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Solution Qno.5 (Spring 2015) Incremental Impact of Expansion

The document summarizes the incremental profits from expanding production to refine additional products Alpha and Beta. Refining Alpha would produce the highest incremental profit of Rs. 1,856,029 per month. The existing total contribution is Rs. 7,948,000 per month from producing Alpha and Beta. Refining time per unit for Alpha is 0.453 hours and 0.533 hours for Beta. The incremental contribution per hour for Alpha is Rs. 490 and Rs. 366 for Beta. Expansion would include additional monthly depreciation costs of Rs. 77,500.

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Ejaz Khan
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236 views3 pages

Solution Qno.5 (Spring 2015) Incremental Impact of Expansion

The document summarizes the incremental profits from expanding production to refine additional products Alpha and Beta. Refining Alpha would produce the highest incremental profit of Rs. 1,856,029 per month. The existing total contribution is Rs. 7,948,000 per month from producing Alpha and Beta. Refining time per unit for Alpha is 0.453 hours and 0.533 hours for Beta. The incremental contribution per hour for Alpha is Rs. 490 and Rs. 366 for Beta. Expansion would include additional monthly depreciation costs of Rs. 77,500.

Uploaded by

Ejaz Khan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Solution

Qno.5 (Spring 2015)


Incremental Impact of
Expansion:
Rs.
Additional Contribution
Additional Fixed Cost

=5,000x373.81 (w-3)
(77,500 w-4 +
250,000)

1,869,05
0
(327,500)
1,541,55
0

Incremental Profit Per month


Incremental Profit of refining
Alpha
Incremental Contribution (5,000 x
490 w-6)
Incremental Costs (500,000
+92,500 w-7)
Incremental Profit Per Month

Beta

2,448,529

1,828,12
5

(592,500)

(592,500)

1,856,029

1,235,62
5

Recommendation:
Since refining Alpha produces highest profit, therefore the company should go
ahead with refining product Alpha.
1) Total Existing Contribution
Rs. 000
Alpha (1000 x 11,300)

11,300

Beta (14,700 x 1,125)

16,538

Total Revenue

27,838

Less: VC (as Per Qusetion)

19,890

Total Contribution

7,948

2) Total Existing Hours

=Total Conversion cost/rate


per hour

=4,890,000/2
30
21,261 hours

3) Existing Contribution/hour

4) Depreciation Per
Month(expansion)

=7,948,000(w-1)/21,261(w2)
Rs.
373.81/hour
=(20,000,0001,400,000)/20*12
Rs.77500.00

5) Refining Time Per unit


Alpha (68/150)

0.453 hours

Beta (80/150)

0.533 hours

6) Incremental Contribution/hour
Rs.
Alpha (380-158)/0.453

490

Beta (400-205)/0.533

366

7) Depreciation/month (refining)

=25,000,0002,800,000/20*12

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