Prof.

Behere’s Classes
1
 Marginal Costing

Problem (1) Chandrashekhar Enterprises supplies you with the following data

Months Sales. Profit

Rs. Rs.
January 3,00,00 8,000
1981 0
February 3,80,00 24,000
1981 0

You are asked to compute: (1) Break-even point (2) Profit at sale level of Rs. 2,40,000 (3)
Sales’ required to earn a profit of Rs. 2,40,000 and (4) M/s for 2 years.

Problem (2) Sales, turnovers and costs during 2 years are as follows:

Ye Sales. Profit
ar Rs. Rs.
198 1,50,00 1,30,00
0 0 00
198 1,70,00 1,45,00
1 0 0

Find out: (1) P/V ratio; (2) B.E.P.; (3) Sales to earn profit of Rs. 40,000; (4) Profit made
when sales are Rs.2,50,000; (5) M/s at a profit of Rs. 50,000 and (6) Variable cost for 2
years.

Problem (3) 1) Fixed Cost 2) Break Even Point 3) Profit @ 8,00,000 sales 4) Sales to
earn Rs. 60,000 profit . 5) M/s for 2 years. 6) Variable Cost for 2 years.

Ye Sales. Profit
ar Rs. Rs.
Situation 1st 2,00,00 30,000
1 0
2nd 3,00,00 70,000
0
Situation 1st 3,00,00 (-)
2 0 20,000
2nd 5,00,00 (+)
0 20,000

Problem (4) 2 years sales were Rs. 3,00,000 and Rs. 5,00,000 and 2 years profit were
Rs. 30,000 and Rs. 80,000. Find out (1) Fixed cost (2) Break down point (3) Sales to earn
Rs. 60,000 profit (4) 10,00,000 Sales (5) sales to earn 10% profit on sales (6) variable
cost for 2 years (7) Margin of safety for 2 (8) BEP (revised) if s.p. is ↓ by 10%. (9) sales
to earn profit after tax 70,000 (if tax rate is 30%).

Problem (5) S. Ltd. furnishes you the following information related to the half year
ended 30th June, 1980:
Rs.
Fixed 45,000
expenses
Sales Value 1,50,0
00
Profit 30,000

During the second half of the year, the company has projected a loss of Rs. 10,000.
Calculate: (1) The break even point and margin of safety for six months ending 30th June
1980. (2) Expected sales volume for second half of the year assuming that the P/V ratio
and fixed expenses remain constant in the second half year also. (3) The break-even
point and margin of safety for the whole year 1980.

Problem (6) A company has annual fixed costs of Rs. 1,40,000. In 1975, sales amounted
to Rs. 6,00,000 as compared with Rs. 4.5 lakhs in 1974 and profit in 1975 was Rs. 42,000
higher than that in the year 1974.
1) At what level of sales does the Co. break even ?
2) Determine profit or toss on a forecast sales volume of Rs. 8,00,000.
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3) If there is a reduction in selling price by 10% in 1976 and the Co. desires to earn
the same amount of profit in 75, what should be the required sales volume ?

Problem (7) Calculate: (1) The amount of fixed expenses ; (2) The number of units to
Break-even; and (3) the number of units to earn a profit of Rs. 40,000.
The selling price per unit can be assumed of Rs. 100. The company sold in two
successive periods 7,000 units and 9,000 units and has incurred a loss of Rs. 10,000 and
earned Rs.10,000 as profit respectively.

Problem (8) You are given the following Information of a company: Variable cost per
unit Rs.12; Fixed expenses Rs.60,000; Selling price per unit Rs. 18; Total sales Rs.
2,25,000. Find out :
(a) Break-even point, profit-volume ratio & Margin of safety,
(b) What should be the selling price per unit if the break even point is bought down to
6,000 units,
(c) At what selling price would the sale Rs. 15,000 units yield the net profits of Rs.
45,000.

