Cost & Management Accounting

Decision Making Process

 By Dr. Pooja Talreja

Case 1: (Product Mix Decision) ABC Ltd. Is manufacturing two models of geysers- instant & regular.
Both the geysers are produced in the same factory using the same material and resources. The
following particulars taken from the records of the company:

Particulars Instant Model (per unit) Regular Model (per unit)

Sales 2500 5000
Material Cost (Rs. 50 per kg) 500 1250
Direct Labour (Rs. 30 per hour) 750 1500
Variable Overhead 250 500
Total Fixed Overhead Rs.
10,00,000

a. Comment on the profitability of each product when:

i. Total Sales in value are limited
ii. Raw materials are in short supply
iii. Production capacity in terms of units is the limiting factor
b. Total availability of raw material is 20,000 kg and maximum sales potential of each model is
1000 units, find the product mix to yield maximum profits. Also, Compute the profit.

Case 2: (Accept or Reject Decision) Bombay Dyeing annually manufactures 1000 premium
towels at its high tech plant at Jamshedpur. The cost per towel is Rs. 80. The home market
consumes the entire volume of production at a selling price of Rs. 85 per towel. In the next year,
a fall in the demand in home market is expected as a result of which home market is likely to
consume 1000 units only if the selling price is brought down to Rs. 75 per towel. The analysis of
the cost per 1000 towel is:

Material Rs. 30,000

Wages Rs. 22,000

Fixed Overheads Rs. 16,000

Variable Overheads Rs. 12,000

The marketing department of the company did an extensive research and found that export
order from Dubai can be obtained for 2,500 units of towel if it is sold for Rs. 73 per towel. It is
also discovered that for every additional 1000 units (over initial 1000 units) or a part thereof, the
fixed overheads will increase by 10%. You are required to suggest whether the foreign market
should be explored or not. Give the supportive calculations.
 Case 3: (Make or Buy Decision) Avon Bicycles is manufacturing bicycles for men & women. The
company is currently purchasing 5,000 pieces of two-tone bicycle bells from the outside vendor
at a price of Rs. 12 per unit. A part of the manufacturing capacity in the factory is idle. The
management of the company is thinking to manufacture these bells in its own factory for which
the following cost estimates are given by the cost accountant:

Particulars Rs.
Direct Material 4
Direct Labour 3
Variable Overheads 3
Depreciation of Special equipment 1
Allocated Overheads 2
Per unit Cost 13

You are required to give your expert opinion as to

a. Whether the company should make or buy the bells?

b. What would be your decision, if the supplier offers the component at Rs. 9 per unit?
c. What will be your decision if the idle capacity can be hired out to some other producer for
Rs. 15,000? Assume the original data where the vendor is ready to supply at Rs. 12 per piece.

Case 4: (Profit Planning Decision)

Hosiery Garments is a manufacturing company selling two types of socks – cotton and woolen. The
accountant of the company provides the following information:

Particulars Cotton (Rs.) Woollen (Rs.)

Direct Material per pair 20 25
Direct Labour per pair 10 15
Variable overhead (100% of
direct labour)
Fixed Overhead Rs. 10,000 p.a.
Selling price per pair 60 100

The manager of the company is confused about the different combination of two types of socks to
be manufactured and sold in the market to maximize the profits. You are required to give a
comparative profitability analysis for the following alternative product mixes:

a. 900 units of cotton and 600 units of woollen

b. 1800 units of cotton only
c. 1200 units of woolen only
d. 1200 units of cotton and 400 units of woollen

Case 5: (Operate or Shut down Decision)

Bhagwati Chemicals is a globally recognized firm in the business of manufacturing paint remover.
The product is widely used in different industries for removing the paint from surfaces of concrete,
stone, wood, etc. The company has normal capacity to produce 20,000 packs per annum. The
company incurs the following manufacturing cost(Rs.) per pack:

Cost of Chemicals and other direct materials Rs. 80

Cost of direct staff Rs.20
Variable overhead Rs.24
Fixed Overhead Rs.40
Product Cost (per unit) Rs. 164

Each pack of the product is sold at Rs. 210 with the help of a middleman wgo charges a commission
of Rs. 6 per pack. During the next quarter, only 1000 packs can be produced and sold.

Due to expectations of early monsoon arrival, the industry is facing a slowdown which is expected to
continue for another one quarter. Management plans to shut down the manufacturing plant
estimating that the fixed manufacturing overheads can be reduced to Rs. 74,000 for the quarter.
When the plant is operating, the fixed overheads are incurred at a uniform rate throughout the year.
Shut down will result into additional costs for the quarter Rs. 14,000 due to compensation payable
to the workers and termination of maintenance contract.

The management of the company seeks your support and advice on the following:

a. Whether the plant should be shut down during the quarter ?

Case 6: (Pricing Decision)

Sintex Plastic is a leading company in plastic water-tank Industry. Company is currently working at
90% capacity and producing 13,500 units of water tanks p.a. The accounts department of the
company has provided you the following cost and sales figures for the current year at 90% and the
projected cost at 100%:

Particulars 90% (Rs) 100% (Rs.)

Sales 15,00,000 16,00,000
Fixed Expenses 3,00,500 3,00,500
Variable Expenses 1,45,000 1,49,500
Semi-fixed expenses 97,500 1,00,500
Units Manufactured 13,500 15,000

Labour and material cost per unit is constant under present conditions. Profit margin is 10%.

You are required to determine the differential cost of producing 1500 units by increasing capacity to
100%.