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A B C
Selling Price 200 160 100
Variable Cost 120 120 40
Contribution 80 40 60
Combined PV Ratio
BEP Sales (In Rs)
Sales Mix 0.446 0.286 0.268
896000
368000
0.411
672000
Question 2
Semi Variable Expenses Change in Expenses / Change in No. of Units
Let No. of Units be 40, 60, 80, 100
40
Variable Cost Per Unit Variable @ 40%
Production Ohs 60 2400
Administrative Ohs 20 800
Selling and Distribution Ohs 30 1200
Fixed
Production Ohs 9000
Administrative Ohs 5000
Selling and Distribution Ohs 5000
Option 1
Capacity @ 50% Capacity @ 70%
Sales 60000 80000
Less:
Direct Wages 25000 35000
Direct Materials 20000 28000
Production Ohs 3000 4200
Looking at the above numbers, it is better for TBA Ltd. to keep the factory operation
for better time next year as it is incurring huge costs amounting to Rs 61600 for closing
9500 at 50% level and loss of 9700 at 70% level. It also has a positive contribution at both
nses / Change in No. of Units
Units be 40, 60, 80, 100
60 80 100
60% 80% 100%
3600 4800 6000
1200 1600 2000
1800 2400 3000
Option 2
Close Down
0
Initial Cost of
Reopening 20000
b) A B
8000 6000
SP after processing 38 42
Sales 304000 252000
Cost before processing Rs 26 per kg 208000 156000
Further Processing Costs 56000 60000
Net Profit 40000 36000
PV Ratio 0.13 0.14
Ranks 2 1
d) As suggested in b)
A B
8000 6000
SP after processing 38 42
Sales 304000 252000
Cost before processing Rs 26 per kg 208000 156000
Further Processing Costs 56000 60000
Net Profit 40000 36000
C X
5000 500
32 6
160000 3000
130000 13000
30000 -10000
C X
5000 500
32 6
160000 3000
130000 13000
NIL NIL
30000 -10000
106000
96000
Question 4
A B C
Sales 45000 225000 30000
Less: Variable Cost
Production Cost 24000 144000 12000
S & A Cost 8000 8200 7800
Contribution 13000 72800 10200
Less: Fixed Cost 5100 49800 11100
Profit/Loss 7900 23000 -900
Conclusion
The board had decided to eliminate Product C which is making a Loss. According to the abo
Product C has the Highest PV Ratio amongst all the other products. The Margin of Safety
meagre -2648 which can be recovered with one good year of sales for Product C. For the a
reasons, Product C should not be eliminated from the Product Line.
ss. According to the above figures,
ts. The Margin of Safety is also a
for Product C. For the above
uct Line.
Question 5
Semi Variable Ohs
Variable Cost Per Unit 0.333333333
Units 24000 27000
Variable Cost 8000 9000
Fixed Cost 20000 20000
Total Semi Variable 28000 29000
Conclusion
The management should increase the production and foray into foreign markets
contribution and the profits are also increasing even though the product is sold
lower price.
foray into foreign markets as there is an increase in the
though the product is sold in the foreign market at a
Question 6
Royalty is assumed to be a Variable Cost
SP 36500
Less: Variable Costs
DM 16000
DW 2000
Variable Factory Ohs 5000
Royalty 1000
Variable Selling Ohs 500
The company should be interested in the business because it has zero contributi
able to utilise the idle capacity. Fixed Costs are not considered because any way
would be incurred.
28500 should be charged to the engineering company as it would cover all the v
well. The fixed cost, royalty and profit is not considered for the above computati
Fixed cost is not considered because they will be incurred irrespective of the lev
charge the management for Sunk Cost.
has zero contribution even with a reduced selling price. It will also be
d because any way by keeping the production line idle, fixed costs
uld cover all the variable expenses of the company and the taxes as
e above computation.
spective of the level of production. Its a Sunk Cost. No need to
Question 7
Before Mechanization After Mechanization
No. of Articles 50000 48000
Workmen 400 300
No. of Articles per workman 125 160
PV Ratio 0.25
Conclusion
The proposal of mechanization should be accepted because there is an increase in the con
compared with the previous level.
At 48000 level - After Mechanization
In Rs. Particulars
2304000 Assuming SP per unit stays the same
0.29
increase in the contribution and the PV ratio has also increased when
If Incentive Wages is
included in Calculation
171000
1131000
639000
0.28
Question 8
Direct Materials and Direct Labour are variable in nature whereas the Factory Overheads a
Factory Overheads
Variable Portion Per Unit 2
Units
50000 80000
Factory Ohs
Variable 100000 160000
Fixed 100000 100000
Per Unit Fixed Factory Ohs 2 1.25 A Drop of Rs 0.75 Per Unit
Solution a) The above calculation tells us why there was a drop of Rs 0.75 per un
being apportioned with 50000 units, and later with an increase in production to
Solution b)
Assuming all units are sold at Rs 6
Units
50000 80000
Sales 300000 480000
Less:
DM 75000 120000
DL 75000 120000
Factory Ohs Variable 100000 160000
Contribution 50000 80000
Fixed 100000 100000
Profit/Loss -50000 -20000
as the Factory Overheads are semi variable expenses
a drop of Rs 0.75 per unit - It was because the fixed cost portion was earlier
crease in production to 80000 units, the same fixed cost per unit was reduced.
Conclusion
The order should be accepted as it has a positive contribution of Rs
80000. Also, the company would build markets in the future by procuring
an overseas order which will eventually lead to recovery of fixed costs
and achieving a break even situation. So the current loss of Rs 20000
would not matter much given the positive future prospects for the
company.
on was earlier
nit was reduced.
ribution of Rs
future by procuring
ry of fixed costs
oss of Rs 20000
pects for the
Question 9
a) Machine hours available 4752
Machine hours required 36
Number of equipments that can
produced 132
Estimated demand for the next
period (50% increase) 198
The company may buy one of the components. The number of units that ca
b) the three options available are:
Buy A
Component Machine Hours Reqd
A 0
B 14
C 12
Total Machine Hrs Per Unit 26
If the increases in demand during the net period is 50% it is not possible to
c) is only 38.5% of the remaining two options the cheaper one has to be acce
Buy B
Market Price 160
Less: VC If Co. manufactured 54
Net Cost to be incurred 106
Machine Hrs Saved 14
Cost per hour saved 7.57
It is cheaper to increase capacity by buying C this option has to
d) Profit Statement
Buy B
Component Machine Hours Reqd
A 10
B 0
C 12
22
r all options.
Buy C
125
58
67
12
5.58
ng C this option has to be exercised.
Buy C
Component Machine Hours Reqd
A 10
B 14
C 0
24