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Marginal costing

M.Lakshminarayana Started The Discussion:

MARGINALCOSTING

Marginal Cost-Meaning: Marginal cost is the additional cost incurred by the production of one extra unit. Marginal cost is average variable cost which is presumed to act in a linear fashion, i.e., Marginal cost per unit is assumed to be constant in the short run, over the activity range being considered.

Marginal Cost-Definition: The Institute of Cost and Management Accountants (ICWA), London defines Marginal Cost as: "The amount at any given volume of output by which aggregate costs are changed if the volume of output is increased or decreased by one unit. In practice, this is measured by the Total variable cost attributable to one unit".

Marginal Costing - Meaning: Marginal Costing distinguishes between fixed costs and variable costs. The Marginal cost of a product is its variable cost, i.e., It includes direct labour, direct materials, direct expenses and the variable part of overheads.

Marginal Costing-Definitions: It can be defined as "a (costing) principle where by variable costs are charged to cost units and the fixed cost attributable to the relevant period is written off in full against the contribution for the period".

According to institute of Cost and Management Accountants (ICWA), London.
"Ascertainment of Marginal costs and of the effect on profit of changes in volume or type of output by differentiating between fixed costs and variable costs."

Uses of Marginal Costing: There are two main uses for the concept of Marginal Costing:
1.As a basis for providing information to management for planning
and decision making. It is particularly appropriate for short run
decisions involving changes in volume or activity and the resulting
cost charges.
2.It can also be used in the routine cost accounting system for the
calculation of costs and the valuation of stocks. Used in this
fashion, it is an alternative to total absorption costing.



Marginal Costing and Absorption Costing
In absorption costing, all costs are absorbed into production, and thus operating statements do not distinguish between fixed and variable costs. Consequently the valuation of stock and work-in-progress contains both fixed and variable elements. On the other hand, using Marginal costing, fixed costs are not absorbed into the cot of production. They are treated as period costs and written off each period in the costing profit and in progress are valued at Marginal cost only, i.e., the variable elements of cost, usually prime cost plus variable overhead. AT the end of a period the Marginal cost of sales is deducted from sales revenue to show the contribution, form which fixed costs are deducted to show net profit.

Advantages or Arguments for the use of Marginal Costing in Routine Costing:
The following are the advantages of Marginal costing:
1. Simple to operate.
2. No apportionments, which are frequently on an arbitrary basis, of
fixed costs to products or departments many fixed costs are
indivisible by their nature, e.g., Managing director's Salary.
3.Where sales are constant, but production fluctuates (possibly an
unlikely circumstance) Marginal costing shows a constant net profit
whereas absorption costing shows variable amounts of profits.
4.Under or over absorption of overheads are almost entirely avoided.
The usual reason for under/over absorption is the inclusion of fixed
cost into overhead absorption rates and the level of activity being
different to that planned.
5.Fixed costs are incurred on a time basis, e.g., salaries, rent, rates
etc. and do not relate to activity. Therefore, it is logical to write
them off in the period they are incurred and this is done
using marginal costing.
6.Accounts prepared using Marginal Costing more nearly approach
the actual cash flow position.
7.Marginal Costing establishes that the profit is the function of sale
and not of production since profits, depend on sales volume and not
on production volume. This can be seen by preparing a profit
statement under Marginal Costing.
8.It facilitates control over costs, particularly variable costs, by
avoiding arbitrary apportionment or allocation of fixed costs. Since
fixed costs are more or less uncontrollable, the management can
concentrate on variable costs which are generally controllable.
9.It helps in short-term profit planning, cost control and taking correct
decisions, keeping the view the exigencies of the situation. It better
serves the needs of the management.

Limitations of Marginal Costing:
Marginal costing however, suffers from the following limitations:

1.Marginal costing assumes that all costs can be classified into fixed
and variables. But there may be certain costs which are neither
fixed nor variable.
2.The application of marginal costing in certain industries such as
ship building, construction, etc. may show no profit or loss during
the year work is in progress, but huge profit in the year the work is
completed. This is due to non-inclusion of overheads in the value of
closing work-in-progress.
3.In the long run, true selling price should be based on total cost i.e.,
inclusive of fixed cost also. In the short run or in special situations
when a product is sold below the total cost, customers may insist on
the continuation of reduced prices forever and this may not be
possible in all cases.

Arguments for the use of Total Absorption in Routine Costing:
1.Fixed costs are a substantial and increasing proportion of costs in
modern industry. Production cannot be achieved without incurring
fixed costs which thus form an inescapable part of the cost of
production. So should be included in stock valuation.
2.Where production is constant but sales fluctuate, net profit
fluctuations are less with absorption costing than with marginal
costing.
3.Where stock building is a necessary part of operations, the inclusion
of fixed costs in stock valuation is necessary and desirable,
otherwise a series of fictitious losses will be shown in earlier period
to be off set eventually by excessive profits when the goods are
sold.
4.The Calculation of Marginal cost and the concentration upon
contribution may lead to the firm setting prices which are, below
total cost although producing some contribution, absorption
costing makes this likely because of the automatic inclusion of
fixed charges.
5.SSAP (Stocks and work-in-progress) recommends the use of
absorption costing for financial accounts because and revenues
must be matched in the period when the revenue arises not
when the costs are incurred. Also it recommends that stock
valuations must include production overheads incurred in the
normal course of business even if such overheads are time related
i.e., fixed. The production overheads must be based upon normal
activity levels.


BREAK EVEN ANALYSIS (OR)
COST VOLUME PROFIT ANALYSIS (CVP ANALYSIS)

The term `Break Even Analysis' is the one commonly used, but it is some what misleading as it implies that the only concern is with that level of activity which produces neither profit nor loss, the break even point, although the behaviour of costs and profits at other level is usually of much greater significance. Because of this an alternative term, Cost-volume profit analysis or CVP analysis if frequently used in more descriptive.

Purposes of CVP Analysis:
Break-even analysis or Cost-Volume profit is an important application of Marginal costing. It has the following purposes:
1.To ascertain the amount of profit or loss at any level of activity.
2.To determine the selling price/sales volume, which will give the
desired amount of profit.
3.To ascertain the selling price; sales volume which will yield the
desired return on capital employed
4.To determine costs and revenues at various levels of activity.
5.To ascertain the effect of change (Increase or decrease) in fixed
costs, variable costs, selling price, production/sales volume or
profit.
6.To suggest the change in sales mix for obtaining maximum profits.
7.To compare profitability among products and firms.

