Decision Making Particulars A B C D

Direct Material 80 100 100 120

Make or Buy Decision Direct Labour 20 25 25 30
1. An industrial company is purchasing Variable Overheads 10 12 15 10
annually 10,000 units of a component @ Rs. 9 per Fixed Overheads 15 23 20 20
unit. There is a proposal to make component Total 125 160 160 180
within the factory itself. Studies show that the Output per machine 4 2 3 3
machine required to make the component will cost hour (unit)
Rs. 1,50,000 with a life of 10 years, at the end of The key factor is machine capacity.
which the scrap value is likely to be Rs. 15,000. You are required to advice the management
Space for the machine can be easily found but will whether to make or buy them from a supplier who
have a notional annual rent of Rs. 1,500. The quotes following prices.
amount required for the machine will have to be A : Rs. 115; B : Rs. 175; C : Rs. 135 and D : Rs.
withdrawn from a fixed deposit account earning 185.
interest @ 10%. Insurance will be ½ % and power
consumption Rs. 6,0000 per annum. Materials will 4. A machine manufactures 10,000 units of a
cost Rs. 1.80 per unit and a contingent of 5 part at a total cost of Rs. 21 of which Rs. 18 is
workers @ Rs. 600 p.m. will be needed in variable. This part is readily available in the
addition to a supervisor costing Rs. 1,000 p.m. market at Rs. 19 per unit.
Comment on the proposal from the costing point If the part is purchased from the market then the
of view. machine can either be utilized to manufacture of
component in same quantity contributing Rs. 2 per
2. Auto parts ltd. has an annual production of component or it can be hired out at Rs. 21,000,
90,000 units for a motor component. The Recommend which of the alternatives is
component’s cost structure is given below: profitable?
Materials Rs 270 per unit
Labour ( 25% fixed) Rs. 180 per unit 5. Expansion Ltd. manufactures automobile
Expenses: Variable Rs. 90 per unit accessories and parts. The following are the total
Fixed Rs. 135 per unit cost of processing 1,00,000 units:
Total Rs. 675 per unit Direct Material Cost Rs. 45 lakhs
a. The purchase manager has an offer from a Direct Labour Cost Rs. 8 lakhs
supplier who is willing to supply the Variable factory Rs. 6 lakhs
component at Rs. 540. Should the overheads
component be purchased and production Fixed Factory overheads Rs. 5 lakhs
be stopped? The purchase price of the component is Rs. 22.
b. Assume the resources now used for this The fixed overheads would continute to be
components manufacturing are to be used incurred even when the component is bought from
to produce another new product for which outside, although there would have been reduction
the selling price is Rs. 485. to the extent of Rs. 2,00,000.
In the latter case material price will be Rs. Required:
200 per unit, 90,000 units of this product a. Should the part be made or bought
can be produced, at the same cost basis as considering that the present facility when
above for labour and expenses. Discuss released following a buying decision
whether it would be advisable to diver the would remain idle?
resources to manufacture that new product, b. In case the released capacity can be rented
on the footing that the component out to another manufacturer for Rs.
presently being produced would, instead of 1,50,000 having good demand, what
being produced, be purchased from the should be the decision?
market.
6. A radio manufacturing company finds that
3. Bombay Equipment manufactures four while it costs Rs. 62.50 to make component X-
components, the cost structure of which is given 273, the same is available in the market at Rs.
below: 57.50 each with an assurance of continued supply.
The breakdown of the cost is:
 Particulars Cost per unit Y 16 Hours @ Rs. 0.25 per unit
Material Rs. 27.50 Variable Exp. 150% of wages
Labout Rs. 17.50 Fixed Expenses Rs. 750
Variable overheads Rs. 5.00 Selling Price:
Depreciation and other fixed cost Rs. 12.50 X Rs. 25
Total Rs. 62.50 Y Rs. 20
a. Should the company make or buy the The directors want to be acquainted with the
component? desirability of adopting any one of the following
b. What would be your decision, if the alternative sales mix in the budget for the next
supplier offered the component at Rs. period:
48.50 each? a. 250 units of X and 250 units of Y
b. 400 units of Y only
7. A manufacturing company finds that while c. 400 units of X and 100 units of Y
the cost of making a component No. 0.51 in its d. 150 units of X and 350 units of Y
own workshop is 8.00 each, the same is available State which of the alternatives you would
in market at Rs. 6.50 with an assurance of recommend to management.
continuous supply. Give your suggestion whether
to make or but this component. Give also your 10. The following production/sales mix is
views in case the suppliers reduces the price from capable of achievement in a factory.
