4, Yargral Costing is @ technique of decision-making, which involves ~ fa) Ascettainment of Total Costs, {@) Cassfication of Costs into ~ (i) Fixed and (i) Variable, and, {@) Use of such information for analysis and decision-making, Marginal Costing Is the ascertainment of Marginal Cost, and of the effect on Profit of changes in volume or type of ‘cxtput, by differentiating between Fixed Costs and Variable Costs. 4.2Direct Costing Direct Cost is @ cost which can be identified either with a Cost Center or with a Cost Unit. ‘Direct Costing is the practice of charging all Direct Costs to operations, processes or products, leaving all Indirect Costs tobe written off against profits in the period in which they arise. Under Direct Costing, Stocks are valued at Direct Costs, i.e. costs whether fixed or variable, which can be directly ‘atrbutable to the cost units. 1.3 Marginal Costing vs Direct Costing Marginal Costing Direct Costing ‘Marginal Costing is the ascertainment of Marginal | Direct Costing is the practice of charging all Direct Costs etiect on proft, of changes in | Costs to operations, processes or product, leaving eee between | all Indirect Costs to be written off against profits in the period in which they arise. ‘Stocks are valued at Direct Costs, Le, casts whether ‘Stocks are valued at Marginal Costs, 1c. Variable | freq gr variable, which can be directly attributable Costs only. to the cost units. Thi Fred Costs are considered a Period Costs, and | Fixed Costs which are considered direct are charged | not charged to products at al. to operations, processes or products. Al Variable Costs are direct, but al Direct Costs may not be Variable, the \n specific elements of cost total cost oF the change, oe ‘that result from any Scanned with CamScanner‘addition or deletion of a product or a territory, and selection of an additional sales channel. 1nd Semi-Variable expenses. It is the Differential Cost includes Fixed! a difference between the total costs Of tWo alternatives, Differential Cost may be either incremental or I 44.4.5 Marginal Costing vs Differential Costing Particulars Margi Differential Costing) inal Costing Marginal Costing isthe ascertainment of Marginal | Differential Costing is the technique of Costing Costs and of the effect on prof, of changes in| which uses Differential Costs and / oF Diferentiat 1. Meaning | lume or type of output, by differentiating between | Revenues for ascertaining the acceptability of an Fixed Costs and Variable Costs. aerate. ae re 1510 Se ecening Sys ‘Accounting System. They are computed separately. 5. Time | Generally used for short-term decision-making only. | Can be used for long and short-term decisions. 14.1.6 Variable Cost and Fixed Cost Particulars Variable Cost Fixed Cost Fixed Costs are costs which are assumed to Variable Cost is that portion of cost, which changes or a 1. Meaning | varies proportionately based on output / volume / | Fomaln constant, for 2 gwen period eee that period. 2 Items | Variable Cost = Direct Materials + Direct Labour + Direct | Fixed Cost = Faxed Production OH > Expenses + Variable Production OH + Variable SD OH. | Administrative OH + Fixed S&D OH. Raw Materials, Labour (based on number of units 3, Examples | produced), Power, Royalty (based on production, ete. | Rent, Salary, Insurance, etc. Fixed Cost per unit of output will vary 4 Cost per | Variable Cost per unit is assumed to remain constant | inversely with changes in the level of unit at all levels of output, ‘output. As output increases, Fixed Cost per I vice-versa. unit decreases, and Variable Costs are incurred only when production currence | thes place. Heres, no prodcien mens no Verb 6. Cost: Once incurred, Variable Costs ill increase Behaviour _| proportionately based onthe level of output /quanty, 7. Mature | Variable Costs are considered as product-related costs, Variable Costs are Product Costs, and hence included i & iacision | inventory valuation. So, Inventxy Value composes Diet Materials + Orect Labour + Dect Expenses + Scanned with CamScanner44:1.7 Variable Cost vs Cost Variance Variable Cost Cost Variance at which varies directly in proportion to every ca vr decrease inthe vole of output of tion fs known as Variable Cost element of cost for which standards have been established. 44.1.8 Semi-Variable Cost ‘These are expenses that exhibit features of Fixed and Variable Costs. Examples: Delivery Van Expenses, Telephone Charges, Repairs and Maintenance Expenses, etc. They may behave in any of the folowing manner — (a) Expenses that do not change when there is a small change in the level of activity but change whenever there is 2 slightly big change ~ €.9. no change in expenses if output increases by 10%, but increases by 5% for increase in ‘output beyond 10% a a b) © ses that change in same irection as the change in level of activity but not in the same proportion, ©) oerpense may change bY 1% for every 2% change In aethty, e {€) Expenses which remain fixed upto a particular level and thereafter become variable, or vice~ersa, 2, Semi-Variable Expenses usually have two parts ~ a fixed part and a variable part. (Refer Chapter 4 for segregation of Semi-Variable Expenses.) the theory of Marginal Costing, it is presumed that Variable Costs are related to output and Fixed Costs are related to J. Hence, the Fixed Costs are charged off to the Profit and Loss Account. The cost and revenue information is in the following format — Particulars ‘Amount ‘Sales Value 70K Variable Cost (Direct Materials + Direct Labour + Variable POH + Variable SAD OH) 2006 Contribution = Sales Less Variable Costs 700C Fixed Cost___ (Fixed Production OH + All AOH + Fixed S&D OH) 20K Profit / (Loss) = Contribution Less Fixed Costs 0K there are a number of products, the Marginal Cost Statement will be as under: Particulars Product A | Product B | Product C ‘Sales Revenue KK 00 ‘Variable Costs x x Contribution x XK Fixed Costs, Profit Fixed Costs are subtracted from the pool of Total Contribution, since they are treated as Period Costs, Not relatable to any product as such. So, Fixed Costs are not apportioned to products. Marginal Cost Equation Cost Statement, when written in an equation form, constitutes the Marginal Cost Equation. BBR Scanned with CamScanner| " nie w BRE BS i | Riss S18 re 14.2.4 Marginal Costing vs Absorption Costing ~ Cost Costing ‘Only Variable Costs are included for product Recognition _| costing & inventory valuation. expenses is based on nature, ie. Fixed and Variable. ‘Treatment of Fixed Costs are regarded as a Period Cost. Profitability of different products is analysed by their PV Ratio (and not Net Profit Ratio) Fixed Costs are charged to cost of production. Each product bears a reasonable share of Fixed Cost ang thus the profitability of a product is influenced by the apportionment of Fixed Costs. Cost data presented highlight the Total Contribution and Contribution of each product. Cost data are presented on conventional pattem. [Net Profit of each product is determined after subtracting Fixed Cost along with their variable costs. Difference in the quantity of Opening Stock Closing Stock does not affect the unit | and Cost of production. Difference in the quantity of Opening and Closing Stock affects the unit cost of production due to the impact of related Fixed Cost. Only Fixed OH Expenditure Variance can be computed. There is no Volume Variance since Fixed Overheads are not “absorbed”. Al Fixed OH Variances (Expenditure, Volume, etc.) can bbe computed and reported. (@) Factory Cost (ie. Direct Material + Direct Labour + All POH), are charged ‘as expenses when goods are sold. (b) All AOH and SOH are charged as ‘expenses as and when incurred, (@) Variable Production Cost (i.e. Direct Material + Direct Labour + Variable POH), are charged as expenses when goods are sold. (b) Fixed POH, and all AOH and SOH are charged as ‘expenses as and when incurred. ‘Note: The points listed in the above columns can also be considered as Features of Marginal Costing / Absorption Costing respectively. 14.2.5 Stockholding & Profits - under Marginal & Absorption Costing Profits under Marginal Costing System and under Absorption Costing System will be equal. Profits under Marginal Costing System and under Absorption Costing System ‘equal, the Fed Cost element included in both stocks is the same amount. fea oe Profits under Absorption Costing System wil be higher than Profits under Marginal Casting because Closing Stock Isat a higher amount under Absorption Costing (inclusive of Fed OF System. Ths 5 Profits under Marginal Costing System will be higher than Profits under Absorption because Opening Stock is at 9 higher amount under Absorption Costing (Inclusive of therein. ‘Costing System. This Fixed OH M4 a | Scanned with CamScanner‘absorption Costing, Fixed POH is included in inventory valuation, Hence, such Fixed POH Urs for charging against the sales when they are made. So, when production is constant 1 Costing will tend to produce @ more stable profit profile, onder Nerina Costing pnp, Fed POH are treated as Period Cost and are sales fluctuate, due constant change of Fixed POH, reported profit will vary widely. For example, wie spe Fue Ovrhndcharge wb aoe gk on pra wl fa Sry Hence, the Accountant's reasoning Is not valid in the above case. 4426 Contribution “we J, Contribution is the excess of Sales Revenue over Variable Cost, i.e. Contribution = Sales Less Variable Costs. ; Contribution is called 50, since It initially contributes towards recovery of Fixed Costs and thereafter towards Profit of the business. The Contribution earned by a business, forms a fund for Fixed Expenses and Profit. ‘The Contribution concept is based on the theory that the Fixed Expenses of a business is @ ‘Joint Cost’, which cannot te equitably apportioned to different segments of the business. Hence, Contribution serves as a measure of efficiency ‘of operations of various segments of the business. 44.2.7 Relationship between Profit and Contribution ‘ofits the excess amount of Contribution over and above Fixed Cost, ie, Profit = Contribution Less Fixed Costs. ‘note: Basically, the business eams a surplus of Sale Revenve over Variable Costs, which is called Contribution. Once Fixed Costs are fully recovered, such excess Contribution is termed as Profits. 44.2.8 Means of Increasing Profits ‘Profits can be increased by ~ “1. increasing the Selling Price per unit, increasing the Sales Volume / Quantity, ‘Loss isthe excess of Fixed Costs over Contribution. So, Loss is unrecovered Fixed Cost. Loss is due to the shortfall in Contribution, and arises due to the unrecovered portion of Fixed Costs. Scanned with CamScannera adhuka’s students’ Handbook on Cost and Management Acro — Fx CA 44.3.2 Profit Volume Ratio (PV Ratio) weaning: Profit Volume Ratio (PV Ratio) isthe relationship between Contribution and Sales Value. Its also t ¥ contribution to Sales Ratio, Total Contribution Contribution per unit 2. Formula: PV Ratio = THOLCONRNBHED 109 (op) SRNR PE 4100 (oy ‘= Change in Contribution Change in Prof Change in Sales“ 17) “Change in Sales * 10° (or) = 100% Less Variable Cost Ratio. 3. Significance of PV Ratio: (a) PV Ratio is considered to be the basic indicator of the profitability of the business, {b) The higher the PV Ratio, the better it is for a business, In the case of a Firm enjoying steady business conditioes ‘over period of years, the PV Ratio will also remain stable and steady. (©) TFPV Ratio is improved, it will result in higher profits. 