Assumptions Behind CVP Analysis:
The major assumptions behind CVP analysis are presented here under:
1.All costs can be resolved into fixed and variable elements.
2.Fixed costs will remain constant and variable costs vary
proportionately with activity.
3.Over the activity range being considered costs and revenue behave
in a linear fashion.
4.That the only factor affecting costs and revenues of volume.
5.That technology, production methods and efficiency remain
unchanged.
6.Particularly for graphical methods that the analysis relates to one
product only or to a constant product mix.
7.There are no stock level changes or that stocks are valued at
marginal cost only.



Marginal Cost Statement
Sales xxx
Less:Variable Cost xxx
Contribution xxx
Less:Fixed Cost xxx
Profit xxx
===
Equations:
Sales = Total Cost + Profit.
Sales = Variable Cost + Fixed cost + Profit.
Contribution = Fixed Cost + Profit
Profit = Contribution - Fixed cost.
Sales = Variable Cost + Contribution
Sales - Variable Cost = Contribution
Variable Cost = Sales - Contribution

Elements of CVP Analysis:

1.Contribution: Contribution is the difference between the sales and the marginal cost of sales and it contributes towards fixed expenses and profit.
Contribution = Sales- Variable Cost
Contribution = Fixed expenses + Profit.

Ill. 1: From the following information prepare marginal cost statement.
Sales - 10,00,000; Variable Cost - 5,50,000; Fixed Cost- 2,50,000

Ill. 2: From the following information prepare marginal cost Statement and find out (a) contribution (b) Profit
Sales - 15,00,000; Direct Material - 3,50,000; Direct Wages - 2,50,000; Overhead - 4,00,000
Of the overhead 50% are variable and remaining fixed.

Ill. 3: From the following information prepare statement of profit under Absorption costing method and marginal costing Method:
Direct Material - 4,00,000; Direct Wages - 3,50,000; Direct Expenses - 1,50,000
Factory overhead - 4,00,000; Office overhead - 1,00,000; Selling & Dist. overhead - 1,00,000
Sales - 17,50,000
Assume 50% of Factory overhead 100% of office overhead and 40% of selling and Distribution overhead as fixed.

Ill. 4: Determine the amount of fixed expenses from the following particulars:
Sales - Rs.2,40,000; Direct Materials - Rs.80,000; Direct Labour - Rs.50,000; Variable overhead - Rs.20,000; and profit Rs.50,000.

Ill. 5: From the following information calculate profit.
Production - 10,000 units; Sales - 6,000 units; Selling price per unit - Rs.200
Variable cost of production - Rs.10,00,000; Fixed cost for the period - Rs.5,00,000

Ill. 6: From the following information calculate profit under Marginal and Absorption costing methods:
Production - 25,000 units; Opening stock - 5,000 units; Closing Stock - 8,000 units
Selling price per unit - Rs.10; Variable cost of production - Rs.1,00,000.
Variable Cost per unit for opening stock: Rs.3; Fixed Cost per unit for opening Stock: Rs.2.
Fixed cost for the period: Rs.50,000.

2.Contribution/Sales (C/S) or Profit/Volume (P/V) Ratio:
This is the ratio of contribution to sales and is calculated as follows:

1 Contribution x100 OR
Sales
Fixed expenses + Profit x 100 OR
Sales

Change in profits x 100
2. Change in sales

The ratio can also be shown in the form of a percentage of the formula is multiplied by 100.

The P/V Ratio is one of the most important ratio for studying the profitability of operations of a business and established the relationship between contribution and sales. Higher the P/V Ratio, more will be the profit and lower the P/V Ratio, lesser will be the profit. Hence, it should be the goal of every concern to increase or improve the P/V Ratio. It can be done by:

a. Increasing the selling price per unit;
b. Reducing direct and variable costs by effectively utilising men,
machines and materials.
c. Switching the production to more profitable products showing
higher P/V Ratio.

Ex: 1. From the following calculate P/V Ratio
Selling price per unit 10; Variable cost per unit 6.
Ex: 2. From the following Calculate P/V Ratio
Sales 1,00,000 Variable costs 70,000.
Ex: 3. From the following calculate P/V Ratio
Particulars 1998 1999
Sales 1,00,000 1,50,000
Profit 25,000 45,000

Ex: 4. By noting "P/V will increase or P/V will decrease or P/V will not change", as the case may be, state how the following independent situations will affect the P/V ratio:

1. An increase in the physical sales volume;
2. An increase in the fixed cost;
3. A decrease in the variable cost per unit;
4. A decrease in the contribution margin;
5. An increase in selling price pre unit;
6. A decrease in the fixed cost;
7. A 10% increase in the selling price per unit and10% decrease in
the physical sales volume;
8. A 10% increase in both selling price and variable cost per unit;
9. A 50% increase in the variable cost per unit and 50% decrease in
the fixed cost;
10. An increase in the angle of incidence.

3. Break even point:
A business is said to break even when its total sales are equal to its total costs. It is the sales volume at which there is neither profit nor loss, costs being equal to sales value. Contribution is sufficent to meet its Fixed Cost.
The formula for break even point is as follows:
Fixed cost .
Break even point (in units) = Contribution per unit

Break-even Point (in Rupees) = Fixed Cost or
P/V Ratio
Fixed Cost x Sales
Contribution

Ill.9: From the following particulars calculate
1.Contribution,
2. Break Even Point in Units and in Rupees
3. What will be the selling price per unit if the break even point is
brought down to 25,000 units.

Fixed Expenses Rs.1,50,000
Variable cost per unit 10
Selling Price Per Unit 15

4. Calculation of output or sales value at which a profit is earned:
The formula for the calculation of output to earn a certain amount of profit is as follows:
Fixed Cost +Desired Profit
Contribution per unit

The formula for thc calculation of sales value to earn a certain amount of profit is as follows:
Fixed Cost + Desired Profit
P/v Ratio

Ill.10: From the following figures Calculate:
1. P/V Ratio
2. Break Even Point
3. Sales to earn a profit of Rs.1,20,000
Sales Rs.6,00,000
Variable Costs Rs.3,75,000
Fixed Costs Rs.1,80,000

5. Margin of Safety:
Margin of Safety is the difference between actual sales and break-even sales. Sales or output beyond break even point is known as margin of safety because it gives some profit.

Formula for margin of Safety:
1. Actual Sales - Break Even Sales; or
2. Profit / P/v Ratio

If the Margin ofsafety is large, it is an indicator of thestrength of a business, because with a substantial reduction in sales or production, profit shall be made. On the other hand, if the margin is small, a small reduction in sales or production will be a serious matter and lead to loss. Efforts be made by the management to increase the margin of safety so that more profit may beearned.