Problem (9) The following data are obtained from the records of a factory:

Sales 4,000 units at 25 1,00,0

each 00
Materials consumed 40,000
Variable over heads 10,000
Labour Overheads 20,000
Fixed overheads 18,000 88,000
Net 12,000
Profit

Calculate: (1) The number of units by selling which the company will neither loose nor
gain anything. (2) P/V ratio and margin of safety at present level; (3) The extra units
which should be sold to obtain the present profit if it is proposed to reduce the selling
price by (a) 20% and (b) 25% (4) The selling price to fixed to bring down its break even
points to 500 units under present conditions (5) The sales required to earn profit of Rs.
60,000 at the present selling price of Rs. 25 per unit.

Problem (10) The following information is available from A Co. Ltd. in certain year.
(1) Sales Rs. 1 lakh ; 2 Variable cost, Rs. 60,000; 3 Fixed cost Rs. 30,000.
(a) Find out the P/V ratio. Break even point and M/s at this level.
(b) Calculate the effect of; (1) 20% Increase in selling price; (2) 10% decrease in selling
price; (3) 5% decrease in sales volume; (4) 10% decrease in fixed costs; (5) 10%
decrease in variable costs; (6) 20% increase in SP plus, increased in fixed overheads by
Rs. 10,000; (7) 20% increase in selling price accompanied by an increase of 10% in fixed
costs and decrease by 10% in variable costs.

Problem (11) Diamond company plans to earn Rs. 2,10,000 after income taxes in 1971.
The tax rate is to assumed 60% of net income before taxes. The fixed costs for the year
are estimated Rs. 4,20,000. The contribution margin is estimated at 20% of sales
revenue.
You are required to compute the sales revenue required to earn a net income after
income taxes of Rs.2,10,000. If the contribution margin can be increased to 25 %. How
much sale’s revenue will be required to earn a net income after income taxes of Rs,
2,10,000 ?

Problem (12) From the following data draw a simple breakeven chart:

Selling price per unit Rs 10.0

. 0
Trade Discount 5%
Direct material cost per unit Rs 3.00
.
Direct labour cost per unit Rs 2.00
.
Fixed Overheads Rs
10,0
.00
Variable over heads on direct 100
labour cost %
If sales are 10% and 15% above the break-even volume, determine the net profits.
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Problem (13) The following are the budgeted data of Volga Company:
Rs. Rs.
Sales(15,000 units @ 75,0
Rs.5) 00
Less
Fixed Costs 28,000
Variable Cost 15,000 43,0
00
Operating Profit 32,0
00
Add
Other income 9,000
Less
Other expenses 3,000 6,00
0
Net 38,0
Profit 00
How would you compute break-even points ?

Problem (14) The budgeted sales of two companies are given :

Budgeted sales (units) 10,0 10,0
00 00
Budgeted selling
price (unit) 2.00 2.00
Budgeted variable
Cost (unit) 1.25 1.00
Budgeted Fixed Cost 5,50 8,00
(Total) 0 0
Budgeted Capacity 80% 80%
Compute the following for each of the above two companies: (i) Budgeted profit. (ii)
Budgeted Break-even point. (iii) The impact of + 10% deviation in budgeted sales. (iv)
Margin of safety as a % of total capacity.

Problem (15) Find out the amount of profit if: (a) P/V ratio Is 30% and margin of safety
is Rs.30,000 (b) P/V ratio is 30% margin of safety ratio is 33 1/3 and sales are Rs.
9,90,000.

Problem (16) Cadbury Schweppes Limited, a British Chocolate and Soft Drink company,
is planning to establish a subsidiary company in India to produce, Schweppes Mineral
Water.
Based on the estimated annual sales of 40,000 bottles of the mineral water, cost
studies produced the following estimates for the Indian subsidiary:

Total Annual % of total Annual

costs costs
Rs. that is variable
(Rs.)
Material 1,93,600 100%
Labour 90,000 70%
Overhead 80,000 64%
Administratio 30,000 30%
n

‘The Indian’ production will be sold by manufacturer’s representatives who will

receive a commission of 8 % of the sale price. No portion of the British Office expenses is
to be allocated to the Indian subsidiary.

Problem (17) Following information is presented by the Costing Department to the

management accountant of the company.
1) Contribution 10,000
2) Fixed Cost 4,000
3) P/V Ratio 1/3
The management accountant is asked to find out the margin of safety if P/V ratio is
brought down to 1/2 .