Rs. 6.50 to Rs.. 5..50. The cost data is as follows: a. 2,000 units of product X and 2,000 units of
Particulars Cost per unit product Z
Material Rs. 3 b. 4,000 units of product Y
Labout Rs. 2.00 c. 1,000 units of Product X, 2,000 units of
Variable overheads Rs. 1.00 Product Y and 1,600 units of product Z.
Depreciation and other fixed cost Rs. 2.00 Cost per unit is as follows:
Particulars X Y Z
8. LMN Ltd. purchases 20,000 bells per Direct Material 20 16 40
annum from an outsider at Rs. 5 each. The Direct Wages 8 10 20
management feels that these be manufactured and Variable Overheads 2 4 8
not purchased. A machine costing Rs. 50,000 will Selling Price 36 40 100
be required to manufacture the item within the Fixed Cost are Rs. 20,000. Determine the
factory. The machine has an annual capacity of marginal contribution per unit of X, Y and Z. Also
30,000 units and life of 5 years. The following calculate the profit resulting from the product mix
additional information is available: under (a), (b) and (c).
Material Cost per bell Rs. 2.00
Labour Cost per bell Rs. 1.00 11. Calculate the effect of sales mix from the
Variable overheads 100% of labour cost following data by comparing the P/V ratio and
a. The company should continue to purchase Break Even Point.
the bells from outside suppliers or should Product P Q R S
make them in the factory, and Sales 40,000 50,000 20,000 10,000
b. The company should accept an order to Variable 24,000 34,000 16,000 4,000
supply 5000 bells to the market at a selling New Sales 30,000 44,000 40,000 6,000
price of Rs. 4.50 per unit? Mix
Fixed Cost Rs. 29,400.
Product Mix
12. Ambika Condiments brings out 2 products
SUCHI and RUCHI which are popular in market.
9. Following information has been made The management has the option to alter the sales
available from the cost records of universal mix of the two products out of the following
Automobiles Ltd. manufacturing spare parts. combinations:
Direct Material:
X Rs. 8
Y Rs. 6
Direct Wages: SUCHI RUCHI
Particulars
X 24 Hours @ Rs. 0.25 per unit (Units) (Units)
Option: I 800 600 Product A 3
II 1,600 -- Product Y 2
III -- 1,300 Fixed expenses Rs. 800
IV 1,100 500 Variable expenses are allocated to product as
The per unit production cost/sale 100% of direct wages.
SUCHI RUCHI Selling price of A is Rs. 20 and of B is Rs. 15.
Direct Material (Rs.) 25 30 Sales mixture:
Direct Labout (Hours) 10 12 a. 1,000 units of Product A and 2,000 units of B
Variable factory overheads 100% of labour b. 1,500 units of Product A and 1,500 units of B
Selling Price (Rs.) 75 90 c. 2,000 units of Product A and 1,000 units of B
Labour rate is Rs. 2 per hour
Common fixed overhead for both products Rs. Acceptance of New Order
10,000. You are required to:
a. Prepare a marginal cost statement for the 15. A plant at present operating at 75%
two products; and capacity and producing 2,40,000 units. Variable
b. Evaluate the options and identify the most costs per unit are as follows:
profitable sales mix. Direct Material Rs. 1.50
Direct Labour Rs. 2.00
13. From the following data you are required Variable overheads Rs. 0.50
to present to Management An offer is received from a foreign customer to
a. The marginal cost of product X and Y and the buy 60,000 units at Rs. 4.50 per unit. Management
contribution per unit. hesitates to accept the offer because the selling
b. The total contribution and Profit resulting price is less than the total cost per unit and also
from each of the suggested sales mixtures. because the current selling price is Rs. 5.25 per
Particulars Rs. Per unit unit. No change is expected in respect of fixed
Direct Materials overheads which will remain unaltered at the
Product X 10.50 following figures.
