Practical Problems

1. A company annually manufactures 10,000 units of a product at a cost of Rs. 4 per unit and
there is home market for consuming the entire volume of production at the sale price of Rs.
4.25 per unit.

In the year 1997, there is a fall in the demand for home market which can consume 10,000 units
only at a sale price of Rs 3.72 per unit. The analysis of the cost per 10,000 units is:

 Materials Rs.15,000
 Wages 11.000
 Fixed overheads 8,000
 Variable overheads 6,000

The foreign market is explored and it is found that this market can consume 20,000 units of the
product if offered at a sale price of Rs. 3.55 per unit. It is also discovered that for additional
10,000 units of the product (over initial 10.000 units) that fixed overheads will increase by 10 per
cent. Is it worthwhile to try to capture the foreign market?

2. The following details have been furnished to you regarding two proposals which are for
consideration before a firm.

(a) Improvement in the quality of the product, which will result in an additional sale of 5,000
units at the existing price. However, this improvement in quality will result in increase in the
variable cost by 10 paise per unit.

(b) Reduction in the selling price of the product by 12 paise per unit. This will push up sales by
5,000 units.

In both cases the fixed expenses will increase by Rs. 1,000.

The present sales of the firm are 10,000 units at the rate of Rs. 2.10 per unit. The variable cost is
Rs. 1.60 per unit and the total fixed costs are Rs. 3,000.

You are required to state whether it will be appropriate for the firm to select any of the new
proposals or should it continue with the existing scheme.
 3. A company is currently working at 90% of its capacity and producing 13,500 units per
annum. It operates a flexible budget system. The following figures are obtained from its
budget.
Capacity Utilization 90% 100%
Sales 15,00,000 16,00,000
Fixed Expenses 3,00,500 3,00,500
Semi Fixed Expenses 97,500 1,00,500
Variable Expenses 1,42,000 1,49,500

Direct cost per unit is constant.

Profit margin is 10% at 90% capacity.
It received an export order for 1500 units and additional packing charge will be Rs. 1000 for the
order.
You are required to state whether it will be appropriate for the firm to select any of the new
export order or should it continue with the existing scheme.

4. The following details are available from ABC Co. Ltd.

Particulars Amt.
Sales (40000 units @ 25 PU) 10,00,000
Advertisement Exp 1,00,000
Salesman salary 80,000
Travelling Exp. 50,000
Rent of office 10,000
Others 10,000

The management is planning to establish a new market in the East region in next year.
The advertisement expenses and travelling expenses will be increased by 25% and 10%,
respectively.

Salesman salary will be increased by 30,000.

The target annual sales volume at the existing selling price for the new market is 10,000 units.
The variable cost of production is Rs. 12 per unit. Should company establish new market or not?
5. Details of cost and revenue for two different alternatives are as follow.

Particulars Amt. (13,000 units) Amt. (18,000 units)

Variable Cost:
Direct Material (PU) 1 1
Direct Labour (PU) 2.5 1
Fixed Cost:
Admin & Selling Exp. 6000 8000
Repairs & Maintenance 4000 24000
Rent 2000 4000
Selling Price (PU) 5 5

Find out differential cost for 13000 and 18000 units and also give your suggestion for which
alternative is suitable for the company.