4. Improvement of PV ratio: PV Ratio can be improved by the following means ~ (2) By reducing the Variable Cost, (©) By increasing the Selling Price, or (©) By increasing the share of products with higher PV Ratio in the overall sales mix. (where a Firm produces 2 ‘number of products) 5. Uses of PV Ratio: (2) To compute the Variable Costs for any volume of Sales. (b) To measure the efficiency or to choose a most profitable line. The Overall Profitability of the Firm can be improved by increasing the sales/output of a product giving a higher PV Ratio. (©) To determine Break-Even Point and the level of output required to earn a desired Profit. (@) To decide the most profitable sales-mix. 14.3.3 Break Even Point (BEP) 1 Break ~ Even Point (BEP) is the level of Sales at which Total Contribution equals Fixed Costs. Meaning: Hence, at that level, there is neither a Profit nor a Loss to the Firm (Total Revenue = Total Costs, and Profit / (Loss) = Zero). 2 Formula; (2)Break Even Point (in t) Fixed Costs PY Ratio This is denoted as BES, (Break Even Sales Value) (b) Break Even Point (Qtty) Fixed Costs: Contribution per Unit ‘This is denoted as BEQ. (Break Even Quantity) Costs and Revenues in 3. Assumptions underlying Break Even Analysis / CVP Analysis: (@) Output Quantity is the only Cost Driver and Cok ue ong slat Orie and Revenue Driver. This means that changes nthe eels of Revere ar (©) Total Costs can be easily classified into Fixed and Variable categories, (©) Selling Price per unit remains constant, irrespective of quantity sold. 146 ee rt Scanned with CamScannerFr ___——_=ss ats-eene sup cats er unit remain constant. However Toa 7 (eee ah ap aes nen recy tea Pet oan ne eg of won, Pose POS nd papers ; 9) eee no snicant change nthe eve of See remain unchanged my manufactures and sells @ jering and Closing Inventory. 0) Meenas unchanged ‘ingle produc. In the case of a multi-product Company, the sales rene ad Cos functOs are near oer the range of . resources required for production are abundanth ies under consideration. of BEP: BEP represents the Cut-Off Pesan ee ot Level of Sales ? than BEP. @ 0 ‘Greater than BEP {Fim Should operate above the Break-Even Point in order to ear Profs. sreak Even Point: Generally, Fixed Costs include Depreciation and Amortistion aso. Hence, if only Cash Fixed cash Broa sidered for analysis, the Cash BEP is computed as under ~ Cash Fixed Costs (uss are com a Cash Fixed Costs foycash BEP (in 2)= Ratio (0) Cash BEP (Qty) = . ~. > : Low BEP & | Condition 2: Low BEP & | Condition 3: High BEP & | Condition 4: High Costs are | Small AOI: In this case, the | Small AOL: that wee of profit | conclusions are same as in | the Fixed Costs are high and 49 Scanned with CamScannerMeaning: Inference Point i the level of Sales at which Total Costs (and Hence Total Profits) of two options , The decslon-maker i indferent as to option chosen, since both options wl result in the same amount of pron” ea 2. Formula: (a) Indifference Point (in ©) |, Difference in Fixed Costs Difference in PV Ratio (or) = Difference in Fixed Costs, Difference in Variable Cost Ratio Profit of Option y Profit of Option x (b) Indifference Point (in units) = Difference in Fixed Costs Difference in Contribution per Unit (or) . Difference in Fixed Costs Difference in Variable Cost per Unit ‘Note: Indifference Point may also be called the Cost Break Even Point. ‘Note: Indifference Point is calculated only in respect of two options. Where more than two options are considered, Indifference Point can be calculated on a comparative basis for two combinations. Amount in Quantity 3. Significance: Indifference Point represents a cut-off indicator for deciding on the most profitable option. At that lev! Of Sales (Le. Indifference Point), Costs and Profits of two options are equal. The profitability of different options are — Level of Sales Most Profitable Option to be chosen Reason Below Indifference Point. | Option with Lower Fixed Cost popticlipes epee IY At Indifference Point | Both options are equally profitable Indifference Point. Above Indifference Point _| Option with Higher PV ratio (lower Variable Cost) | The higher the PV Ratio, the Better tis 14.3.11 Indifference Point vs Break-Even Point Particulars Indifference Point Break-—Even Point BEP is the level of Sales at which the Toa Indifference Point is the level of Sales at which | BEP 1. Definition Contribution equals Fixed Costs. Hence, there s Total Costs and Profits of two options are equal ee ee Indifference Point (in ® ) 2. Formula | _ Difference in Fixed Costs Difference in PV Ratio 3, Signi It is the activity level at which Total Cost under | It is activity level at which the Total Revenue from — Fixed Costs (Paraa4a.i0) | Dek Even Pont (in €) = “Saat two alternatives are equal. 8 product or product mix is equal to its Total Cost. ‘Used to choose between two alternative options for 4. Purpose ete Used for profit planning. 14.3.12 Shut Down Point Ss 4 Meaning: Shut Down Point indicates the level of operations (Sale), below which nt justifiable tps + Operations. For this purpose, Fixed Costs of a business are classified into ~ (a) Avoidable or i. Costs, and (b) Unavoldable or Committed Fixed Costs. A Firm has to clase down i ts Contr recover even the Avoidable Fixed Costs. (Note: Avoldable Fixed Costs = Total Fi aa (Unavoidable) Fixed Casts, } - a a i Scanned with CamScannerve Vw se Lees ne nS 3 ‘ncurred when the Plant is shut down, own Point (@ )= Avoidable Fed Costs ‘Avoidable Fixed Costs 3 Stu : Avoidable Fised OF ol PV Ratio Shut Down Point (Qtty) = “Teton per UR + significance of Shut Down point and = consequent decisions are fk shut Down Point. | Close down Operations ‘Avoidable Fixed Costs are not fully recovered. It &s better ee ———+ enpenses. |__| ease down and save additional Continue Operations | Avoidable Fixed Costs are just recovered. Continue Operations | Avoidable Fixed Costs are recovered. Further to recovery of the balance Fixed Costs also. enero ts | a Key Factor or Limiting Factor whi hs) 1 ey Factor represents a resource whose availabilty i fess than its requirement. 1 Sects eo Fo Ts a factor, which a a particular time or over a period iis the actives of 2 Frm: 2 serio caled Critical Factor (ince ts alo cal othe F's sucess and Budget Factor (since Dulac 2S formulated by reference to such limitations of restraints). 4. Some examples of Key Factors are ~ (a) Shortage of Raw Material, (b) Labour Shortage, (c) Restrictions. in, Pant Capaatty, (4) Demand or Sales Expectancy, (e) Cash availabilty, etc. 4 Incase of Key Factor situation, the procedure for decision-making is as under — Description the Resource Constraint [Identify the Key Factor. ‘Compute Total Contribution or Contribution per unit of the product. ‘Compute Contribution Per Unit of the Key Factor, ‘re. Contribution per Direct Labour Hour, Contribution per kg, i. 2 3 | of Raw Material, etc. | Rank the products based on Contribution per unit of the Key Factor. 5 ‘scat the key resources based n Ranks given above, and oer condos speed in he question [Criteria / Basis for Selecting Priority of Product _. Profit Volume Ratio Contribution per unit of Raw Material required to produce 2 unit of 2 product 3. Wabour Hour is a Limiting Factor ‘Contribution per Labour Hour © unit of 3 4 there is a heavy demand for the product Profit Volume Ratio with Factor 144.2 General principles relating to Factor or Key Resource. ‘have no Opportunity Costs. ss I hep i, wl erode Ta omal Resource Avalalty at Normal Costs. Fer Wenig Key Resource, Avaabity, = Ay addtional 1: ating ay Rese, dno Ore WOR ad emu) wi ae onder. 14th Scanned with CamScannerPadhuka's Students’ Handbook on Cost and Management Accounting ~ For CA Inter 8. For kdentving Key Resource, Requirement = Requirement at 100% Capacity Levels, le, Maximum Output. 9, In case of minimum production condition, fran raircs rarer Old eet es Factor Ranking prio. Adelittonal Resource requirements only should be allocated based on Key Factor Ranking, In case of Multiple Products and Multiple Key Factors with difference in ranking priority, Linear Programm 7. Techmques may be applied for Resource Aacation decison, (uy) 11, Application of Key Factor Principles is subject to ~ (a) feasibility, and (b) Company policy. 14.4.3 Factors considered in Marginal Costing decisions In Marginal Costing decisions, the following factors are to be considered ~ 1, Contribution: Whether the product or option under consideration makes a Contribution oF at, is the tac consideration, If there 's No Contribution or Negative Contribution, the proposal is not acceptable. 2. Specific Fixed Cost, if any: Where a choice is to be made between two courses of action, the addtional Fy Overhead, if any, should be taken into account. 3. CYP Anatysis: The effect of increase in volume on Profits, and the rate of earning additional Profits, should be analyser 4. Incremental Contribution: Where additional quantities can be sold only at reduced prices, Incremental Contribution (Additional Quantity « Additional Contribution per unit) will be more effective in decision making. 'S. Capacity: Whether acceptance of the incremental order, or additional product line is within the Firm’s capacty or whether Key Factor comes into play, should be analysed. 6. Non-Cost Factors: Non-Cost Factors should also be considered, wherever applicable. 14.4.4 Advantages of Marginal Costing 1. Pricing decisions: Since Marginal Cost per unit is constant from period to period within a short span of time, firm decisions on pricing policy can be taken. If Fixed Cost is included, the unit cost will change from period to peroa depending upon the volume of output. This will make decision-making dificult. 2, Overhead Variances: Overheads are recovered in costing based on pre-determined rates. This creates the prablem of treatment of under-recovery or over-recovery of Overheads, if Fixed Overheads were included. Marginal Costing ‘voids such under-recovery or over recovery of Fixed Overheads since these costs are recognised as Period Casts. 3. True Profit: Under Marginal Costing technique, Stocks of Finished Goods and WIP are carried on Marginal Cost bass, ‘and the Fixed Costs are written off to Profit and Loss Account as Period Cost. This shows the true profit of the perc. 4. Break-Even Analysis: Marginal Costing helps in Break-Even Analysis, which shows the effect of increasing or decreasing production activity on the profitability of the Company. 5. Control over Expenditure: Segregation of Expenses as Fixed and Variable helps the Management to exercise conta over expenditure. “Management can compare the actual Variable Expenses with the budgeted Variable Expenses and take corrective action through Variance Analysis. 6. Business Decision-Making: Marginal Costing helps Management in taking a number of business decisions ike Make (oF Buy, Discontinuance of a particular product, acceptance of export offers, etc. 7. Profit Planning: Marginal Costing helps in Profit Planning and Analysis, through the preparation of Analytical BEP ‘Charts, comparison between Budgeted and Actual BEP, etc, 14.4.5 Areas where Marginal Costing technique is used * ‘Some areas where Marginal Costing technique is used by for decision-making are ~ 1, Determination of Selling Price ~ (a) under normal circumstances, (b) for special market or for a special (©) during recession, (4) at Marginal Cost or below Marginal Cost, (€) price-mix and price-discrimination decisions. 