MARGINAL COSTING HOMEWORK

A.1. HOMEWORK Statement showing the contribution per unit for the four products & their priority order for production in 2017 & 2018 A B C D A) Selling price p.u. 21.75 36.75 44.25 64.00 B) Variable cost p.u. (15.75) (28.50) (34.5) (54.50) C) Contribution p.u. for 2016 (A B) 6 8.25 9.75 9.50 D) Priority order for 2016 IV III I II E) Increase in variable cost for 2017 0.6 1.35 1.05 2.4 (10% of material cost) F) Contribution p.u. for 2017 (C E) 5.4 6.9 8.70 7.10 G) Priority order for 2017 IV III I II Since the Product C is the most profitable product, hence 10,000 additional units in both the years will be produced of Product C only. a) Statement showing the total profit for 2017 Contribution of Product A (20,000 6) 1,20,000 Contribution of Product B (5,000 8.25) 41,250 Contribution of Product C (35,000 9.75) 3,41,250 Contribution of Product D (15,000 9.50) 1,42,500 Total 6,45,000 (-) Fixed Cost (5,05,000) Profit 1,40,000 b) Statement showing the profit for 2018 Contribution of Product A (20,000 5.4) 1,08,000 Contribution of Product B (30,000 9.90) 2,07,000 Contribution of Product C (35,000 8.70) 3,04,500 Contribution of Product D (15,000 7.10) 1,06,500 Total 7,26,000 (-) Fixed Cost (5,05,000 + 35,000) (5,40,000) Profit 1,86,000 c) Statement showing the contribution required from Product B & the no. of units to be sold of B in 2017 to earn same profit as that of 2016 Profit Desired 1,40,000 (+) Fixed Cost (2017) 5,40,000 Total contribution required 6,80,000 (-) Contribution of Product A, C D (5,19,000) Contribution required from Product B 1,61,000 No. of units to be sold of Product B 23,333.33 Contribution of Product B in 2017 (1,61,000/6.90) (approx.) 1

A.2. PRIME VISION / C.A. FINAL / ADVANCED MANAGEMENT ACCOUNTING / Working Note: 1. Calculation of Direct Cost per unit Total Sales for 20,000 units 4,00,000 (-) Profit (20% of 4,00,000) (80,000) 3,20,000 (-) Indirect costs (80,000 + 40,000 + 80,000) (2,00,000) Direct Cost 1,20,000 1,20,000 6 Direct Cost per unit 20,000 2. Calculation of Variable Indirect Cost per unit 80,000 4 20,000units 3. Calculation of Variable Indirect Cost per unit in semi-variable cost V.C.p.u. Differencein amounts Differencein quantity 42,500-40,000 22,500-20,000 1 Statement showing the selling price per unit for export order Direct cost per unit 6 Variable Indirect Cost per unit 4 V.C.p.u. in semi-variable cost 1 Rs. 1,000 0.25 Additional packing cost 4,000units Total Cost per unit 90 11.25 + Profit 10 1.25 Selling price per unit 100 12.50 Note: In the above statement fixed cost is not considered because the export order is an additional order for which no additional fixed cost will be incurred. A.3. i) Statement showing the loss being made at present Total Contribution of X (2,50,000 50%) 1,25,000 Total Contribution of Y (4,00,000 40%) 1,60,000 Total Contribution of Z (6,00,000 30%) 1,80,000 4,65,000 (-) Total Fixed Cost (5,02,200) Loss 37,200 2