Problem (18) Alcos Ltd. manufactures and sells four types of products under the brand
names A, B, C and D. The sales mix is value comprises of 33 1/3% and 41 2/3% 16 2/3%
and 8 1/3% of products. A, B, C, and D respectively. The total budgeted sales (100%) are
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Rs. 60,000 per month. Operating costs are :
Variable costs : Product A 60% of selling price
Product B 68% -do-
Product C 80% -do-
Product D 40% -do-
Fixed cost Rs. 14,700 per month.
(a) Calculate the break even point for the products on an over all basis. It has been
proposed to change the sales mix as follows. The total sales per month remaining Rs.
60,000.
Product A B C D
Percent 25% 40% 30% 5%
(b) Assuming that the proposal is implemented, calculate the break even point.

Problem (19) The following is the statement of a Rampha Co. for the month of
November

Products
L– M– Total
Rs. Rs.
Sales 60,00 60,00 1,20,0
0 0 00
Variable 42,00 30,00 72,000
costs 0 0
Overhead 18,00 30,00 48,000
0 0
Administratio 36,000
n
Net Profit 12,000

You are required to compute the P/V ratio for each product, and then compute the
P/V ratio, break-even point -and then profit for the Company under each of the following
assumptions:
(i) Sales revenue divided, 60% to product L and 40% to product M (ii) Sales revenue
divided 40% to product L and 60 % to product M.
Also construct a profit volume chart showing the profits estimated on sales upto
1,80,000 per month for each of the sales mix provided above.

Problem (20) From the following data, calculate : (i) Break-even point expressed in
amount of sales in Rs. (ii) Number of units that must be sold to earn a profit of Rs. 60,000
per year; (iii) How many units must be sold to earn a net income of 10% of sales ?

Rs.
Sales price 20 per
unit
Variable manufacturing 11 per
costs unit
Variable selling costs 3 per
unit
Fixed factory overheads 5,40,0 per
00 year
fixed selling costs 2,52,0 per
00 year

Problem (21) The following are the cost and the sales data of a manufacturer selling
three products X, Y & Z

Produc Selling Variable cost percent of

ts Price rupee
per unit per unit Rs. Sales
Rs. volume
X 4 3 20
Y 5 4 40
Z 8 6 40
Capacity of the manufacturer Rs. 15,00,000 total sales volume Annual fixed cost
Rs. 2,30,000
1) Final break -even point In Rupee.
2) Calculate his profit or loss at 80% of capacity.
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Problem (22) The sales Director of your concern requires to compute the sales volume
necessary in order to:
1) Break -even (2) Make a profit of Rs. 4 per unit (3) Make a profit of 30 % of sales
(4) Make a profit of Rs. 30,000 p.a. (5) Maintain the present profits in Rs. with an increase
of Rs. 20,000 in fixed costs and decrease of Rs. 2 per unit in out of pocket costs. (6)
Maintain the present profit per unit with the revision in costs and out of pocket costs is
in 5 (7) Maintain the present percentage of profit to sales with the revision in costs and
out of pocket as in .
The cost data of your firm as computed by the cost Accountant are as below:

Rs.
Sales 1,00,000 10,000 Units = Rs. 10 per unit.
Out of pocket costs (Variable) 50,000 10,000 Units = Rs. 5 per unit.
Burden (Fixed) 30,000 10,000 Units = Rs. 3 per unit.
Profit 20,000 10,000 Units = Rs. 2 per unit.

Problem (23) The Budgeted results of A Co. Ltd. include

Produ Sales P/V

ct Value ratio
A 50,000 50%
B 80,000 40%
C 1,20,000 30%

Fixed overheads for the period Rs.1,00,000

The directors are worried about the results of the Co. They have requested you to
prepare a statement showing the amount of loss expected and recommend a change in
the series of each product or in total mix which will eliminate the expected loss.

