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7/30/2019 All Sums Costing
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1. PRICING
EVALUATE ALTERNATIVE RESPONSES TO PRICE CHANGES
The accounts of a company are expected to reveal a profit of Rs.14,00,000 after
charging fixed costs of Rs.10,00,000 for the year ended 31st march, 2004. The
selling price of the product is Rs.50 per unit and variable cost per unit is Rs. 20.
Market investigations suggest the following responses to the price changes:
Alternative Selling price reduced by Quantity sold increases by
I 5% 10%
II 7% 20%
III 10% 25%
Evaluate these alternatives and state which of the alternatives on profitability,
consideration, should be adopted for the forthcoming year.
SOLUTION
Statement for evaluating three alternatives on profitability consideration
Particulars alternatives
I
Rs.
II
Rs.
III
Rs.
A.
B.
Selling price per unit (WN 1)
Less : Variable cost per unit
47.50
20.00
46.50
20.00
45.00
20.00
C. Contribution per unit (A-B) 27.50 26.50 25.00
D. Revised quantity of units to
be sold (WN 4)
88,000 96,000 1,00,000
E. Total contribution (C*D) 24,20,000 25,44,000 25,00.000
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Recommendation: An alternative of the above 3 alternatives on profitability
consideration clearly shows that alternative II is the best as it gives maximum
contribution and hence profitability; therefore this alternative should be adopted.
Working notes
1) Selling price per unit
I : Rs.50-5% of 50 = Rs.47.50
II : Rs.50-7% of 50 = Rs.46.50
III : Rs.50-10% of 50 = Rs.45.00
2) Contribution per unit
Contribution=selling price per unit-variable cost per unit
=Rs.50-20
=Rs.30
3) Expected quality of units to be sold:
Profit 14, 00,000
Add: fixed cost 10, 00,000
Total contribution
Quantity of units sold = total contribution/contribution per unit
=24, 00,000/30
=80,000 units
4) Revised quantity of units sold:
Alternative Units to be sold Units
I 80,000 units + 10% of 80,000 units 88,000
II 80,000 units + 20% of 80,000 units 96,000
III 80,000 units + 25% of 80,000 units 1,00,000
24,00,000
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2. KEY FACTOR
From the following data, which product would you recommend to be manufactured
in a factory, time being the key factor.(time)
Per unit of product A B
direct material 24 14
direct labor(Rs 1 per hr) 2 13
Variable overhead( Rs 2 per hr) 4 6
Selling price 100 110
Standard time to produce 2 hrs 3 hrs
SOLUTION: CONTRIBUTION ANALYSIS
Particulars A B
Sales 100 110
Less: variable costs
Direct material 24 14
Direct labour 2 13
Variable overheads 4 30 6 33
Contribution 70 77
Standard time 2 hrs 3 hrs
Contribution per standard hour 70/2 =35 77/3 =25.67
Ranking: Product A is better
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3. PRODUCT MIX
2 PRODUCTS, 3 MIXES
From the following data you are required to present.
1) The marginal cost of product X and Y and the contribution per unit .
2) The total contribution and profits resulting from each of the suggested sales
mixtures.
Particulars Product Per unit Rs.
Direct materials X 10.50
Direct materials Y 8.50
Direct wages X 3.00
Direct wages Y 2.00
Variable expenses 100% of direct wages per product.
Fixed expenses (total) Rs. 800
Sales price X Rs.20.50
Y Rs.14.50
Suggested sales mixes
Alternatives No. of units
X Y
A 100 200
B 150 150
C 200 100
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SOLUTION
1) Marginal cost and contribution
Particulars Product X Product Y
Direct materials 10.50 8.50
Direct wages 3.00 2.00
Variable expenses (100% of
direct wages)
3.00 2.00
Marginal cost per unit 16.50 12.50
Selling price per unit 20.50 14.50
Less : marginal cost 16.50 12.50Contribution per unit 4.00 2.00
2) Contribution & profits of sales mix
Sales Mix (A)
Particulars Rs.
Contribution from 100 units of product X @ Rs.4 400
Contribution from 200 units of product Y @ Rs.2 400
Total contribution
Less : fixed expenses
800
800
Profit nil
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Sales mix (B)
Particulars Rs.
Contribution from 150 units of product X @ Rs.4 600
Contribution from 150 units of product Y @ Rs.2 300
Total contribution
Less : fixed expenses
900
800
Profit 100
Sales Mix (C)
Particulars Rs.Contribution from 200 units of product X @ Rs.4 800
Contribution from 100 units of product Y @ Rs.2 200
Total contribution
Less : fixed expenses
1000
800
Profit 200
3) Advice
Mix C should be adopted because it gives the maximum contribution and profit.
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4. OPTIMUM LEVEL
OPTIMUM CAPACITY LEVEL
Jay and Vijay company is at present operating at 60% capacity producing at the
rate of 10000 units a month- a single product sells for 9.00 a unit.
for the year 2003 the results have been as follows:
Particulars Rs Rs
Sales: 120000 units at 9 per unit
Cost of sales:
Direct material Direct labor Variable overheads Fixed manufacturing overheads
Gross profit
Selling expenses
Fixed Variable
Administrative expenses
FixedProfit
180000
360000
90000
135000
50000
36000
22000
1080000
765000
315000
108000207000
Although the company is operating at a net high profit at a plant capacity of 60%,
it is a fact that if the price unit could be reduced by 20%, the value of the sales
would increase to 180000units per year with an increase in the fixed manufacturing
overheads of 9000 per year. If sales price could be reduced by 331/2 the volume of
sale should increase to full capacity (2000000)units with increase in expenses at
60% levels as follows;
manufacturing overheads 11000 fixed selling expenses 2000 fixed administrative expenses 6000
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you are required to
1.prepare a comparative statement showing net income under the threealternative profit volume relationships and
2. compute the break even sales point in eachSOLUTION:
statement of net income
Particulars Per
unit
Rs 120000
units
Rs 180000
units
Rs 20000
units
Sales
Less: variablecost
Direct material
Direct labor
Variable o/h
Variable selling
Contribution
Less; fixed
expenses
Selling
Manufacturing
Admin. expen.
