ma is tomaximise profits. To achieve this goal, s regarding the Marginal Unit, the Product-Mix, the Pricing, Making or 80 on. It has also to ascertain the costs that are controllable and establish a peel ont them. Marginal Costing is an effective technique applied by the management aking several policy decisions such as pricing, product mix, special offers, discontinue a product, optimum level of production, cost control and so on. The aim of every such decision is to maximize profits in the short run as well the long run. It also helps in ‘profit planning’. Marginal Costing enables the management to study different scenarios (cost and revenue situations) under various alternatives. The management can plan its short-term as well as long term profits. This is explained in detail below. 41.2 IMPORTANT FACTORS IN MARGINAL COSTING DECISIONS Inall recommendations ofmarginal costing decisions, both the following factors - quantitative/cost and qualitative/non-cost factors are to be considered : (1) Quantitative/Cost Factors © Incremental production costs for each unit ° ae cost of purchasing from outside supplier (price less any discounts available plus shipping, ete. Number of available suppliers Production capacity available to manufacture components ng facilities for production rather than for other purposes Opportunity costs of Amount of space available for storage © Costs associated with carrying inventory (2) Qualitative/Non-Cost Factors Reliability of supply sources Quality of inputs purchased from outside Nature of the work to be sub-contracted (such as the importance of the part to the whole) Impact on customers and markets Future bargaining position with supplier(s) Possible future price changes Possible use of released production capacity and fac making. Reasonable certainty, from the side of supplier about, meeting the delivery dates. ‘Technical know-how used by outside suppliers should not be highly secretive. Impact on jobs of workers and industrial relation problems. Relationship with other suppliers Whether more than one supplier outside buying. ete sGilicthex the nedessary technical expertise tomake the productis available in-house. ‘lity as a result of buying instead of of product/component is available to reduce the risk of essity : Make or buy decisions arise when a company with unused production capacity ia ers the following alternatives : i nu n raw materials or sub-assemblies from outside suppliers; capacity to produce the items within the company.Direct Materials 125 62,50,009 Direct Labour 80 40,00,00 Variable Manufacturing Overhead 50 __25,00,009 Total Incremental Cost 255 1,27,50,000 Cost to Purchase Part 300 _1,50,00,000 ‘Net Advantage in Part Production 45 __22,50,000 In the above analysis the fixed manufacturing overhead has not been considered because ithasto be incurred under both alternatives. The fixed manufacturing overhead is a sunk cost which is not relevant to the decision. Logically, the costs that will increase or decrease as a result of making the part should be considered. (4) Decision to Buy : A company generally buy a component instead of making it under following situations : [fit costs less to buy rather than to manufacture it internally; Ifthe return on the necessary investment to be made to manufacture is not attractive enough; Ifthe company does not have the requisite skilled manpower to make; Ifthe concern feels that manufacturing internally will mean additional Zabour problem: If adequate managerial manpower is not available to take charge of the extra work of ‘manufacturing; af Ifthe component shows much seasonal demand requiring large inventories: If transport and other infrastructure facilities are adequately availabe: Ifthe process of making is confidential or patented; Ifthe rsk of technological obsolescence forthe component f not worth the capital invegiment iting Factor :Ifno limiting factor i in operation, the cision termarnria rests on whether the bought-out price ofan article is lower tharite ene ah for our decision because fixed cost will not chat? ts marginal Cost. The fixed cost is irrelevant for ow dest change asa result: buying the product/compons article slower than ts marginal cost, iil be proftate Ifthe bought-out price of an arent © ere firm will save marginal cost ang, article from outside in all cireumstarc than the marginal cost to no Bee oe n eg cen ‘the bought-out price is his! ‘article from between the: Impact of Key/Lit oS manufacture’ product If i ‘buy the ‘if the firm decides to buy ifthe ‘which \oe© Imetease or decrease the production ofa single article © Add, continue or discontinue a product © accept or reject a specific order © add, continue or discontinue a department, and so on, Marginal Costing helps the management in taking price decisions. In Absompe ; are fixed 50 28 to cover the ton coon om rolon Rotate at NE theres Marginal Costing, however, the price can be fixed on the basis of only Variable c ceable Co useful in the following situations :- (@) when supply exceeds demandUnit selling price @) Unit variable cost @) Contribution per unit @) Total fixed cost ®@) Break-even point (in units) Present production (in units) Margin of safety (in units) P/V ratio ‘Thus, in the above case, the original price of a unit is reduced byNo. of units budgeted Selling Price per unit Variable Costs per unit 52 24 In has been proposed that an intensive advertisement campaign involving an expenditure of & 1:20:00 per month and reduction of selling prices will increase the sales of production © ab unde (1) Miike selling price is reduced to ® 55 per unit, the sales wil increase to 59,000 units per month, (2) Iithe selling price is reduced to 7 51 per unit, the sales will increase to € 65,000 units per month, The fixed costs of the company amount to % 34,20,000 per month Required (1) Calculate the current monthly break-even sales value of the company. (2) Evaluate the two proposals and advise which of the proposals should be implemented. Solution : (CA May 2002, adapted) (1) Current monthly break-even sales value of company [WN 1] Fixed Costs of the Company _ %34,20,000 PIN Ratio. 40% (2) (a) Evaluation of Proposal (i) %85,50,000 a Total contribution of Product C (59,000 units x € 31) [WN 2 (a)] Contribution of Product A and B [WN 1 : 16,00,000 + 10,64,000} Total Contribution Less : Advertisement Cost (b) Evaluation of Proposal (il) : Contr Product C (65,000 units x % 27) [WN 2 (b)] pierces ‘A and B [WN 1 : 16,00,000 + 10,64,000) ntributionF._ Sales Revenu PIV Ratio (%) = Contribution Pe E %43,20,000 x 100 a Sales %7,08,00,000 i (2) 2) Contribution per unit of product ¢ under proposal (i) Contribution per unit : : Er unitis € 24, OY POGUE C willbe R31, when its selling price is ® 55 and vaniat Materials Labour Variable Overheads Fixed Overhead Profit Selling Price This cost is based on manufacture of 1,00,000 fans pa, The company expects that a 2 they will have to reduce the selling price. However, they want f- keep the total prom competition ‘is You are required to prepare a statement showing the position, it ; (1) Selling price is reduced by 10% and (2) Selling price is reduced by 20%. See isin = 1,00,000 fans x 8 500 perfan = €5 Croras, Fixed cost at present = = © pes (1) If selling price Is reduced by aos ae 1,000 - Contribution 499 = ee M.Com, Nov. 2017, Oop P. V. Ratio ‘ ired for profit of € 5 Crores Therefore, Sales requil eccrine