CVP Analysis/Incremental Analysis for Product Mix and Capacity Decisions
1. CVP Analysis/ Incremental Analysis/ Decision Making Mohit Kumar singh KrishnapriyaPremchandra M. JagmeetKaur
2. Case 3 P A or B or Both. Q X or Y or Both. Minimum quantity to be produced A and B: 1500 each X and Y: 1200 each Machine Hours Available: P: 4500 Q:5100
3. Solution 1 T1. Before Conversion: Considering Machine P A Contribution Margin=18 B Contribution Margin=35 Since A has a lower contribution margin, it will give less Profit. So, the minimum amount required to be produced for A is 1500 units. For B, 3000 MHs is available. (4500-1500) So, No of units of B= 3000/1.25=> 2400 units
4. Now Considering Machine Q. X Contribution Margin: 50 Y Contribution Margin: 60 X Minimum=1200 Units. ( 1 unit: 1.25 MH) Total MH required for X= 1500. MHs available for Y: 5100-1500=3600 MHs. No. of Units for Y: 3600/0.8= 4500 Units.
5. Total Contribution Units Contribution A 1500 * 18 =27000 B 2400 * 35 =84000 X 1200 * 50 =60000 Y 4500 * 60 =270000 Total Contribution= 441000 Profit= Total Contribution-FC =441000-400000 =41000
6. After Conversion Versatility Contribution Margin Order Y > X > B > A. 1200 1500 1500 Total MH=9600 X+A+B= 4200 Units
7. MH used: Units MH Total A 1500 1 1500 B 1500 1.25 1875 X 1200 1.25 1500 Y 4725 Y= 4725/0.8=5906 UNITS
8. Total Contribution Margin after Conversion Cont margin Units Total A 18 1500 27000 B 35 1500 52500 X 50 1200 60000 Y 60 5906 354360 TOTAL 493860 Profit= Tcont – FC =493860-(425000) =68860. Yes, Profit is more by 27860. (68860-41000)
10. Equipment is ordered. (Company Manufactures) Sales Per tube: 240/24=10 Cost Per tube: 234/24=9.75 For 3 lakh units: Total Profit= 300000*(10-9.75)=75000 For 3.5 lakhunits 350000*(10-9.75)-30000=57500 For 4.5 lakh units 450000*(.25)-30000=82500
11. If it buys Selling price=Rs.10 Cost= (0.8*108+.9*72+.9*54)/24+1.35 =9.68 Contribution margin=10-9.68=.32 For 3 lakh units: Total Profit= 300000*.32=96000 For 3.5 lakh units 350000*.32=112000 For 4.5 lakh units 450000*.32=144000 Since profit is more if it buys,the company must buy rather than manufacture tubes
12. Volume of sales.. ? Assumption- Initially profit was 75000 With increase in capacity to 3.5 lakhs, profit came down to 57500 Economical scenario assumed is 75000 75000= .25*sales-30000 (Profit=CM-Fc) X=42000, i.e. should produce 420000, so as to equal profit.
