per

hours
required
:5
Contribution per Labour Hour
= Labour
F
Contribution perunit 25
unit 10
hours required
per
Hour Machine =2.5
G. Contibution per Machine
6,00,00o
Fixed Overheads T 25 z600 000
H. Break-even Point = Contribution per unit 24,000 24
units 25 000
profitable
because. its contribution per unite
(a) When sales quantity is limited, Product
A is
more
unit
higher than that of Product B.
Product B is
more profitable
because its PiV ratio
higher than tha
is higha

( ) When sales vajue is limited,

of ProductA.
because
profitable because its contribution
Product B is more

(c) When raw material is in short supply, A.

per
of material is higher than that of Product b e c a u s e its contribution
Kg. raw
profitable
(a) When labour hours are limited,
Product A is more abour
hour is higher than that of Product B. B is more
more profitab
machine hours is limited, Product
in terms of that of Product A.
(e when production capacity than
contribution per machine hour
is higher
Decause its Product B is more
profitable because its PA. ause
PN ratio
there are heavy demand conditions, is
(When
higher than that of Product A. because its breat
Product A is more profitable k-even
there are low demand conditions,
(9) When
point is lower than that of Product B.
4.4 EXPLORING NEW MARKETS
Ilustration 24
A pen manufacturer makes an average net profit of 25.00 perpen on a selling price of R143.00
of sales is:
producing and selling 60,000 pens, or 60% of the potential capacity. His cost

Direct Materials 35.00

Direct Wages 12.50
Works Overheads (50% Fixed) 62.50
Sales Overheads (25% Variable) 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 increase by 8%
and 6% respectively. But he has no option of increasing the selling price. Under this situation, he
obtains an offer for a further 20% of his capacity. What minimum price will you recommend tor
acceptance to ensure the manufacturer an overall profit of 7 16,73,000.
Solution: (M.Com., Mar. 2000, adapted)
Particulars
60,000 Units 80,000 Units
Amount Per Pen Amount Per Pen

Direct Materials
Direct Wages 21,00,000 35.00 29,68,000 37.10
7,50,000 12.50|10,80,000 13.50
Prime Cost
Works Overheads 28,50,000 47.50 40,48,000| 50.60

ixed
ariable |18,75,000 31.25 20,62,500 25.78
18,75,000 31.25 25,00,000 31.25
lorks Cost
66,00,000 110.00 86,10,500 107.63
 rial DecistOn Making
HonagernatDe,

g e l l i n gO v e r h e a d s

201
Fred

Variable
cost
o fS a l e s
3,60,000
1,20,000|
6.00 3,96,000| 4.95
2.00
' ***** *** 2.00 1,60,000
Proit
70,80,000 118.0091,66,500 114
4.58
T o t aS
l ales
|15,00,000 25.00 16,73,000 20.91

Minimum
rice recommended will be
?
135.49 per pen.
85,80,000 143.00 1.08,39,500 135.49
stration25:
rer has
planned level of his
Am

manuare estimated as operation atat 50%

peration
tollows, it 50% 50% of
of his
his plant
plant
capacity of 30,000 units. His
expenses

Direct Materials
of the plant capacity capac
is utilized.
) Direct Wages 8,280
Variable and Other
Manufacturing Expenses 11,160
Total Fixed Exg Expenses irrespective of 3,960
expected sellin Capacity utilization
ling price in the domestic 6,000
d aa trade enquiry trom an Overseas market is 2 per unit Recently the manufacturer has
ecerved
arice of1.45 per unit. Organisation interested in purch
chasing 6,000 units at a
orofessional Management Accountant, what should be
ction of the offer ? your suggestion
uggestion regarding
r acceptance
ot yoUr suggestiorn with suitable quantitative
Suppor
information. (M.Com., Oct. 06, adapted)
Solution

Statement of Cost and Profit

Particulars
PU. Present Proposed Total
Position Offer 70%
50% 20%
15,000 6,000 21,000

