250,000 a i Y 4,00,000 ~ Z 6,00,000 a {consumes 10 kg of raw mal 4,000 units will consume (1, 10,000 kgs should by utilized to c material is in (io) When raw pet juction of A wroduction of A upto pa A for the period are %5,02,200. The management is worried about the Fixed overheads ‘Thus maximum P Y +10 kgs) 10,000 kgs ey Remaining otters manufacture 400 units of product B 1 gs + 25 kgs) ‘silts, You are required to prepare a statement showing the i anno units ofA and 400 units of B isthe product mix which yield maximum Te rocoentnendla changein the ales Oe eee e profi. potal cates value maintaining the same sales mix, which will eliminate era loa (CA Inter) ‘Contribution from product A = 1,000 units x 71,000 ‘Contribution from product B = 400 units x €1,750 = Solation: ‘Statement Showing the Present Loss ‘Total Contribution ‘Less: Fixed Cost, Boe Prac cal : Profit 700,000 = ies Value x P/V Ratio a) y $250,000 50% 125,000 % Z %4,00,000 x 40% 160,000 Ee aciees markets three products X, Y and Z. Alll the three products F757 26,00,000 x 30% 130,000 data given below, indicate ‘machines. Production is imited by machine capaci: From Bat rortes for products X,Y and Z with a view tomaxamiznS = fixed overheads 12550 000 “£65,000 5,02,200 (7200) Fer limin, iri ‘climinating this loss, an additional contribution of %37,200 is required Maia i 1g th : Pan neh the sae sles mix means that the ratio of sales valve of and Z should Products Zz a Y _ Det art pert Selling rariable cost per unit %) q On asa, = 4 ‘all P/Y yatig = Total contributi 4,65,000 i ols tal Conte AUC P ne time required per unit (in minutes) = 100 = 37.2% ey tonal sa By: Total sales 72,50,000 = Additional contribution _ 37,200 Combined P/V ratio 37.20% e000« 25: 40 : 60 for X, y 20.48 ald be in les of 100,000 a 248,000 Aaaiiony oo, ¥ 20 ee ie rer jodluction Procea fal | problem 20 4 (Sales pip and IGM! products products PIE SIGMA 4 tee ost data 20 20 1 6 er unit © ‘i 5,000 per annum, th selling price PEF ‘ : 2 i , the 7th machine could also be Serable cost PT ae anit of production ey 1 lakh 25 lakh Se ae Sea me vo , faken into account because it does not change under different Nee iia (us ye 4 akh oe relevant in this case. Ha pours avaiable — eral pe te ae ine hours and market limitations, you are sem 20.25 ( ‘Changes in Price and Volume) xt vniting factors © - Considering limiting to give optimum contribution; E ye Product Co manufactures product MK. The company is expected to show a profit required to: pest combination of products es re augmented OF etal based a 000 from the production of ie product MK in the year 2010, after charging fixed @ a a et enachinery regret vide uF tional capacity of 20000 iy 410.00,00- Product MK is sold for 250 per unit and has a variable cost of £20 per (b show the adI807 5 lakh pet ™ ‘ R an anual Fm os sea ifthe anna rental charges reduce a rch suggest the following responses to price charges: par machines to be ren ICWA Inte) ) Or “Alternative selling price ‘i reduced by A 10% B 20% c Be lity considerations, which raluate these alternatives and suggest on profitabi site should be adopted for the forthcoming year 2011, ‘assuming there is no change (CA Inter) inthe cost structure. Ston: Tolal Contribution = F +P = 14,00,000 + 10,00,000 = %24,00,000. =%30 Contribution per unit = S - V = 50-20 Quantity produced = %24,00,000 + #30 = 80,000 units. Profitability Statement Alternatives A B ie Selling £ : . ‘ling price 0.00 5000 50.00 150,000 units @ 214 per unit pace 2.50 _3.50_ aes. 0088 Vatahocest 4750 46.50 on 20.00 20.00 20 ~ (Contd) Total Contribution )20.51 Conclusion: ‘Alternat \ contribution and profit. problem 20.26 (introducing company products 3 s: a aS pay oe ‘and costs 0! “incon 4 ‘sales (units) rial Factory ‘Adm. and selling selling overheads variable cost (V) +5, Forbolh Contribution (S— V) ec Las: Fixed cost: Factory ‘Adm and selling Profit () Recommendation Before diversification “After diversification 1,90,000 Profit € —-1,20,000 345,000 , 199 = 39.38% 2,75,000 100 = 36. 760,000 x 100 = 36. 