Product (24) Sunita Manufacturing Company produces chairs. An analysis of their

accounting raveals

Fixed cost Rs. 30,000 for the

year.
Variable Rs. 20 per chair.
cost
Capacity Rs. 2,000 chairs per
year
Selling Rs. 70 per chair
price

(1) Find the break-even point. (2) Find the number of chairs to be sold to get a profit of
Rs. 30,000 (3) What will be the answer for (1) and (2) if selling price changes to Rs. 50
per chair? (4) If the company can manufacture 600 chairs more per year with an
additional fixed cost of Rs. 2,000 what should be the selling price to maintain the profit
per chair as at (2) above

Problem (25) The management of X Co. Ltd. is worried about the performance of
Department A and wants to close the department. The following data has been collected:

A B C
Sales 40,0 60,0 1,00,0
00 00 00
Variable. Costs 36,0 48,0 60,000
00 00
Fixed Costs
apportioned 6,00 9,00 15,000
on the bas is of sales 0 0
Total Cost 42,0 57,0 75,000
00 00
Profit & Loss - +3,0 +25,0
2,00 00 00
0

(a) You are required to advice management in respect of closure of Department A. (b) On
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the above, if specific fixed costs are ascertained as follows : Dept A - Rs. 2,000; Dept B –
Rs. 13,000; Dept C -Rs. 5,000 and balance Rs. 10,000 as general fixed over heads.

Problem (26) Two business Y Ltd., and Z Ltd. sell the same type of product in the same
type of market. The budgeted profit and loss account for the coming year is as :

Y Ltd. Z. Ltd.
Rs. Rs.
Sales 1,50,00 1,50,000
0
Less : Variable 1,20,00 1,00,000
costs 0
Add : Fixed Costs 15,000 35,000
Profit 15,000 15,000

You are required to (a) Calculate the break-even point of each business (b)
Calculate the sales, volume at which each of the business will earn Rs. 5,000 profit, and
(c) State which business is likely to earn greater profit in conditions of (i) Heavy demand
(ii) low demand for the product. Also briefly give your reason.

Problem (27) Given the following Information, you are required to :

(a) Comment which product should be produced if labour hour is the limiting
factor and idea is to produce only product. (b) Calculate the present marginal cost and
contribution per unit; {c) State which of the alternative sales mix would you recommend
to the management and why.

Selling price Rs.25 Rs.20

Direct Rs.8 Rs.6
materials
Direct wages 24 labour 16 labour
hrs. hrs.
@ Rs. 0.25 @ Rs.0.25
hour hour

Fixed overheads: Rs. 730 and variable overheads 150% of direct wages.
Alternative Sales mixes: (1) 250 units of X and Y (2) 400 units of Y and (3) 400 units of X
and 100 units of Y.

Problem (28) The following particulars are obtained from the records of the Co.
engaged in the production of two products A and B from a certain raw material. You
comment on the profitability of each product when:
(a) Total sales potential in units is limited (b) Total sales potential is limited in
value (c) Raw material is in short supply (d) Production capacity is the limiting factor. (e)
When total availability of raw materials is 4000 kg and maximum sales potential of each
product is 1,000 units, find the product mix which would yield maximum profit.
Product A Product B
(per unit (per unit
Rs.) Rs.)
Sales 100 200
materials @ Rs.10 per kg. 20 50
wages @ Rs. 6 per labour 30 60
hour
Variable overheads 10 20
Total fixed overheads 10,000

Problem (29) The following particulars are extracted from-the records of Ellora Sales
Ltd.

Product A B
Sales per unit Rs. Rs.
100 120
Consumption of 2 Kg 3 Kg
material
Material cost Rs. Rs.
10 15
Direct wage cost Rs. Rs.
15 10
Direct expenses Rs. 5 Rs. 6
Machinery hours used Hrs. 3 Hrs. 2
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Overhead expenses:
Fixed Rs. 5 Rs.
10
Variable Rs. Rs.
15 20
Direct wage per hours Rs. 5
(a) Comment on the profitability of each product (both use the same raw material )
when (i) Total sales potential in units is limited ; (ii) Total sales potential in value is
limited; (iii) Raw material is in short supply and (iv) production capacity (in terms of
machine hours) is the limiting factor. (b) Assuming raw material as the key factor,
availability of which is 10,000 kg and maximum sales potential of each product being
3,500 units, find out the product mix which will yield the maximum profit.

Problem (30) The following set of information Is presented to you by your client B Ltd.
Producing two products X and Y.