2. Product Mix Decisions, viz. ~ (a) Selection of optimal product mix, (b) Substitution of one product with another (€) Discontinuing or dropping of @ product line, etc, iad Production vs Outsourcing Decisions ~ whether to Make or Buy a certain component / produc, ‘Shut-down or Continue decision, or determination of output level in period of recession or depression, Marketing Decisions, viz ~ Seling in the Domestic Market or in the Export Market, acceptance of Change vs. Status Quo, Retaining or replacing a Machine / Process, etc, atti Expanding or Contracting decisions, etc, =a ” ees age ae ————— Scanned with CamScannerva goods ore of pershable nature, Z we Fam has Brees’ Coes er eter Wa 5. To obviate shut-down costs. 3 Wen n : Fon aera $ To ah pas acter tae OA ol rok fo capture future market. i ‘yo uunch OF roduce a new product inthe marta. 8. To capture foreign market. ares yolume-Profit Analysis Ee | qt-volume- Profit ‘Analysis (CVP Analysis) is the analysis of three variables, viz. Cost, Volume and Profit, which 1 ee paamiblernteniess eat letters aims at measuring variations of Profts and Costs with Volume, which is sgnficat to business prof planning: TE | oR Am impact on profit due to changes in~ (2) Sale Prices, (ei variate Coe, (c) Fixed Costs, (6) Our Se analysis makes use ofthe Marginal Costing principles for planning and for making short-run decisions; Jf pesumptions: The assumptions of CVP analysis are given Under BEP Anais above: I ince: CVP Analysis is important since it provides information on the following ~ [® {@ senaviour of Costs in relation to Volume or Level of Output, |) Level of Output to achieve Break-Even, i.e. recovery of Total Costs, | (g Sales Requited to earn a particular Target Profit, | (@ Profit that can be earned at a certain level of Output, |e) Sensitivity of Profits due to variation in output levels. 444.8 Limitations of Marginal Costing |, bifficutt to classify: It is dificult to classify exactly the expenses into Fixed and Variable category: Most of the ‘expenses are neither totally variable nor wholly fixed, Single Cost Driver: Marginal Costing assumes that the Output Quantity ts the only Cast and Revenue Driver, |e. that ‘vtich causes changes in the levels of Revenue and Costs. This may not be true in all cases. ‘Contribution is not final: Contribution of a product itself is not a guide for optimum profitability unless it i linked with the Key Factor. ‘Wrong pricing decisions: Sales Staff may mistake Marginal Cost for Total Cost and sell at 2 price, which wil result in toss of ow profs. Hence, Sales Staff should be cautoned against incorrect pricing decisions, while ving them information on Marginal Cost. ‘Stock Valuation: Overheads of fixed nature cannot altogether be excluded particularly in large contracts, while "valuing the WIP, This aspect is not considered in Marginal Costing, Naive assumptions: Some assumptions regarding the behaviour of Revenues and Costs are not necessarily true ‘ina realistic situation. For example, additional output can be sold only by reducing sale prices. mnores time factor and investment. For example, the Marginal Cost of two jobs sn} emt. 14.13 Scanned with CamScanner“Pacals Students’ Handbook on Cost and Management Accounting — For CA Inter ILLUSTRATIONS CEE ‘eling Price per unit 0} 50 10 219) [Variable Costas % of Sling Price 0 20) % % No.of units sold 10,000 4,000 20) 6,000 "Marginal Contribution 20,000 | € 80,000 2). 75000 Fixed Costs 12,000 0) e000 | ¢ 10,000 Proft/Loss 2(0) ©2000 | © 30,000 20h) Solution: ‘Situations WE BYE cee 2 24.17 - (Gwen) (Gwen) = 1, Selling Price per unit 40% 3% se 750 pu 220 pu connie 2. Variable Cost as Sb of SP (owen) 60% | £32-60% | (Gwen) 75% | (Gren) 75% ‘SP - Cn sP-Cn= 20 * 75% = ‘SP-Cn= 3. Variable Cost per unit (1 x 2) =%3 pu 730 pu 215 pu 12.00 pu %z0,000 _ | _¥40.00 _ | sPpu-vCpu | _€25,000 _| _ts0000 _ 4. Contribution per unit (1-3) | 10,000 units | 3,000 units =20-15= | 6000 unts | 5,000 unts 22pu 220 pu @5 pu 24.17 pu Z10p | (Given) (Gwen) | S256 = | (Given) (Gren) | a 10,000 units | 4,000 unts | 35 op6'unts | 6000 units | 5,000 unts (Given) (Given) FC + Profit = (Given) eee eo 5. C2000 80,000 | %1,50,000 | _%25,000__| (Sven) #501000 (Given) = Contrib, ~ Pft = (Given) (Given) Contrib. ~ Prt = Soe 12,000 60,000 21,20,000 10,000 235,000 Cont. - FE=| (Given) (Given) | Conti. — FE 8. Profit / (Loss) (6-7) 78,000 £20,000 z30,000 |= 715,000 _| (Given) 15,000 Answer: (2) 85, (&)€8,000, (<)60%, (4) 860,000, _(e) 30,000 units, (€1,50,000, (@) 16.65, (m) 715,000, (66.67%, 4) 835,000. it eT uction Capacity of 200,000 units. The folowing informatio, fr Year 1 Year 2 ‘Sales (units) 80,000 1,20,000 Total Cost () 4,40,000 4580, 000 There has been to change in the Cost Structure and Selling Price and itis anticipated that it will remain unchanged in Year 3 also, Selling Price is @ 40 per unit, 4 Calculate(1) Variable Cost p.u. (2) PV Ratio, (3) Break-Even Point (in units), (4) Profit if the Firm operates at 75% ofthe capacity. Solution: 1, Variable Cost per unit= Difference in Costs ____£.45,60,000~& otanpreer (using Level of Activity Method) “Difference in Prodn Quantity (1,20,000 = 80,000) units 2. Fixed Cost = Total Costs less Variable Costs (estimated using 80,000 units output level data) ‘= € 34,40,000 ~ (80,000 unitsx® 28) = ® 12,00,000 [Note: 1,20,000 units level can also be taken here] sitll cit Scanned with CamScannercontribution PUL, 199 = 40-28 , 199 « te * ple PE BL ee iy = ted Coats 12,00, pone oe Contribution per Unit 40 a ‘ a 75% Sas CAPACRY ‘= Total Contribution ~ Fixed Cost = (2,00,000 units x 75% ® 12 p.u.) = 12,00,000 = € 6,00,000 2,000 units (100"% capacity) 73 per unit roduction Overhead tl ___ {2 per unit 22 on cd Ore Maia labour per ent wa wal Bren POT ‘At 1,500 units Remarks / Inference ZI “ince total amount is constant at both levels, is 1,500 x €4.= £6,000 | Pea cost in ‘at two levels, 1,500 x €2 = © 3,000 | and POH II per unit remains constant Cost in 2,000 x £2 = € 4,000 corbin = Sling Pree Lese Al Variable Costs = € 8-82 = € 6 Per unk. ___ Fixed Costs, 6,000 _ 4. break Even QuentlY = Cerrbuton per Unk” 86 1,000 units. Note: Information is not sufficient for computing PVR and BES. 1 Computation of Required Sales is 4 product Z has a Profit-Volume Ratio of 28%. Fixed Operating Costs directly attributable to Product Z during the Quarter required to achieve 2 quarterly profit of € 70,000. z fotthe financial year will be € 2,80,000, Calculate the Sales Revenue Solution: Desired Contribution _ Fired Required Sales = “py Ratio - arn A i A my rpkated 20,00 units. Variable Cost of the product is € 20 per unit and Fixed ‘kCompany has introduced a new product and ‘Overheads are & 3,20,000. You are required to: Bb Calculate Seng rice per uit to eam a profit of 1% on Sales Value, BEP and Margin of Safety. 2 Tins sting Pris etuca by he Company by 10% demands expected toncrease by S000 uns, ten what willbe ls impact on Profit, BEP and Margin of Safety? 4. Calculate Margin of Safety if Profit is € 64,000. ‘Solution: 4. Present Sale Price, BEP and MOS: Let Selling Price per unit = °P’. ‘So, Sales Value = 20,000 units x P = 20,000 P 0, Profit at 10% = 20,000 P x 10% = 2,000 P Centrbution per unit = Sale Price (~) Variable Cost = (P ~ 20) ‘The equation is ‘Total Contribution = Fixed Cost = Profit. On substitution, we have 20,000 untsx(P= 20) =3,20,000 = 2,000 P ‘On simplification, we have 20,000P ~ 00,000 ~ 3,20,000 = 2,000P Hence, Required Sale Price = © 40 pu Profit = 10% on Sales = % 80,000 n solving, 18,000P = 7,20,000, or P = 40, So, Soles Value = 20,000 units * €40 = © = Feed Costs _, 3,20,000 units, BES (t= BEQ sa (00-20) 16,000 (®)= 16,000 units x © 40 pu = % 640,000 HOS (Cuty) » Total Sales ~ B&Q = 20,000 = 16,000's 4,000 unis. MOS (€)= 4,000 units >= 40 pu = © 2,60,000 Cost + Desired Profit _ %2,80,000+270,000 _ PV Ratio ~ 28% ES ae 41s Scanned with CamScannerPadhuka's Students’ Handbook on Cost and Management Accounting ~ For CA Inter See en 2. Impact of Price Reduction on Profit, BEP and MOS: = Total Contribution Q Prot += 25,000 unitsx(36 ~ 20) 3,20,000 (6-20) Fed Costs BEQ = ‘Gonitribution per Unit ) Fixed Costs 3,20,000 = 20,000 units. "= New Sle ee = © ss 10% 36g BES (€)=20000 units « © 6 pu = © 7,20,009 MOS (Qty) = Total Sales = BEQ = 25,000 ~ 20000 = 8,000 units, MOS (2) 5000 us #36 pu = ®1,0,099 3._MOS when Profit is € 64,000: Situation 1: Seton ton igi Sle rie 40 pu et Ret eet NOS Quant" Gsrerbution pau. Gio-my* 3200 units MOS Sale Value = MOS Quantity x Price 3,200 units « % 40 pu = % 1,28,000 TOD ine x C36 pase & Marginal Costing ~ PVR, BEP, MOS, etc. may Lid manufactures and sells its Product R-9. The foll loving Fgues have bon coed trom cost ecard o an the product R-#: Elements of Cost Variable Cost portion Fixed Cost ] Direct Material 30% of Cost of Goods Sold = Direct Labour 15% of Cost of Goods Sold = Factory Overhead 10% of Cost of Goods Sold 22,3000 General & Administration Overhead 2% of Cost of Goods Sold 271,000 1 Selling & Distribution Overhead 4% of Cost of Sales 268,000 a Last Year, 5,000 units were sold at €185 per unit. From the given data find the following: {2) Break-Even Sales (in Rupees) (b) Profit earned during last year (c) Margin of Safety (in %) (d) Profitif the Sales were 10% less than the Actual Sales. Solution: 1. Cost of Goods Sold (COGS) = Material + Labour + FOH + General & AOH So, COGS = (30% + 15%+ 10% + 2%) = 57% of COGS + 2,30,000 +71,000 $0,043 COGS = 3,01,000 Hence, cocs = 3.04000 - 7.99,000 2. Cost of Sales (COS) = COGS + SAD OH So, COS = 7,00,000 + 4% of COS + 68,000 Se, 96% COS = 7,6,000. 50, Cos = 7659 . g,00,000 3._Variable and Fixed Costs: Particulars Variable Cost (®) Fixed Cost | Direct Material 7,00,000 x 30% = 2,10,000 : Direct Labour 7,00,000 15% = 1,05,000 i Factory Overhead 7,00,000 x 10% = 70,000 2,30,000 General & Administration OH 7,00,000 x 2% = 14,000 7,000 | Selling & Distribution OH 8,00,000 x 4% = 32,000 ‘Total PVR @) BrelcEven Soles = Feet ros = em. = © 6,90,882, sae ae con 7 ae Scanned with CamScanner____—-e ee ep a pn ere su We at wear (Sle = Toa Vrole Coss) — Total Fed Cots o Toles 13100) = 3.66000 = € 428,000 - -) BES _ 9,25,000 (-) pt SY Oe = 2 aa = 25.31% e Sales were 10% less than the Actual Sales: profit f the (Assumed 10% reduction in Sale Qty). Orree = 90% of (® 9,25,000 ~ & 431,000) ~ & 3,69,000 = & 4,44,600 - # 3,69,000 = ¢ 75,600 a ves the following Ir i co aty 3.75000 Margin of Safety (Quantity) 5 000 writs — © 3,87,500 Break Even Sales in Units: ee 008 ging P nit, (i) Profit, sat — (9 Selling Price per unit, {iil Profit Volume Ratio, (iv) Break Even Sales (in Rupees), and (v) Fixed Cost. MOSAmount _ % 3,75,000 Price p.t ee tt atest SHCPTEE PS WosQuantty ~s00unts " * 25 P# ott Total Sales (-) Total Cost Note: Total Sales = BES + MOS = 15,000+5,000 = 20,000 units) 1 = (15,000 + 5,000) units x % 25 ~ 3,87,500 = € 1,12,500 0 Profit = MOS Quantity x Contribution p.u. on substitution, 1,12,500 = 15,000 units x Contribution p.u. ‘So, Contribution p.u. = % 7.50 = 30% 5 4 sesin = BES Quantty x Sale Price p.u. = 5,000 units x & 25 = € 1,25,000 ‘4. AEP, Total Contribution = Fixed Cost . ‘Total Contribution at BEP = 5,000 units x & 7.50 p.u. So, Fixed Cost = % 37,500 DEP and an Computations SiS A a TE ‘The PV Ratio of Delta Ltd is 50% and Margin of Safety is 40%. The Company sold 500 units for & 5,00,000. Calculate ~(a) BEP. ‘snd (b) Sales in units to earn a Profit of 10% on Sales. ‘Solution: 1. Computation of BEP 7 %5,00,000 . 