Ill.11: For the following particulars Calculate:
1. P/V Ratio
2. Break -Even Point
3. Margin of Safety
4. Sales required to earn a profit of Rs.1,50,000
5. Profit when sales are of Rs.10,00,000 and
6. Margin of safety available to it, if the company is earning a profit
of Rs.2,00,000.
Fixed Overhead Rs.1,50,000
Profit Rs.1,00,000
Sales Rs.5,00,000

Ill.12: Assuming that the cost structure and selling prices remain the same in the periods 1 and 2, find out:
a. P/V Ratio
b. Fixed Cost
c. Break Even Point for Sales
d. Profit When Sales Rs.1,00,000
e. Sales Required to earn a profit of Rs.20,000
f. Margin of Safety at a Profit of Rs.15,000
g. Variable cost in Period 2
Period Sales Profit
1 1,20,000 9,000
2 1,40,000 13,000


DECISION MAKING

Decision making is concerned with the future and involves a choice between alternatives. Many factors, both qualitative need to be considered and for many decisions and quantitative financial information is a critical factor. The important relevant in formation is presented Revenues:

1. Future costs and Revenues:
It is the expected future costs and revenues that are important to the decision maker. This means that past costs and revenues are only useful in so far as they provide a guide to the future. Some costs are irrelevant.

2. Differential costs and Revenues:
Only those costs and revenues which alter a result of a decision are relevant. Where factors are common to all the alternative being considered they can be ignored; only the differences are relevant. In many short run situations the fixed costs remain constant for each of the alternatives being considered and thus the marginal costing approach showing sales, marginal cost and contribution is particularly appropriate.

The information provided by the total cost method is not sufficient in solving the management problems. Marginal costing techniques is used in providing assistance to the management in vital. Decision making, especially in dealing with the problems requiring short-term decisions where fixed costs are excluded. The following are important as where marginal problems are simplified by use of the marginal costing.

1. Fixation of selling price
2. Key or limiting factor
3. Make or Buy decisions
4. Selection of a suitable product mix
5. Effect of change in price
6. Maintaining a desired level of profit
7. Alternative methods of production
8. Diversification of products
9. Closing down of suspending activities
11 Alternative courses of action
12 Level of activity planning.

Selling Price Below the Marginal cost:
1.When a new product is introduced in the market. This is done with
the hope that sales will increase with the passage of time and cost of
production will come down as a result of increase in sales.
Ultimately cost of production will be in line with the selling price
and the concern will start earning profit from the new line of
production.
2.When foreign market is to be explored to earn foreign exchange.
3.When the concern has already purchased large quantities of
materials.
4.When closure of business may mean breaking of business
connections may be re-established by a heavy expenditure on
advertisement and sales promotion.
5.When the sales of one product at a price below the marginal cost
will push up the sales of other profitable products.
6.When employees cannot be retrenched.
7.When competitors are to be eliminated from the market.
8.When the goods are of perishable nature.

Ill. 13: The Everest Snow company manufactures and sell direct to consumers 10,000 jars of `Everest Snow' per month at Rs.1.25 per jar. The company's normal production capacity is 20,000 jars of snow per month. Analysis of cost for 10,000 jars show:
Direct Material 1,000
Direct Labour 2,475
Power 140
Misc. Supplies 430
Jars 600
Fixed expenses of Manufacturing and administration 7,955
Total 12,600
The company has received an offer for the export under a different brand name of 1,20,000 jars of Snow at 10,000 jars per month at 75 paise a jar. Write a short report on the advisability or otherwise of accepting the offer.

Key Factor (or) Limiting Factor (or) Principal Budget Factor
This is a factor which is a binding constraint upon the organisation i.e., the factor which prevents in definite expansion or unlimited profits. It may be sales, availability of finance, skilled labour, supplies of materials or lack of space key factory is also called as limiting factor or principle budget factor.

Where a single binding constraint can be identified, then the general objective of maximising contribution can be achieved by selecting the alternative which maximises the contribution per unit f the key factor in an organisation will change. For example: a firm may have a shortage of orders, it overcomes this by appointing more sales men and then finds that there s a shortage of machinery capacity. The expansion of the productive capacity may introduce a problem of space and so on.

Examples of Decisions involving marginal costing:
Several typical situations in which marginal costing can provide useful information or decision making are given below:
The steps involved in analysing such problems are as follows:
1.Check that fixed costs are expected to remain unchanged.
2.If necessary separate out fixed and variable costs.
3.Calculate the revenue, marginal costs and contribution of each of
the alternatives.
4.Check to see if there is a limiting factor which will be a binding
constraint and if so, calculate the contribution per unit of the
limiting factor.
5.Finally, choose the alternative which maximises contribution.

Ill. 14: The following particulars are extracted from the records of a company:
Per unit .
Product A Product B
Sales Price (Rs) 100 110
Consumption of Materials (kg) 5 4
Material cost (Rs) 24 14
Direct Wages (Rs) 2 3
Machine hours Used 2 3
Variable overheads (Rs) 4 6

Comment on the profitability of each product (both use the same raw material) when:
(a) Total sales potential in units is limited.
(b) Total Sales potential in value is limited.
(c) Raw Material is in short supply.
(d).Production capacity ( in terms of machine hours) is the limiting
factor.

ACCEPTANCE OF A SPECIAL ORDER
By this is meant the acceptance or rejection of an order which utilises spare capacity, but which is only available if a lower price than normal price is quoted.
Ex:
Products
Particulars X Y Z Total
Sales 32,000 50,000 45,000 1,27,000
Less: Variable costs 24,000 26,000 22,000 72,000
Contribution 8,000 24,000 23,000 55,000
Less: Fixed cost 12,000 13,000 11,000 6,000
Profit/loss (4,000) 11,000 12,000 19,000

As product X have a contribution of Rs.8,000; it should not be dropped as fixed costs Rs.36,000 remaining constant.
When product X is dropped the profitability is as follows:
Contribution from Product Y 24,000
Contribution from product Z 23,000 47,000
Less: Fixed Costs 36,000
Profit 11,000
Net profit is dropped from Rs.19,000 to Rs.11,000 when product X is dropped and it is suggested that product X should not be dropped.

Differential Costing:
Differential costing is a broader and more fundamental principle than marginal costing an therefore has a much wider application. Differential costing examines all the revenue and cost differences between alternatives so as to determine the most appropriate decision.

Marginal costing assumes that the only differences between alternatives are changes in variable costs and revenues i.e., that fixed costs do not alter. But fixed costs will be changed when the production was beyond a certain level. Differential costing examines all differences, it is suitable for situations short run and long run decisions.