X Y
(Rs.) (Rs.)
(1 Direct material per 20 18
) unit
Direct wages per 6 4
unit
Sales price per unit 40 30
Proposed Sales mixes:

(i) (units) 100 200

(ii) (units) 150 150
(iii (units) 200 100
)
(2) Fixed expenses during the, period are expected to be Rs.
1,600
(3) Variable expenses are allocated to products at the rate of
100% of Direct Wages.

As a Cost Accountant you are required to present to the management of AB Ltd.

the following:
(a) The unit marginal cost and unit contribution. (b) The total contribution and
resultant profit from each of the above sales mixes. (c) The proposed sales mixes to earn
a profit of Rs. 300 and Rs.600 with the total sales of X and Y being 300 units.

Problem (31) A company engaged in plantation activities has 200 hectares of virgin
land which can be used for growing jointly or individually tea, coffee and cardamom. The
yield per hectare of the different crops and their selling price per kg are as under :

Yield Selling price per Kg

(Rs.)
Tea 2,000 20
Kg
Coffee 500 Kg 40
Cardamo 100 Kg 250
m
The relevant cost data are given below:
(A) Variable Cost per Kg.
Tea Coffee Cardamom
(Rs.) (Rs.) (Rs.)
Charges 8 10 120
Material 2 2 10
s
4 1 20
Total 14 13 150
Cost

(B) Fixed cost per annum

Cultivation and Growing 10,00,0
Cost 00
Administrative Cost 2,00,00
0
Land Revenue 50,000
Repairs and Maintenance 2,50,00
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0
Other Costs 3,00,00
0
Total Costs 18,00,0
00

The policy of the Company is to produce and sell all the three kinds of products
and the maximum & minimum area to be cultivated per product is as follows:
Hectares
Maximu Minimu
m m
Tea 160 120
Coffee 50 30
Cardamo 30 10
m
Calculate the most profitable products mix and the maximum profit which can be
achieved.
Problem (32) On the basis of the following Information in respect of an engineering
company, what is the product mix which will give the highest profit attainable Rs. Do you
recommend over time working upto a maximum of 15,000 hours at twice the normal
wages (overheads are ignored for the purpose of this question).
Product A B C
Raw material per unit (Kg) 10 6 15
Labour hours per unit
@ Rs. 1 per hour (hrs) 15 25 20
Sales price per unit(Rs.) 125 100 200
Maximum production possible 6,00 4,00 3,00
units 0 0 0

1,00,000 kg raw materials are available @ Rs. 10 per kg maximum production

hours are 1,84,000 with facility for a further 5,000 hours on overtime basis at twice the
normal wage rate.

Problem (33) The Bins and Tins Ltd. produces and markets Industrial containers and
packing cases. Due to competition the company proposes to reduce the selling prices. If
the present level of profit is to be maintained, Indicate the number of units to be sold if
the proposed reduction in selling price is (a) 5% (b) 10% (c) 15% . The following
additional information is available :
Rs. Rs.
Present Sales turnover
(30,000 units) 3,00,0
00
Variable Cost (30,000 1,80,0
units) 00
Fixed Cost 70,000 2,50,0
00
Net Profit 50,000

Problem (34) The price structure of a cycle made by the Cycle co. Ltd. is as follow

Per cycle
Rs.
Materials 60
Labour 20
Variable 20
Overheads
100
Fixed Overheads 50
Profit 50
Selling Price 100

This is based on the manufacture of one lakh cycles per annum.

The company expects that due to competition they will have to reduce selling
prices, but they want to keep the total profit intact. What level of production will have to
be reached, i.e. how many cycles will have to be made to get the same amount of profits,
if
(a) The selling price Is reduced by 10% ?
(b) The selling price is reduced by 20 %
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Problem (35) Your company manufactures a single product. The selling price is Rs. 100
per unit. Currently the capacity utilisation is 60% with the sales turnover of Rs. 6 lakhs.
The company proposed to reduce the selling price by 20% but desires to maintain the
same profit position by increasing the output. Assuming that the increased output could
be made and sold, determine the level at which the company should operate to achieve
the desired objectives.
The following further data are available.
(1) Variable Cost per unit Rs. 20.
(2) Semi variable cost (including a variable element of Rs. 5 per unit) Rs. 60,000.
(3) Fixed costs of Rs. 2,00,000 will remain constant upto 80% level. Beyond this an
additional amount of Rs. 40,000 will be needed