Product Y 8.50 Administration overheads Rs. 1,80,000
Direct Wages Selling and distribution exp. Rs. 80,000
Product X 3.00 However the export order shall require special
Product Y 2.00 packing which will cost Rs. 20 per 100 units.
Fixed expenses (total) Rs. 800 Advise the management whether the order should
Variable expenses 100% of direct wages per be accepted or not.
product
Selling price: 16. Sports Specialists ltd. are famous for
Product X Rs. 20.50 specialized manufacture of quality chess board
Product Y Rs. 14.50 sets. Presently, the company is working below its
(units) normal capacity of 1,000 units per month. The
Suggested Sales Product Product company sells its chess board sets in the national
Mixtures X Y market at Rs. 150 per unit. During April 2014,
A 100 200 600 units were sold which is the regular sales
B 150 150 volume for each month all through the year.
C 200 100 Rs.
Direct Materials 60
14. Present the following information to show Direct labour 30
to the management: Factory overheads 30
a. The marginal product cost and the contribution Selling & Administration overheads 15
per unit; The company has received an export order on
b. The total contribution and profit resulting from 20/4/2014 for supply of 600 units to be dispatched
each of the following sales mixture by 30/4/2014. However, the order stipulates the
Particulars Rs. Per unit price per unit Rs. 100 only. The cost analysis
indicated that the cost of direct material and direct
Direct Materials
labour that are to be incurred on the export order
Product A 10
would be the same amount per unit as the regular
Product B 9
line of production. However, an amount of Rs.
Direct Wages
2,000 will have to be incurred on special packing,
labelling, get up, etc. No additional factory, 19. A company produces a single product
selling or administrative overheads costs would be which is sold by it presently in the domestic
incurred in executing the export order since the market at Rs. 75 per unit. The present production
firm is operating below normal capacity. and sales is 40,000 units per month representing
Using differential cost analysis method, prepare 50% of the capacity available. The cost data of the
the income statement to show whether the product are as under:
acceptance of the export would be profitable to the Variable costs per unit Rs. 50.
company? Fixed costs per month Rs. 10 lakhs
To improve the profitability the management has
New Proposal three proposals on hand as under::
a. To accept an export supply order for 30,000
17. A firm is selling X Product, whose units per month at a reduced price of Rs. 60
variable cost per unit is Rs. 10 and fixed cost is per unit, incurring additional variable cost of
Rs. 6,000, it has sold 1,000 articles during one Rs. 5 per unit towards export duties, etc.;
month at Rs. 20 per unit. Market research shows b. To increase the domestic market sales by
that there is a great demand for the product if the selling to a domestic chain stores 30,000 units
price is reduced. If the price can be reduced to Rs. at Rs. 55 per unit, retaining the existing sales
12.50 per unit, it is expected that 5,000 units can at the existing price;
be sold in the expanded market. The firm has to c. To reduce the selling price for the increased
take a decision whether to produce and sell for the domestic sales as advised by the sales
growing demand of 5,000 units at the rate of Rs. department as under:
12.50. Give advice to the management in taking a Reduce Selling Price Increase in Sales
decision. per unit by: expected (in Units)
5 10,000
18. A company currently operating at 80% 8 30,000
capacity has the following particulars: 11 35,000
Particulars Rs. Prepare a table to present the result of the above
Sales 32,00,000 proposals and give your comment and advice on
Direct Materials 10,00,000 the proposals.
