total cost of production per unit Rs.

8
market price of the component = Rs. 6.50

total cost = variable cost + Fixed cost variable cost = will be incurred only when there is a production
fixed cost will be present, even if there is no production

marginal costing principal says that we should consider only the

variable cost
material cost per unit 3
direct labour 2
other variable cost 1
total variable cost per unit 6
market price of the component 6.5

decision: Since, the variable cost per unit of the component is less than its market price, it advisable to manufacture the comp

if supplier reduces the selling price from Rs. 6.50 to Rs. 5.50, what will be the decision

decision: Since, the variable cost per unit is more than the market price, it is better to buy the component from outside.
only when there is a production
if there is no production

hat we should consider only the variable cost, in decision making

sable to manufacture the component.

component from outside.

computation of contribution
Product A Product B
Selling Price 14 11
LESS : VARIABLE COST
material 5 5
labour 3 1.5
other variable OH 1.5 1.5
Total Variable Cost 9.5 8

contribution 4.5 3
.
contribution per labour hour
=contribution per unit/no. of labour hours per unit
=4.5/6 =3/3
o.75 1

maximum number of labour hours=4800

Product A Product B
maximum production 800 1600
Contribution 3600 4800

Decision: As the contribution per labour hour is more for product B , in order to maximum Profit ,we should
ximum Profit ,we should produce Product B
Solution

Contribution per unit Product A Product B

Selling Price 20 15
Less Varible Cost
Direct material 10 9
Direct wages 3 2
other Variable Exp 3 2
total variable cost per unit 16 13

Contritbution per unit 4 2

total contribution, total profit for different sales mix

A) 100 untis of Product A and 200 units of B
Product A Product B Total
Total Contribution 400 400 800
Less Fixed Cost 800
Profit 0

B) 150 units of Product A and 150 units of Product B

Product A Product B Total
Total Contribution 600 300 900
Less: Fixed Cost 800
Profit 100

C) 200 units of Product A and 100 Units of Product B

Product A Product B Total
Total Contribution 800 200 1000
Less : fixed cost 800
Profit 200

Decision: since, the sales mix of 200 untis of Product A and 100 units Product B is providing maximum Profit, It should be preferred
It should be preferred.