2h oe unit. Sale Price per unit = “=o = € 1,000 per + Given MOS = 40%, So, BES = 100% 40%= 60% of Sales € 5,00,000 = & 3,00,000. seq = 300 units. | «so, Fixed Cost = Contribution out of BES = BES x PVR = ¥ 3,00,000 x 50% = & 1,50,000 2. Required Sales Quantity to earn Profit of 10% of Sales P Let Sale Quantity to earn Profit of 10% of Sales be "Q” units. So, Total Sales Value = Qtty x Price = Q x 1000 = 1000 Q. + Contribution at 50% PVR = 1000 Q x 50% =500Q. Profit = 10% on Sales = 1000 Q x 10% = 100. Q * The equation is Contribution ~ Fixed Cost = Profit. * $0, we have '500 Q - 1,50,000 = 100 Q. Scanned with CamScannerPadhuka’s Students’ Handbook on Cost and Management Accounting - For CA Inter | "4 Calculate: 4. Number of Units by selling which the Company will neither lose nor gain anything. 2, Sales needed to earn a Profit of 20% on Sales. 4. Extra Units to be sold to obtain the Present Prof, fit is proposed to reduce the Selling Price by 20% and 25%, 44 Selling Price to be fixed to bring down its Break-Even Point to 10,000 Units under present conditions, Senator: 1. Computation of 08 Fixed Cost + Profit 3,60,000+2;40,000 se (2) Contrbation a nT 000 E70 PM $0, VE=25~750= 817595, Fixed Cost 3,60,000 ©) BEQ™ Gotibution pu 75 2, Sales to earn Profit of 20% on Sales Let required Quantity =°Q' units Profit = 20% on Sales = 20% on (25 x Q) = 5Q Profit = Total Contribution ~ Fixed Cost 5Q = (75xQ) ~ 3,60,000 Solving, Q = 1,44,000 units, Hence, Required Sales Value = 1,44,000 units x 25 = ® 36,00,000 3. Effect of Sale Price Reduction and Additional Quantity for earning same Profit Sale price reduced by 20% 2% {@) Revised Sale Price per unit 25 ~ 20% = % 20 | 25-25% = 1875 (©) Revised Contribution p.u. = Selling Price - Variable Cost 17.50 2250 tus (@)_ Required Contribution = Fixed Cost + Profit © 6,00,000 %6,00,000, (@) Quantity to eam above Contribution = ¢ +b 2,40,000 units 480,000 units (€) Additional Quanity = (4) ~ 80,000 units at present 41,60,000 units | 400,000 units 4-Sale Price for BEQ = 10,000 units: Let New Selling Price per unit = "P" Beg = —FeedCost__ 19.099 Fed Cost_ (On solving, P= 53,50, So, Required Sale Price = € 53.50 Contribution pu. ee 2 a ‘10. Computation of PVR, BEP, Cash BEP, etc. 7 " MNP Lid sold 2,75,000 units of its product at & 37.50 per unit. Variable Costs are & 17.50 per unt (Manufacturing Costs of 14 ‘and Selling Costs of @ 3.50 per unit. Fixed Costs are incurred uniformly throughout the year and amount to & 35,00000 {including Depreciation of €15,00,000). There are no beginning or ending inventories, Required — ‘1. Estimated Break-Even Sales Quantity and Cash Break Even Sales Level Quantity, 2 Estimate the PV Ratio. 3. Estimate the number of units that must be sold to earn an Income (EBIT) of €2,50,000. ‘4. Estimate the Sales Level to achieve an After-Tax Income (PAT) of &2,50,000. Assume 40% Corporate Income Tax Rate Solution: 1. Contribution per unit = Sale Price less Variable Costs Se sea a UR Cash Fixed Costs: fark Bren Quay = = Contribution per unit . ‘4, PV Ratio: “Zeles Price per unk” 100 5. If Required Profit (EBIT) = € 2,50,000, Contribution required = FC+EBIT 6, Quantity required to eam above profit of € 2,50,000 7. Since Tax Rate Is 40%, PAT constitutes 60% of EBIT. Hence, if required PBT is € 2,50,000, required EBIT = = © 37.50 - 817.50 = C20 per unt Scanned with CamScannercosting -BEP wih ferentVORFG ‘Company manufacturing Baby Food with a shel ite of one year furnishes the folowing ret Campy a Cig ak 20 ct won orate ot 1p ch 1 fg te previo year, production was 1,20,000 packets and the expected production in current year is 1,50,000 information: re ; aa reat oats year, Fixed Cost per unit was 60 and its expected to increase by 10% inthe current year. The Variable Cost Is ,_ bei crease by 25%. Seling Price forcuront year as been Fed ab ® 300 per packet pon were ctsae he Bryan Yo us for th corn or = Year 2015 Fixed Cost + 10% increase pth in 2016, Required Contribution= 2016 Fixed Cost pee = (1,20,000 units x * 60 pu) + 10% =279, out of - Opening Stock Current Production ia) song price Pu ® 300 300 ip) Variable Cost pu Given () (Given) 180 180 + 25% = 225 fg cameibton pu (2b) @) 120 6 . (Given) 20,000 units 55,20,000 _ 73 600 units Quantity 5 Je) Total Contribution 1120 x 20,000 = % 24,00,000 79,20,000 - 24,00,000 = 55,20,000 So, BEQ = 20,000 + 73,600 = 93,600 units 2. Marginal Cost Statement-two periods analysis AIDA MS SS TT OR aes lowing figures are avalable for the records of ABC Company as at 31 March. Year Sales Year (in Lakhs) 200 Year 2 (@in Lakhs) 250 Profit 30. 45 ‘Gilate: a) PV Ratio & Total Fixed Expenses, (b) Break-Even Level of Sales, (c) Sales required to earn a Profit of € 70 Lakhs. Solution: Marginal Cost Statement (fled up after PVR WN 1) (®im Lakhs) Particulars Year 1 Year 2 Sales (Gwen) = 200.00 (Given) = 250.00 Wariable Costs (bal ig.) = (Sales ~ Contrib.) = 140.00 (bal. fig.)= (Sales ~ Contrib,)= 175.00 Contribution (Gt 30% See WN 1) = 60.00 (ot 30% See WN 1) = 75.00 Fined Costs. (bal. fig) = (Contrib. = Profit) = 30.00 (bal. fig) = (Contrib, ~ Profit) = 30.00 Profit /(Loss) (Given) =30.00 (Given) = 45.00 Pvp = Stange In Prof 99 = 45(-)30_ “Total Fixed Expenses = & 30 Lakhs (from above Change Sos" oc aan ~ °° . eed es = Fixed Costs _ ¢ 30 Lakhs. ¢ 190 Lakhs. PR 30% Sales required . to gam a prof § 70 as Desired Profit _ © 30 Lakhs-+ 70 Lakhs ‘5 Desired Contiod ae 8333.33 Lakhs PV Ratio 49 Scanned with CamScannera ee lmlmll—S—SS—SS ‘adhiukas Students’ Handbook on Cost and Management Accounting ~ For CA Inter | ee con 31% March, It produced and sold 16,000 Ar ooC ants, Kean earn proft ol 8 pr uni. =? related Computations ‘ells its product at & 30 per unit, During the quarter Joss of & 10 per unit. f the volume of sales is raised to 40, You are required to calculate: (@) Break Even Point in Rupees. (b)_ Profit tthe sale volume is 50,000 units, i) ‘Minimum Lovel of Production where the Company need not to close the production if unavoidable Fixed Costs & 150,09, ‘Solution: . Marginal Cost Statement (filed up after computing PVR 3s per Note below) i = Situation I (16,000 units) Situation TI (40,000 units) pau. te] pu. z Sales 30 | 16,000x® 30=4,80,000 | 30 | 40,0008 30=12,00,009 Less: _ Variable Cost (bal. fig.) (Sales ~ Contrib.) | 10 1,60,000 | 10 4,00,000 Contribution at 66.67% (see Note below) | 20 3,20,000| 20 800,000 Less: Fixed Cost (bal. fig.) (Contrib.~ Profit) 4,80,000 480,000 Profit/ (Loss) 16,000x% 10=(1,60,000) 40,000 % % B= 3,20,000 n “Change in Proft 49 _ 320,000 ~(-1,60,000) _ 4,80,000 _ 66 670% = 2 PV Ratio = “Change in Sales * “°° “12,00,000-4,80,000 ~ 7,20,000 3 .- Fixed Costs 2. (@) Break Even Point (in ¢)= PETES (©) Profit when Sales = 50,000 units Profit = Contribution (~) Fixed Cost = (50,000 units x ¢ 30 x 66.67%) less % 4,80,000 = % 5,20,000 Avoidable Fixed Cost _ 4,80,000 ~1,50,000 i “-G = ES = 16,500 units. 3. Shut Down Point (Quantity) i ‘a 4,80,000 _ : bare aoe ‘ACompany had incurred Fixed Expenses of 450,000, with Sales of 15,0,000 and earned a Profit of & 3,00,000 during the fist ‘half year. In the second half, it suffered a loss of ® 1,50,000. Calculate: 1. PVR, BEP and MOS for the first half year. 2 Expected Sales Value forthe second half year assuming that Selling Price and Fixed Expenses remained unchanged ‘during the second half year. 3. BEP and MOS forthe whole year. ‘Solution: Marginal Cost Statement Particulars First Half (7) Second Half (@) | ___ Total for the year (@) | Sales Given = ® 15,00,000 (Note) = € 6,00,000 8 21,00,000 Less: Variable Costs | (byt) Sales ~ Cn = & 7,50,000 | _(b/f) Sales Cn = € 3,00,000 & 10,50,000 | (FC + Profit) = % 7,50,000, (FC + Profit) = ® 3,00,000 © 10,50,000 Given = ® 4,50,000 Given = & 4,50,000 8 _9,00,000 | Given = ®3,00,000 |" Given(Loss)= € (150,000) £150,000 © 7,50,000 ¥15,00,000 50% ‘Same as I Half = 50% ‘Same = 50% TASt0O & 90,000 £200.00 -¢ 1600,000 MOS = Total Sles-BES | © 15,00,000 - €9,00,000 = ¥21,00,000~ 18,00000, £6,00,000 g Note: Soe PYR = 50%, Sales Value fr Second Mal wil be Sonebuton_ = £200000 _ ¢6,00,000. Sa zi cs st ili ll Scanned with CamScannery uP ae Myer of Ganapati Co. which wre. Outing 20X2, the Company operated at a Margin of Safety of ‘estimated that ale would go down due to he Sal pre ; natin _Merginal Costing 000 and the PV < 25% amounted to € 9,00000 a Ta : a comparative statement indicating the Sales, Variable Costs, Fixed Costs and Profits for 20X1 and 20%2. sales will the Company be better of by locking up the business in 20X27 1. Marginal Cost Statement Year 20x1 ‘Year 2042 (Given) = ® 9,00,000 75:6/00,000 _ 7 9.57,143 70% {(bal. fig.) = (Sales ~ Contrib.) = 6,00,000 (no change in volume) = ® 6,00,000 (Gales less variable Cost) = © 2,57,143 (bal. fig) = (Contr. - Profit) = ® 1,54,286 (ee Computation below) = @ 1,02,857 (Given) 25% x © 9,00,000 = & 2,25,000 (Given) 40% x © 8,57,143 = %3,42,857 (Given) 33.33% (Given) = 30% | 8 2,25,000 x 33.33% = € 75,000 © 3,42,857 « 30% = © 1,02,857 "te: Since there is no change in volume, Total Variable Cost will remain the same for both year ® Since PY Ratio for 20%2 is 30%, Variable Cost = 100% — 30% = 70%. Hence Sales figure is derived therefrom. 1 shut Down Point = voiebie Fed Costs ce 50,000 2 3,47,620. Ee 3. BEP in different situations /contexts and Fixed Costs Analysis - Computation ofBEQ {Alaanese Company is planning to establish a Subsidiary Company in India to produce Product K. Based on the annual sales of 40,000 units of the Product, cost studies produced the following estimates for the Indian Subsidiary ~ Particulars Total Annual Costs Percent of Total Annual Cost which is variable 210,000 100% 2 1,50,000 80% Factory Overheads, = 92,000 oO Aéninistration Expenses © 40,000 35% Catt the BEP in Rupe Sales and n numberof units for he nan Subeidlary onthe assumption tha the Sal Price ia er unit. is 7 1. Computation of Sale Price per bottle Commission is 8% of Sales Revenue and Profit is 10% of Sales Revenue. $0, Cost of Sales, ie. Cost excluding Commission = 100% ~ 18% Costs excluding Commission = © 2,10,000 + & 1,50,000 + € 92,000 + € 40,000 €4,92,000 82% Hence, Desired Total Sales Revenwve = 600,000 0,000 units Sale Price per unit = 1421 Scanned with CamScanner£14 «8% =u 3. Computation of BEP (if SP = © 14 p.u.) {(@) Contribution per unit = Sale Price per > Fixed Costs (©) Break Even Quantty = croton per Unit (©). Break Even Point (in & }= BEQ x Sale Price per unit 17, Computation of BEP at different Capacities & Sale Prices: eee nan ety = 32,000 units. 