18% 3,76,000 sp iteintion has esute in higher profi of, 30.000 and higher P/V ratio at 39.38% ire diversification plan should be imp y = 20.27 (Discontinuance of a Product Line) ska’ is engaged in 9 distinct lines of production. Their production cost per unit prices are as under: P/V ratio A 30,000 If Perunit Total | Per unit am z z z 12 3,60,000 ‘Direct materials 200 0000 4.00 3.00 90,000 5.00 Jabour (1/4 of SP.)rofitability oduction arrange? ZAC ia given up sale of Band C will increase Dy 50%. Then ‘B30 units are Article C - 7,500 units. Contribution on B = 3,000 x 22 = Contribution on C = 7,500 x 18 = ‘otal contribution gt ‘Less: Fixed overheads Profit ascertained 66,000 %1,35,000 21,25,000 ‘units and C ~7,500 units. Contribution on A = 4,500 x 13 = 358,500 Contribution on C = 7,500 x 18 ie 135,000, “Total contribution x ‘Fixed overheads 1,93,500 Profit 76,000 117,500 1B is discontinued, production of A and C will increase by 50%, i ses you the assurance th of various alternatives a5 ‘ments are shown below: the sales would be, A450 n A (4,500 * 13) on B (3,000 x 22) ‘an: Of the three alternatives, the highest amount of profi @1,25,000 000) is earned ine and §} ‘one line an’ discontinue the line wh; Fo discontinue OF ey intend t0 dh ich Jusi ir wants Baise bY 50%. TheY Comtine of production is discontinued. Thus, the man. a wo ober RES ST ptable- go you think that the Line which J whl correct ction itis les Prone ye? If 50, 40 9 js C0} proces ale A283) pee in ping ee thod prod gree tinued tements to support your decision problem 20.28 (Selecting a Mell of Production) ‘Aand Type B machines have been desi ee yp n designed to proctuce th a TF than Type sd es ea at ee sts are ta inent costs 3 ces Type B f z set up costs or “a 9.90 ai sable cost per unit type of machine should be used for processing various sized orders? Vari (ICWA Inter) Whid lotion: suppose size of the order = x Type A machine should be used when: Total cost on Type A < Total cost on Type B. 400 + 9.9x < 600 + 9.4x (9.9 = 9.4)x < 600 - 400 0.5x < 200 05 = x < 400 ee same way, Type B machine should be used when: i cost on Type A > Total cost on Type B ee 400 + 9.9x > 600 + 9.4x ——— x> 400 ‘Ris When, as machine should be used when the size of the order is less than 400 No tesize oh ler size is more than 400 units, type B machine should be used. But Othe gad he order is exactly 400 units, either A or B may be used because at this Typed er total cost of both will be exactly equal as shown below: TneB ea + (%9.90 x 400 units) = %4,360 (600 + (%9.40 x 400 units) = 4,360Cost and Management 20.54 13,500 mn: rooduct supported by the following tabulatin 205 problem 20.29 (Diferental Cost An? =e : ‘Accompany at present working 18 ON ne ene: operates a flexible budgetary contre’ ®? an Price above Fo 75 a oo | % iming that export 15,00,000 ee sins ting system sprinted ot Act Ae es ect ‘97.500 uct B. He immediately decides to advise mange "155 is being incurred ‘Gement to discontinue manufacture of it \ctured ae = oduct aie Terial cost per unit are constant under present conditions. Profit margin ] i oe tA Product B mange Tabour and ma : ; { 7 = is 10% of sales at 90% ina the differential cost of producing 1,500 units by Es l 11,00,000 pt = ee capacity to 100%. pS wiable manufacturing cost |i esa ai e. recommend for export of these 1 wufacturing overheads td () What price would you ‘much lower than indigenous p Fed mant . f account that overseas prices are (CWA Ine) 6500 19000 ae ae 17900 18000 : Z 4600 44000 Solution: shich is needed for computing = i labour cost whicl 81,000 ‘The problem does not give the er backward from sales as follows: i fom 66,600 267000 differential cost. It is computed by w At 90% capacity aaa 223,000 e ee 1600, _ 15,00,000 Do you agree with the Cost Accountant's conclusion? Argue with your views on the Sales (13,500 units) 150,000 basis of data. (ICWA Inter) ess: Profit (10% of sales) 73,50,000 Soto: goods sold eo 145,000 Profitability Statement Products Series 3,00,500 a 7 T Cost of labour and material (Prime cost) hee z z e Labour and material costs are variable in nature and thus at 100% capacity fet) 100000 5,000 490,000 be ed as under: tbe cost: Manufact < 100 nufacturing. 52,000 26,000 140,000 re = oq) 807 (opprox) Seling and distribution 18,000 17,000 18,000 Statement of Differential Cost Analysis cata cost @) tion C = (A — edt (a-B) Manufacty ring and distribution fixed cost (D) loss (C~ py20.56 Cost and Ma @ PVR aoe 4 (@_ Ratio of fixed cost to variable cost sea - ; ey | & 15 | ® Selling and distribution 2 50 No 3B (@@) Total selling and distribution cost | A oe : asa ratio of sales ed w | mi i aot 25 0 : Conclusion: Product B should not be discontinued at ieee Product B appears unprofitable because of arbitrary apportionment of ¢; @ @ ‘overhead. It is burdened with 73.1% fixed manufacturing overhead of its varia ig tbls a | a a profit (A-B) = v0 220 cost which is almost six