ii) a) Revised Sales amount of Product X to eliminate the said loss Present Sales + Additional sales 2,50,000 + 37,200/50% 3,24,400 (Sales of Y & Z will remain constant) b) Revised Sales amount of Product Y to eliminate the loss 4,00,000 + 37,200/40% 4,93,000 (Sales of X & Z will remain constant) c) Revised Sales amount of Product Z to eliminate the loss 6,00,000 + 37,200/30% 7,24,000 (Sales of X & Z will remain constant) d) Revised sales amount of all the three products, maintaining the same sales mix to eliminate the loss FixedCost BEP Sales (Value) Sales 12,50, 000 Contribution 4,65,000 Sales of Product X (13,50,000 5/25) 2,70,000 Sales of Product Y (13,50,000 8/25) 43,20,000 Sales of Product Z (13,50,000 12/25) 6,48,000 13,50,000 A.4. i) Total cost for 2,000 units produced in overtime working 2,000 12 24,000 Total cost for 2,000 units produced in second shift working (2,000 10.50) + (6,000) 27,000 Since the total cost for 2,000 units with overtime working is lower than second shift working, hence when the demand is 10,000 units, overtime working should be preferred alongwith shift working. ii) Let the additional units to be produced for the cost to be equal by both the options x units Total cost with overtime working Total cost with second shift working (x + 12) (x 10.50) + 6,000 12x 10.50x + 6,000 x 4,000 units Alternatively, AdditionalFixedCost Cost Indifference Point (CIP) Savingin variablecost perunit iii) 6,000-0 4,000 units 12-10.50 If the total demand of the product is 12,000 units (8,000 + 4,000) then second shift working or overtime working will make no difference. If the demand is above 12,000 units then second shift working should be preferred since variable cost per unit is less. And if the demand is less than 12,000 units, the overtime working should be preferred. Statement showing cost of production error Total cost incurred for additional 3,000 units in second shift working 37,500 [(3,000 10.50) + 6,000] (-) Total cost to be incurred for additional 3,000 units in overtime working (36,000 (3,000 12) Cost of prediction error 1,500 3

A.5. WN 1: Calculation of Overhead Absorption Rate per Machine Hour TotalEstimatedOverhead(Fixed) TotalEstimatedMachineHours 9,60,000 [(40,000 2) (80,000 1)] 6 WN 2: Calculation of Variable Cost per unit for two Products P & Q P Q Total cost per unit 20 40 (-) Fixed cost per unit (12) (6) (Machine h p.u. 6) (2 6) (1 6) Variable cost per unit 8 34 i) Statement showing the profit as per draft budget Total profit of Product P [40,000 (25 20)] 2,00,000 Total profit of Product Q [80,000 (50 40)] 8,00,000 Total Profit 10,00,000 ii) Statement showing the contribution per machine hour for the two Products P & Q and their priority order P Q A) Selling price p.u. 25 50 B) Variable cost p.u. (WN 1) (8) (34) C) Contribution p.u. (A B) 17 16 D) Machine hours p.u. 2 1 E) Contribution per machine hour (C/D) 8.5 16 F) Priority order II I Statement showing the most profitable production mix with the available machine hours / Products Total Quantity Machine Hours p.u. Total Machine Hours Utilised Q 1,00,000 1 1,00,000 P 30,000 2 60,000 1,60,000 Statement showing the profit for the most profitable production mix Total contribution of P (30,000 17) 5,10,000 Total contribution of Q (1,00,000 16) 16,00,000 Total Contribution 21,10,000 (-) Fixed Cost (9,60,000) Profit 11,50,000 4

iii) Calculation of the no. of units to be produced of Product C Product P is less profitable & hence Product P will be replaced by Product C. Total machine hours being used for Product P i.e. 60,000 when utilised for Product C will give a production of 60,000/1.5 i.e. 40,000 units of Product C. Statement showing the total contribution required & the selling price for Product C Contribution of Product P to be recovered by C 5,10,000 + Additional fixed cost on account of Product C 60,000 + Return on additional capital employed (2,00,000 45%) 30,000 Total contribution required 6,00,000 Contribution per unit of Product C (6,00,000/40,000) 15 Selling price p.u. Cont. p.u. + V.C. p.u. 15 + 21 36 A.6. Working Note: 1) Calculation of variable cost per good unit by using the regular material & cheaper material Regular Material Cheaper Material Direct Material ( 36 + 33.33%) 48 40 (given) Direct Labour ( 20 + 10%) 22 23 (increase by 1) Variable Overhead ( 20 + 5%) 21 21 84 (+) Cost of defective units per good unit ( 84 5/100) - 4.20 ii) 91 88.20 Statement showing the additional cost/saving in cost by using the cheaper material instead of regular material Saving in variable cost [(91 88.20) 1,50,000] 4,20,000 (-) Additional Fixed Cost (4,00,000) Saving in Total Cost 20,000 Since cheaper material saves the overall cost by 20,000 hence the company should prefer using cheaper material. 5