22.90 oat eae 111.10 ‘unt less Variable Cost per unit = € 14~% 11.10 = © 2.90 per unit. £92,800 = 32,000 units « ® 14 = % 4,48,000. and produces 10,00 buckets pa. The present ‘cost break-up for one bucket is - Materials & 10, Labour & 3, and OH & 5 (of which 60% is Fixed). ‘The Selling Price is € 20 per bucket. itis decided to work the Factory at 50% capacity the Selling Price falls by 3%. At 90% capacity, the Selling Price falls by 5, accompanied by a simiar fall inthe price of materia Calculate the Profit at $0% and 90% capacities, and also the BEP at those capacity productions. Solution: Computation of Profits and BEP Capadty Levels: | 50% 30% } 10,000, 10,000 | Production (Units) sil spaisat SRO Bom * 20%22,500 uns | P.u. Total Pu. Total Soles %20-3% = 19.40 | 242,500 €20-5% = 19.00 | 427,500 Less: Variable Costs | | Materials | 10.00 1,25,000 710-5% = 9.50) 2,13,750) Wages 3.00 37,500 3.00 67,500 Variable OH (40% of @ 5) 2.00} 25,000 2.00} 45,000 Contribution 440 55,000 4.50 1,01,250 Less: Fixed OH (60% x %5x 10,000) | 30,000 30,000 Profit | 25,000 74,250 = __Fined Costs | 730,000 __ %30,000 EQ = ution per Unt | 04a ee 450 ieee BES = BEQ x Selling Price per unit 6,818 uts x 19.40 = © 1,32,270 | _ 6,667 uts x 19.00= € 1,26,673 JOverall PVRandBEP TN ‘A Company has three factories situated in North, East and South with its Head Office in Mumbai, The Management has tat ete py pre ecpe och ey bra ed- _@ no in 000) Particulars toe, Aetual ‘Over (Under) Budget Aetual oe ae | North 4,100 (400) 135 (180) East 1450 150 210 ‘South 4,200 200) 330 Calculate for each factory and forthe Company as a whole forthe period ~(1) Fixed 14.22 - —_ At Ts = ss a Scanned with CamScanner[ev ratio _—__ Profit. = Change_In_PLOE . 100 Budget Change in Sales | 5 @ 100840 | — 150 41,300 210 0 420 Bx 100 = 60% (200) 1400 | 330 (110) “0 eo 100 = 55% 2. of Fixed Costs and BEP ‘Actual Sales PVR Contribution | Actual Profit | Fixed Cost_| _BEP. (1) = Given] @)(WN4) | (3)=(1x2) | (@)=Given | 6)=G)-4) @=@+@)) 1,100 45% 495 135; 360, Ss 1,450 60% 870 210 660 ae 55% 660 330, 330 CI 54% 2,025 675 1,350 2,500 2025. Total Fixed Costs _ 1,350 _; sees Vale 7 37557 24% Overall BEP =O erat yao 422° =2,500 (1m £0008) Precio wid OFS MOS SET Eo Sales of three produts ofa Company areas follows = Z y ao 15,000 20,000 74.00 24.00 24.00 250 ta 3.50 212,000 27,500 for each product — 7A Badgatd Prof, Budgeted Break Even Sales, ara Baeted Margin af Salty in terms of ‘Value. Also compute Overall PVR, BEP and MOS. x x z Total 24.00 4.00 74.00 22.50 3.00 23.50 21.50 @1.00 0.50 10,000 units 15,000 units 20,000 units 240,000 60,000 80,000 2% 1,80,000 715,000 £15,000, © 10,000 % 40,000 12,000 © 9,000 7,500 © 28,500 % 3,000 %6,000 % 2,500 11,500 37.5% 25% 12.5% 22.22% % 32,000 | ___€ 36,000 £60,000 €1,28,250 I ©.9,000 © 24,000 20,000 51,750 “Total Contribution ip Tonal Fisad Costs in = 2oat Conse 100 Over 0 EY Ra meeeten and K. Te ue ws 4 sof and 3 uns fT Contrbton — Tern Pn Cont ar 8 par oth conde the Break-Even Point, Margin per unit are & 40 Naya) nile & va 14.23 Scanned with CamScanner9! Handbook on Cost and | Accounting ~ For CA Inter / q Particulars ‘Mix Ratio 7 . Contribution per unit (given) —_— i 3. Ratio of (1x 2) : 4. To achieve BEP, Required Contribution = Fixed Cos, €6,16,000, to be apportioned in the above ratio, Hence, the Required Product-wise Contribution i 5, Break Even Quantity (units per month) = (4 +2) a 6. Overall BEQ = 11,200 + 8,400 = 19,600 units. BEQ in Product Mix Situation Sing, aU nrc re oi X.Y nd ZT nt Si eso of tha product a € 108,€160 75 respectively. The corresponding unit Variable Costs are & 50, ® 80 and & 30. The proportions (quantity-wise) in which D maneaet nd sll on 2%, 30% and 50% respectively, “The tol Fld Costs ae © 1490000 Calera products ‘overall Break Even Quantity and the product-wise break up of such quantity. ‘Solution: Let Overall BEQ of three products X, Y and Z together be 'Q’ units. (i mela! the ratio of quantity is 20%, 30% and 50% for X, Y and Z. The Overall BEQ is, Products x ¥ z |L. Contribution p.u. = Sale Price p.u. less Variable Cost p.u. 100-50=%50| 160-80=2%80| 75-20=?45 2. Break Even Quantity 0.209 0309 0509 3. Contribution at BEP Level (I x 2) 10Q 249 2sQ 44, ACBEP, Total Contribution = Fixed Cost. Hence, 10.Q + 24 Q + 22.5 Q = ® 14,80,000. So, 56.5 Q = ® 14,80,000. Therefore, Q = £14,800 _ 96,195 units. Product wise break-up of Overall BEQ: + Product X : 26,195 units x 0.20= 5,239 units + Product ¥ : 26,195 units x 0.30= 7,858 units + Product Z : 26,195 units 0.50= 13,098 units ‘22 Overall PVR and BEP - Sales Mix Fee ncrn Strr yor oh Mgrs (int) Product A Product B Product C Sales 2,00,000 5,00,000 3.00,000 Variable Expenses: Cost of Goods Sold 1,10,000 2,80,000 1,35,000 Selling Expenses 20,000 90,000 45,000 Fixed Expenses: Overheads 30,000 75,000 45,000 ‘Administrative Expenses 12,000 30,000 18,000 ‘Income Before Tax 28,000 25,000 ‘7,000 Less: neon Tex Tax at 40% 41,200 10,000 22500 | 16,800 4 ‘400 | Ta pec or sania Vik ssa Kolin woh an oe LL Pessoa ‘among the products in proportion to their Budgeted Sales Value. You are required to ~ 1. Compute the Budgeted BEP of the Company as a whole from the data provided, 2. Draft an Income Statement product-wise to ‘fect on Budgeted Income Budgeted Sales Vale © aa nso Path tt © al tena see et eae Ss 7 AEB ore 3 Ryan mpscintiemec, henna ia tulbie d Scanned with CamScanner(2) Variable Costs percentages are Shy pct ee oe Te mae Sones Ted Coopers ee ee! aes (3,00,000 +1,25,000) =4,25,000 | —10,00,000 COGS at 55%, 56% and 450 1,78,750 140,000 191,250] 5,10,000 SOH at 10%, 18% and 15% 32,500 45,000 63,750 141,250 |Contribution (a — b) 113,750, 65,000 1,70,000 | 3,48,750 ed Costs: OH (see Note) 48,750 37,500 63,750 150,000 Admin OH 19,500 15,000 25,500 | 60,000 ofit before Tax (cd) 45,500 12,500 80,750 | 1,38,750 18,200 5,000 32,300 | _$5,500 27,300 7,500 48,450 [83,250 Total Contribution = £348,750] — Tow Ses vate" !°° = Tinmntng =| 34875% ‘Total fied Costs _€2,10,000 _ _ Over PY Ratio" “4a7s% | 6.02150 Fred OH and Administration = echenes 150/00 and & 60000 respectively are te-apporionad based Gre ‘revised Budgeted Sales Value (as per Company’s Policy) i.e. 325 : 250 20 ‘Effect of Sales Mix Change: ret a as om nt Rat et 8 QS) aight Rat Pos an 5 aga, _ Overall PVR has increased from 32% to 375%. Overall BEP is reduced from 8 6,56,250 to & 6,02,150° 0 pope eime (ue, PAT wil increase by & 17250 (€ 83,250 65000) ove the Bugeted Income as a ren of ‘Proposed change in product mix, Scanned with CamScanner= =< Ul =! Bada Suen hank on Cs ot Manogennt Aon =for Ae —__ —————_ |, however, be no change in Fixag ‘ext year, the Variable Costs are expected to Increase by 10% There wil unlimited Cony, andthe ut tobe produced and wold ‘The salos potential for each ofthe products Is Solution: __1. Marginal Cost statement (for last year, at 80% capacity) ____ Particulars A 8 C| Tea] ‘Sales Quantity 10,000 units | 15,000 units | 5,000 units fa Selig Price pu 10 ti2 220 ‘Sales Value 1,00,000 1,80,000 1,00,000 38000 Less: Variable Costs (balancing figure) 35,000 75,000 | _$5,000 | 1.65099, Contribution (Fixed Cost + Proft) 65,000 __1,05,000 45,000) 215009 Less: _ Fired Costs (given) 40,000 45,000, 25,000| 1.1990 | Profit (as % of Sale Price, given) 25,000 60,000 26,000 | 1.05550 Individual PV Ratio 65% 58.33% 45% | Total Contribution 1 Overall PV Reto = Tor Sales Value 1 56.50% Total Fixed Costs @1,10,000 fe Overal BEP = = “Overall PV Ratio” 56.50% | O4A1S| ‘Overall M¢ rotal Sales — Overall BES = % 3,80,000-%1,94,415 | 185,585 ‘Note: Profit and Fixed Costs are written first in this statement. Contribution is worked back as Fixed Costs + Profit. 2. Evaluation of Product-wise Profitability next Particulars [ A B c (2) Seling Price p.u. (as per last year) - 310.00 12.00 20.00 (b) Variable Costs p.u. (as per last year) (Total VC = Quantity) 33.50 5.00, 1100 (© Variable Costs p.u. for next year (b + 10%) 33.85 550 21210 {(@) Revised Contribution pu. for next year (2 = ¢) 26.15 6.50 2730 ‘Since machine time for the 3 products are the same, the product yielding the highest contribution per unit should be preferred. Hence, Product C should be produced additionally next year, so as to reach full capacity. Present Total Output = 10000 + 15,000 + 5,000 = 30,000 uns at 80% capacty. Hence, Total Capacty = 22000 = 37,500 units. Hence, additional 7,500 units of Product C will be produced next year. 3. Marginal Cost Statement (for next year, at full A. Particulars: A 8 c Total ‘Sales Quantity 10,000 units | _ 15,000 units 12,500 units Contribution p.u. for next year (as per WN 2) 76.15 76.50 7.90 ‘Contribution | 61,500 97,500 98,750 | 2,57,750) Less: _ Fixed Costs (given) 40,000 45,000 25,000 | _1,10,000 Profit 7 21,500 52,500 73,750 | _ 147,750 SCE ‘Statement and are concerned with the & 1,10,000 Indicated profit on a sales volume of 20,000 units. The Fixed Cost structure of %9,90,000 appears to be high and they have some doubts about departing from the unit Sales Price of € 100, There is a general agreement that the “Profit Target” should be & 2,20,000. Required: jas ie 1. Compute the Budgeted BEP in rupees and in units and the number of units required to be sold to eam the Target Profi. 2. What willbe the new BEP inthe following casos ~ 14.26 — Scanned with CamScannersic Computations | 1, Basic Sales Volume = 20,000 units) | —_rotar (ey | rer une | 20,00,000 100.00 9,90,000 49.50 1,10,000 5.50 Cost + Profit 11,00,000 55,00 | = Contrtountion YS aie « = 9.00,000 } 45.00 = rmrbuton 199 5 100 = 55% eens tog even Quantity ak = 999008 = 16,000 units even Sales = 18,000 units x 100 = ® 18,00,000 ea contribution for Target Profit = Fixed Cost + Profit 9,90,000 + % 2,20,000 = % 12,£0,000 Required Contribution toearn Target Profit = Feauired Contribution ty to be sold to earn Targk Contribution per unit Situation 2 (a): Increase in Sale Price & Decrease in Sales Volume _ ©12,10,000 _ = ERO = 22,000 units Revised Selling Price per unit = 7100 + 20% 2120 arable Cost per unit WN LC 245 e)contrbution per unit (a= b) 275 Fixed Cost %9,90,000 _ i Break Even Quantity = Contribution per unit & 75 a= {[e) Break Even Sales = 13,200 units x & 120 % 15,84,000 jRevised Sales Volume 15% reduction in Sales Volume = (20,000 - 15%) 17,000 units | Revised Profit = Contribution less FC (17,000 units x & 75) ess FC © 9,90,000 © 285,000 Required Contribution _ % 12,10,000 IP) Quanty to be sold to earn Target Profit = ee een 16,133 units Situation 2 (b): Decrease in Fixed Cost & Variable Cost Ul2) Revised Fixed Cost % 9,90,000 ~ & 55,000 &9,35,000 (fb) Revised Variable Cost per unit 245 - 6% 242.30 /Revised Contribution per unit (a - b) Gale Price © 100 — Revised Variable Costs ® 42.30 57.70 ll = Revised Fixed Cost _ €9,35,000 _ ect ‘Contribution per unit" — 57.70 16,205 units "= 16,205 units x € 100 % 16,20,500 Fixed Cost & 9,35,000 + Target Profit € 2 % 11,55,000 Re quired Contribution —| = “Contribution per unit 20,017 units sh _ ee {for better operation. Details are— c 50% © 150 Lakhs Scanned with CamScanner‘ofthe Merged Plant for Break Even. at 75% capacity of the Merged Plant. ‘Turnover from the Merged Plant to give a profit of € 28 Lakhs. Contribution at 100% Capacity Level before or we. Solution: __1. Computation o ae Particulars: Plant. ak Capacity | 100% | 100% 100% = 280 1300 {@) Sales Given = 300 ian ™. 