DIFFERENTIAL COST STATEMENT
Ex: Present Production Total Production Difference
1. No.of units 1,00,000 1,30,000 30,000
2. Sales 2,00,000 2,54,000 54,000
3. Marginal cost:
a) Labour 80,000 1,08,000 28,000
b) Material 50,000 65,000 15,000
1,30,000 1,70,000 43,000
4. Contribution(2-3) 70,000 81,000 11,000
5. Fixed Costs 30,000 38,000 8,000
6. Profit (4-5) 40,000 43,000 3,000

Make or Buy:
Frequency management is faced with the decision whether to make a particular product or component or whether to buy it in open market. The decision is usually based on an analysis of the cost implications.
In general the relevant cost comparison is between the marginal cost of manufacturing and the buying in price. However, when manufacturing the component displaces existing production the contribution must be added to the marginal cost of production of the component before comparison with the buying in price.

Ex: Given : Material 2.50
Labour 1.25
Variable overhead 1.75
Marginal cost of component 5.50
Current buying cost 7.75
Loss in saving in purchased 2.25
The component should be manufactured.

Opportunity Cost:
Opportunity cost can be defined as the value of the best alternative forgone. Opportunity cost is an important concept for decision making purposes. Although often difficult to measure, the concept is of great importance because it emphasis that decisions are concerned with alternatives and that the cost of the chosen plan of action is the profit foregone form best available alternative

Cash Break Even Point:
In the computation of cash break-even point, deprecation and other non-cash fixed expenses are excluded from the total fixed costs. Cash break even point. Thus will give such a level of output or sales at which the sales revenue will be equal to cash out flow. The formula is as follows.

Cash Fixed Costs .
Cash break even point = Contribution per unit

Ill.15: From the following data calculate cash break-even point
Selling price unit Rs.20
Variable cost per unit Rs.14
Fixed cost Rs.20,000 including
Rs. 5,000 depreciation

Cost Break Even Point
`Cost Break even Point' refers to a situation when the costs of operating two alternative plants are equal. Though both the plants may have the same total cost, their fixed costs and variable cost per unit may be different. In such a case, the firm may like to determine that point at which the total costs fixed and variable) of operating both the plants are the same. Such a point may be called `cost break even point' or indifference point' in respect of two plants.

. Difference in fixed cost .
Cost Break Even Point = Difference invariable cost per unit

The determination of `cost break-even point' will enable the firm to identify which plant is more profitable to operate for given level of output i.e., in case of high and low demand, assuming the sale price per unit is the same.

Ill. 16: There are two plants - A and B. Their fixed costs are A Rs.6,00,000 B Rs.9,00,000 the variable costs per unit in these two plants are: A Rs.12 and B Rs.10.

Required:
1) Find out the cost-breakeven point for plants A and B.
2) Indicate the circumstance when the operation of a particular plant will be more profitable.
3) Show financial implications when demand is 1,00,000 units and when it is 2,00,000 units.

11. Find the Cost Break-even points between each pair of plants whose cost functions are:
Plant A Rs.6,00,000 + Rs.12 X
Plant B Rs.9,00,000 + Rs.10 X
Plant C Rs.15,00,000 +Rs. 8 X
(Where X is the number of units produced).

Illustrations
1.Your company has a production capacity of 2,00,000 units per year. Normal capacity utilisation is reckoned as 90%. Standard variable production costs are Rs.11 per unit. The fixed costs are Rs.3,60,000 per year. Variable selling costs are Rs.3 per unit and fixed selling costs are Rs.2,70,000 per year. The unit selling price is Rs.20. In the year just ended on 30th June, 1998, the production was 1,60,000 units and sales were 1,50,000 units. The closing inventory on 30-6-98 was 20,000 units. The actual variable production costs for the year were Rs.35,000 higher than the standard.
1. Calculate the profit for the year
a. by the absorption cost in method, and b. by the Marginal
costing method.
2. Explain the difference in the profit.

2.PH Ltd. has a productive capacity of 2,00,000 units of Product BXE per annum. The company estimated its normal capacity utilisation at 90% for 1986-87. The variable costs are Rs.22 per unit and the fixed factory overheads were budgeted at Rs.7,20,000 per annum. The variable selling overheads amounted to Rs.6 per unit and the fixed selling expenses were budgeted at Rs.5,04,000. The operating date for 1986-87 are as under:

Production 1,60,000 units
Sales @ Rs. 40 per unit 1,50,000 units
Operating stock of finished goods 10,000 units

The cost analysis revealed an excess spending of variable factory overheads to the extent of Rs. 80,000. There are no variances in respect of other items of cost.

REQUIRED:
(1).Determine the budgeted break-even point for 1986-87.
(2).What increase in price would have been necessary to achieve the budgeted profit?
(3). Present Statements of Profitability for 1986-87 using:
A. Marginal costing basis.
B. Absorption costing basis.
(4).Explain the reason for the difference in profits under the two methods stated in (3).

3. Wonder Ltd. manufactures a single product Zest. The following figures relate to Zest for one year period:

Activity Level 50% 100%
Sales and Production (units) 400 800
Rs.Lakhs Rs.Lakhs
Sales 8.00 16.00
Production costs:
Variable 3.20 6.40
Fixed 1.60 1.60
Selling and
Administration Costs:
Variable 1.60 3.20
Fixed 2.40 2.40

The normal level of activity for the year is 800 units. Fixed costs are incurred evenly throughout the year and actual fixed costs are the same as budgeted. There were no stocks of Zest at the beginning of the year.

In the first quarter, 220 units were produced and 160 units were sold.

REQUIRED:
a. What would be fixed production costs absorbed by Zest if
absorption costing is used?
b. What would be the under/over-recovery of overheads during
the period?
c. What would be the profit using absorption costing?
d. What would be the profit using marginal costing?
e. Why is there a difference between the answers to (c) and(d) ?

4. Compact Ltd. drew up its budget for th year, segregating costs into fixed and variable costs. The direct material cost has been determined - at Rs.80 per unit of product manufactured; direct labour Rs.50 per unit; variable overhead Rs.20 per unit; and fixed overhead Rs.60,00,000. Administration and selling expenses will have a fixed component of Rs.20,00,000 and a variable component of Rs.30 per unit sold. At a selling price of Rs.500 per unit, a sales volume of 30,000 unit was expected and the budget for the period was drawn up as below:

BUDGETED INCOME STATEMENT (ABSORPTION COSTING)
Rs. Rs.
Sales (30,000 units at Rs.500) 1,50,00,000
Cost of goods sold:
Opening stock -----
Direct Materials 24,00,000
Direct Labour 15,00,000
Variable Overhead 6,00,000
Fixed Overhead 60,00,000
Closing Stock ---- 1,05,00,000
Gross Profit 45,00,000
Fixed Selling and
Administration 20,00,000
Variable Selling and
Administration 9,00,000 29,00,000
Net Profit 16,00,000
The actual production for the year 30,000 units, as budgeted. But only 20,000 units could be sold, at Rs.500 per unit. Before the close of the year, another 3,000 units were sold to a foreign distributor at Rs.300 per unit. The actual results for the year are presented below:

ACTUAL INCOME STATEMENT (ABSORPTION COSTING)
RS. RS.
Sales (20,000 units at Rs.500 +
3,000 units at Rs.300) 1,09,00,000
Cost of goods sold:
Opening stock ----
Direct Material 24,00,000
Direct Labour 15,00,000
Variable Overhead 6,00,000
Fixed Overhead 60,00,000
Cost of goods available 1,05,00,000
Less: Closing Stock 24,50,000 80,50,000
Gross Profit 28,50,000
Fixed Selling and
Administration 20,00,000
Variable Selling and
Administration 6,90,000 26,90,000
Net Profit 1,60,000
Note: Closing stock consists of 7,000 units at Rs.350 each.
Cost of goods manufactured 1,05,00,000 = Rs.350
Units manufactured 30,000
The Managing Director of Compact Ltd. was critical of the sales of Rs.3,000 units to the foreign distributor at below cost. With a manufacturing cost of Rs.350 per unit and a variable selling cost of Rs.30 per unit, he felt that on the 3000 units, the company lost Rs.2,40,000. Had it not been for this, he felt that the profit should have been Rs.4,00,000, as against Rs.1,60,000 reported. He was very much upset at what he considered to be the blunder of this special sale.

a.Prepare the Absorption Costing Income Statement assuming
the company sold only 20,000 units at Rs.500 and had not done
the sale to the foreign distributor.
b.Prepare a Direct Costing Income Statement based on the actual
sales and reconcile it to the Actual Absorption Costing Income
Statement.
c.Prepare a Direct Costing Income Statement assuming sale of
only 20,000 units at Rs.500 and reconcile this with the
Comparative Absorption Costing Income Statement.
d.Is Compact Ltd. better or worse off for having made the
foreign sale?

5. Evenkeel Ltd. manufactures and sells as single product X whose price is Rs.40 per unit and the variable cost is Rs.16 per unit.

(a) If the Fixed Costs for this year are Rs.4,80,000 and the annual sales are at 60% margin of safety, calculate the rat of net return on sales, assuming an income tax level of 40%.

(b) For the net year, it is proposed to add another product line Y whose selling price would be Rs.50 per unit and the variable cost Rs.10 per unit. The total fixed costs are estimated at Rs.6,66,600. the sales mix of X:Y would be 7:3. At what level of sales next year would Evenkeel Ltd. break-even? Give separately for both X and Y the break-even sales in rupees and quantities.

6. The Operating results of B.M.Ltd. for the year 1981 were as under

Product Sales Mix % PV Ratio%
A 40 20
B 10 6
C 30 12
D 20 10

Total sales value of all the products was Rs.80 lacs.
Total fixed overheads amounted to Rs.10 lacs.
The raw material content of each of the products represented 50% of the respective variable costs.

The forecast for the year 1982 is an under:
(i) The raw material costs will go up by 10%.
(ii)The company has been able to obtain an important quota of raw materials of the value of Rs.35 lacs.
(iii)The maximum sale potentiality of any at the above four products is 40% of the 1981 value.
(iv)The company expects to secure an increase of 5% in the selling prices of the products uniformly.

Required:
(a) Prepare a statement showing the profitability of 1981.
(b) Set a product mix to maximise profits in 1982.
(c) Prepare a statement showing the profitability of 1982.

7. On a turnover of Rs.20 crores in 1984, a large manufacturing company earned a profit of 10% before interest and depreciation which were fixed. The product mix of the company was as under:

Products Mix % to PV Ratio Raw material
Total Sales % as % on sales value
P 10 30 40
Q 30 20 35
R 20 40 50
S 40 10 60

Interest and depreciation amounted to Rs.1.50 lakhs and Rs.77 lakhs respectively.

Due to fluctuations in prices in the international market, the company anticipates that the cost of raw materials which are imported will increase by 10% during 1985. The company has been above to secure a licence for the import of raw materials of a value of Rs.1,023 lakhs at 1985 prices. In order to counteract the increase in costs of raw materials the company is contemplating to revise its product mix. The market servey report recently prepared indicates that the sales potential of each of the products P,Q and R can be increased upto 30% of total sales value in 1984. There is no inventory of finished goods or work-in-process in both the years.

8. GTM Ltd. consists of three departments, grinding, turning and milling all of which have the same productive capacity. The overheads budget for the next cost period of 1,000 machine hours capacity for each department is as follows:

Fixed Costs Directly variable cost per machine Hour
Grinding 20,000 2.50
Turning 10,000 2.00
Milling 7,500 3.75

The company wishes to participate in a tender in which there are three contract X,Y and Z. However, as per the tender terms, contracts Y and Z have to be offered as a package and GTM Ltd. feels that it would not offer the package unless it is as profitable as contract X, since capacity can be utilised elsewhere.

The Works Manager has studied the specifications relating to these three contracts and has worked out the following details:
Contract Contract Contract X Y Z
Direct Material costs 18,000 16,100 12,400
Direct Labour Costs (rate per hour) which differ due to skills involved:
Grinding 3.00 2.50 4.50
Turning 2.00 2.50 4.00
Milling 1.50 2.00 2.25

Use of Capacity
(in machine hours)
Grinding 660 400 400
Turning 760 500 420
Milling 864 400 320

It will be necessary to employ 3 men in each department for the member of hours during which machine facilities are used in the work in respect of each of the three contracts.

You are require to compute:

(a).A Comparative Statement showing the minimum amount at
which the firm could afford to accept the contracts.
(b).If at least one man (included under direct labour) has to be
employed in each department, regardless of the level of
activity, indicate the amendment to your computation in (a).
(c).Assuming that tenders would be accepted if GTM Ltd. quoted
the following prices for the contracts; X Rs.41,000; Y
Rs.32,000 and Z Rs.26,500, advise the firm what it should do
concerning the contracts to be accepted under the conditions (a)
and (b) above.

9. A firm has Rs.10,00,000 invested in its plant and sets a goal of a 15% annual return on investment. Fixed costs in the factory presently amount to Rs.4,00,000 per year and variable cost amount to Rs.15 per unit produced. In the past year, the firm produced and sold 50,000 units at Rs.25 each and earned a profit of Rs.1,00,000. How can management achieve their targetprofit goal by varying different variables like fixed costs, variable costs, quantity sold or increasing the price per unit?

10. A company has an opening stock of 6,000 units of output. The production planned for the current period is 24,000 units and expected sales for the current period amount to 28,000 units. The selling price per unit of Rs.10. Variable cost per unit is expected to be Rs.6 per unit while it was only Rs.5 per unit during the previous period. What is the Break-even volume for the current period if the total fixed cost for the current period is Rs.86,000?

