DECISIONS INVOLVING ALTERNATIVE CHOICES

1. A toy 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:
Direct material Rs. 3.50
Direct wages Rs. 1.25
Works overhead Rs. 6.25 (50% fixed)
Sales overhead Rs. 0.80 (25% variable)

During the current year, he anticipates that his fixed charges will go up by 10%, while rates
of direct material and direct labour will increase by 6% and 8% respectively. But he has no
option of increasing the selling price. Under this situation he obtains an offer for an order
equal to 20% of his capacity. The concerned customer is a special customer.

What minimum price will you recommend for acceptance to ensure the manufacturer an
overall profit of Rs. 1,67,300.

2. The following data relate to a manufacturing company:

Plant capacity : 4,00,000 units per annum
Present utilization: 40%
Actual for the year were:
Selling price Rs. 50 per unit
Materials cost Rs. 20 per unit
Variable manufacturing costs Rs. 15 per unit
Fixed costs Rs. 27 lakhs

In order to improve capacity utilization the following proposals are being considered:
Reduce selling price by 10%
Spend additionally Rs. 3 lakhs on sales promotion.

How many units should be made and sold in order to earn a profit of Rs. 5 lakhs per year?

3. A business produces three products A, B and C for which the standard variable costs and
budgeted selling prices are as follows:
Particulars A (Rs.) B (Rs.) C (Rs.)
Direct material 3 6 8
Direct wages 4 4 10
Variable overhead 3 5 7
Selling price 18 25 48
In two successive periods, sales (units) are as follows:
A B C
Period I 10,000 10,000 10,000
Period II 20,000 13,000 5,000
The budgeted fixed overheads amounted to Rs. 1,35,000 for each period. In spite of
increased sales the profit for the second period has fallen below that of the 1st period.

Present figures to management to show why this fall in profit should or should not have
occurred.

4. A T.V. manufacturing company finds that while it costs to make component X, the same is
available in the market at Rs. 5.75 each, with all assurance of continued supply. The
breakdown of cost is:
 Materials Rs. 2.75 each
Labour overheads Rs. 1.75 each
Variable overheads Rs. 0.50 each
Depreciation and other fixed cost Rs. 1.25 each
Total Rs. 6.25 each

1. Should the company make or buy the component?

2. What should be your decision if the supplier offered component at Rs. 4.85 each?

5. S Ltd. Manufactures and markets a single product. The following information is available:

Materials Rs. 8 per unit

Conversion costs (variable) Rs. 6 per unit
Dealer’s margin Rs. 2 per unit
Selling price Rs. 20 per unit
Fixed cost Rs. 2,50,000
Present sales 80,000 units
Capacity utilization 60%

There is acute competition. Extra efforts are necessary to sell. Suggestions have been made
for increasing sales:
1. By reducing sales price by 5%
2. By increasing dealers margin by 25% over the existing rate.

Which of the two suggestions you would recommend if the company desires to maintain
the present profit?

6. The cost of a manufacturing company for the product is:

Materials Rs. 12
Labour Rs. 9
Variable expenses Rs. 6
Fixed expenses Rs. 18
Total Rs. 45

The unit of product is sold for Rs. 51.

The company’s normal capacity is 1,00,000 units. The figures given above are for 80,000
units. The company has received an offer for 20,000 units at Rs. 36 per unit from a foreign
customer.

Advice the manufacturer on whether the order should be accepted. Also give your advice if
the order is from a local merchant.

7. You are given the following information in respect of products X and Y of Bee Cee Co.
Ltd.
Particulars X Y
Selling price Rs. 42 Rs. 33
Direct material Rs. 15 Rs. 15
Labour hours (50 paise per hour) 18 hours 9 hours
Variable overheads 50% of direct wages 50% of direct wages
Show which product is more profitable during labour shortage.
8. 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:

Product Yield (kgs.) Selling Price (Rs. Per kg)

Tea 2,000 20
Coffee 500 40
Cardamom 100 250

The relevant cost data are given below:

(a) Variable cost per kg.:
Particulars Tea (Rs.) Coffee (Rs.) Cardamom (Rs.)
Labour charges 8 10 120
Packing materials 2 2 10
Other costs 4 1 20
Total cost 14 13 150
(b) Fixed cost per annum:
Particulars Amount (Rs.)
Cultivation and growing cost 10,00,000
Administrative cost 2,00,000
Land revenue 50,000
Repairs and maintenance 2,50,000
Other costs 3,00,000
Total costs 18,00,000

The policy of the company is to produce and sell all the three kinds of products and the
maximum and minimum are to be cultivated per product is as follows:
Product Maximum Area (hectares) Minimum Area (hectares)
Tea 160 120
Coffee 50 30
Cardamom 30 10
Calculate the priority of production, the most profitable product mix and the maximum
profit which can be achieved.