A.7. ii) Statement showing the total contribution for the various selling prices for the two types of materials available S.P. p.u. Quantity V.C. p.u. Regular Material Cont. p.u. Total cont. V.C. p.u. Cheaper Material Cont. p.u. Total cont. 128 1,90,000 91 37 70,30,000 88.20 39.80 75,62,000 136 1,70,000 91 45 76,50,000 88.20 47.80 81,26,000 144 1,50,000 91 53 79,50,000 88.20 55.80 83,70,000 152 1,40,000 91 61 85,40,000 88.20 63.80 89,32,000 160 1,25,000 91 69 86,25,000 88.20 71.80 89,75,000 168 1,10,000 91 77 84,70,000 88.20 79.80 87,78,000 176 95,000 91 85 80,75,000 88.20 87.80 83,41,000 If the company uses regular direct material, then it should prefer to sell 1,25,000 units @ 160 p.u. & if it uses cheaper material, even then a selling price of 160 p.u. only will be more profitable. iii) Statement showing the additional fixed cost to be incurred for cheaper material in order to get indifference point at a selling price of 160 p.u. Contribution with Regular Material 86,25,000 Contribution with Cheaper Material 89,75,000 Extra contribution with Cheaper Material 3,50,000 If the additional fixed cost of 4,00,000 by using cheaper material gets reduced to 3,50,000, then at a selling price of 160 whether regular material is used or cheaper material is used, it makes no difference. Working Note: 1. Calculation of fixed cost per quarter 2,00,000Rs. 4 2,00,000 4quarters 2. Calculation of contribution per unit [21 (7.80 + 2.10 + 2.50 + 0.6)] 8 Shut Down Point Sales (Units) FixedCost -ShutDownCost Contribution perunit 2,00,000-(74,000 14,000) 8 14,000 units If the sales for the quarter is 14,000 units, shutting down the business or continuing the business makes no difference. But if the sales is expected to be less than 14,000 units, then it is preferable to shut down the business. For 10,000 units shutting down the business is better alternative. 6

A.8. PRIME VISION / C.A. FINAL / ADVANCED MANAGEMENT ACCOUNTING / WN 1: Calculation of premium payable for purchase of Exim Scrips at 60,000 tonnes 6 crores 50% 3 crores WN 2: Calculation of premium payable for purchase of Exim Scrips at 75,000 tonnes capacity Foreign currency required for 60,000 tonnes 6 crores Foreign currency required for 75,000 tonnes 7.5 crores (- ) Foreign currency entitlement on account of Export Sales 6.3 crores (15,000 14,000 30%) Balance requirement to be met by purchasing Exim Scrips 1.20 crores Premium payable (1.20 crores 50%) 60 lakhs a) Statement showing the total profit with a capacity of 75,000 tonnes ( lacs) I) Total Sales 14,040 [(60,000 19,900) + (15,000 14,000)] II) Total Cost Raw Material & Chemicals (11,500 75,000) 8,625 Packing (500 75,000) 375 Steam, Power etc. Variable (1,500 60% 75,000) 675 Fixed (1,500 40% 60,000) 360 Wages & Salaries Variable (400 50% 75,000) 150 Fixed (400 50% 60,000) 120 Stores, Spares, etc. Variable (600 1/3 75,000) 150 Fixed (600 2/3 60,000) 240 Overheads Variable (500 20% 75,000) 75 Fixed (500 80% 60,000) 240 Depreciation Fixed (900 60,000*) 540 Special packing & other expenses (800 15,000) 120 Premium for purchase of Exim Scrips (WN 2) 60 11,730 III) Profit (I II) 2,310 b) Statement showing the total profit at a capacity of 60,000 tonnes ( lacs) Present profit (60,000 tonnes 4,000) 2,400 (-) Premium for purchase of Exim Scrips (WN 1) (300) Profit 2,100 Since the total profit with 75,000 tonnes is higher than that of 60,000 tonnes, the company should export 15,000 tonnes of its product. 7