11. The Magic Carptes Associates have just developed a new carpet design with the brand name 'Arabian Nights'. Sales demand is very difficult to predict but it very much depends upon the selling price. At a price of Rs.30 per square metre, it is estimated that the annual sales demand would be between 50,000 and 90,000 square metres p.a. At a price of Rs.40 per square, sales demand would be between 34,000 and 44,000 square metres per annum. As regards cost, at production volumes of 45,000 square metres or less per annum, attributes fixed costs would be Rs.2,12,000 per annum and variable costs would be Rs.32 per square metre. At higher production volumes, attributes fixed costs would increase to Rs.3,08,000 but variable costs per square metre would be only Rs.24.

'Arabian Nights' has been developed at a cost of Rs.80,000.

When the product is marketed, an amount of Rs.70,000 per annum will be charged to the operation towards head Office expenses.

The Production of the new carpet will have to supervised by a foreman. In order to find time for supervision, he has to give up work in another department, for which he is paid a salary of Rs.1,000 per month.
The production of 'Arabian Nights' would be undertaken, of course, in a division of the factory which is at present rented out to M/s.Shine or Rain Ltd., Umbrella-makers for an amount of Rs.10,000 per quarter.

You are required to calculate the margin of safety, as a percentage of expected sales volume at both the maximum and minimum sales volume for the two price levels and decide on the selling price per square metre.

12. Paramount Food Products is a new entrant in the market for chocolates. It has introduced a new product - Sweetee, This is a small rectangular chocolate bar. The bars are wrapped in aluminium foil and packed in attractive cartons containing 50 bars. A carton is, therefore, considered the basic sales unit. Although management had made detailed estimates of costs and volumes prior to undertaking this venture, new projects based on actual cost experience are now required.

Income statements for the last two quarters are each thought to be representative of the costs and productive efficiency we can expect in the next few quarters. There were virtually no investments on hand at the end of each quarter. The income statements reveal the following:
First Second
Quarter Quarter
Sales Rs. Rs.
50,000 x Rs.24 12,00,000
70,000 x Rs.24 16,80,000
Cost of Goods Sold 7,00,000 8,80,000
Gross Margin 5,00,000 8,00,000
Selling and Administration 6,50,000 6,90,000
Net Income (loss) before taxes (1,50,000) 1,10,000
Tax (negative) (60,000) 44,000
Net Income (Loss) (90,000) 66,000
========= ========
The firm's overall marginal and average income tax rate is 40%. This 40% figures has been used to estimate the tax liability arising from the chocolate operations.

Required:
(a) Management would like to know the break-even point in
terms of quarterly carton sales for the chocolates.
(b).Management estimates that there is an investment of
Rs.30,00,000 in this product line. What quarterly carton sales
and total revenue are required in each quarter to earn an after-
tax return of 20% per annum on investment?
(c).The firm's marketing people predict that if the selling price is
reduced by Rs.1.50 per carton (Re.0.03 off per chocolate bar)
and a Rs.1,50,000 advertising campaign among school
children is mounted, sales will increase by 20% over the
second quarter sales.

13. A company produces X,Y and Z, from a raw material M. For every 100 tonnes of M put into production the following yield is obtained:
Product Tonnes Selling Price per tonne
X 50 Rs.40
Y 30 Rs.60
Z 15 Rs.80
Waste 5 -
Relevant costs per tonne of input for the coming year are budgeted to be:
Ram Material M Rs.20
Variable Processing Costs Rs.10

Variable marketing costs are budgeted to be at the rate of 10% of sales value. Annual fixed overheads are budgeted to be as follows:
Per annum (Rs)
Manufacturing 40,000
Marketing 30,000
Administration 20,000

The company intends to process 10,000 tonnes of material M in the coming year.

Required:
(a).The expected results for the year based on the above data.
(b).The break-even point in terms of sales value and tonnes of
material to be processed.
(c).The maximum price per tonne which the Company can pay
for its raw material in order to achieve a return of 15% on
capital employed of Rs.5,00,000 assuming an input of 10,000
tonnes per year.
(d).Discuss the limitations of the technique you have used in (b)
above and reservations you would have on your answer.

14. A Company manufactures two products namely Product A and product B. The price and cost data are as under for 19XI:
A (Rs.) B (Rs.)
Selling Price 200 100
Variable Costs 120 40

Total Fixed Costs are Rs.23,00,000 per annum.

The company sells the two products in the sales value ration of 7:3 and is operating at a margin of safety of 20%.

During the next year, 19X2 the company anticipates that the variable costs of product A and B will go up by 2 1/2% respectively. The fixed expenses will also go up by 5%.

Required:
(i).Find the quantity of Products A and B sold in 19XI.
(ii)Evaluate the following proposals which are under
consideration for implementation in 19X2.

(a).If the company desires to sell the same quantity of Product A
as in 19X1, how many units of Product B should be sold to
earn the same profit as in 19X4?
(b).If the selling price of Product A is reduced by 5% as
compared to 19X1, and the quantity sold is increased to
24,000 units, how many units of Product B should be sold to
earn the same profit as in 19X1.
(c).If Product A is discontinued, how many units of Product B
should be sold to earn the same profit as in 19X1.
(d).If product A is discontinued and the quantity of product B is
to be restricted 37,375 units, what percentage increase in
selling price of Product B is necessary to earn the same profit
as in 19X1.

15. Solo Products Ltd. manufactures manually a product under the brand name Distinct. The current variable cost of producting each Distinct is Rs.4 and the selling price Rs.10 per unit. The annual fixed costs are Rs.1,20,000.
There is a proposal to acquire a semi-automatic machine costing Rs.60,000 to manufacture Distinct. A s a result the variable cost will decline to Rs.2 per unit; but there will be increase in annual cash outlays of Rs.30,000 and the new annual fixed costs will be Rs.1,50,000.

The new equipment will have a useful life of 4 years (independent of annual production volume). Solo products Ltd. has a cost of capital of 10%. You are required to find out:

(i) What level of annual sales is necessary in order for this investment in semi-automatic machine to break-even - that will generate enough annual profit to repay the initial capital cost and the required rate of return on this capital?

(ii)What level of annual sales will be necessary to switch over profitability from manual to semi-automatic production?

Note. The annuity factory representing the present value at an interest rate of 10% of receiving Re.1 at the end of each of the next 4 years is 3.17.
Ignore Taxation.