Direct Labour 4,00,000
Variable overheads 2,00,000 Adding and Dropping Product Line
Fixed overheads 13,00,000
An export order has been received that would 20. Universe Ltd. manufactures 20,000 units
utilize half the capacity of the factory. The order of X in a year at its normal production capacity.
cannot be split i.e. it has either to be taken in full The unit cost as to variable costs and fixed costs at
and executed at 10% below the normal domestic this level are Rs. 13 and Rs. 4 respectively. Due to
prices or rejected totally. trade depression, it is expected that only 2,000
The alternatives available to the management are: units of X can be sold during the next year. The
a. Reject the order and continue with the management plans to shut down the plant. The
domestic sales only; (as at present), or fixed costs for the next year then is expected to be
b. Accept the order, split capacity between reduced to Rs. 33,000. Additional costs of plant
overseas and domestic sales and turn away shut down are expected at Rs. 12,000. Should the
excess domestic demand, or plant be shut down? What is the shut-down point?
c. Increase capacity so as to accept the export
order and maintain the present domestic sales 21. The cost per unit of three products X, Y
by: and Z are given below:
i. Buying the equipment that will increase the Particulars X Y Z
capacity by 10%. This will result in an Direct Material 20 16 18
increase of Rs. 1,00,000 in fixed costs, and Direct Labour 12 14 12
ii. Work overtime to meet balance of required Variable Overheads 8 10 6
capacity. In that case labour will be paid at Fixed expenses 6 6 4
one and half time the normal wage rate. Total Cost 46 46 40
Prepare a comparative statement of profitability Profit 18 14 12
and suggest the best alternative. Selling Price 64 60 52
No. of Units Produced 10,000 5,000 8,000 24. The following details were tracked from
Production arrangements are such that if one the budget for the forthcoming year:
product is given up the production of the others Particulars Rs. Rs.
can be raised by 50%. The directors proposed that Sales (40,000 Units) 3,60,000
product Z should be given up because the Direct Material 1,20,000
contribution from the product is the lowest. From Direct Labour 80,000
the Present analysis of the data indicate whether Variable overheads 40,000
the proposal should be accepted? Fixed overheads 1,00,000 3,40,000
Net Profit 20,000
22. The Management of a factory is In order to improve the amount of net profit
considering the question of dropping an budgeted. It is proposed to reduce the selling price
unprofitable line and tenders your advice. from Rs. 9 to Rs. 8 per unit. It is anticipated that if
Following is the data: (Rs. In lakhs) this reduction is made, the volume of sale would
Particulars X Y Z increase by 30,000 units.
Sales 10.00 8.00 2.00 Assuming that if the selling price were reduced as
Direct Material 2.95 3.36 0.75 suggested, calculate the net profit that will be
Direct Labour 1.18 1.12 0.45 achieved.
Variable Expenses 1.77 1.12 0.30
Fixed Expenses 3.30 1.80 0.90 25. The SN Manufacturing company produces
Profit/Loss 0.80 0.60 (0.40) 10,000 units per annum by employing 50% of
In the event of discontinuance of manufacture of factory capacity. The price of a unit is Rs. 50. The
Z, certain supervisory staff of that product could total costs are:
be discharged. Their salary etc. would come to Rs. Particulars Rs.
20,000 which is included in fixed expenses. The Materials 1,00,000
management on recommendation, proposed to Wages 2,00,000
drop Z, retain their supervisory staff and increase Fixed Overheads 1,00,000
the production of X by 2 lakh units not at a selling Variable overheads 40,000
price of Re. 1 each. Give your advice. 4,40,000
The company accepts an order for an additional
General Problem 10,000 units at a selling price of Rs. 40. The
increased volume of production reduces material
23. Quality product Ltd. manufactures and price by 2½%. Wages remain constant. Bud, due
markets a single product. The following data are to employment of new workers, there is an overall
available: drop of 5% efficiency.
Rs. Per unit Prepare a statement showing the variations of net
Material 16 profits resulting from the acceptance of an order.
Conversion Cost (Variable) 12
Dealer’s Margin 4
Selling Price 40
Fixed Cost Rs. 5 lakhs
Present Sales – 90,000 units
Capacity Utilization – 60%
There is acute competition. Extra efforts are
necessary to sell. Suggestion have been made of
increasing sales:
a. By reducing selling price by 5%
b. By increasing Dealer’s margin by 25% over
the existing rate.
Which of these two suggestions you would
recommend, if the company desires to maintain
the present profit. Give reasons.