Profit/loss
9
7.20
6
1.50
2
0.75
0.35
180000
360000
90000
36000
1050000
666000
270000
540000
135000
54000
1296000
999000
300000
600000
150000
60000
1200000
1110000
50000
135000
22000
414000
207000
50000
144000
22000
297000
216000
25000
146000
28000
90000
226000
207000 81000 136000
Therefore the present activity at 60 % capacity (of 20000) units is better, as it gives
maximum profit of 207000
break even sales = fixed cost x sales
contribution
for 120000 units = 207000x 1080000 =540000414000
for 180000 units = 216000 x 1296000 = 942545297000
for 200000 units = 226000 x 1200000 = 301333390000
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5. COST CONTROL
MECHANIZATION & LABOR INCENTIVES
The present output details of a manufacturing department are as follows;
Average output per week = 48000 units from 160 employees
Sales value of output = 600000
Contribution made by output toward fixed expenses and profit = 240000
The board of directors plan to introduce more mechanization into the department at
a capital cost of 160000. The effect of this will be to reduce the number of
employees to 120, and increasing the output per individual employee by 60% . To
provide the necessary incentive to achieve the increased output, he board intends to
offer a 1 5 increase on the piece of work rate of 1 per unit for every 2 5 increase in
average individual output achieved.
To sell the increased output, it will be necessary to decrease the selling price by 4
%.Calculate the extra weekly contribution resulting from the proposed change and
evaluate for the boards information, the desirability of introducing the change.
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SOLUTION:
Statement of extra weekly contribution
Expected sales unit 57600
Particulars
Sales value: (57600 x 12)
Marginal costs (excluding wages)
(57600 x 6.50)
Wages: (57600 x 1.30)
Total marginal cost:
374400
74880
691200
449280
241920
Marginal contribution
Less: present contribution
241920
240000
1920Increase in contribution (per week)
Evaluation since the mechanization has resulted in the increase of contribution to
the extent of 1920 per week, therefore the proposed change should be accepted.
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6. DISCONTINUE PRODUCT
DISCONTINUE
A pen manufacturer makes an average net profit of Rs. 25.00 per pen on a selling
price of Rs. 143.00 by producing and selling 60,000 pens, or 60% of the potential
capacity. His cost of sales is :
RS.
Direct materials 35.00
Direct wages 15.50
Works overhead (50% fixed) 62.50
Sales overhead (25% veriable) 8.00
During the current year he intends to produce the same number of pens but
anticipates that his fixed charges will go up by 10%while rates of direct labour and
direct material will be increase by 8% and 6% respectively. But he has no option
of increasing the sales price. Under this situation, he obtains an offer for a further
20% of his capacity. What minimum will you recommend for acceptance to ensure
the manufacturer an overall profit of Rs. 16,73,000.
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Solution:
Particulars 60,000 units 80,000 units
Amtrs. Per pen
rs.
Amtrs. Per
pen rs.
Direct materials 21,00,000 35.00 29,68,000 37.10
Direct wages 7,50,000 12.50 10,80,000 13.50
Prime cost 28,50,000 47.50 40,48,000 50.60
Works overhead
Fixed 18,75,000 31.25 20,62,500 25.78
Variable 18,75,000 31.25 25,00,000 31.25
Works cost 66,00,000 110.00 86,10,500 107.63
Selling overhead
Fixed 3,60,000 6.00 3,96,000 4.95
Variable 1,20,000 2.00 1,60,000 2.00
Cost of sales 70,80,000 118.00 91,66,500 114.58
profit 15,00,000 25.00 16,73,000 20.91
Total sales 85,80,000 143.00 1,08,39,500 135.49
Minimum price recommended will be Rs. 135.49 per pen.
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7. SPECIAL ORDER
Export order
the cost sheet of a product is as follows
Particulars Per unit
Direct material
Direct wages
Factory overheads
Fixed
Variable
Administrative expenses
Selling and distribution expenses
Fixed
Variable
Cost of sales
10
5
01
02
00.50
01
21
The selling per unit is 25. The above cost information is for an output of 50000
units, whereas the capacity of the firm is 60000 units. A foreign customer is
desirous of buying 10000 units at a price of 19 per unit. The extra cost of exporting
the product is 0.50 per unit. You are required to advice the manufacturer whether
the order should be accepted?
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SOLUTION:
Particulars 50000 units 60000 units
Rs Per unit Rs Per unit
Sales (50000x25)
(10000x19)
1250000 1250000
190000
Total sales
Variable costs
Direct material
Direct wages
Cost of exports
Factory overheads
Selling and distribution
1250000
500000
250000
100000
50000
25
10
5
2
1
1440000
600000
300000
5000
120000
60000
24
10
5
0.08
2
1
Total variable cost
Contribution
Fixed costs
Factory overhead
Administration
Selling and distribution
900000
350000
50000
75000
25000
18
7
1
1.5
0.5
1085000
355000
50000
75000
25000
18.08
592
0.83
1.25
0.42
Total fixed costs 150000 3 150000 2.50
Profit 200000 4 205000 3.42
If the export order is accepted, profit increases from 200000 to 205000 i.e. By
5000 and therefore it should be accepted by the manufacturer.