DECISION MAKING- Marginal Costing 1. A company has a PV ratio of 40% by what sales must be increased to offset: a.

10% reduction in selling price, and b. 20% reduction in selling price X ltd has PV ratio of 40%. By what percentage must selling price increase to offset 25% increase in variable cost The particulars of two plants producing identical product with same selling price are as under: Plant A Plant B Capacity utilization 70% 60% Rs. Lacs Rs. Lacs Sales 150 90 Variable cost 105 75 Fixed Cost 30 20 It has been decided to merge Plant A and Plant B. The additional fixed expenses involved in the merger amount to Rs.2lacs Required: a. Find the BEP point for Plant A and B before the merger and BEP of the merged plant. b. Find the capacity utilization of the integrated plant required to earn profit of Rs.18lacs A, B C are three similar plants under same management who want them to be merged for better operation. The detail are as under: Plant A B C Capacity 100% 70% 50% Turnover (Rs. Lacs) 300 280 150 Variable Cost 200 210 75 Fixed Cost 70 50 62 Find out i. the capacity of the merged plant for BEP; ii. the profit at 75% capacity of merged plant iii. The turnover from merged plant to give a profit of 28 lacs The following data relate to a manufacturing company: Plant capacity :400000 units per annum. Present utilization: 40% Actuals for the year 20X1 were: Selling price Rs.50per unit , Variable cost Rs.15 per unit Material Cost 20 per unit, Fixed Cost 27 lakhs In order to improve capacity utilization the following two alternative proposal are considered: I. Reduce Selling price by 10% II. Spend additionally Rs.3 laks on sales promotion

2. 3.

4.

5.

How many units should be sold earn a profit of Rs.5 lakhs per year under each of these proposal? 6. Quality Products ltd., manufactures and markets a single product. The following data are available: Material Per unit Rs.16 Dealers margin 10% of the selling price Conversion Cost (variable ) Per unit Rs.12 Selling price per unit Rs.40 Present sales 90000 Units Capacity Utilisation 60% There is acute competition. Extra efforts are necessary to sell. Suggestions have been made for increasing the sales: Proposal I: By reducing selling price by 5 % Proposal II: By increasing dealers margin by 25% over existing rate. Which of these two suggestions would you recommend, if company decides to maintain the present profit? Give reasons. X ltd., Manufactures a standard product, the marginal cost per unit of which are as follows: Direct Materials Rs.160.00 Direct Wages Rs.120.00 Variable Overheads Rs.20.00 Total Rs.300.00 Its Annual budget included the following: Output:40000 units Fixed Overheads: Production Rs.8000000 Administrative Rs.4800000 Marketing Rs.4000000 Total Rs.16800000 Contribution Rs.20000000 Recently the top management of the organization has started thinking in terms of revising its budget and some alternatives in the form of proposals(stated below) were discussed in the last board meeting Proposal I The organization expect a profit of Rs.4800000 and wants to know the selling price to be quoted for the purpose. It is estimated that (a) an increase in advertising expenditure of Rs.944000 would result in a 10% in sales and (b) fixed production overheads and marketing overheads would increase by Rs.200000 and Rs.136000 respectively Proposal II The organization expects that with an additional advertising expenditure sales would go up by 20% and profit margin of 15% would be obtained. Under circumstances, fixed production overheads are increased by Rs.320000 and Rs.200000 respectively. The organization wants to know the additional expenditure on advertisement required with view to achieving results.

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Required: Draw up forecast statements for each of these alternatives and determine the selling price per unit to be quoted (proposal I) and the additional expenditure on advertisement required (proposal II) 8. A confectioner markets three products, all of which requires sugar. His monthly sales, cost of sales and sugar consumption is as follows Product X Product Y Product Z Total Sales Rs.10000 Rs.12000 Rs.8000 Rs.30000 Cost of sales Rs.6000 Rs.8000 Rs.5000 Rs.19000 Sugar requirements 500kg 800kg 240kg 1540kg Due to government restriction his sugar quota has been reduced to 1405kg per month. Required to suggest suitable mix which would give the company maximum profit under the given circumstances.

A company manufactures and markets three products X, Y, Z. all the three products are from the same machine. Production is limited by machine capacity. From the data below indicate the priorities for products X, Y, Z with view to maximizing profits: Products X Y Z Raw Material per unit 11.25 16.25 21.25 Direct Labour per unit 2.50 2.50 2.50 Other variable cost per unit 1.5 2.25 3.55 Selling Price per unit 25 30 35 Standard Machine time 39min 20 min 28min 10. The following particulars are extracted from the records of the company. Product A Rs.100 Rs.10 Rs.15 Rs.5 rs.3 rs 5 Rs 15 Product B Rs 120 Rs 15 Rs 10 rs 6 rs 2 rs 10 Rs 20

9.