times that of product A. (@ Product B is no less profitable than product A as P/V ratio of B is 34% which more than of A. ea, (Gi) Although sales of B are much less than A and C, it is burdened with the same eo nt of sling aa distrbution costs. ia) By discontinuing product B, the contribution of £22,000 made by it will not be oe Ss ie would be equal to the amount of fixed cost of £23,609 ,000 a * incremental reven 0, 250000 Tank Pests re problem 20.32 (Differential Cost Analysis) Ald co. has capacity to produ units of a x Product every month. Its works cost apportioned to it BR re oie Cost Analysis atvarying levels of eee ; “The following extracts are taken from sales budget of a company for a current year a Works oe er unit & Rupees in ’000 20% a Sales: 40,000 units @ 225 per unit 1,000 30% 380 2 pure 370 100 50% 360 80 60% 350 50 70% 2 Bn 10 80% 330 10 pail 90% 320 iene eoresdering al proposal ish a new market in the eastem 100% 310 eat aaa to Pee aetson expenditure by 25% ad Rees administration expenses amount to %1,50,000 and fixed marketing expenses : pe yy 2000 Per month, respectively. The variable distbution cost amounts to ki radi tet 100% of its output at 2500 per unit provided it incurs the following further 6 en it items costing £0 per unt of tl A aws every month giving the first prize of €50,000; 2nd prize of 2 000, 3rd prize of 210,000 and three consolation prizes of %5,000 each to OF ae buying the product. eon to its customers; (9 ich 4S €1,00,000 on refreshments served every month tay Ponsors ‘Statement of Incremental Cost and Revenue Present Proposed Incremental cost and revenue sk at a cost of €20,00,000 per month. ion programme every weel aire position position ean ‘marl it without incurring iad aN aaa “ong uutput at €550 per unit without in 1000 350 ue 3 ing cost sheets. ed peas —— ond) fhe company on its course of action. Show the supporting cost (CA Inter)| 10,000 } 5,20,000 | 52 | 520,000 Nil 420,000 | 51 | 5,10,000 | +80,000 Gadusion: Acceptance of orders only from source A or A and B gives a loss of (i But when all the three orders are accepted, the company makes a profit of {[Link] the company should accept all the orders. froblem 20.34 (Differential Cost Analysis) Ilidhas been offered an order from A Ltd for 10,000 units of output @ €100 each, which fusavariable cost of 860 and will involve an outlay of €60,000 for set-up, jigs and dies. At Re time there is another offer of an order from B Ltd for 8,000 units of output at Re a Variable costs are estimated at €68 each and involve and outlay of 50,000 for has an installed production capacity of 1,00,000 units and present ees and dies. Which order should the company accept? erie neat ‘As production capacity utilization increases, © Pa Sition; 2s follows : 00,000 units at 100% ‘a few special further 000 at 30% capacity Statement of Incremental Revenue and Cost ‘Capacity utilization Cost per unit 4) Size of order (units) Source C- 10,000 units a see the company whether 2ny o al the export orders should be accepted of 04 : acwA) Q 5,94,000ve anal am the above a y be concluded since oy it gives sore bbe accep! y anD KEY TERMS ment account SuMMAR smaneethe best cours? objectives of major ein selecting or this the manager ici sider all relevant cost i age ete courses of action. ie - ich ifs pe pst mmaivjso which do not chen ae soured 38 re ral G onjective Type Questions ie or False Statements. ===— === =—==— eee , Tru mn profitability managerial decisions. price below total cost. 1, Material cost is an ou! 4 Differential cost analysis helps in make or by decisions 4 Management may sell at a price which is even below marginal cost in certain special circumstances. 10. Differential costin, 1g can be used in absorption costing as well as marginal costing: IL Multiple Choice Questions. 1 Which of the following is an out of pocket cost? ill @ Sunk cost a: pobesbeus cost @ Allot! 1 * fecordng to marginal costing, selling prices Inthe short (©) Variable cost plus contribution (d) Below marginal cost Total cost plus profit I; aol cost plus contribution ! of the following is an irrelevant cost? ~ @) Sunk cost ae Replacement cost (@ Allof these : company has an i it yulk will not affect prices of eee ta price which is more pepany than ait Products in the market, Such a bulk order such as assurance of continued supply, quality of the produc a ©) Fixed n sales or product mix decisions, a mix that provides the highest cost (®) Variabl £ Yet cot pis any oppor stile st > be