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 I II III Selling price reduced by 5% 7% 10% Quantity sold increases by 10% 20% 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 I Rs. Selling price per unit (WN 1) 47.50 Less : Variable cost per unit 20.00 alternatives II III Rs. Rs. 46.50 45.00 20.00 20.00

A. B.

C. D.

Contribution per unit (A-B) Revised quantity of units to be sold (WN 4)

27.50 88,000

26.50 96,000

25.00 1,00,000

E.

Total contribution (C*D)

24,20,000

25,44,000

25,00.000

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 Add: fixed cost Total contribution 14, 00,000 10, 00,000 24,00,000

Quantity of units sold = total contribution/contribution per unit =24, 00,000/30 =80,000 units 4) Revised quantity of units sold: Alternative I II III Units to be sold 80,000 units + 10% of 80,000 units 80,000 units + 20% of 80,000 units 80,000 units + 25% of 80,000 units Units 88,000 96,000 1,00,000

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 direct material direct labor(Rs 1 per hr) Variable overhead( Rs 2 per hr) Selling price Standard time to produce A 24 2 4 100 2 hrs B 14 13 6 110 3 hrs

SOLUTION: Particulars Sales Less: variable costs

CONTRIBUTION ANALYSIS A 100 B 110

Direct material Direct labour Variable overheads Contribution Standard time Contribution per standard hour Ranking: Product A is better

24 2 4 30 70 2 hrs 70/2 =35

14 13 6 33 77 3 hrs 77/3 =25.67

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 Direct materials Direct materials Direct wages Direct wages Product X Y X Y Per unit Rs. 10.50 8.50 3.00 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 X A B C 100 150 200 No. of units Y 200 150 100

SOLUTION 1) Marginal cost and contribution Particulars Direct materials Direct wages Variable expenses (100% of direct wages) Marginal cost per unit Selling price per unit Less : marginal cost Contribution per unit 16.50 20.50 16.50 4.00 12.50 14.50 12.50 2.00 Product X 10.50 3.00 3.00 Product Y 8.50 2.00 2.00

2) Contribution & profits of sales mix Sales Mix (A) Particulars Contribution from 100 units of product X @ Rs.4 Contribution from 200 units of product Y @ Rs.2 Total contribution Less : fixed expenses Profit Rs. 400 400 800 800 nil

Sales mix (B) Particulars Contribution from 150 units of product X @ Rs.4 Contribution from 150 units of product Y @ Rs.2 Total contribution Less : fixed expenses Profit Rs. 600 300 900 800 100

Sales Mix (C) Particulars Contribution from 200 units of product X @ Rs.4 Contribution from 100 units of product Y @ Rs.2 Total contribution Less : fixed expenses Profit Rs. 800 200 1000 800 200

3) Advice Mix C should be adopted because it gives the maximum contribution and profit.

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 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 Fixed Profit Rs Rs 1080000 180000 360000 90000 135000

765000 315000

50000 36000 22000 108000 207000

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

you are required to 1. prepare a comparative statement showing net income under the three alternative profit volume relationships and 2. compute the break even sales point in each SOLUTION: statement of net income Particulars Per Rs unit
Sales 9 7.20 6 Less: variable cost Direct material Direct labor Variable o/h Variable selling Contribution Less; fixed expenses Selling Manufacturing Admin. expen. Profit/loss 1050000 1296000 1200000

120000 Rs units

180000 Rs units

20000 units

1.50 2 0.75 0.35

180000 360000 90000 36000

666000 414000

270000 540000 135000 54000

999000 297000

300000 600000 150000 60000

1110000 90000

50000 135000 22000

207000 207000

50000 144000 22000

216000 81000

25000 146000 28000

226000 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 =540000 414000 for 180000 units = 216000 x 1296000 = 942545 297000 for 200000 units = 226000 x 1200000 = 3013333 90000

5. COST CONTROL
MECHANIZATION & LABOR INCENTIVES The present output details of a manufacturing department are as follows; Average output per week Sales value of output = 48000 units from 160 employees = 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.

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: Marginal contribution Less: present contribution Increase in contribution (per week) 374400 74880 449280 241920 241920 240000 1920 691200

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.

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 Direct wages Works overhead (50% fixed) Sales overhead (25% veriable) 35.00 15.50 62.50 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.

Solution:
Particulars 60,000 units Amtrs. Per pen rs. Direct materials Direct wages Prime cost Works overhead Fixed Variable Works cost Selling overhead Fixed Variable Cost of sales profit Total sales 3,60,000 1,20,000 6.00 2.00 3,96,000 1,60,000 91,66,500 16,73,000 4.95 2.00 114.58 20.91 18,75,000 31.25 18,75,000 31.25 66,00,000 110.00 20,62,500 25,00,000 86,10,500 25.78 31.25 107.63 21,00,000 35.00 7,50,000 12.50 29,68,000 10,80,000 40,48,000 80,000 units Amtrs. Per pen rs. 37.10 13.50 50.60

28,50,000 47.50

70,80,000 118.00 15,00,000 25.00 85,80,000 143.00

1,08,39,500 135.49

Minimum price recommended will be Rs. 135.49 per pen.

7. SPECIAL ORDER
Export order the cost sheet of a product is as follows Particulars Direct material Direct wages Factory overheads Fixed Variable Administrative expenses Selling and distribution expenses Fixed Variable Cost of sales 00.50 01 21 01 02 Per unit 10 5

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?

SOLUTION: Particulars 50000 units Rs Sales (50000x25) (10000x19) Total sales Variable costs Direct material Direct wages Cost of exports Factory overheads Selling and distribution Total variable cost Contribution Fixed costs Factory overhead Administration Selling and distribution Total fixed costs Profit 50000 75000 25000 150000 200000 1 1.5 0.5 3 4 50000 75000 25000 150000 205000 0.83 1.25 0.42 2.50 3.42 100000 50000 900000 350000 2 1 18 7 500000 250000 10 5 600000 300000 5000 120000 60000 10 5 0.08 2 1 1250000 25 1250000 Per unit 60000 units Rs 1250000 190000 1440000 24 Per unit

1085000 18.08 355000 592

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.