COSTS FOR DECISION MAKING

1. A machine manufactures 10,000 units of a total part at a cost of Rs.21 of which

Rs. 18 is variable. This part is readily available is the market at Rs. 19 per unit.
If the part is purchased from the market then the machine can either be utilised to
manufacture a component of the same quantity contributing Rs. 2 per component
or it can be hired out at Rs. 21000/-. Recommend which of the alternate is
profitable.

2. A Co. 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 2013, there is fall is the demand for
home market which can consume 10,000 units only at a sale price of Rs. 3.75 per
units. The analysis of the cost per 10000 units is

Materials Rs. 15,000

Waqer Rs. 11,000
Fixed overhead Rs. 8000
Variable O/H Rs. 6000

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 20,000 units of the product fixed overhead will
increase by 20%. Is it worthwhile to try to capture the foreign market?
3. A company currently operating at 80% capacity has the following particulars :
Rs.
Sales 32,00,000
Direct materials 10,00,000
Direct Labour 4,00,000
Variable Overheads 2,00,000
Fixed Overheads 13,00,000

An export order has been received that would utilize half the capacity of the
factory. The order cannot be split, i.e., it has either to be taken in full and executed
at 10% below the normal domestic prices, or rejected totally.
The alternatives available to the management are :
(1) Reject the order and continue with the domestic sales only; (as at
present), or
(2) Accept the order, split capacity between overseas and domestic sales and
turn away excess domestic demand, or
(3) Increase capacity so as to accept the export order and maintain the
present domestic sales by :
a. buying an equipment that will increase capacity by 10%. This will
result in an increase of Rs. 1,00,000 in fixed costs, and
b. Work overtime to meet balance of required capacity. In that case
labour will be paid at one and a half time the normal wage rate.
Prepare a comparative statement of profitability and suggest the best alternative.

4. Given below the following information, you are required to:

(a) Calculate and present the marginal product cost and contribution per unit:
(b) State which of the alternative sales mixes you would recommend to
management, and why?

Selling price : X Rs. 500

Y Rs. 400
Direct Materials : X Rs. 160
Y Rs. 120
Direct Wages : X 24 hours at Rs. 5 per hour
Y 16 hours at Rs. 5 per hour
Fixed Overhead Rs. 15,000
Variable Overhead 150% of direct wages
Alternative sales mixes :
(i) 250 units of X and 250 units of Y.
(ii) Nil units of X and 400 units of Y.
(iii) 400 units of X and 100 units of Y.
5. A firm has to install a machine for the production of a part. Two machines A and
B are considered. Their particulars are as follows:

Machine X Machine Y
Cost Rs. 10,000 Rs. 20,000
Annual capacity 2000 units 5000 units
Economic life 10 years 10 years
Salvage value Nil Nil
Material per unit 3.00 3.00
Production cost per unit other than depreciation 5.00 4.50
Part of existing overheads p.a (Supervision, Rent etc.) Rs. 1,000 Rs. 1,000

Interest is 9% p.a. The part is available in the market @ Rs. 9 per unit and can be
sold at a net price of Rs. 8.50. The firm requires 3,000 units. Show which of the
machine will be most economical?

6. Florida Fashions sells both designer and moderately priced women’s wear.
Profits have been volatile. Top management is trying to decide which product line
to drop. Accountants have reported the following data:

Per Item
Designer Moderately Priced
Average Selling Price 2400 1400
Average Variable Expenses 1200 750
Average Contribution Margin 1200 650
Average Contribution Margin (%) 50% 46%

The store has 8000 squire feet of floor space. If moderately priced goods are sold
exclusively, 400 items can be displayed. If designer goods are sold exclusively,
only 300 items can be displayed. Moreover, the rate of sale (turnover) of the
designer items will be two thirds the rate of moderately priced goods. Prepare an
analysis to show which product to drop.
7. A large corporation in Mumbai city has offered 200 rooms Holiday Inn a one
year contract to rent 40 rooms at the reduced rates of Rs. 2000 per room instead of
the regular rate of Rs. 3400 per room. Corporation will sign the contract for 365
day occupancy because its visiting manufacturing and marketing personnel
are virtually certain to use all the space.
Each room occupied has a variable cost of Rs. 480 per day (for cleaning, laundry,
lost items and extra electricity).
The manager expects an 85% occupancy rate for the year so he is reluctant to sign
the contract. If the contract is signed, the occupancy rate for the remaining 160
rooms will be 95%.
Required:
Compute the total contribution margin for the year with and without the contract.
Is the contract profitable to Holiday Inn?
Compute the lowest room rate that the hotel should accept on the contract so that
the total contribution margin would be the same with or without the contract.

8. Consider the following data for XL Limited.

Product A Product B
Per unit per unit
Selling Price Rs. 200 500
Material (Rs. 20 per liter) 40 160
Labour (Rs. 10 per hour) 50 100
Variable Overheads 20 40
Total Fixed Overheads per annum 15,00,000

Comment on the profitability of the each product when:

- material is in short supply
- production capacity is limited
- sale quantity is limited
- sale value is limited