Question 1

A B C
Selling Price 200 160 100
Variable Cost 120 120 40
Contribution 80 40 60

PV Ratio 0.4 0.25 0.6

Rank 2 3 1

Per Unit Production Time 0.04 0.025 0.0333

Demand Met 2000 1600 2400
Hours to Meet Demand -
Rank Wise 80 40 80

Sales 400000 256000 240000

Contribution 160000 64000 144000

Combined PV Ratio
BEP Sales (In Rs)
Sales Mix 0.446 0.286 0.268
896000
368000

0.411
672000
 Question 2
Semi Variable Expenses Change in Expenses / Change in No. of Units
Let No. of Units be 40, 60, 80, 100
40
Variable Cost Per Unit Variable @ 40%
Production Ohs 60 2400
Administrative Ohs 20 800
Selling and Distribution Ohs 30 1200

Fixed
Production Ohs 9000
Administrative Ohs 5000
Selling and Distribution Ohs 5000

Option 1
Capacity @ 50% Capacity @ 70%
Sales 60000 80000
Less:
Direct Wages 25000 35000
Direct Materials 20000 28000
Production Ohs 3000 4200

Administrative Ohs 1000 1400

Selling and Distribution Ohs 1500 2100

Contribution 9500 9300

Fixed Cost 19000 19000

Profit/Loss -9500 -9700

Looking at the above numbers, it is better for TBA Ltd. to keep the factory operation
for better time next year as it is incurring huge costs amounting to Rs 61600 for closing
9500 at 50% level and loss of 9700 at 70% level. It also has a positive contribution at both
nses / Change in No. of Units
Units be 40, 60, 80, 100
60 80 100
60% 80% 100%
3600 4800 6000
1200 1600 2000
1800 2400 3000

Option 2
Close Down
0

Initial Cost of
Reopening 20000

Maintenance Service 24000

Closing Down Cost 10000
Reduction in Fixed
Cost 7600
Total Cost -61600

keep the factory operational for one year and wait

unting to Rs 61600 for closing down as against loss of
positive contribution at both the capacity levels.
Question 3
a) Joint Processing Cost
RM Input 300000
Other Material 30600
DL 80000
Production Ohs 100000
Total Cost 510600
Total Output 19500
Cost per Kg of each product 26.2
Sale Value of By Product 3000
Sale Value Per Kg - All Products 0.2
Cost Per Kg of Each Product 26

b) A B
8000 6000
SP after processing 38 42
Sales 304000 252000
Cost before processing Rs 26 per kg 208000 156000
Further Processing Costs 56000 60000
Net Profit 40000 36000
PV Ratio 0.13 0.14
Ranks 2 1

Product A and B should be processed further as their Profit is increasing whe

c) Profit earned if all products sold without processing

A B
8000 6000
SP after processing 28 30
Sales 224000 180000
Cost before processing Rs 26 per kg 208000 156000
Profit earned if all products sold
without processing 16000 24000

d) As suggested in b)
A B
8000 6000
SP after processing 38 42
Sales 304000 252000
Cost before processing Rs 26 per kg 208000 156000
Further Processing Costs 56000 60000
Net Profit 40000 36000

Only Main Products - Profit 106000

With By Product 96000
 C X
5000 500
43 8
215000 4000
130000 13000
60000 1500
25000 -10500
0.12
3

fit is increasing when compared to before processing stage.

C X
5000 500
32 6
160000 3000
130000 13000

30000 -10000

C X
5000 500
32 6
160000 3000
130000 13000
NIL NIL
30000 -10000

106000
96000
 Question 4
A B C
Sales 45000 225000 30000
Less: Variable Cost
Production Cost 24000 144000 12000
S & A Cost 8000 8200 7800
Contribution 13000 72800 10200
Less: Fixed Cost 5100 49800 11100
Profit/Loss 7900 23000 -900

P/V Ratio 28.9 32.4 34

BEP (In Rs) 17647.05882 153703.7037 32647.05882

MOS 27352.94118 71296.2963 -2647.059

Conclusion
The board had decided to eliminate Product C which is making a Loss. According to the abo
Product C has the Highest PV Ratio amongst all the other products. The Margin of Safety
meagre -2648 which can be recovered with one good year of sales for Product C. For the a
reasons, Product C should not be eliminated from the Product Line.
 ss. According to the above figures,
ts. The Margin of Safety is also a
for Product C. For the above
uct Line.
Question 5
Semi Variable Ohs
Variable Cost Per Unit 0.333333333
Units 24000 27000
Variable Cost 8000 9000
Fixed Cost 20000 20000
Total Semi Variable 28000 29000

Units 24000 Per Unit 27000

Sales 480000 522000
Less: Variable Cost
DM 120000 5 135000
DW 84000 3.5 94500
Variable Ohs 48000 2 54000
Semi - (Variable Portion 8000 0.33 9000
Contribution 220000 229500
Fixed Cost 100000 100000
Profit 120000 129500

PV Ratio 45.83333333 43.96551724

Conclusion

The management should increase the production and foray into foreign markets
contribution and the profits are also increasing even though the product is sold
lower price.
 foray into foreign markets as there is an increase in the
though the product is sold in the foreign market at a
Question 6
Royalty is assumed to be a Variable Cost

SP 36500
Less: Variable Costs
DM 16000
DW 2000
Variable Factory Ohs 5000
Royalty 1000
Variable Selling Ohs 500

Contribution b4 Taxes 12000

Less: Taxes
Excise 1000
Sales Tax 3000
Contribution 8000
Less: Fixed Cost 3000
Profit 5000

PV RATIO 21.92 AFTER TAX

32.88 BEFORE TAX

Solution 1) 10 units @ 28500
SP Per Unit 28500
Total VC (Inclusive of Taxes) 28500
Contribution 0
FC 3000
Loss 3000

The company should be interested in the business because it has zero contributi
able to utilise the idle capacity. Fixed Costs are not considered because any way
would be incurred.

