Fixed Cost per unit reflects only allocated costs and

is irrelevant for decision making

costs and
EXAMPLE 2 (SALES MIX)
Given the following information you are required to (a
and present the marginal product cost and contributio
(b) state which of the alternative sales mix you would
recommend to the management, and why.
Per unit
Selling price X Rs. 25; Y Rs. 20
Direct Materials X Rs.8; Y Rs. 6
Direct Wages X 24 hours at Rs.0.25 per hour
Y 16 hours at Rs. 0.25 per hour
Fixed overhead Rs.750
Variable overhead 150% of direct wages
Alternative sales mix
a. 250 units of X and 250 units of Y
b. Nil unit of X and 500 units of Y
c. 400 units of X and 100 units of Y
 equired to (a) calculate
d contribution per unit,
x you would
y.

ur
 AUTOMOBILE COSTS
Annual Cost per mile
Costs of Based on
Fixed 10, 000 miles
Sl.NoItem Items per year
1 Annual straight line depreciation on car ((Rs 24 000 original cost-Rs 10,000 estimated resale value in 5 years)/5 years) Rs.2800 $0.28 64.4 Sunk
2 Cost of gasoline (Rs2.70 per gallon/ 27 miles per gallon) 0.1 23 Relevant 46

3 Annual cost of auto insurance and license Rs.1380 0.138 Irrelevant

4 Maintenance and Repairs 0.065 14.95 Relevant 29.9

5 Parking fees at Apartment Society (Rs.45 per month × 8 months) Rs.360 0.036 Irrelevant

6 Total average cost per mile Rs.0.619

ADDITIONAL DATA
7 Reduction in the resale value of car due solely to wear and tear Rs.0.026 per mile 5.98 Relevant 11.96

8 Cost of round trip Ticket from Lucknow to New Delhi Rs.104 Relevant

9 Benefit of relaxing and being able to study during the train ride rather than having to drive ? Relevant

10 Cost of putting the dog in a kennel while gone Rs.40 Irrelevant

11 Benefit of having a car available in New Delhi City ? Relevant

12 Hassle of Parking the car in New Delhi City ? Relevant

13 Cost of parking the car in New Delhi City Rs.25 per day Relevant 25
 CASE-2
Sl.No, Particulars Current
Situation
in $
1 Units Produced and sold 5000
2 Selling price per unit 40
3 Direct materials cost per unit 14
4 Direct labor cost per unit 8
5 Variable overhead cost per unit 2
6 Fixed costs -Other 62000
7 Fixed costs, Rental of new machine NA

Find Net Advantage of Renting the Machine

 Situation
With New
Machine (in $)
5000
40
14
5
2
62000
3000

e Machine
 PRODUCT LINE
Particulars Total Drugs Cosmetics
Sales 250,000.00 125,000.00 75,000.00
Variable Expenses 105,000.00 50,000.00 25,000.00

Contribution Margin 145,000.00 75,000.00 50,000.00

Fixed Expenses:
Salaries 50,000.00 29,500.00 12,500.00
Advertising 15,000.00 1,000.00 7,500.00
Utilities 2,000.00 500.00 500.00
Depreciation-Fixtures 5,000.00 1,000.00 2,000.00
Rent 20,000.00 10,000.00 6,000.00
Insurance 3,000.00 2,000.00 500.00
General Administrative 30,000.00 15,000.00 9,000.00

Total Fixed Expenses 125,000.00 59,000.00 38,000.00

Net Operating Income (Loss) 20,000.00 16,000.00 12,000.00

 Has 3 major product lines Drugs, Cosmetics &
House-Wares House Wares
50,000.00
30,000.00
If we drop the house ware product line what may
be the implications
20,000.00 Is it advisable? (Hint: Beware of allocated fixed
cost)
Calculate segment margin house ware and
8,000.00 highlight your decision. What may be the impact
6,500.00 on net operating income if we do not drop the
1,000.00 product line
2,000.00 Can a manager choose to retain an unprofitable
4,000.00
500.00
product.
6,000.00

28,000.00

(8,000.00)
metics &
ne what may

ated fixed
e and
the impact
drop the
nprofitable
 Table-1: Mountain Goat Cycles
Costs per year
Sl.No. Particulars Per unit ($) 8,000 Units
1 Direct materials 6 48,000
2 Direct Labor 4 32,000
3 Variable overhead 1 8,000
4 Supervisor’s Salary 3 24,000
Depreciation of special 2 16,000
5 equipment
6 Allocated general overhead 5 40,000
Total 21 168000

Before going ahead with the above decision the

following points need to be discussed:
A. If the supervisors salary is not avoidable?
B. Opportunity costs of the space now being used
to produce shifters generating a segment margin of $60000 per year.
Should the Supplier's offer be accepted
HINTS
CASE 5
Jet, Inc. makes a single product whose norma
price is $20 per unit.
A foreign distributor offers to purchase 3,000
$10 per unit. This is a one-time order that w
affect the company’s regular business.
Annual capacity is 10,000 units, but Jet, Inc. is c
producing and selling only 5,000 units.
Should Jet accept the offer?
hose normal selling

hase 3,000 units for

der that would not
s.
Jet, Inc. is currently
ts.
AB MANUFCATURES & SELLS TWO PRODUCTS A & B.
SELLS 600 UNITS OF A & B AT RS 23 & 19 RESPECTIVELY
COST ST. IS AS UNDER A B
DIRECT MATL 2.00 4.00
DIRECT LABOUR 4.00 4.00
FACTORY OVHDS (40% FXD) 5.00 3.00
OTHER OVHD (40% VBLE) 8.00 5.00
TOTAL 19.00 16.00
FACTORY OVHDS ABSORBED ON BASIS OF MCH HRS WHICH IS LTD FACTOR. MCH HR
A & 1.5 FOR B
AB RECVD OFFER TO SELL PRODUCT A @ RS 17.50 & B AT RS 15.50.
CO. HAS SPARE CAPACITY OF 25% & CAN SUPPLY EITHER A OR B
WHICH OFFER IS TO BE ACCEPTED.
NOTE: Fxd Cost per unit reflects only allocated costs & is irrelevant for decsion makin
D FACTOR. MCH HR IS 2 .5 PER HR FOR
50.

nt for decsion making