50% 200) 300+ 400 + 300 = 1649 = 210 3. (0) Variable Cost Given = 200 5 2 om = 159] = — 200+ 300 + 150 = 65 [1e Contribution 100 100 150 a] {(@) Fixed Cost (as given) = — 2 182 “Total Contribution _ 199 w= x 100 = 35% {e) Overal VR of Merged Plant = Terr sales vale “1” ~ 1000 Teta Fed Coss 182 = ¢ 529 vans, (0 Ova BE ot Meroe Pt = “Crea PY Ratio” 35%" * 2. Required Computations: hs {@) Capacity ofthe Merged Plant at Break Even Point = «100 = 522. , 100 = 52% (©) Profit 2t 75% Capacty of Merged Plant = Contribution less Fixed Costs (© 1,000 Lakhs x 75% « 35% PVR) less € 182 Lakhs = % 80.50 Lakhs. {) Required Sales for Profit of € 28 Lakhs: __ Desired Contribution _ Fixed Cost + Desired Profit _ 2 — i Little Angel School has total of 150 students consisting of 5 sections with 30 students per section. The Schoo! plans for 2 ‘picnic around the city during the week-end to places such as Zoo, Amusement Park, Planetarium, etc. A Private Transport ‘Operator has come forward to lease out the buses for taking the students. Each bus will have a maximum capacity of 50 (excluding 2 seats reserved for the Teachers accompanying the students). The Schoo! will employ two Teachers for each ‘bus, paying them an allowance of & 50 per Teacher. It will also lease out the required number of buses. The following are the other cost estimates: i Particulars Cost per Student (@) Particulars Cost(®) Breakfast 5 Rent 650 per bus. ‘Lunch 10 Special Permit Fee © 50 per bus: Tea 3 Block Entrance Fee at the Planetarium 8250 Entrance Fee at Zoo z Prizes to Students for Games 7250 ‘No Costs are incurred in respect of the accompanying Teachers (except the allowance of € 50 per Teacher). You are required to 1. Prepare 2 Flexible Budget estimating the total cost for levels of 30, 60, 90, 120 and 150 students. Each item of cost is to be indicated separately. 2 Compare the Average Cost per Student at these levels, 4. Give your conclusions regarding the Break-Even level of students, if the school proposes to collect € 48 per Student. Solution: 1. Flexible {for different Levels Particulars 30 Students | 60 Students | 90 Students | 120 Students | 150 Students ‘A. Variable Costs: Breakfast 150 300 450 600 7m Lunch 600 900 1200 1500 Tea 180 270 360 450 Entrance Fee 120 180 240 300, Total (A) 4,200 3,800 | 2400 | 3000, 14.28 or Scanned with CamScannerfeachers 0 150 ee a ee pa a foro Eirnce Fee ae prize to Students _| 280 = 250 250 ; 2 500 $0 a 3,300 3,900 5,300 5,900 £333 35.00 43.33 ‘44.47 9.33 ‘amputation of Break Even Level of Students: per Student = Colection Per Student € 45 es Variable Cot per Student & 20 = ¢ 25 © Costs relate to block of 50 students, the Fixed and Semi- Variable Costs for three levels wil be: Upto 50 Students | 51-100 Students | 101 ~ 150 Students 1,300 22,100 72,900 25 ts tas 52 ww 116 Fred Cost plus Semi-Variable Cost (B + C) ‘cortrbution per unit : i 2 a ‘University conducts a special course on “Computer Applications” for a month during Summer. For this purpose, it applications from graduates. ‘An Entrance Test is given to the candidates and based on the same, a final selection of 2 d candidates is made. The Entrance test consists of four objective type of examinations and is spread over four days, examination per day. Each candidate is charged a fee of € 50 for taking up the Entrance Test. The following data was for the past two years. ‘Statement of Net Revenue from the Entrance Test forthe course on “Computer ” Particulars Yeart| Year? Revenue (Fees collected) %4,00,000 | € 150,000 Valuation 40,000 ‘50,000 Question Booklets 20,000 30,000 Hall Rent at 2,000 per day 8.000 8.000 Honorarium to Chief Administrator 6.000 6,000 ‘Supervision (One Supervisor for every 100 candidates at € 50 per day) 4.000 6.000 General Administration Expenses. e000 | 6,000 Total Cost |e 84000 | €4,18,000 Revenue 816,000 t = 34.000 required to compute: ‘Budgeted Net Revenue if 4,000 candidates take up the Entrance Test in the next year, t Break Even Number of Candidates. ‘Number of Candidates to be enrolled If the Net income desired is € 20,000, into Fixed and Variable __ Year?) ——_—Nature €1,50,000 . 50 NA NA = 3,000 for | €40,000 £60,000 | 2,00 3 00 ences oan 7° Hence, Variable in nature. 429 Scanned with CamScanner‘Supervision (1 Supervisor for every 100 candidates at & 50 per day) General Administration Expenses © 6,000 | _ of | Test net Rovere for next year (with 4,000 2: Statement of Entrance Test! Particulars m | (2) Gross Revenue [Fees Collected) (4,000 candidates * (b) Costs: Valuation ano (4,000 candidates x © 20) Question Booksets(Variable) (4,000 candidates * € 10) Hal Rent (Fired) Honorarium to Chief Administrator (Fixed) ‘Supervision Charges (Step-Fixed Cost) General Administration Expenses _(Fixed) [[ Budgeted Net Revenue (ab) 3. Computation of Break-Even Number of Candidates en Number of Candidates ane {@) Determination of approximate BEQ (b) Nearest Candidate Levels and Fixed Costs (Contribution per Candidate= 50-20-10= %20 | No. of Candidates1,000- 1,100 1,100 - 1,200 Less: _ Average Supervision Costs per Candidate Fixed Costs 20,000 © 20,000 2200 + 100 Candidates i2 ‘Supervision %.2.200 __% 2,400 [Net Contribution per Candidate £48 — | Total Costs 22.200 22,400 ee eng tie cerned by Tel oe apes. BQ =< ee Sos = N aauitat _(€) Determination of BEQ by Trial and Error Method lars z ‘Maximum Contribution from 1,100 Candidates at & 20 per unit ‘2.000 Less: _ Fixed Costs ofthis level (including Supervision Costs) 22,200 ‘Unrecovered Fixed Costs 200 lLess:__ Additional Fixed Costs of further operations (extra Supervision Costs) 200 Total Fixed Costs to be recovered now = 400 ‘Contribution per Candidate 20 per Candidate ‘Adéitional Number of Students to recover the above Fixed Costs 400 = 20 = 20 Candidates Hence, Break-Even Number of Candidates = 1,100 + 20 = 4,120 Candidates, 4. Computation of Number of Candidates to earn Net Income % 20,000 Note: Required Total Contribution = Fixed Costs & 20,000 + Profit & 20,000 ‘no, of candidates l ] Nearest Candies Laveen Pass Ea No. of Candidates 2,100 - 2,200 2,200 ~2,300 Profit Required % 20,000 20,000 Fixed Costs & 20,000 % 20,000 Scanned with CamScanner-amnum Contribution from 2,200 Candidates Med costs ond Profits. of ths level (chat ee Fixed Costs 7 Ean Cove) jtjonal Number of Students to recover the above arion® —— Fixed Costs: Hence, Required Number of Candidates (for Net Income & 20,000) = 2,200 + 30 = 2,230 Candidates. ‘with different cost structures a a aT set erent ses of Chapple wih el uc cnt a sto pn Te Coo A 8 ity of opening another store, which will have the following expenses and revenues: Price 30.00 Production Cost 219.50 's Commission 710 Cost e700 Expenses ore € 360,000, made up as Ren € G00, Salaries € 200,000, Advertsing € 80.000 and Other Fad Note: Consider each part ofthe question separately. ‘cacalate the annual BEP in units & in value, Compute profit or loss if 35,000 pairs of Chappals are sold saetConmission Is proposed to be dacontined, bit instead a fixed amount of € 90,00 i to be Incured in Fad “A eduction in Selling Price of 5% is also proposed. What willbe the BEP in units? to pay the Store Manager € 0:0 per pair as futher commission. The Sling Price is also proposed 1 “increase by 5%. What would be the BEP in units? j wero the orginal data th Store Manager were tobe paid € 0.30 comission on each par of chappal sol in excess ‘gtthe BEP, what would be the Store's Net Profit if 50,000 pairs were sold? Situation Present Proposal (2) | Proposal (3) | rice per pair 30.00 330 — 5% = € 28.50 330 + 5% = 83150 21.00 19.50 2 +2050 = 22150 on per pair 9.00 9.00 10.00 %3,60,000 | __3,60,000 + 90,000 = & 4,50,000 3,60,000 Fixed Costs icetasnpetar 40,000 pairs 50,000 pairs 36,000 pairs: ES = BEQ x Sale Price pu © 12,00,000 ©14,25,000 2 11,34,000 35,000) — & 3,60,000 = % 45,000. ‘= (Contribution less Fixed Costs) = (€ 9 ‘Additional Sales | Total [Gea 210,000 pairs |_ 50,000 Bais (given) | EME pests oes Increase in Fixed Costs) = $0,000 pairs. )) = 96,000 pairs, ‘Commission above BEP) = © 87,000. Wat Scanned with CamScanner(2), Decrease of 10% in Seling () tnerease of 10% Variable Costs. {c) Increase of Sales Volume by 2000 units. (@)_ Increase of € 6,000 in Fixed Costs. £1,50,000 _ » 19 ‘Solution: Note: 1. Present Selling Price p.u. = i000 pu. 2, Present Contribution p.u. = Seling Price p.u. = Variable Costs pu. = % 10-26 =24 pu, Contribution per unit_ 199, gg = __Fved Costs 3. 1n the folowing calculations, PVR = cor Price per unit Contribution per Unit Computation of PVR, BEP and MOS BES=| MOS (Qtty)=| MOS(?)= Particulars | PVR = See Note BEQ = See Note | eq SP p.u. | Total Sales — wen 82 10-6 334,000 _ 8,500 x10 = | 15,000- 8,500 =| 6.500 x10 = Data given ines caer 85,000 6,500 units 265,000 | 10% Deceasein | 9 34,000 _ 11,333 x9 = | 15,000- 11,333 = | 3667 x9 = Seling Price ere eGe eae, 3,667 unts | ___¢33,003 | ‘10% Increase in 10 -6.60 _. ©34,000 _, 10,000 x10 = | 15,000 - 10,000 = 5,000 «10 = Variable Costs To | e349 =20.000 units | “"y 1,00,000 5,000 units 50,000 Sales Increase by | 10-6 _ gy, | © 34,000 8,500 x10= | 17,000-8,500=| 8.500 x10 = 2000 units 10 4 285,000 8,500 units 285,000 %6000incease | 10-6 _ 405, | © 40,000 10,000 x10 = | 15,000 10,000=| 5,000 10 = in Fixed Costs 10 LZ) %1,00,000 5,000 units 50,000 | 30. Changelin Costs, Price and Volume == ‘The following data relate to a manufacturing Company - 1. Plant Capacity: 4,00,000 units per annum. Present Utilization: 40% 2 Actuals forthe year were as under ~ (2) Selling Price 250 per unit (0) Materials Cost % 20 per unit (C) Variable Manufacturing Costs 1Sperunit (@) Fined Costs 227 Lakhs {In order to improve capacity utilization, the following proposals are considered — (a) Reduce Selling Price by 10%, and _(b) Spend additionally € 3 Lakhs on Sales Promotion. ‘Required: How many units should be made in order to earn a profit of €5 Lakhs? 1. Revised Selling Price (€50 less 10%) 845 per unit 2, Variable Cost Materials ¢ 20 + Variable Manufacturing Cost © 15 £35 per unit 3, Contribution (=2) 10 per unit Given & 27 Lakhs + Additional Promotion € 3 Lakhs Flied Costs € 30 Lakhs + Profit €5 Lakhs 235 Lakhs ‘6.No. of units required to earn above Contribution €35,00,000 eeanetlons 14,32 __ililiia a] Scanned with CamScannerston ot seting Prceand Sale Quantity ‘Company sells its products at & 60 per unit. Last year, the Company operated at a Margin of Safety of 40%, ured € 3,600 andthe Vaile ost alo oS was BO year tis estimated that Variable Cost wil go up by 10% and the Fined Costs wil increase by 5%, the Seling Price required to be fixed in the next year to earn the same PVR a in ast year. + the same Selling Price of € 60 per unit in the next year also, find the number of units required to be produced to.earn the same profit as in last year. __4. Computation of SP to earn the same PVR as in last year of SP to earn the same PVR as ine AL alas year = 100% ~ Variable Cost Ratio = 100% ~ 80% Syaniable Cost per unit (for last year) = © 60 x 80% = 4895 ‘Variable unit (for next year) = % 48 + 10% = 152.80 per Se ie = 80% of New Sale Price: “ce PVR should be the same as last year, Variable Costs should be 752.80 = 166 per unit = € 18,00,000 60% of Total Sales = 7% 12,00,000 2 2,40,000 3,60,000+5%) + € 2,40,000 = © 6,18,000 ‘of Sale Quantity re profit statement of two quarters of a Firm Particulars = js as under — 75,000 €2,75,000 cate Fixed Overheads in the increased by 20%. There was a saving of & 6,000 in Soave Determine the quantity that should have been sod in the ing Price, Profit and VOM per unit 7,500 72" = 83 per unit = 825 per unit = © 110 per unit = 820 per unit ~ (1,00,000 75,000) (3,750- 2,500) = © 20 per unit 14.33 Scanned with CamScanner‘Total Fixed Factory Overheads for 2° Quarter Less: _ Saving of Fixed Factory Overheads “Tatal Factory Overheads of 2™ Quarter (before considering saving) Variable Overheads (3,750 units x ® 20 calculated above) ‘Net Factory Overheads for 2°? quarter _2:Computation of Sale Quantity in 2 Particul (WN 1c) Selling Price per unit Less: Direct Wages Variable Factory Overheads ‘Quarter to maintain same amount of profit per Variable Casts per unit Direct Materials (& 35 x 120%, je. 20% Price Increase) (WN 1b) (WN te) a ob 20, er unit as in 1% Quarter _ to maintain same amount of, unit as in 1 lars. £ z to ‘Contribution per unit Profit per unit (WN 19) ‘Balance for Fixed Cost per unit Total Fixed Cost Hence, Quantity required to be sold = £27000 33. Price - Quantity Sensitivity - Evaluation of Proposals Soy ‘The accounts of a Company are expected to reveal a profit of € 14,00,000 after charging Fixed Costs of € 10,00,000 for the year ‘ended 31% March. The Selling Price of the product is € 50 per unit and Variable Cost per unit is € 20. Market investigations ‘suggest the following responses to the price changes ~ ‘Alternatives Selling Price reduced by Quantity sold increased by 1 5% 10% 4 1 T% 20% W 10% 25% Evaluate these aliematives and state which of the alternatives, on profitability consideration, should be adopted for the {forthcoming year. Solution: Particulars Present | __Alternative 1 Alternative 2 Alternative 3 1. Selling Price p. Given Given % 50 - 5% Given 7 50- 7% | Given % SO 10% = = 750.00 = 747.50 = 746.50 245.00 2. Variable Cost p.u. Given = % 20.00 Given = % 20.00 Given = % 20.00 Given = % 20.00 3. Contribution p.u Given = % 30.00 SP -VC = % 27.50 SP —VC = % 26.50 -. 