A.9. PRIME VISION / C.A. FINAL / ADVANCED MANAGEMENT ACCOUNTING / Alternatively Statement showing the additional profit/reduction in profit if 15,000 tonnes are exported in addition to local sales ( lacs) I) Additional Revenue Sales (15,000 14,000) 2,100 Saving in premium for purchase of scrips (3 crores 60 lacs) 240 2,340 II) Additional Cost Raw Material & Chemicals (11,500 15,000) (1,725) Packing (500 15,000) (75) Stores & Spares, etc. (600 1/3 15,000) (30) Steam, Power etc. (1,500 60% 15,000) (135) Wages & Salaries (400 50% 15,000) (30) Overheads (500 20% 15,000) (15) Special packing & other expenses (800 15,000) (120) III) Additional Profit 210 Since the export sales increase the profit by 210 crore hence the company should export the remaining 15,000 tonnes. Adjustment to be effected in local selling price in order to earn the same profit as it was earned earlier Earlier profit (60,000 4,000) 24 crores Proposed profit for the future (Statement (a)] 23.10 crores Reduction in profit 90 lacs In order to earn 90 lacs extra profit, the local selling price should be increased by 90 lacs/60,000 tonnes 150. Revised local selling price 19,900 + 150 20,050 Assumption: It is assumed that the fixed cost & variable cost per unit has remained the same in both years & change in profit is only due to the change in number of units. i) Differencein profits 26,000-18,000 PV Ratio 100 100 Differencein sales 2,80,000-2,40,000 PV Ratio 20% ii) BEP Sales Contribution PV Ratio 100 Sales 20 Contribution 100 2,40,000 Contribution 48,000 Contribution 48,000 Contribution per unit 2 No.of units 24,000 Fixed Cost Contribution Profit 48,000 18,000 30,000 FixedCost 30,000 BEP Sales (units) Contribution p.u. Rs.2 BEP Sales 15,000 units FixedCost BEP Sales (Value) Sales 2,40, 000 Contribution 48,000 BEP Sales 1,50,000 8

iii) PRIME VISION / C.A. FINAL / ADVANCED MANAGEMENT ACCOUNTING / Margin of Safety Sales Year 1 MOS Sales (Units) MOS Sales 9,000 units Year 2 MOS Sales Profit Contribution p.u. Profit Contribution p.u. MOS Sales 13,000 units Year 1: MOS Sales (Value) Year 2: MOS Sales (Value) iv) Desired Sales (Units) Desired Sales 35,000 units Desired Sales (Value) Desired Sales 3,50,000 26,000 Rs. 2 Profit P/V Ratio Profit P/V Ratio 18,000 Rs. 2 18,000 90,000 20% 26,000 1,30,000 20% FixedCost DesiredProfit Contribution perunit 30,000 40,000 Rs.2 FC DP Contribution [30,000 40,000 Sales 2,40, 000 48,000 A.10. i) FixedCost DesiredProfit v) Desired Sales (Value) Sales Contribution [30,000 DP] 3,00,000 2,40, 000 48,000 40,000 30,000 + DP Desired Profit 10,000 Statement showing the total cost for 5 different levels of students joining the trip No. of students 60 120 180 240 300 No. of Buses 2 3 4 5 6 Rent of Buses ( 700) 1,400 2,100 2,800 3,500 4,200 Special Permit Fee ( 50) 100 150 200 250 300 Teacher s Allowance ( 200) 400 600 800 1,000 1,200 Refreshment ( 40/student) 2,400 4,800 7,200 9,600 12,000 Entrance Fees ( 5/student( 300 600 900 1,200 1,500 Block Entrance Fee 200 300 300 450 450 Cost of Prizes 1,050 1,050 1,300 1,400 1,500 Total Cost 5,850 9,600 13,500 17,400 21,150 9