Selling Price per unit Material Cost per unit Direct Wages Cost per unit Direct Expenses per unit Machine hours used per unit Overhead Expenses Fixed per unit Variable per unit

Direct Material cost per kg of material is Rs.5. Direct wage per hour is Rs.5. Required: (a) Comment on the profitability of each product(both use the same raw material) when (i) Total sales potential in units is limited; (ii) Total sales potential in value is limited (iii) Raw material is in short supply;and (iv)Production capacity(in terms of machine hours) is the limiting factor.

(b) Assuming raw materials as the key factor, availability of which 10,000kg,and maximum sales potential of each product being 3500 units , find out the product mix which will yield the maximum profit. 11. From the following particulars, find the most profitable product mix and prepare a statement of profitability of that product mix Product A. 1800 60 Product B 3000 55 Product C 1200 50

Units budgeted to be produced and sold Selling price per unit (Rs.)

Requirements per unit: Direct Materials 5kg 3kg 4kg Direct labour 4hrs 3hrs 2hrs Variable overheads Rs.7 Rs.13 Rs.8 Fixed overheads Rs.10 Rs.10 Rs.10 Cost of direct materials per kg Rs.4 Rs.4 Rs.4 Direct labour hour rate Rs.2 Rs.2 Rs.2 Maximum possible units of sales 4000 5000 1500 All the three products are produced from the same direct material using the same type of machines and labour. Direct labour which is the key factor, is limited to 18600 hours. 12. Power ltd., provides you following data for three products: A B C Selling price per unit 10 10 10 Variable Cost to Sales Ratio 40% 50% 60% Possible maximum sales(units)2000 200 4000 Fixed costs 9600 Raw Material req. per unit (kg) 4 2.5 1.6 Minimum Sales 20 units 40 units -----Required: suggest the priority order of the product mix in each of the following alternative cases: a. on the basis of contribution per unit of each product b. on basis of total contribution per product c. on the basis of PV ratio d. on basis of BEP e. in times of heavy demand for companys product f. in times of low demand for companys product g. in case the Raw Material is in short supply h. if maximum availability of Raw Material is 7000kgs, suggest that product mix which will yield maximum profit and also ascertain profit at the suggested product mix. 13. On basis of the following information in respect of an engineering company, what is the product mix which will give the highest attainable profit? Do you recommend overtime working Products Manufactured P1 P2 P3 Raw Material Cost per unit (rs.) 100 60 150

Labour Cost per unit (Rs.) 12 20 16 Variable Overhead per unit(Rs.) 3 5 4 Selling Price Per unit 125 100 200 Maximum Sales Demand (units) 6000 4000 3000 Max Raw Material Available 100000kg @ Rs.10per kg Max Production hours available 184000 @Re.0.80 with facility for a further 15000 hrs on overtime basis at twice the normal wage rate. A farmer owns a orchard which has an area of 350 acres on which he grows apples, apricots, cherries, and plums. Of the total areas, 250 acres of land is unsuitable from apples and plums and are suitable only apricots and cherries. On the remaining100 acres of land any of the four fruits can be grown. The Marketing policy requires that in each season all four types of fruit must be produced and the quantity of any one type should not be less than 12000 boxes. It is also essential that the area devoted to anyone should be in terms of complete acres and not in fraction of acres. There are no physical or marketing limitations and there is an adequate supply of all types of labour. The details regarding the selling price, production and cost are given below: Apples Apricots Cherries Plums Selling price per box(Rs.) 10 10 20 30 Seasons yield per acre(in boxes) 500 150 100 200 Weight per Box(kgs) 30 30 40 20 Material per acre(rs.) 180 70 60 100 Labour growing per acre(Rs.) 200 150 100 130 Harvesting and packing per box(Rs.) 1 1 2 3 Transport per box(Rs.) 2 2 1 3 Fixed overheads each season: Cultivation and growing Rs.58000, Harvesting Rs.68000, Transport Rs.5000, Administration Rs.42000, Land revenue Rs.9000 Required: Advise the farmer on the area allotted to each item in order to earn the maximum total profit and what is that total profit? An engineering company is engaged in producing through operations at welding and pressing departments. Product W1 and W2 are produced by welders in welding department whereas products P1 and P2 are produced by press-operators in pressing departments. Due to specific skill requirements, the welders and press-operators can only work in their own department. The following relevant data are available in respect of the products: Products W1 W2 P1 P2 Hrs req. per unit 4 4 5 2 Selling price per unit 48 50 77 69 Direct Matrial Cost per unit 18 22 32 44 Direct labour hourly rate 4 4 4 4 Variable OH rate per unit 2 2 3 3 The Company incurs Rs.50000 per annum towards fixed costs. The maximum available hours are 20000 and 16000 for welding and pressing departments respectively. The 14.

demands keep on fluctuating but minimum demands which are to be met as per managements decision are 2000 units of W1, 2500 units of W2, 1800 units of P1 and 2200 units of P2 The production manager suggests that the welders and press operators can be trained to perform both welding and pressing jobs so that excess demand of any of the products can be met. This decision is going to increase the burden of fixed costs by Rs.5000 p.a. Required: Prepare the probability statement for optimum product mix and recommend with reason and appropriate workings whether it is advisable to train the welders and press operators as suggested by production manager.