Units 01.45 Units

Sales 2.000 30,000| 700 38,700
Less:Variable Cost
Direct Material 0.552 8,280 3,312 11,592
Direct Labour *** "** 0.744 11,16 4,464 15,624
Variable& OtherManufacturing Overhead... 0.264 3,960 1,584 5,544
Total Variable Cost **** * 1.560 23,400 9,360 32,760
Contribution (S - V) 0.440 6,600 (660) 5,940
Less: Fixed Cost 6,000 (6,000)
Profit 600 (660) (60)
The price offered by the Foreign Co. is 1.45 per unit of additional product which is less than the
estimated variable cost of production i.e. 1.56 per unit. This will result in an estimated negative
contributiorn of 7 0.11 per unit and a total loss of 660 on additional 6,000 units. Hence, based on
that the offer may be rejected. However, other qualitative
the above quantitative details, it is suggested be considered before taking the final
actors such as need for developing an export market, may
decision.
lustration 26
Following relevant data of a firm is given

Particulars Activity Levels (tons)

50,000 60,000 70,000 80,000
tons tons tons
tons
5,000 6,000 7,000 8,000
Vaiable Cost ( in thousands) 1,500 1,600 1,650 1,700
demi-Variable Cost ( in thousands) 2,500 2,500| 3,000 3,000
ixed Cost ( in thousands)
9,000 10,100 11,650 12.700
Total Cost ( in thousands)
 Cost Accounting - IV (TYR
B AF:

202
clear from
the above and the semi- SEM
is thefim a
iable sst
The fixed costs follow p-graph pattern
above given
as
activity
levels.
Given that
fim operates
rate between the
change at unform
tons level at present
manutactures additional (a
if it
-

incremental costs
.alculate the additional/
(b) 15,000 tons.

6 AOVIse whether the firm should accept 'any

one' should it
accept
one' of the
following additional
epeca
market offers and if Yes, 'which
of 125/- per ton.
(0 for 10,000 tons at a selling price (M.Com, Part, April 09.
()for 15,000 tons at a selling price
of 150/-perton. 09, adapea
Solution:
Present level = 55,000 tons

Particulars
10,000 tons 15,000
in '000)in 'o
1. Calculation of Additional / Incremental Cost
1,00
Variable Cost
Semi-Variable Cost SR
Fixed Cost 00
Additional / Incremental Cost (A) 1.075
2. Incremental Revenue (B)
Incremental Profit (A B) -
*

*
*

**
*

***
***
1250|
175
21)
22
Advice Since the firm is getting an incremental profit of 175 (000) and R 150 (000) in
150
activity of 10,000 and 15,000 tons respectively. Hence, 10,000 tons level offer should be s addftona
lustration 27: (Alternative Export Offers) accepled.
A firm already in production gives you its following detailsS
Annual Capaclty Unit Cost Unit Price
Units
6,000 80 100
7,000 75 97
8,000 74 95
9,000 72
10,000 71
The firm is operating at 8,000 units'
capacity at present and cannot
15,000 units' capacity level by any means. Under the exceed, in any case, total
additional orders, only circumstances, the firm receives two altemative
of which it can accept
one
(a) For 2,000 units from an export market at a
price of 70 per unit.
(6) For 7,000 units from another export market at a
has to increase its establishment for price of 75 per unit and it is given that the
going from 10,000 units to fm
into additional fixed cost of 15,000 units which would resut
30,000
units level which would remain the per annum, in addition to the 'per unit cost of 71 at 10,0
same even
Advise the firm as to whether subsequently i.e. at the level of 15,000 units.
any of the alternative additional
not, any if yes, which one? export orders should be accepled
Solution: (M.Com., April 2010, adapted
Operating at = 8,000 units

Units Cost Sales Revenue Aditional Proft

(a) 2,000 1,18,000
(7,10,000- 5,92,000) 1,40,000 22,000
8,000 5,92,000 (2,000 x 70) F 11/Unit) (70 59) x 20
-

10,000 7,60,000 1,68,000

7,10,000
9,00,000 1,90,000
(b) Additional (7.60,000 +(2,000 x70)]
7,000 15,03,000
[10,65,000 5,92,000 5,25,000 22,000
(7,000 x 75) I(75 -71.861) x7,000
+30,000 (FC)]|
 erial Decision Making
203
( c )Total

