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MBA Class of 2015, Semester I

KEY FACTORS
Key factor is that factor which limits the volume of output or level of activities of
An undertaking at a particular point of time or over a period.

The extent of its influence must be first assessed so as to maximise the profits.
e.g. of key factors may be
i. Shortage of raw material
ii. Shortage of Labour hours
iii. Machine capacity available
iv. Sales capacity available

Basis of decision
The product mix decision should be taken on the basis of contribution per unit of key factor
i.e. contribution per unit
key factor per unit
Case 1
X ltd produces two products using the same raw material and production facilities,
Following information is provided to you
Product A Product B
Rs Rs
Selling price per unit 100 80
Material @ Rs 2 per Kg 20 10
Labour @ Rs 3 Per hr 15 30
Variable overheads @ Rs 4 per machine hr 40 16
Comment on the profitability of each product when
i. Raw material is in short supply
ii. Labour hour are limited
iii. Production capacity ( in term of machine hour ) is limited
iv. There is heavy demand conditions
v. There are low demand conditions
Statement showing the contribution per unit of key factor
Particulars product A product B
Selling price per unit 100 80
less variable cost 75 56
Contribution per unit 25 24
PV Ratio 25% 30%

Contribution per Kg of raw material 25/10 24/5
Rs 2.5 Rs. 4.8

Contribution per Labour hour 25/5 24/10
Rs 5 Rs. 2.4

Contribution per machine hr 25/10 24/4
Rs.2.5 Rs. 6

Break even point Rs 600000/25 600000/24
24000 25000
units units

a. When Raw material is in short supply product B is more profitable
b. When Labour hours are limited, product A is more profitable
c. When production capacity is limited in terms of machine per hr product B is more profitable
d. When heavy demand is there product B is profitable due to high PV ratio
e. When low demand is there product A is profitable due to low BEP

Try yourself
Case 2
Product A Product B
Rs Rs
Selling price 200 500
Material ( Rs. 20 per liter) 40 160
Labour ( Rs 10 per Hr) 50 100
Total fixed cost Rs. 15000
Comment on the profitability of each product when
i. Raw material is in short supply
ii. Labour hr is limited.
iii. Only 1000 liters of raw material is available for both the product in total & maximum
sales quantity of each product is 300 units.
Case 3. Pricing decision & desire level of profit decision
An enthusiastic marketing manager suggests to his managing director that only if he is
Permitted to reduce the selling price of a product by 20%, he would be able to achieve a
30% increase in sales volume. The managing director finding that the sales volume increase
Exceeds in percentage the extend of requested reduction in price. Further following inform-
at ion is given.

Present selling price is Rs. 7.50 per unit
Present volume of sales 200000 units
Total variable cost is Rs. 10,50,000
Total fixed cost is Rs. 3,60,000
Assume no changes in the costs pattern in the coming period:
i. Examine the consequences of the managing director accepting the advise of
marketing manager & 30% increased in sales is realized
ii. At what volume of sales can the present quantum of profits be sustained, after effecting the
price reduction.
Case 4. Make or Buy Decision
Question
A manufacturing company finds that while the cost of making a component 001 in its own
workshop is Rs.8 per unit. The same is available in the market at Rs.6.50 with an assurance
of continuous supply. Give your suggestion whether to make or buy this component. Also
give your view in case the supplier reduces the price of the component from Rs.6.50 to
Rs.5.50. Following information can be used to derive a decision.
Material Rs 3.00
Direct Labour Rs.2.00
Other Variable Exp Rs.1.00
Depreciation & other fixed Expenses Rs. 2.00