ii) Statement showing average cost per student for various levels of students joining the trip No. of students 60 120 180 240 300 Total Cost (i) 5,850 9,600 13,500 17,400 21,150 Cost per students 97.5 80 75 72.50 70.50 iii) W.N. 1: Calculation of contribution per student Collection per student ( 65 + 10) 75 (-) Variable cost per student ( 40 + 5) ( 45) Contribution per student 30 Statement showing various break even no. of students for the trip Total cost to be recovered through contribution 1 50 51 100 Bus Rent ( 700) 700 (1) 1,400 (2) No. of students (Range) 101 125 2,100 (3) 126 150 2,100 (3) 151-200 2,800 (4) 201 250 3,500 (5) Special Permit Fee (50) 50 100 150 150 200 250 300 251-300 4,200 (6) Teacher s Allowance 200 400 600 600 800 1,000 1,200 Block Entrance Fee 200 200 300 300 300 450 450 Cost of Prices 900 1,050 1,050 1,200 1,300 1,400 1,500 2,050 3,150 4,200 4,350 5,400 6,600 7,650 Cont. p.s. 30 30 30 30 30 30 30 BEP (No. of student) 68.33 105 140 145 180 220 255 Not in Range Not in Range Not in Range In Range In Range In Range In Range From the above table it can be seen that the following no. of students taken for the trip will give losses & hence the college should try avoiding these no. of students. 1) Below 145 students 2) 151 179 students 3) 201 219 students 4) 251 254 students A.11. Calculation of contribution p.u. Selling price p.u. Variable cost p.u. Vee 1,800 900 900 Jay 2,160 1,800 360 Kay 4,300 4,200 100 Weighted Average Contribution p.u. TotalContribution TotalUnits 10

If the products are sold in 3 : 3 : 4 ratio (3900) (3360) (4100) 33 4 4180 418 10 If the products are sold in 2 : 5 : 1 (2900) (5360) (1100) 251 3,700 432.50 8 Since the weighted average contribution of the products is higher in the 2 nd option hence the co. should prepare selling the products in the ratio of 2 : 5 : 1. A.12. a) Statement showing the total cost of the component at two levels of activity for the three alternatives 20,000 units 40,000 units Purchase Produce with auto machine Purchase Produce with auto machine Produce with semiauto machine Produce with semiauto machine Variable Cost 4,80,000 2,40,000 3,00,000 9,60,000 4,80,000 6,00,000 (Units CPU) (20,00024) (20,00012) (20,00015) (40,00024) (40,00012) (40,00015) Fixed Cost - 1,62,000 84,000-1,62,000 84,000 (FOH other than dep.) Depreciation - 90,000 60,000-90,000 60,000 (Cost/Life) - 2,52,000 1,44,000-2,52,000 1,44,000 Total Cost 4,80,000 4,92,000 4,44,000 9,60,000 7,32,000 7,44,000 From the above table, the following conclusions can be made: i) Producing will be more economical as compared to purchasing. ii) If 20,000 units are to be produced, semi-automatic machine should be preferred whereas for 40,000 units, automatic machine should be preferred. b) AdditionalFixedCost Cost Indifference Point Savingin V.C.p.u. i) Between purchasing & producing with semi-automatic machine 1,44,200-0 CIP 16,000 units 24-15 If the component required is more than 16,000 units, the company should switch-over from purchasing option to producing with semi-automatic machine option. ii) Between purchasing & producing with automatic machine 2,52,000-0 CIP 21,000 units 24-12 If the component required is more than 21,000 units the company should switch-over from purchasing option to producing with automatic machine option. 11

c) Cost Indifference Point between automatic & semi-automatic machine 2,52,000-1,44,000 15-12 CIP 36,000 units If the requirement of component is below 36,000 units, the company should prefer semi-automatic machine. For exactly 36,000 units, any machine can be preferred but if the requirement is more than 36,000 units, than automatic machine should be preferred. A.13. WN 1: Calculation of contribution per unit Selling Price Variable Cost X 50 40 10 Y 50 35 15 a) BEP Sales (Units) X Y FixedCost Contribution Rs. 2,00,000 20,000 Rs.10 Rs. 3,00,000 20,000 Rs.15 b) Since, the contribution per unit of Factory Y is higher than that of Factory X, hence Factory Y is more profitable than Factory X. This is because a factory which contributes at a higher rate will help in recovering the fixed cost at a higher rate & after recovering the fixed cost will help in earning the profit also at a higher rate. c) Cash BEP Sales (Units) X Y FixedCost - Depreciation Contribution perunit 2,00,000-40,000 16,000 Rs.10 3,00,000-30,000 18,000 Rs.15 d) BEP Sales for the company as a whole with the present product mix i.e. 3 : 2 ratio BEP Sales (Units) FixedCost WeightedAverageContribution p.u. 2,00,000 3,00,000 {[(3 10) (215)] (32)} 5,00,000 12 41,667 units (aprox.) 12