228.00 4. Quantity sold (Note 2) | Given 80,000 + 10% | Given 80,000 + 20% | Given 80,000 + 25% 80,000 units = 88,000 units = 96,000 units 1,00,000 units 5. Total Contribution © 24,00,000 €24,20,000 © 25,44,000 8 25,00,000 yA) (Note 1) 6. Fined Costs ©10,00,000 €10,00,000 © 10,00,000 €10,00,000 7. Profit €14,00,000 14,20,000 x ae ~_8.15,00,000 | ‘Conclusion: Alternative 2 is preferable due to maximum profit, ‘Present Contribution is calculated as Profit + Fixed Cost, Total Contribution 2. Present Sole Quantity = ontrbution per Unit” £24, 30 per unit 14,34 = 80,000 units, Scanned with CamScannerwith 10% increase in Selling Price with a 10% reduction in Sales Volume. Volume to maintain origina profit after a 10% rise in Material Costs, a the originally Budgeted Seling Price per unit. Original Budget ‘Situation (1) | ‘Situation (2) “40,000 (Given) | 40,000 ~ 10% =36,000 | 260 Lakhs +58 = 44,521 Price pau. 700 Lakhs + 40,000 units = 1,750 | 1,750 +10% =%1,925| Asin Budget = ¢ 1,750 440 Lakhs + 40,000 units = % 1,100 21,100 (See Note) % 1,166 (2-3) =% 650 T825 (SP - VO) = * 584 (1% 4) ® 260.00 Lakhs 297.00 Lakhs | _ (FC-+ PR)= 260.00 Laks Cost given (Given) € 202.50 Lakhs | (Given) € 202.50 Lakhs | (Given) € 202.50 Laks 57.50 Lakhs ©9450 Lakhs (Given) 57.50 Lakhs ca SEALE som = 60H 10% = Seams (52 +124) Lakhs cae a 40,000 Units Revised Total Variable Costs per unit in Situation (2) T1,166 per unit of Safety © 120 Crores co 1s Managenent ha decided to wreas Production to 8% Capecty Lave wt he fallowing modiicauons Selling Price will be reduced by 10%. Variable Cost will be incroased by 2% on Sales, ores, including Depreciation on additions, but excluding Interest on Adklitonal Fixed increase by € 50 Cr nt Cot a ea core wb ene | Expenditure and Working Capital, ate the Sales figure, with the that willbe naedad to earn & 20 Crores over and above the present Profit and ss sn 15% Interest on the ah reced (0 Brook Even Saet, (PIV Rat, ) Margin of Satay, zt Scanned with CamScanner il(a) Sales (Total Sales = BES + MOS) ) Variable Costs at 70% (Since PVR = 30%) Contribution at 30% of Sales (d) Fixed Costs (BES x PVR) (e) Present Profit (MOS x PVR) or (Contribution Less Fixed Cost) 2 of Sales {(@)_Desired Profit = Present Profit + € 20 Crores extra profit required (b) Fixed Costs to be recovered = Present Fixed Costs + Additional Fixed Costs + 15% Interest on Additional Capital of € 100 Crores 120 + 50 + 15 = 8 185 Coreg | (©) Desired Contribution = (a +b) 741 Cores (@)_As Variable Cost increases by 2% on Sales , New PVR will be existing PVR - 2% = Wh = 2% = 79%, ©241.Crores () Sales required to eam the above Pront = <2T Sores 1860.71 Crores New Fixed Costs £185 Crores 1 (0 Newt New PV ato” 28% hinenesdchinted| {@)_New NOS = Total Sales (revised) less New BES = (e - f) © 200 Crores Note: New PVR can also be computed as under — Old New (say) % 100.00 % 100 - 10% = 2 90.00 70% of % 100 = % 70.00 (70% + 2%) of 290 = % 64.29 %30.00 22520| 230 _ 225.20 _ | 7100 ~ es000 ~ | ‘36, Evaluation of Proposals with change in Costs and Prices. a ACompany manufactures a single product with a capacity of 1,50,000 units per annum. The summarized Profitability Statement ‘for the year is as under ~ Particulars z z ‘Sales 100,000 units at ® 15 per unit 5.00000 Less: Cost of Sales Direct Materials 300,000 Direct Labour 2,00,000 Production Overhead: Variable 60,000 Fixed 3,00,000 ‘Administration Overheads (Fixed) 1,50,000 ‘Selling and Distribution Overheads: Variable 90,000 Fixed 4,50,000 t Pat a1 You are required to evaluate the following options: 1+ What i the Sales required to earn a target prof of 25% on Sales, it tho packaging is improved ata cost of € 1 piu? 2 There is an offer from a large retail for purchasing 30,000 units per annum, subject to different brand name at a cost of © 2 per unit, However, in this case there will be no Expenses, Also this will not, in any way, affect the Company's existing business. What will {for this additional a packaging with & Providing Selling and Distribution be the break-even price 3. Wan ‘of € 3,00,000 is made on advertising, the sales would increase 0 aa from the present level of 1,00,000 units 1,20,000 units at a price of € 16 per unit. Will that expenditure be 4. Ifthe Selling Price Is reduced by € 2 per unit, there wil be 100% 1 M0 Saiog by € 2 por ‘pacity utilization, Will the reduction in Salling 14.36 ——— Scanned with CamScanner211.50 120,000 units €8,50,000 2 13,80,000 © 3,00,000 = 1,50,000 ©1,50,000 | 6,00,000 | _(6+3) = % 9,00,000 ©6,00,000 %2,50,000, 4,80,000 sans -£ 6,50 + £2.00 = € 8.50 per unit. Profit in Situation (3) = 4,80,000 ~ 2,50,000 = & 2,30,000. So, the proposal is justified. Profit in Situation (4) = € 3,75,000 ~ 2,50,000 = & 1,25,000. So, the proposal is justified. ‘Quantity required = °Q' units. So Sales = % 15 x Q units = 15 Q and Profit = 25% of 15 Q = 3.75 ‘Contribution Fixed Cost. So, 3.75 Q = (15 Q~ 7.50 Q) ~ 6,00,000 (including packing) Q-7.5 Q = - 6,00,000. So 3.75 Q = 6,00,000. On solving, we get Q = 1,60,000 units. (Note: However, this is outside the Firm’s maximum capacity of 1,50,000 units.) en price for additional offer = Variable Cost only (since there are no Fixed Costs) Butd 500,000 00,000 4,00,000, 4,00,000 30,000 4,30,000 70,000 470,000 70,000 1,30,000 Scanned with CamScannerProcess A | @12 220 © 30,00,000 Capacty in units) ae Anticipated Sales (Next Year, in units) 4,00,000 ‘Suggest: a : noe = 7 pa ta Would you change your answer as given above, i you were informed thatthe capacities processes ‘follows: A 6,00,000 units, B 5,00,000 units? Why? z 1. Basic Computations A 20 212 8 © 30,00,000 3,75,000 Units 4,00,000 Units 25,000 Units €2,00,000 ” Point = —CPANGE in Fixed Costs _ 30,00,000-21,00,000 _ 9,00,000 eee Poet © Soe in Corton po 8-6 77 "ie 2. ‘Since Anticipated Sales (400,000 uns) is below the Indiference Point (4,50,000 Fue Cots preferate. Hence, Process 8s preferable srefted by high etches) ee 3 \No change in answer even if capacity of Process A increases, since Anticipated Sales is onty 400,000 (Note: However, if it assumed that Capacity as per Qn.2 represents Anticipated anticipated Sales above the Indifference Point of 4,50,000 units, In case of jee ‘case of output above ¥ ___2pton with Higher PYR (lower VC pu) shouldbe chosen, Hence, Process is preferable in this case.) sie Scanned with CamScannerate the Cost Indifference Points, Interpret: your results. present case load is 600 cases, and oprate on cost considerations? is expected to go up to 880 cases in ear futures 1. The Cost Indifference Points are computed as under — A (Manual) B (Semi-automatic) € (Fully-autornatic) 215,000 ©45,000 1,25,000 240 140 J 0 £45,000 —¢ 15,000 Sool __ 145,000 -€ 15,000 _ 390 reports. end B= “—~¢ 240-€ 140 Difference in Variable Cost per Unit" £.1,25,000 -€ 15,000 _ 550 reports. © 1,25,000 -t 45,000 oo Between = ©2508 Band 140-8 40 800 reports. CandA @ 240-8 40 se totmerence Pins and Deco: (he nubersindat te rmbe f reps aes aie) Nil 300 550 800 A AorB Aorc Borc C Choice of Method | Reason ’A (Manual) Due to Lower Fixed Cost. | Either A or B Indifference Point. B (Semi-automatic) Next Range of Lower Fixed Costs. Either Bor C Indifference Point. C (Fully automatic) Lower Variable Costs per report / case. ‘and hence Method B (semi-automatic) can be used. “Case Load = 600 cases. This is in the range 300 to 800, Load is expected to go up to 850 cases in the near future, Berce Po etnon 8 (S50 cat) et relevent for decor malin soe Bf Erofeahn in he 800 cases, This Indifference Point ‘will be relevant only ifthe choice lies between A and C. the Court should opt for Method C (fully automatic) 4, Cost of various options at 550 Cases: x c © 15,000 © 45,000 @1,25,000 £240 « 550 = © 1,32,000 € 140 550 = © 7,000 £40 x 550 = % 22,000 1,47,000 422,000) 3,47,000 | ference point becomes Irelevant in the overall analysis Bore Fiabe an ad Hc, Wi Scanned with CamScannerP Costs are ‘ABC Lid can produce 4,00,000 units of a product p. 110% epee Vi gen wee € ‘Variable Seting Expenses ‘The budgeted Fleed Expenses wore & 24,00,000 Selling Expenses were S RnR Sem oer perating ta forthe your re 8 fos 3,20,000 units: Same part 3,10,000 units Stock of Finished Goods 0 erie Costar" eve emma at Fn basis of period. Preparatory nd 31 arch (eo bl of Mangal Cotng i ‘of Absorption Costing. 1, Profit, under Marginal Costing Particulars Computation ‘Sales Valve 310,000 units at 80 per unit ‘Less: Variable Costs Production Costs at % 40 per unit +3,10,000 units at % 40 per unit Seling Costs at & 12 per unit 3,10,000 units at € 12 per unit Contribution Less: _ Fixed Costs Production 24,00,000 + Seling 16,00,000 Profit 2. Profit Statement under Absorption Costing as Particulars Computation 2 ‘Sales Value 310,000 units at & 80 per unit 2,48,00,000 ‘Less: Cost of Goods Sold (as computed below) e Cost of Production Variable 3,20,000 units x % 40 pu = 1,28,00,000 Fixed (Note 1) 3,20,000 units x ® 6 pu =_19,20.000 : Total Cost of Production Total (3,20,000 units x 46 pu) = 1,47,20,000 oll ‘Add: Opening Stock of FG (Note 2) 40,000 units x & 46 pu = __18,40,000 (Cost of Goods availabe for Sale 1,65,60,000 Less: Closing Stock of FG (Note 3) 50,000 units % & 46 pu = _23,00,000 Gross Profit tose 50H Variable 3,10,000 units x € 12 per unit Fixed Given Profit (before absorption adjustments) He Underabsorption of Fixed OH Incurred € 24,00,000 ~ Absorbed 19,20,000 Profit (efter sbsorption adjustments) rived. unt €24,00,000 ae Absorbed Fived Costs per (ome 09 apacy 40,000 unt)», FEA OO 6 per ut 2 Ine snes ca of Og Sh han ene os wrk prt % ‘Parti led Cae Coat pda on Fro) wa aay OY © 00+ aes 14.40 li Scanned with CamScannera ‘capacity of 200,000 units per year. Normal Capacity “Costs are € 11 per Un. Fined Costs are © 3,60,000 per yeu. ing Costs are € 2,70,000 per year. The unit Selling Price Is © 20. In the yoar just 1000 units and sales were 1,50,000 units, The Closing Inventory on 20° June was Costs for the year were © 35,000 higher than the standard. You are required to ~ the profit forthe yearby ~(a) Absorption Costing Method, and (b) Marginal Costing Method. the dlfference inthe profits, 1. Profit Statement for the ‘ended 30” June (under Absorption Costing Method) Particulars x es . (2,50,000 units x © 20) 