15,000
10,95,000

Profit is
9,65,000+30,000)
22,000.
12,85,000
(7,60,000+(7,000 x75)]
1,90,000

Additional
Advice:Anyw of
of the.
the above 2 alternative
export orders
@ver (a)
is more
advisable in case ofduDt accepte as both are equallydoprofitabie.
ers may be accepted, not
Howe

lustration 28
as to stability of demand as fixed cost ise
capacity a fact
factory can produce 5,000 At present the production is 1,000 articles
articles. At for

home me consumption. Ihe cost incurred articles. presentt

Particulars

M a t e r i a l s

40,000
* *

Wage
36,000
Factory Overheads
Fixed 12,000
Variable
20.000 32,000
Administrative Overheads (Fixed) 18,000
* ***

Celling and Distribution Overheads:

Fixed 10,000
Variable 16.000 26.000
Total 1,52,000

The home market can consume onily 1,000 articles at a selling price of 155 per article. The foren
1o
market Isforthethis product can however consume additional 4,000 articles if the price is reduced
125. market worth
foreign ? trying
Support your answer with calculations. (M.Com., Oct. 2013, adapted)
Solution
Option 1: 1,000 units sold in the domestic market 155 per unit
Option 2: 1,000 units sold in the domestic market 155 per unit and 4,000 units exported
7125 per unit
Statement of under Option 1 and Option 2
Profitability
Option 1 Option 2
Particulars Total Per Unit
Total Per Unit
Variable Costs 40.00
40,000 40.00 2,00,000|
Materials 36.00 1,80,000| 36.00
36,000|
Wages 20,000 20.00| 1,00,000| 20.00
Factory Overheads 16.00 80,000 16.00
Distribution Overheads...
16,000
Selling and 1,12,000D 112.00 5,60,000 112.00
. Total Variable Costs
Fixed Costs 12,000 .00 12,000| 2.40
Factory Overheads 18,000 18.00 18,000 3.60
Administrative Overheads 10.00 10,000 2.00
10,000|
Selling Overheads 40,000 40.00 40,000 8.00
B. Total Fixed Costs ***°* **° * * **
1,52,000 152.00 6,00,000 120.00
C. Total Costs [A B]
155.00| 1,55,000 155.00
Sales 1,55,000
5,00,000 125.00
Domestic
Export * *
***
***
***
* * *
1,55,000 155.00 6,55,000 131.00

D. Total Sales
* * * *
3,000 3.00 55,000 11.00

E. Profit (D-C market is worth trying.

2, the foreign
under option
3 profit are higher
 IV
Cost Accounting
(TYBAFaAF ::SEMSEM
-

204

llustration 29 the Sales

Budget of a company for the
ror the curren
current year
OOwing extracts are taken from

Particulars Tin '000

Sales 40,000 units@ 725
per unit
Selling Costs
Advertising 100
Salesmen's Salariees 80
Travelling Expensess 50
Rent of Sales Office 10
Others 10
in
emanagement is considering a proposal to establish a nevw market in the eastem 2
next year. It is proposed to increase the advertising expenditure by 25% and appoint aon in
sales pervisor at a salary of T 30,000 per year to establish a market. This will invohve
travelling and travelling expense shall increase by 1070.
arget annual sales volume at the existing selling price for the new market is 10,000
addifiomg
estimated variable cost of O00 units.Th
production is 7 12 per unit.
Should the company
try to establish the new market?
Solution June 1996;
(ICWA-Inter, CS-inter, Dec
Particulars
19807
Incremental Sales Revenue
in'000 in 'o0
New Market 10,000 units7 25
Less: Differential Cost
Variable Cost of Production
Increase in Advertising
(10,000 units at 12) 120
Expenses
Additional Sales Supervisor (25% of 1,00,000) **

25
Additional Travelling
Salary of 30,000 per
year
Expenses (10% of 50,000) 30
Incremental Profit 5 180
It may be advised that in
*

70
view of the additional
should try to establish the new profit (incremental profit) of
market. 70,000, the compan
4.5 DISCONTINUE PRODUCTISHUT DOWN
Illustration 30
OR MERGE PLANT
A manufacturer of
(Discontinue 2 Products)
are incurred
packing cases makes three main
the basis of labour
on
hours. types- Delux, Luxury and Economy. eads
Estimates for the cases show the Wages are paid at 7 1.00 Ove
following: per hour.
Particulars
Delux LuxuryEconom

Materials (
Wages 3.0
Overheads 10.00 8.00
6.00 3.00
12.00 6.00 40
Net Profit/Loss