e) Since the contribution unit of Factory Y is higher than that of Factory X, hence the company should first sell all 30,000 units of Factory Y. This will give a contribution of 30,000 15 4,50,000 for recovering the fixed cost. The balance fixed cost of 50,000 will have to be recovered by selling 50,000/ 10 p.u. i.e. 5,000 units of Factory X. Hence, the earliest BEP can be achieved by selling totally 35,000 units, selling the units of Factory X & Y in ratio of 1 : 6 (5,000 : 30,000) f) BEP for the company with the revised mix of 2 : 3 BEP Sales (Units) FixedCost WeightedAverageContribution p.u. 5,00,000 {[(2 10) (315)] (23)} 5,00,000 13 38,462 units (approx.) By changing the mix from 3 : 2 to 2 : 3, the BEP reduces by 3,205 units. (41,667 38,462) Statement showing profit with the mix of 3 : 2 & 2 : 3 3 : 2 2 : 3 X Y 30,000 20,000 X Y 20,000 30,000 Total contribution of X (Units 10) 3,00,000 2,00,000 Total contribution of Y (Units 15) 3,00,000 4,50,000 Total contribution 6,00,000 6,50,000 (-) Fixed Cost (5,00,000) (5,00,000) Profit 1,00,000 1,50,000 By changing the mix from 3 : 2 to 2 : 3, the profit increases by 50,000. A.14. WN 1: Calculation of contribution per seat VIP Rows Middle Level Last Level Charges per seat 320 220 120 (-) Variable cost/seat (20) (20) (20) Contribution per seat 300 200 100 WN 2: Calculation of average contribution per seat if demand is in ratio of 1 : 3 : 1 Total contribution Total sales [(1300) (3200) (1100)] 131 200 13

WN 3: Calculation of no. of seats remaining to be sold by Entertain Ltd. VIP Rows Middle Level Last Level Total no. of seats available 90 360 180 (No. of rows Seats/row) (-) Seats reserved for free Guests (30) - - Balance seats 60 360 1802 (-) Seats to be sold by Drama (30) (180) (90) Troupe (50%) Seats available for Entertain Ltd. 30 180 90 i) Statement showing the net fixed cost to be recovered & no. of seats to be sold by Entertain Ltd. to achieve BEP Hire charges 71,000 Rent 14,000 Air conditioning & other stage arrangement work 7,400 Snacks ( 20 30) (Free for guests) 600 93,000 (-) Fixed Income Income from Advertisement (9,000) Contribution on sales of seats by Drama Troupe [(30 300) + (180 200) (90 100)] (54,000) Net Fixed Cost 30,000 BEP seats to be sold by Entertain Ltd. Net FixedCost AverageContribution perseat Rs.30,000 Rs.200 150 of which VIP Rows 150 1/5 30 Middle Level 150 3/5 90 Last Level 150 1/5 30 Category-wise total seat occupancy at BEP VIP Rows 30 + 30 60 Middle Level 180 + 90 270 Last Level 90 + 30 120 14

ii) Average contribution per seat if demand is in ratio of 2 : 2 : 5 [(2300) (2200) (5100)] 166.66 2 25 Now, BEP of no. of seats Net FixedCost 30,000 AverageContribution perseat 166.66 180 of which VIP Rows 180 2/9 40 Middle Level 180 2/9 40 Last Level 180 5/9 100 The above no. of seats is not possible because VIP Row s seats available are only 30 & last level seats are only 90. Hence, the reduction in contribution of 10 seats of VIP & 10 seats of Last Level will have to be recovered by selling extra tickets of Middle Level seats. Extra seats to be sold of Middle Level Contribution lost fromvip& Last Level Contribution perseat of MiddleLevel [(10 300) (10 100)] 200 20 Hence, Final no. of seats to be sold by Entertain Ltd. to achieve BEP will be VIP Rows 30 seats Middle Level 60 seats Last Level 90 seats A.15. i) a) Calculation of total hours available 7.5 H 30 days Machines 18,000 Hours b) Calculation of hours required for 4,20,000 cans 4,20,000 14,000 hours 30cannesperhour c) Calculation of hours required for 60,000 toys 60,000 4,000 hours 15perhours Note: Producing 60,000 toys alongwith 4,20,000 cans is possible since the hours remaining is 4,000 which can be fully utilised for producing the toys. Statement showing the total profit of 60,000 toys 15 Total Contribution [(60 50) 60,000] 6,00,000 (-) Moulds cost (2,25,000) Profit 3,75,000 Since the toys order is profitable. Hence, the order of toys should be accepted.