16. As a part of its rural upliftment programme, the Government has put under cultivation a farm of 96 hectares to grow tomatoes of four varieties; Royal Red, Golden Yellow, Juicy Crimson and Sunny Scarlet. Of the total, 68 hectares are suitable for all four varieties, but the remaining 28 hectares are suitable for growing only Golden Yellow and Juicy Crimson. Labour is available for all kinds of farm work and is no constraint.

The market requirement is that all four varieties of tomatoes must be produced with a minimum of 1,000 boxes of any one variety.

The farmers have decided that the area devoted to any crop should be in terms of complete hectares and not in fractions of a hectare. The other limitation is that not more than 22,750 boxes of any one variety should be produced. The following data are relevant:


Varieties Royal Golden Juicy Sunny
Red Yellow Crimson Scarlet
Annual Yield:
Boxes per hectare 350 100 70 180
Costs Rs. Rs. Rs. Rs.
Direct Materials 476 216 196 312
Labour:
Growing per hectare 896 608 371 528
Harvesting and packing
per box 3.60 3.28 4.40 5.20
Transport per box 5.20 5.20 4.00 9.60
Market price per box 15.38 15.87 18.38 22.27
Fixed Overheads per annum: Rs.
Growing 11,200
Harvesting 7,400
Transport 7,200
General Administration 10,200

Find out:
1.Within the given constraints, the area to be cultivated with each
variety of tomatoes, if the largest total profit has to be achieved.
2.The amount of such profit in rupees.
A nationalised bank come forward to help in the improvement
programme of the 28 hectares in which only Golden Yellow and
Juicy Crimson will grow, with a loan of Rs.5,000 at a vary nominal
interest of 6% per annum. When this improvement is carried out,
there will be a saving of Rs.1.25 per box in the harvesting cost of
Golden Yellow and the 28 hectares will become suitable for
growing Royal Red in addition to the existing Golden Yellow and
Juicy Crimson varieties. Assuming that other constraints continue,
find the maximum total profit that would be achieved when the
improvement programme is carried out.

17. V Ltd. produces two products P and Q. The draft budget for the next month is as under:
P Q
Budgeted Production and Sale (units) 40,000 80,000
Selling Price Rs./unit 25 50
Total Costs Rs./unit 20 40
Machine Hours/unit 2 1
Maximum Sales potential (units) 60,000 100,000

The fixed expenses are estimated at Rs.9,60,000 per month. The company absorbs fixed overheads on the basis of machine hours which are fully utilised by the budgeted production and cannot be further increased.

When the budget was discussed, the Managing Director stated that the product mix should be altered to yield optimum profit.
The Marketing Director suggested that he would introduce a new Product C, each unit of which will take 1.5 machine hours. However, a processing vat involving a capital outlay of Rs.2,00,000 is to be installed for processing product C. The additional fixed overheads relating to the processing vat was estimated at Rs.60,000 per month. The variable cost of product C was estimated at Rs.21 per unit.

Required:
1.Calculate the profit as per draft budget for the next month.
2.Revise the product mix based on data given for P and Q to yield
optimum profit.
3.The company decides to discontinue either product P or Q
whichever is giving lower profit and proposes to substitute product
C instead. Fix the selling price of product C in such a way as to
yield 15% return on additional capital employed besides
maintaining the same overall profit as envisaged in (ii) above.

18. An export-oriented organisation sells in the Middle East three brands of their products, viz. Juvenile, Adult and Aged. The market for different price segments is as follows:

Brand Selling price per Market demand
100 units (Rs.) (units per month)
Juvenile 600 1,00,000
550 1,20,000
500 1,36,000
Adult 500 2,00,000
475 2,20,000
450 2,50,000
Aged 550 80,000
525 96,000
500 1,00,000

The capacity to pack and export is presently limited to 4 lakh units per month. The variable cost of production per unit is as follows:
Juvenile Adult Aged
Rs. Rs. Rs.
Raw Material 2.10 1.50 1.40
Packing Material 1.60 1.00 1.00
Labour and Expenses 0.62 0.58 0.57

Besides, trade discount is allowed @6% of Selling Price, out of which 1% is allowed to Overseas Agent. Variable distribution and handling charges amount to Rs.12 per carton containing 50 units of each. Export duty is payable at 5% ad valorem.

Export incentives, viz., cash subsidy, duty drawback, etc., amount to 16% of net selling price after considering only 1% discount allowed to the Overseas Agency.

You are require to find out the combination of the three products which will yield maximum profit, considering capacity constraints.

19. A company manufactures four products. The cost data per unit are as under:
A B C D
Selling Price 90 71 100 86
Direct Materials 30 20 40 40
Direct Labour 24 18 30 12
Variable Overheads 12 9 15 6

The fixed costs are estimated at Rs.2,00,000 per month. The company employees 250 direct workers, who work eight hours a day for 25 days a month. The direct wage rate is Rs.6 per hour. It is not possible for the company to increase its operatives in the short run nor is it practicable to work overtime. The company's policy does not allow sub-contracting of work.

The Marketing Director has forecast the following demands for a month:
Product Units.
A 5,500
B 5,000
C 6,250
D 8,250

The management desires you to revise the product mix in the following manner:

(a).to yield the maximum profit for the month.
(b).in proportion to the quantities forecast by the marketing
Director.
(c).in proportion to the labour requirements calculated for the
forecast of sales of the Marketing Director.
Present statements showing the sales, costs and profits in respect of each of the aforesaid product mix.

20. A company produces four products : A,B,C and D which are marketed in cartons. Of the total of 20 machines installed, 8 are suitable for manufacturing all the four products and the remaining 12 machine are not suitable for the manufacture of products A and D.

Each machine is in production for 300 days per year and each is used on a given product in terms of full days and not in fractions of days. The company however has no problem in obtaining adequate supplies of labour and raw materials.

The marketing policy is that all four products should be sold and the minimum annual production should be 3,000 cartons for each product. Fixed costs budgeted amount to Rs.50 lakhs. Production cost and price data are as under:
A B C D
Production/day/machine
(cartons) 14 4 3 6
Selling price/carton 810 790 845 1,290
Cost:Process I
Direct Material/day/machine 140 52 45 84
Direct Labour/day/machine 224 148 90 132
Process:II
Direct Material/day/machine 30 30 30 30
Direct Labour/carton 240 216 300 360
Variable Overheads/carton 390 390 300 720

With a view to meeting the increasing demand for product A and D, the company is contemplating to covert such number of machines as may be necessary out of 12 machines which at present are unsuitable to produce products A and D into all purpose machines. The cost of conversion of these machines is Rs.2,10,000 per machine. The expenditure is to be amortised over a period of three years. The company expects 12 1/2% return on this expenditure.

Market research indicates that the company's sales of Products A and D can be increased by 37,500 cartons and 5,400 cartons respectively.

