Contents

INTRODUCTION: ....................................................................................................1
DIRECT MATERIAL: ..............................................................................................1
DIRECT LABOR:......................................................................................................1
FACTORY OVERHEAD: .........................................................................................1
MACHINERY COST: ...............................................................................................2
Add or drop decision ..................................................................................................3
Answer ....................................................................................................................4
Bill of cupboard ......................................................................................................5
Sell or process decision ..............................................................................................6
Answer ....................................................................................................................6
GROUP MEMBER PICTURE WITH OWNER .......................................................7
INTRODUCTION:
The company we have chosen for our project is Al Javed timber mart. It is in
G-9/2. Near I&T center. They are known for making very fine wooden doors
cabinets and cupboard.

DIRECT MATERIAL:
Direct material they used are solid wood, plywood, fine wood and diyar. There
main product is door. In making of door, they use 2 plywood to made 1 door that
cost them Rs.2000 per door and solid wood cost is 2000 per door.

DIRECT LABOR:
They have 2 permanent workers. The company is responsible to pay them on
monthly bases. The pay is 25,000 for each. So, they almost pay about 50,000 per
month.

FACTORY OVERHEAD:
Indirect materials use for making doors and windows are screws, hinges, glues and
nails. Indirect material costs them about Rs.1000 per door.

1
MACHINERY COST:
They have 2 machine that is used for cutting, welding of wood and sheets. One was
purchased for Rs.30,000 and another machine price is 85,000. The machine useful
life are approximately 4 to 5 years. Two pictures below are the pictures of machine
in Al-Javed timber Mart.

2
Add or drop decision
A decision whether or not to continue an old product line or department, or to start
a new one is called an add-or-drop decision. An add-or-drop decision must be
based only on relevant information. Relevant information includes the revenues
and costs which are directly related to a product line or department.

Al-Javed timber store has mainly three products doors, kitchen cabinet and
closet/cupboard.

We collect some data from them in which they think they bear loss if they will
continue to make cupboard, so they decided to drop this product.

Data they provided is as follow.

Cupboard per unit 15 units per month

Sales Rs. 15,000 Rs 225,000
Less: variable cost 8,880 Rs.133,200
= contribution margin 6,120 Rs 91,800
Less: expenses
Dep equip 1900 28,500
Rent 600 9,000
wages 5000 75,000
Lock of wardrobe 200 3000
Handle of wardrobe 150 2,250
=Net operating loss (Rs1,730) (Rs.25,950)

In variable cost they include two silicon sheet, hanger rod, door plywood etc.

3
Answer
In above income statement they include rent expense and depreciation expense
both are irrelevant cost because if they add or drop whatever the decision will be
the cost of rent will be incurred it is not dependent on their decision and equipment
will depreciate as well. So, rent and depreciation is irrelevant cost we will exclude
that cost.

Net loss or income from cupboard if it discontinues

Cupboard per unit 15 units

Sales (Rs. 15,000) (225,000)
Add: variable cost 8,880 133,200
= contribution margin (6,120) (91,800)
Add: relevant cost
wages 5000 75,000
Lock of wardrobe 200 3,000
Handle of wardrobe 150 2,250
= Net loss from cupboard (Rs 770) (Rs.11,550)
if it discontinues

They should make wardrobe/closet/cupboard because it will give them profit of

Rs.770 per unit. So, they make on average 15 units of closet in month, so it will
give them profit of Rs. 11,550 per month.

Answer: ADD this product

4
Bill of cupboard

5
Sell or process decision
The owner of Al-Javed timber mart told us that the two-plywood sheet they buy
cost him approximately Rs.2000 and they sold it for Rs. 2300 to 2400 no customer
wants to pay above that amount.

But if he processes that plywood sheet and make the door it gave them more profit.
For one door he used two plywood sheet that cost them 2000 Solid wood cost Rs.
2000 per unit of door. Indirect material is glue cement etc. cost them Rs 1000 and
fixed FOH cost will be 600 but it is irrelevant cost because no impact of decision
on this cost, this fixed cost should be incurred wheatear it sells it or process it.
labor to produce one door it completes in one day and wages of labor is RS 1000 to
1200. And he sold one door for RS 8000.

Sell Per unit 35 units

Sales (1 door) Rs.2400 Rs.84,000
Less: cost of plywood Rs.2000 Rs.70,000
Net operating income for Rs.400 Rs.14,000
selling of plywood

Process Per unit 35 units per month

Sales (1 door) Rs 8000 Rs.280,000
Less: relevant cost
DM (solid wood) 2000 Rs. 70,000
DL 1200 Rs. 42,000
V.FOH 1000 Rs. 35,000
Opportunity cost 2400 Rs.84,000
Profit from processing Rs 1400 Rs. 49,000

Answer: there decision is right they should process it and get more profit from
processing.

6
GROUP MEMBER PICTURE WITH OWNER