17,60,000 | ‘Variable Production Cost (1,60,000 units x € 11) Increase in Variable Cost 35,000 | ‘Fixed Cost 3,60, 21,55,000 Total Cost of Production ‘add Opening Stock of Finished Goods (10,000 units x & 13) (See Note 2) 1,30,000 | ‘Cost of Goods available for sale | 22,85,000 | 2,69,375| __20.15,625, “Less: Gosing Stock of Finished Goods 20,000 units (See Note 2) “Profit (a — b) 984,375 B Variable (1,50,000 units x ® 3) 150,000 Fixed 2,70,000 | __7,20,000 | = 264,375 of information relating to Opening Stock, it is valued at Variable Cost zg ‘Stock Valuation: In the absence =t2p. p.. (given) plus an apportionment of Fixed Cost at Normal Capacity. \® Spy 2,00, 000 Jeteck Vatustion: Curent Cost of Production of 1,60,000 units = €21,$8,000 (fram the statement above) te ong Stock 2,000 uns « 22.5550 x 26,000 units = € 2,69,37% [This means that Closing Stock is a Cost of Production, and hence, FIFO Method has been adopted for Inventory Valuation.) Le Particulars: se (1,50,000 units * © 20) fe Pro Cost (160,000 units » © 11) 47,60,000 a 000 “Total Variable Cost of Production | 17,95,000 4,10,000 ‘Goods (10,000 units » € 11) Cost of avaliable for sale | 19,05,000 aaah Scanned with CamScannerPorticulars Less: Closing Stock of Finished Goods 20,000 units (See Note 1) Vartable Cost of Goods Sold 50,000 units » 3) Profits under Marginal Costing Fixed Mfg Costs included in Clasing FG__( 2,69,375 ~ & 2,24,375) ‘Sub-Total lLess: _ Fixed Mfg Costs included in Opening FG__(® 1,30,000 ~ & 1,10,000) Profits under Absorption Costing "; a ‘42._Marginal vs Absorption Costing - Proft Statements ‘ABC Motors assembles and selis Motor Vehicles at & 24,000 per Vehicle. It uses an actual costing system, in which unit costs are calculated on a monthly basis. Data relating to March and April months of a year are: ae shea 0 190 500 oO 350 2 10,000 10/000 = 3,000 = 3000, 200000 200000 6,00,000 q ‘4. Present income Statements for ABC Motors in March and April under ~ (a) Variable Costing, (b) Absorption Costing. 2. Explain the differences between (a) and (b) for March and April. 1. Income Statement under Variable Costing Scanned with CamScanner{400 wnitsx® 15/000) = 60,00/000 (150 unitsxt 14,000) = 21,00,000 81,00, [50 units 24,000) = 64,00,000 | (520 unitsx® 24,000) = 1,24,80,000 ‘Closing Inventory Quantity = Opening Stock + Production ~ Sale Qtty In Absorption Costing, Closing For March: Nil + 500 ~ 350 = 150 units. Inventory is valued at Current Total For April: 150 + 400 - 520 = 30 units. Manufacturing Cost (FIFO Bess) _) n for between er ‘Operating Profits under Variable Costing and Absorption ‘dve to the inclusion of Fixed Manufacturing Cost in Inventory Valuation. Under Absorption Costing, Inventory 1S d at Total Manufacturing Cost, which includes Fixed Cost component. So, we have ~ Profit under Absorption Costing Fixed Manufacturing Cost in Closing Inventory Profit under Variable Costing _| ~_| Less: _ Fixed Manufacturing Cost in Opening Inventory Particulars March April Profits under Marginal Costing 7 12,50,000 %31,20,000 Fixed Mfg Costs included in Closing FG (150 units» 4,000) = 6,00,000 (30 unitsx® 5,000) = 1,50,000 | ‘Sub-Total % 18,50,000 % 32,70,000 Fixed Mfg Costs included in Opening FG Nit | (150 units%<® 4,000) = 6,00,000 Profits under Absorption Costing 2% 18,50,000 2% 26,70,000 Tf Fixed Manufacturing Costs are included in Closing Inventory Valuation, to that extent, Closing Inventory Value ‘and hence Profits will be higher under Absorption Costing. Hence, this amount is added to the Profits under Marginal Costing. The reverse will be the case in case of Opening Inventory Valuation. d Decision-Making Basics of Special Order a ele 3 P R Ltd manufactures medals for winners of athletic events and other contests. Its manufacturing Plant has the capacity to vce 10,000 medals per month. The Company has current production and sales level of 7,500 medals per month. The domestic market price of the medal is % 150. Cost data for October is as under — (that vary with the number of batches) ‘Set up, Materials Handling, Quality Control 150 batches * € 500 per batch for its existing customers in batch size of 50 Medals (180 Batches 50 Medals per batch = 7,500 medals). order for 2,500 at 100 per medal, on apollo feo ee per ‘The Special Order for 2,500 medals 1443 Scanned with CamScanner|PQR Lid accept the special order? Why? Explain briefly. ‘the plant capacity soo medal Instead of 10.000 medals och month The Special Order Sree raced taty shouts POR Lid acct the spell order? Why? Expl ay of Contribution per medal (for existing customers) ‘Average Set Up, et: Casts per medal (for existing customers) = 150 — 35 - 40-10 @ oe) © Li@) ‘Contribution per unit for edsting customers = SP - VC = 2. Evaluation of Special Order for 2,500 medals Particulars - a Sales Revenue (2,500 medals x € 100 per medal) Less: Variable Costs Direct Material (2,500 medals x & 35 per medal) 7500 Direct Manufacturing Labour (2,500 medals x % 40 per medal) 1,00,000 ‘Set-ups, Materials Handling, Quality Control (25 batches x & 500 per batch) ‘Contribution from Special Order ident spare capacity (10,000 ~ 7,500 = 2,500 Decision: The Company may accept the Special Order, since there is suffi ‘medais), and there will be an increase the operating profit by € 50,000. 3. Effect of reduced capacity (i.e. 9,000 medals) ‘Since the Special Order is indivisible, .e. to be accepted or rejected totally, acceptance of Special Order would reduce the ‘Soles to existing customers from the present level of 7,500 to (9,000 ~ 2,500) = 6,500 units. Particulars t ‘Additional Contribution due to Special Order (WN 2) 30,000 \Less: _ Loss of Contribution from existing customers (1,000 medals at € 65 per medal) (65,000) \Net Loss of Contribution (15,000) | Decision: Due to loss of contribution by € 15,000, the Special Order is nat acceptable in this case. 44. Evaluation of Proposals a ‘The Financial Controller of Kapa Ltd has prepared the following estimates of working results for the last year Direct Material © per unit 16.00 Direct Wages © perunit 40.00 Variable Overhead ® per unit 12.00 ~ Selling Price © per unit 125.00 1 Fixed Expenses 6,75,000 per annum, as Sales 25,00,000 per annum. business processes, the overall Direct Labour Efficiency will increase by 12%, but the Wage Rate During do year, itis epee that the Material Prices and Variable Overheads will go up by 10% and 5% ‘will go up by 5%. The Fixed Overheads are also expected to incroase by & 1,25,000. The Vice-President Manufacturing states that the same level of output as obtained should be maintained Ed ata wate te seins fo sore orl fro macy one te tomatoe ‘The Vice-President Marketing states that the market will not absorb any increase in Teapots that pbc lvolng evervamentexpenes as gh below wll nereene te quanty ot ele ay ‘Advertisement Expenses (®) 80,000 1,94,000 3,20,000 —4,60,000 ‘Additional units of Sales 2,000 4,000 6,000 8,000 14.44 Scanned with CamScannermarginal Costing, an Income Statement fr last yoar and this yer, npc cin mb en sr va Ye level to be budgeted the four alternative proposals by the Vice President peer cio! aoe eerie 2125.00 16.00 116 + 10% = € 17.60 Direct Labour aon (Gee Note) = £37.50 Variable OH 1200 112.00 + 5% = 212.60 Total Variable Costs p.u 768.00 267.70 ‘Contribution per unit 257.00 157.30 Seles Quantity %25,00,000 + € 125 = 20,000 units (sper last year) 20,000 units Total Contribution % 11,40,000 % 11,46,000 Fired Coss, 2 675,000| _ 6,75,000 + 1,25,000 = & 8,00,000 Profit 4,65,000 £3,46,000 anc ETcerey creases by 12% th wertes wl ke les et compete the ob, Btw Be Pld 8 MS b tg rae rene tc etd ab! Cha per unt Wb 7-5,» ese € 37-5890 - Alternati ay, even ator Cat peru an oe taken [40 5 ta ret) es 20 sens = higher efficacy and lower time taken] = €42 ess 12% thereon = €36.96 per unit. I is presumed thatthe Labour Efficiency doesnot affect Variable Overheads. Desired Contribution = Desired Profit + Fixed Costs 12,65,000 . __2:12,65,000 = Desired Contribution per unit = 20,000 units ‘units | = 763.25 per unit ‘Variable Costs per unit for this year | = © 67.70 per unit ‘Hence, Desired Selling price to maintain the same profit [__= 2130.95 per unit 3.6) of Advertising Strategies Particulars Option 1 Option 2 Option 3 Option 4 ‘Sales Quantity 2,000 4,000 6,000 | 8,000 ‘Contribution at % 57.30 pu 114,600 © 2,29,200 2 3,43,800 %4,58,400 ‘Advertisement Expenses 80,000 €.1,94,000 %3,20,000 %4,60,000 234,600 235,200 2 23,800 @_ 1,600) onal Net Benefit at pany sould choose OPUON 2,1 nat adatonal advertisement expenses of € 194,000 to increase m 4,000 units, The revised profit for this year wil be 3,46,000 + € 35,200 = €3,81,200, nw Maite getbahd val 14.45, Scanned with CamScannerhas been received that would utze haf he capacity ofthe Factory. The order cannot be split 1 thas ity, ‘in full executed at 10% below the normal domestic prices, or rejected totaly. availabe to the Management are: |. Reject the order and continue with the domestic sales only, (as at present), OF 2. Accept the order, spit capacity betwoen overseas and domestic sales and urn away excess domestic demand, o¢ 3. Increase capacity 80 as to accept the export order and maintain the present domestic sale by = (@) Buying an equipment that willincrease capacity by 10%. This will result in an increase of € 1,00,000 in Fixed Cost, anq In that case, Labour will be paid at one and a half times the Bera mat betace of red capacty. Lach ofl : normal wage rate. Prepare a comparative statement of profitat of Profitability under different alternatives Alternatives: I = a Current Operations pel nad mig os ir Oe Description ‘only at 80% Capacity | 50% for Domestic Sales ar Domestic Sates ang w ‘| for Export Sales 50% for Export Sales Gen = 320,000 | 32,00,000 x S07. = 20,00,000 Given = 32,00,000 3 = (WN 1) = 18,00,000 (WN 1) = 18,00,000 | ___32,00,000 38,00,000 '50,00,000 100% _ 130% 2, Direct Materiats ‘Given = 10,00,000 10,00,000 x 80% =12,50,000 | 10,00,000> 20% ‘16,25,000 Diet Labour Gwen = 4.00000 | 00,000 x 100% - 00,000 (ww 2) =7,00,000 Variable Overhead | Given = 2,00,000 | 2,00,000 x 400% ~2,50,000 ‘Total Variable Cost 16,00,000 20,00,000, 3. Contribution (1 = 2) 16,00,000 18,00,000 4. Fixed Overheads Given = 13,00,000 13,00,000 'S. Profit (3 - 4) '3,00,000 5,00,000 ‘Suggestion: Alternative I] is preferable, due to maximum profits. Working Notes: 1 (e)'Sles Revenue at 100% Capacy (norma prices) = £22.60. - ¢ 400,000 (b) Sales Revenue at 50% Capacity (normal prices) = & 40,00,000 x 50% = % 20,00,000 (©) Export Sales Revenue at 50% Capacity (10% below normal prices) = % 20,00,000 less 10% = © 18,00,000 2. (@) Direct Labour Cost at 100% Capacity (normal rates) = % 4,00,000 x =. 25,00,000 (b) Direct Labour Cost at 110% Capacity (normal rates) = € 5,00,000 x He = €5,50,000 (6) Direct Labour Cost for extra 20% Capacity (1.5 times normal wage rate) = € 5,00,000 x 20%X 1.5 = © 1,50,000 (©) Total Direct Labour Cost at 130% Capacity (b-+c) = 2 5,50,000 + & 1,50,000 = 8 7,00,000 46, Evaluation of Alternative Strategies - Optimal Strategy ) <0) oS a A review, made by the top management of Sweat and je Ltd, whi eee on Strugg) Heh maine only Oe prodck, of he eae ‘Loss for the quarter Fixed Cost (For the year © 1,20,000) Variable Cost per unit The Finance Manager who feels perturbed, that the Company should atleast break-even 1 oworincased sal Tons, Copary a neces wea aan ‘50 per - aa, 7 - Scanned with CamScanner