Problem (36) Cookwell Ltd. manufactures pressure cookers the selling price of which is
Rs. 300 per unit. Currently the capacity utilisation is 60% with a sales turnover of Rs. 18
lakhs. The Co. proposes to reduce the selling price by 20% but desires to maintain the
same profit position by increasing the output Assuring that the increased output could be
made and sold determine the level at which the Co. should operate, to achieve the
desired objective.
The following further data re available
(i ) Variable cost per unit Rs. 60 (ii) Semi variable cost (including a variable element of
Rs. 10 per unit) Rs. 1,80,000 (iii) Fixed costs Rs.3,00,000 will remain constant upto 80%
level beyond this an additional amount of Rs. 60,000 will be incurred.
Problem (37) Quality products Ltd, manufactures and markets a single product. The
following data are available.
Rs. per
Unit
Materials 16
Conversion 12
(Variable)
Dealers margin 4
Selling Price 40

Fixed cost : Rs. 5 Lakhs. Present sales : 90,000 units. Capacity utilisation - 60 %
There is acute competition. Extra efforts are necessary to sell. Suggestions have been
made for increasing sales a) By reducing sales price by 5% b) By increasing dealers
margin by 25% over the existing rate.
Which of these two suggestions you would recommend, If the company desires to
maintain the present profit. Give reasons.

Problem (38) An umbrella manufacturer makes an average net profit of Rs. 2.50 per
piece on a selling price of Rs. 14.30 by producing and selling 60,000 pieces or 60% of the
potential capacity. His cost of sales is:
Rs.
Direct 3.50
material
Direct wages 1.25
Works 6.25 (50%
overhead fixed)
Sales 0.80 (25%
Overhead varying)
During the current years he intends to produce the same number but anticipated
that his fixed charges will got up by 10% while rates of Direct labour and Direct Material
will increase by 8 % and 6% respectively. But he has no option of increasing the selling
price. Under this situation he obtain for a further 20% of his capacity. What minimum
price will you recommend for acceptance to ensure the manufacturer an overall profit of
Rs. 1,673 lakhs? Reason out your recommendation.

Problem (39) A toy manufacturer earns an average net profit of Rs. 3 per piece in a
selling 60,000 pieces @ 60% of potential capacity. The break up of the cost of sales was
as under :
Rs. per
Unit
Direct Material 4
Direct Wages 1
Works 6 (50%
Overhead fixed)
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Sales 1 (75%
Overheads fixed)
During the year, he intends to produce the same number but anticipates that (a)
Fixed expenses increase by 10% (b) Rates of direct labour increase by 20% (c) Rates of
Direct Material increase by 5% (d) selling price can’t be Increased.
Under these circumstances he obtains an order for a further 20% of his capacity.
What minimum price would be recommended for accepting the order to ensure the
manufacturer an overall profit of Rs. 1,80,500.

Problem (40) A manufacturer makes an average net profit of 15 per unit on a selling
price of Rs. 20 each and he sells 50,000 pieces representing 50% of capacity utilization.
His cost break down is:
Material 7.00
Labour cost 4.00
Manufacturing & Administration 4.00 (75%
O/|| fixed)
Selling & distribution O/|| 2.00 (50%
fixed)
During the current year he intends to produce at current level of output but
anticipates a rise in fixed cost by 10%. Similarly rates for direct material and labour will
go up by 10%. The market can absorb a price-increase of 2.5% only. In such situation he
gets an offer for an additional 15% of his capacity. What minimum price will you
recommend so that the manufacturer retains the same amount of profit as he earned on
50,000 units. Give reasons for your recommendations.

Problem (41) A and B are two similar plants under the same management who want
them to be merged for better expansion. The details are as follows;
Plant A B
Capacity 100% 70%
operated
(Rs. In (Rs. In
lakhs) lakhs)
Turnover 200 210
Variable Cost 150 140
Fixed Cost 40 60

Find out : (1) The capacity of the merged plant at break even; (2) Turnover from the
merged plant to give a profit of Rs. 20 lakhs.