Solution 2) Bare Cost to be charged

DM 16000
DW 2000
Variable Factory Ohs 5000
Variable Selling Ohs 500
Royalty 1000
Excise 1000
Sales Tax 3000
SP to be Charged 28500

28500 should be charged to the engineering company as it would cover all the v
well. The fixed cost, royalty and profit is not considered for the above computati
Fixed cost is not considered because they will be incurred irrespective of the lev
charge the management for Sunk Cost.
has zero contribution even with a reduced selling price. It will also be
d because any way by keeping the production line idle, fixed costs

uld cover all the variable expenses of the company and the taxes as
e above computation.
spective of the level of production. Its a Sunk Cost. No need to
 Question 7
Before Mechanization After Mechanization
No. of Articles 50000 48000
Workmen 400 300
No. of Articles per workman 125 160

%age increase in productivity 28

At 50000 level - Before Mechanization

In Rs. Per Unit
Sales 2400000 48
Less:
Wages 400000 1000

Incentive Wages NIL

Fringe Benefits 200000

Other Variable Cost 1200000 24
Contribution 600000

PV Ratio 0.25

Conclusion
The proposal of mechanization should be accepted because there is an increase in the con
compared with the previous level.
 At 48000 level - After Mechanization
In Rs. Particulars
2304000 Assuming SP per unit stays the same

300000 300 Workers * Rs 1000

42000 14% of Wages

Percentage of Basic Wages (Incentive not
150000 included in calculation)
1152000
660000

0.29

increase in the contribution and the PV ratio has also increased when
 If Incentive Wages is
included in Calculation

171000
1131000
639000

0.28
Question 8
Direct Materials and Direct Labour are variable in nature whereas the Factory Overheads a

Factory Overheads
Variable Portion Per Unit 2

Units
50000 80000
Factory Ohs
Variable 100000 160000
Fixed 100000 100000

Per Unit Fixed Factory Ohs 2 1.25 A Drop of Rs 0.75 Per Unit

Solution a) The above calculation tells us why there was a drop of Rs 0.75 per un
being apportioned with 50000 units, and later with an increase in production to

Solution b)
Assuming all units are sold at Rs 6
Units
50000 80000
Sales 300000 480000
Less:
DM 75000 120000
DL 75000 120000
Factory Ohs Variable 100000 160000
Contribution 50000 80000
Fixed 100000 100000
Profit/Loss -50000 -20000
as the Factory Overheads are semi variable expenses

op of Rs 0.75 Per Unit

a drop of Rs 0.75 per unit - It was because the fixed cost portion was earlier
crease in production to 80000 units, the same fixed cost per unit was reduced.

Conclusion
The order should be accepted as it has a positive contribution of Rs
80000. Also, the company would build markets in the future by procuring
an overseas order which will eventually lead to recovery of fixed costs
and achieving a break even situation. So the current loss of Rs 20000
would not matter much given the positive future prospects for the
company.
on was earlier
nit was reduced.

ribution of Rs
future by procuring
ry of fixed costs
oss of Rs 20000
pects for the
Question 9
a) Machine hours available 4752
Machine hours required 36
Number of equipments that can
produced 132
Estimated demand for the next
period (50% increase) 198

S.P per unit 600

Variable Cost per unit 160
Assembly Cost per unit 40
Contribution per unit 400
Total Contribution for 132 units 52800
Less: Fixed Cost 41712
Profit 11088

The company may buy one of the components. The number of units that ca
b) the three options available are:
Buy A
Component Machine Hours Reqd
A 0
B 14
C 12
Total Machine Hrs Per Unit 26

Total machine hrs available Is 4,752 under all options.

No. of units that can be manufactured if A is bought

182.77

Solution b) Additional Capacity that can be created

In %age 38.46

If the increases in demand during the net period is 50% it is not possible to
c) is only 38.5% of the remaining two options the cheaper one has to be acce

Buy B
Market Price 160
Less: VC If Co. manufactured 54
Net Cost to be incurred 106
Machine Hrs Saved 14
Cost per hour saved 7.57
It is cheaper to increase capacity by buying C this option has to

d) Profit Statement

S.P per unit 600

Variable Cost per unit
Making A 32
Making B 54
Buying C 125
Making D 12
Making E 4
Assembly Cost 40
Contribution per unit 333
Total Contribution for 198 units 65934
Less: Fixed Cost (Period Cost
remains same) 41712
Profit 24222
Increase in Profit 13134
. The number of units that can be produced under

Buy B
Component Machine Hours Reqd
A 10
B 0
C 12
22

r all options.

No. of units that can be manufactured if B is

bought
216

Additional Capacity that can be created

63.64

od is 50% it is not possible to meet it by buying component A as additional capacity created

cheaper one has to be accepted

Buy C
125
58
67
12
5.58
ng C this option has to be exercised.
 Buy C
Component Machine Hours Reqd
A 10
B 14
C 0
24

No. of units that can be manufactured if C is

bought
198

Additional Capacity that can be created

50

dditional capacity created