ii) PRIME VISION / C.A. FINAL / ADVANCED MANAGEMENT ACCOUNTING / Statement showing the total profit of 5,40,000 cans Total Contribution [(10 4) 5,40,000] 32,40,000 (-) Fixed cost (20,00,000) Profit 12,40,000 Statement showing the total profit of 4,20,000 cans & 60,000 toys Total Contribution of cans [(10 4) 4,20,000] 25,20,000 Total Contribution of toys [(60 50) 60,000] 6,00,000 Total Contribution 31,20,000 (-) Total Fixed Cost (20,00,000 + 2,25,000) (22,25,000) Profit 8,95,000 From the above it can be concluded that the company should prefer producing additional cans rather than accepting the toys order. Alternatively, Statement showing the additional profit/reduction in profit by accepting the additional cans order of 1,20,000 instead of 60,000 toys. Additional Contribution of cans (1,20,000 6) 7,20,000 (-) Profit of toys to be sacrifice (3,75,000) Additional Profit 3,45,000 iii) Since accepting the additional cans order by sacrificing the toys order given additional profit. Hence, the company should prefer producing 5,40,000 cans only. Cost indifference point between producing the toys & sub contracting the toys AdditionalFixedCost Savingin varcost perunit 2,25,000-0 2,25,000 30,000 toys 57.50-50 7.50 Hours required for producing 30,000 toys 30,000toys perhour 2,000 hours 15toy perhour If the excess capacity remaining after producing the can is above 2,000 hours, then the co. should first prefer the producing the toys to the extent possible & the only the remaining toys should be purchased from the subcontractor. But, if the excess capacity remaining after producing cans is less than 2,000 hours, then the excess capacity should not be used & all 60,000 toys should be subcontracted. Exactly 2,000 hours remaining is CIP. 16

iv) PRIME VISION / C.A. FINAL / ADVANCED MANAGEMENT ACCOUNTING / Statement showing the total profit earned with 4,50,000 cans, 45,000 manufactured toys & 15,000 subcontracted toys Total Contribution of cans (4,50,000 6) 27,00,000 Total Contribution of manufactured toys (45,000 10) 4,50,000 Total Contribution of subcontracted toys (15,000 2.5) 37,500 Total Contribution 31,87,500 (-) Total Fixed Cost (20,00,000 + 2,25,000) (22,25,000) Total Profit earned 9,62,500 4,80,000 If the co. produces 4,80,000 cans, it will required 16,000 hours. 30 The remaining 2,000 hours can be utilised for producing 2,000 15 i.e. 30,000 toys & remaining 30,000 toys can be subcontracted. Statement showing the total profit that could have been earned with 4,80,000 cans, 30000 manufactured toys & 30,000 subcontracted toys. Total Contribution of cans (4,80,000 6) 28,80,000 Total Contribution of manufactured toys (30,000 10) 3,00,000 Total Contribution of subcontracted toys (30,000 2.5) 75,000 Total Contribution 32,55,000 (-) Total Fixed Cost (20,00,000 + 2,25,000) (22,25,000) Total Profit which could be earned 10,30,000 Loss suffered due to improper prediction of demand & negotiation 10,30,000 9,62,000 67,500. Alternatively, Statement showing the additional profit which could have been earned with proper prediction of demand & negotiation. Additional Contribution of cans (30,000 6) 1,80,000 (-) Contribution lost on 15,000 toys subcontracted instead of self manufactured [(10 2.5) 15,000] 1,12,500 Additional contribution/profit which could have been earned 67,500 17