Problem (42) There are two factories under the same management. The management
desires to merge these two plants. The following particulars are available :

Particulars Factory I Factory II

Capacity 100% 60%
operation
Sales Rs. 300 Rs. 120
lakhs lakhs
Variable Costs Rs. 220 Rs. 90
lakhs lakhs
fixed costs. Rs. 40 Rs. 20
lakhs lakhs

You are required to calculate : What would be the capacity of the merged plant to
be operated for the purpose of breaking even; AND what would be profitability on
working at 73% of the Merged Capacity.

Problem (43) Everest Snow Co. manufactures and sells directly to the customers 10,000
jars of Everest Snow @ Rs. 1.23 per jar. The Company’s normal production capacity is
20,000 jars per month. The cost analysis of 10,000 jars shows:
Direct Materials : Rs. 1,000; Direct labour Rs. 2,475; Power Rs. 140; Miscellaneous
Expenses Rs. 430; Cost of jars Rs.600 and Fixed expenses Rs. 7,955.
The company has received an offer from the foreign customer under different
brand name for 1,20,000 jars of snow @ 10,000 jars per month @ 75 paise per jar.
Whether offer should be accepted ?

Problem (44) The cost of the product has been given as under :
Rs.
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Direct Material 5.00
Direct Wages 3.00
Factory Overhead
(Fixed Rs.0.50 + Variable Rs. 1.00
0.50)
Administrative expenses 0.75
Selling overheads
(Fixed Rs.0.25 + Variable Rs. 0.75
0.50)
10.2
5
The selling price is Rs.12. The above figures are for an output of 30,000 units. The
capacity of the firm 45,000 units. A foreign customer is desirous to buy 15,000 units @
cost will reduce by Rs. 1 per unit and labour efficiency will fall by 2%. Whether the offer
should be accepted or not ? If the offer is from local merchants what would have been your
opinion?

Problem (45) Mercury motor parts manufacturers produce various motor parts. The cost
structure of a parts whose annual production is 90,000 units, is as follows:
Rs.
Materials 540 per
unit
Labour (25% 360 per
fixed) unit
Expenses:
Variable 180 per
unit
Fixed 270 per
unit
1,350 per
unit

The purchasing manager explores that a supply is ready to supply the part @ Rs.
1,080. Should the part be purchase and production stopped ? What will be your advice if
the resources producing that part are used to produce a product for which the selling
price is Rs.965. In the latter case material price will be Rs. 390 per units.

Problem (46) Auto Parts Ltd. has an annual production of 90,000 units for a motor
component. The component’s cost structure is given below:
Rs.
Materials 270 per
unit
Labour (25% 180 per
fixed) unit
Expenses:
Variable 90 per
unit
Fixed 135 per
unit
675 per
unit

(a) The purchase Manager has an offer from a supplier who is willing to supply the
component at Rs. 540, should be component be purchased and production stopped ? (b)
Assume the resources now used for this company’s manufacture are to be used to
produce another new product for which the selling price is Rs. 485.
In the latter case material price will be Rs. 200 per unit. 90,000 Units of this
product can be produced, at the same cost basis as above for labour and expenses.
Discuss whether it would be advisable to divert the resources to manufacture that new
product on the footing that the component presently being produced would instead of
being produced be purchased from the market.

Problem (47) A manufacturer working at 60% capacity gives the following date:
Number of units 1,200
manufactured
Direct Materials Rs.72,0
00
Direct Labour 96,000
Variable Overheads 1,20,00
Prof. Behere’s Classes
12
0
Fixed Overheads 96,000
Selling price per unit 400
(a) Due to competition he is required to reduce the selling price to Rs. 360 per unit. What
should be the production so that, he will earn the same amount of profit which he earns
today ? (b) If the cost of materials, labour and variable overheads increase by 25% and
fixed overheads Increase by 20% What should be the selling price so that he will earn the
same amount of profit what he earns today by keeping the present production level, i.e.
1,200 units (c) An offer to produce a further 800 units of his product at Rs. 340 per unit is
received. This will necessitate an increase in the fixed overheads by 10% and decrease
marginal cost by 5% on all units manufactured. Comment whether the offer can be
accepted?