Rs.

Price per unit 22

Variable costs 8
Contribution per unit 14
Total contribution (4000 units) 56000
If the machine is to be manufactured by the firm itself, the above
contribution coming out of selling of the products (4000 units) would be
lost. In addition following costs would also be incurred :

Direct material 20000

Direct labour 10000
Variable overheads 12000
Total 42000
Hence total cost of making = 56000 + 42000 = 98000 which is more than
the purchase price of 85000.

Decision : Purchase
 Cost for 6,000,000 copies
Under Purchase Option

Net cost for purchase of the copier = 160000 – 40000 = 120000

Annual contract = 20000
Total cost 140000

Under Lease Option

Net cost = 40000 + 0.02 X 6000000 = 160000

Decision : Purchase

Indifference point

40000 + 0.02 X Q = 140000 ; Q = 5000000

• P1 P2 P3 Total
Sales 180000 160000 280000 620000
Variable costs 135000 120000 210000 465000
Contribution 45000 40000 70000 155000
Fixed costs 145000
Profit 10000
If P2 is discontinued : (no change in general exp.) (25% decrease in general expenses)
Total contribution : 115000 115000
Specific fixed exp. P1 – 24000 24000
P2 - 33000 57000 33000 57000
General fixed expenses 62000 119000 46500 103500
Profit (+)/loss(-) (-)4000 (+) 11500
• Product B cost analysis
Price 50
Marginal cost 30
Contribution 20
Contribution per hour 20 / 5 = 4
Cost analysis of product A-10
Hours required for manufacture 2 hours
Loss of contribution 2X4=8
Marginal cost of product A-10 5
Total cost of manufacture 13
Supplier’s price 12.50

Decision : Buy A-10

 A B C in Rs. Per unit
Price 64 75 110
Variable cost 48 60 80
Contribution 16 15 30
Machine hour reqd. 4 5 6
Contribution/Mc.Hr. 4 3 5

Total machine hour required for complete manufacture of Z is 15 hours.

Available machine hours are 12000 hours. Total units of Z that could be manufactured is 12000/15 =
800 units, i.e., the current demand.

Sales price of Z 300 Total contribution 65600

Less variable cost 218 Fixed costs 50000
Contribution 82 Profit 15600

If the demand is increased by 25% the total units of Z to be manufactured is 1000 units, which will
require 15000 (15x1000) machine hours. Available machine hours is 12000 hours. Hence there is a
difference of 3000 machine hours. Since contribution per machine hour is lowest for B,
outsourcing of it will be the best alternative.

Required number of B = 3000 / 5 = 600 units.

Contribution for 600 units of Z = [300 – 233 (48+75+80+30)] x 600 = 67x 600 = 40200
Contribution for 400 units of Z = [300 – 218 (48+60+80+30)] x 400 = 82 x 400 = 32800
Total contribution 73000
Fixed costs 50000
Profit 23000
Revenue increase 45000
Cost of service 27000
(60% on revenues)
Additional facility costs 5000
32000
Additional profit 13000