Required
(a).Calculate the optimum profit of the company if the existing
machines were worked on most profitable giving supporting
calculations.
(b).Recommend the maximum number of machines to be
converted into all purposes machines giving supporting
calculations.
(c).Calculate for the first year the optimum profit of the company
after conversion of the required number of machines into all
purpose machines.

21. A manufacturer has three products A,B and C. Currently sales, cost and selling price details and processing time requirements are as follows:
Product A Product B Product C
Annual Sales (units) 6,000 6,000 750
Selling Price (Rs) 20 31 39
Units Cost (Rs) 18 24 30
Processing time required
per units (Hrs) 1 1 2
The firm is working at full capacity (13,500 processing hours per year). Fixed manufacturing overheads are absorbed into unit costs by a charge of 200% of variable costs. This procedure fully absorbs the fixed manufacturing overhead. Assuming that:

(i) processing time can be switched from one product line to another.

(ii)the demand at current selling price is
Product A Product B Product C
11,000 8,000 2,000

(iii)the selling prices are not to be altered, you are required to calculate the best production programme for the next operating period and to indicate the increase in net profit that this should yield. In addition identify the shadow price of a processing hour.

22 (a) A pharmaceutical Company produces formulations having a shelf life of one year. The company has an opening stock of 15,000 boxes on 1st January, 1991 and expects to produce 65,000 boxes are as was in the just ended year of 1990. Expected sale would be 75,000 boxes.

Costing department has worked out escalation in cost by 25% on variable cost and 10% on fixed cost for the year 1991. Fixed costs are estimated at Rs.14,30,000. New price announced for 1991 is Rs.50 per box. Variable costs of the opening stock is Rs.20 per box.

Required:
1.To find out break-even volume for the year 1991, and
2.To estimate the profits that would be realised on the sale during
1991.

(b).A Company manufactures three products from an intermediate
produced in its own plant. The downstream unit at full capacity operations require one lakh kilos of intermediate. However, in view of certain constraints, this output would be affected by 25%. Intermediate is charged to user divisions at Rs.10 per kilo inclusive of its variable cost of Rs.8 per kg.

Following particulars are furnished.
Downstream Unit
Products A B C
Capacity (Kgs) 60,000 40,000 20,000
Intermediate required (Kgs) 66,000 20,000 14,000
Variable Cost (Rs.per kg) 14 8 9
Fixed Cost (Rs.per kg) 3 5 3
Profit (Rs.per kg) 3 2 4
Total Price (Rs.per kg) 20 15 16
It is further given that:
(i) Constraints would prevail throughtout the year and no other arrangement is possible to meet shortage.
(ii)Company had an opening stock of 7,500 kgs. and minimum stock of 2,500 kgs. has to be maintained is any case; and
(iii)For economic operations plants have to be operated at a minimum of 70% capacity.

Required:
1.To suggest the most profitable mix;
2.To compute the loss suffered as a result of main plant
operating at 75% capacity.
3.To re-fix the price of the products so as to retain the same
profit.

CA FINAL EXAMINATION PROBLEMS:
November 1991:
1.Dinesh Dairies Ltd. has two processing and bottling plants, Danida and Danima, in adjoining districts. The comparative cost and revenue data budgeted per month are as follows:
Danida Danima
Production (Litres) 1,00,000 75,000
Variable Costs: Rs. Rs.
Bottles 1,00,000 79,000
Closures 90,000 71,500
Crates 14,000 12,500
Milk Loss 30,000 47,000
Electricity 14,000 14,000
Fuel 40,000 46,000
Water 10,000 11,250
2,98,000 2,81,250
Fixed Costs:
Electricity 13,500 11,000
Salaries and Wages 90,000 60,000
Depreciation 50,000 20,000
1,53,500 91,000
Total Costs: 4,51,500 3,72,250
Sales Realisation 7,00,000 5,25,000
Profit 2,48,500 1,52,750

Danima's high cost, low margin status draws management's attention. It is also observed that Danida can increase its production by 50 per cent with the existing plant capacity and without additional manpower.
Two proposals are under consideration:

1.Cut down Danima's production by 25,000 litres and increase
Danida's production by 25,000 litres.
2.Cut down Danima's production by 50,000 litres and increase
Danida's production by 50,000 litres.
For the additional quantity producted in excess of 1,00,000 litres, Danida will incur Re.0.40 per litre towards group incentice. Transporting the additional output from Danida to Danima's region for sale will cost Rs.10,000 in both cases.
a. Prepare a statement to show the contribution and the profit for
Danida, Danima and for the company as a whole, for each
proposal. Comment on the results.
b.The management is keen that the cut in Danima's production should
not result in its reporting loss, as that would demoralise its
employees. If break-even production is to be retained in Danima
and the balance alone is to be transferred to Danida, show the
contribution and the profit for Danida, Danima and the company as
a whole.

November 1991:
2. Titan Engineering is operating at 70 per cent capacity and presents the following information:
Break - even point Rs.200 crores
P/V Ratio 40 per cent
Margin of Safety Rs. 50 crores

Titan's management has decided to increase production to 95 per cent capacity level with the following modifications.

(i) The selling price will be reduced by 8 per cent.
(ii)The variable cost will be reduced by 5 per cent on sales.
(iii)The fixed cost will increase by Rs.20 crores, including depreciation on additions, but excluding interest on additional capital.
(iv)Additional capital of Rs.50 crores will be needed for capital expenditure and working capital.

Required:
a) Indicate the sales figure, with the working, that will be needed to earn Rs.10 crores over and above the present profit and also meet 20 per cent interest on to the additional capital

(b) What will be the revised:
(i) Break-even point; (ii) P/V Ratio; and (iii) Margin of safety?

November 1991:
3. Perfect Pistons Ltd., produces 60,000 pistons per annum for its parent company Perfect Motors Ltd. The pistons are sold to Perfect Motors at Rs.200 per unit. The variable cost per piston is Rs.180. The annual fixed cost of Perfect Pistons Ltd. is Rs.15 lakhs and it is currently operating at 60% capacity.

The company desires to respond to an export enquiry for 30,000 pistons of the type it is currently manufacturing. The company's aim is to improve capacity utilisation and avoid loss.

You have to take note of the following benefits that will accrue to the export transaction, while determining the FOB price to be quoted.

1.Export incentive by way of cash assistance at 10% of FOB
value

If you have any insight on this, or if you are looking for information on the same topic, please engage with this member to help add value to this discussion.
Disclaimer: This network and the advice provided in good faith by our members only facilitates as a direction towards the actions necessary. The advice should be validated by proper consultation with a certified professional. The network or the members providing advice cannot be held liable for any consequences, under any circumstances.
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